Cost-benefit analysis of a flood protection project incorporating poverty alleviation concerns: case study Vietnam

Abstract

Cost-benefit analysis is the practical application of welfare economics. Cost-benefit analysis uses the potential Pareto criterion to judge alternative resource allocations. The potential Pareto criterion, however, does not allow for consideration of non-efficiency goals such as poverty alleviation. Difficulty in measuring utility has resulted in cost-benefit analysis relying on aggregate valuations of project benefits. Valuations of project benefits are based on willingness-to-pay measures, which impose equal marginal utility of income weights to beneficiaries. If marginal utility of income is greater for the poor then relatively low estimates of project benefits will result. Benefit weighting is an attempt to overcome this shortcoming. Benefit weighting can be arbitrary and inconsistent, however, making it difficult to compare alternative projects or derive meaning from results. Another method is the poverty impact ratio, which compares unweighted benefits for the poor with unweighted total project benefits. In this study, a flood protection project with poverty alleviation as a major objective is examined. Flood protection project benefits are estimated using production and asset values. Therefore, projects that provide substantial benefits to the poor will tend to be outranked by projects that benefit the rich making it difficult to realize the poverty alleviation objective. This method is also inconsistent with the idea of differing marginal utilities of income. A procedure is proposed based on safety-first valuations. Safety-first valuations incorporate risk in a manner consistent with decision-making behavior of the poor. Safety-first valuations are used to rank alternative projects for their effect poverty alleviation effects. The theory is tested on a flood protection project to show that the safety-first approach is superior to the poverty impact ratio for the identification of flood protection projects that alleviate poverty. Estimated safety-first valuations yielded much higher incremental increases in the value of a project than the willingness to pay estimates. For the smallest farm model, the willingness to pay estimate of project benefits was VN 176,000 compared to the safety-first estimated increase in benefits of VND 6.4 million. The safety-first estimate is more consistent with utility theory. Safety-first provides a preference ordering that is superior to the poverty impact ratio.