Driving To Deliver Your Business

Sound finance |

Back in 2011 the government had been proposing to spend 190 million[1] on a flood defence scheme for Leeds. Instead, they cancelled the scheme and only did 50m worth of the work. The scheme was based on a hypothetical worst-case flooding scenario. In 2011, the economic losses from such a flood were estimated at 500 million[2]. To put it another way, the additional 140m was expected to return 500m in savings when such a flood occurred, or about 3.57 for every 1 invested. Pretty decent. Of course, you d have to pro-rate that over the lifetime of the project and consider the annual probability of a really big flood happening in any given year, because we might never need it. If it s never needed, it will look like a white elephant. But it s fair to make some allowance for the risk that big floods start coming along unexpectedly frequently, or that they turn out to be bigger than we assumed. If that happened, the scheme would be more valuable than expected. Floods can be very bad, but there is no scenario in which they would do Leeds good, so our thinking about this should be biased to the high side, the so-called tail risk.

PwC[3] estimates that the UK flooding event of December 2015 amounts to an economic loss of 2.8bn for the whole country. Very roughly, we might allocate 80% of that to the flooding of Manchester, Leeds, and their suburbs because there s a lot of valuable stuff there to wreck and a lot of people to inconvenience.

I ll make the mightily charitable assumption that Manchester is of equal value with Leeds, and split that 50/50. This gives us a billion-pound loss for West Yorkshire alone, or more precisely, 40% of 2.8bn, 1.1bn. That s twice the estimate in the reference scenario. We re well into the tail risk here. It s possible the PwC accountants included things that the Environment Agency modellers didn t they reckon insured losses to property are about half the total, so the rest must be things like disruption to transport and emergency response spending. I ve no idea if the EA tried to estimate those. Whether they did or they didn t, though, they re costs and somebody will have to pay them. So, for the 140m additional investment, we could have spared ourselves a bit more than a billion in out-of-pocket losses. To put it another way, every additional 1 spent on the flood scheme would have saved us 7.86. And I thought we were short of cash!

As we say in Yorkshire: Buy cheap, buy two.

References

  1. ^ 190 million (www.yorkshireeveningpost.co.uk)
  2. ^ 500 million (www.theguardian.com)
  3. ^ PwC (www.yorkshireeveningpost.co.uk)



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