Budgeting and other forms of planning are such an integral part of the way we all work, that we can easily take it for granted. There are few events that occur in our business lives which someone hasn’t thought “might happen”. I think that people often just chalk up losses from low probability events as misfortune – rather than poor planning and risk management.
The recent floods in Queensland and Victoria are obvious high impact low probability events. Wherever your organisation is located, it seems obvious that there are risks from natural disasters. The question becomes one of risk management – how much money and effort should be invested upfront to counteract the risk. For low probability events, the most sensible outcome might be to put in place contingency planning for mitigating the damage once the event occurs.
I am sure that there will be plenty of inquiries into the recent floods in Queensland, but the rapid response of various government departments made it clear that the risks were well understood. In 2000, Geoscience Australia published an extremely detailed study of the risks posed by natural disasters in South East Queensland, with exhaustive analysis of the projected impact of flooding on Brisbane, the Gold Coast, and Ipswich.
While the projections clearly rely on scientific measurements of weather and river flow, the financial and risk modelling used in the planning are quite relevant to many business planning situations.
In many areas, the government sector is decades ahead of business when it comes to risk management practices.
The area where planning differences are starkly defined – is when cost benefit analysis is used to justify preventative measures. Such as building infrastructure to prevent flood damage, or improve traffic safety, or reduce health problems caused by pollution.
In 2002, the Australian federal government published the benefits of flood mitigation economic study, which clearly outlined the cost benefit methodologies that have been used for flood mitigation infrastructure projects, and analysed their effectiveness based on the actual subsequent events.
A distasteful reality is that some cost benefit analysis requires the estimation of the value of a human life. A commonly used estimate in Australian government modelling is $1.2m AUD per fatality, based on modelling reported in Counting the Cost of Crime.
With any cost benefit analysis, there are often grey areas, where simple adjustments to the assumptions can have a big effect on the economics. The New York Times recently reported on the major discrepencies between estimated values for a human life, both between US government departments, and within a single department – depending on the project. In case you are wondering, the value used by the US federal government can be anywhere between $1m and $10m USD, with $5m to $6m being the most commonly used at the moment.
So why are the lives of US citizens worth so much more than Australian lives?
Well, perhaps the value sometimes depends on the decision making process itself. With all other factors equal, it is often easier to show an economic benefit for a project when the estimated cost of a life is high.