The Cost of Preservation

To: Bill Stent <>
Subject: The Cost of Preservation
From: Frank O'Connor <>
Date: Mon, 12 Aug 2002 18:09:32 +0800
At 14:51 12/08/2002 +1000, Bill Stent wrote:
"The economics are absolutely stark"
Tragically, that's not so.
I'm not entirely across this, having been out of the industry for a few years, but I can assure you that cost benefit analyses can balance very finely on assumptions used in building models.  The most important of these would be the "discount rate" - that is, how much we all (not just the economists) under-value future cash flows.  A higher discount rate will tend to blinker you from future consequences of your actions.  For a truly sustainable approach we should have a very low discount rate.  Unfortunately (again, tragically) discount rates tend to be high - highest in the private sector, where the approach is often "if we can't make a big profit in a short time it's not worth doing".
Another assumption that tips the balance (currently) in favour of the bulldozers is how you value the environment.  For example, there may be tremendous value in having the environment there for everyone to enjoy (so called "existence value"), but you can't put existence value in the bank, or get a loan using existence value as collateral.

I am not quite sure what Bill is arguing here?  The higher the discount rate that you use for future cash flows, the less likely a project is to meet the investment guidelines, unless all the income comes early in the project, and the expenditure occurs at the very end.  Very few projects are based on this type of cash flow, certainly in the mining industry where I worked for 13 years.  Most projects have a high upfront cost.

Frank O'Connor     Birding WA
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