The Cost of Preservation

[Frank O'Connor <>]

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 http://members.iinet.net.au/~foconnor

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