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Valuing Environmental Assets - Central Catchment Nature Reserve in Singapore
 

Valuing Environmental Assets - Central Catchment Nature Reserve in Singapore

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With increasing demands for fiscal prudence, governments worldwide are under pressure to show that net positive economic benefits are accrued from expenditures on environmental preservation and ...

With increasing demands for fiscal prudence, governments worldwide are under pressure to show that net positive economic benefits are accrued from expenditures on environmental preservation and maintenance. In the land-constrained island-state of Singapore, maintaining 2000 hectares of green forests in the Central Catchment Nature Reserve (CCNR) may seem counter-intuitive and hence, a valuation exercise is warranted. This paper evaluates some candidate valuation methods.

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    Valuing Environmental Assets - Central Catchment Nature Reserve in Singapore Valuing Environmental Assets - Central Catchment Nature Reserve in Singapore Document Transcript

    • Valuing the Central Catchment Nature Reserve in Singapore An assessment of some valuation methods Vikas Sharma, PMP®, Associate Director Public Sector & Government Practice Frost & Sullivan September, 2013
    • Valuing the Central Catchment Nature Reserve in Singapore 2013 SETTING THE CONTEXT With increasing demands for fiscal prudence, governments worldwide are under pressure to show that net positive economic benefits are accrued from expenditures on environmental preservation and maintenance. In the land- constrained island-state of Singapore, maintaining 2000 hectares of green forests in the Central Catchment Nature Reserve (CCNR) may seem counter-intuitive and hence, a valuation exercise is warranted. This paper evaluates some candidate valuation methods. SINGAPORE’S CENTRAL CATCHMENT NATURE RESERVE (CCNR) Located in the geographical centre of Singapore, the CCNR is the largest of four gazetted nature reserves in Singapore and is protected under the Parks and Trees Act 2005. Containing over 2000 hectares of undisturbed primary forests, CCNR is often termed ‘Singapore’s Green Lung’. In its network of freshwater streams and swamps, CCNR hosts over 1600 floral species and over 500 animal species, several of which are endangered and native to Singapore. Singapore’s main reservoirs – MacRitchie, Upper Seletar, Upper Peirce, and Lower Peirce – are in CCNR. A popular destination among nature lovers in Singapore, it houses a number of recreational facilities, chief among them being: Singapore Zoo, Night Safari, the 20-km long MacRitchie Trails, and the HSBC TreeTop Walk – a 250 meters long suspension bridge connecting the two highest points in MacRitchie. CCNR also runs educational programs and guided tours to enlighten general public on nature conservation.
    • Valuing the Central Catchment Nature Reserve in Singapore 2013 VALUATION METHOD 1 – CONTINGENT VALUE METHOD (CVM) Description: Using CVM, the first step is to define the valuation problem – for instance, measuring CCNR’s total economic value vis-à-vis perhaps just the recreational use value (depending on the context). The importance of ‘context’ is reflected in this method’s name – it is called ‘contingent’ because results collected are contingent on the specific scenario described to the respondents. Next, a survey questionnaire is designed and a statistically robust respondent sample selected. After this, respondents are surveyed on how much they value CCNR. The collected data is analyzed and the average respondent value extrapolated to the relevant population to arrive at CCNR’s valuation. Why CVM?: 1) CCNR has both ‘use’ value (by virtue of recreational facilities such as Zoo, Night Safari, TreeTop Walk etc.) as well as significant ‘non-use’ value (by virtue of its biodiversity). If the right questions and survey methods are incorporated, CVM can provide estimates for both values, thus estimating CCNR’s ‘total economic value’. 2) CVM is the most widely used valuation method, with ample research available on its methodology, limitations and strengths. Hence, it’s probable that decision makers are familiar and comfortable with its results. Difficulties: An expected downside to its wide adoption is that CVM’s limitations and biases have also been well- researched. A few key difficulties relevant to our context are – 1) CVM captures ‘stated’ Willingness to Pay (WTP) as opposed to ‘actual’ WTP since it simulates a hypothetical transaction. The actual real-world economic commitment of respondents may be very different. 2) It suffers from Strategic bias that is introduced by respondents who may have vested interests in a particular valuation outcome and hence, may state exaggerated valuations (too high/too low) to drive results towards their desired outcome. 3) Respondents may make associations among environmental goods that are unintended by researchers. For instance, when asked about WTP for maintaining CCNR, respondent may confuse forest cover with air quality and actually provide WTP to pay for clean air in Singapore.
    • Valuing the Central Catchment Nature Reserve in Singapore 2013 VALUATION METHOD 2 – OPPORTUNITY COST METHOD (OCM) Description: First, all possible alternative uses of CCNR’s site are listed. For each alternative activity, the ‘net’ income benefits are then computed (benefits minus any costs involved). The highest net benefit possible from any alternative activity is the opportunity cost incurred in preserving and maintaining CCNR, and hence, assigned as CCNR’s value. Why OCM?: 1) Given Singapore’s context, alternative uses can be reasonably approximated. The CCNR site, if not preserved, would most probably be used for building residential or commercial properties on account of Singapore’s constrained land supply. With demand for property expected to only grow, the computed OC doesn’t run the risk of diminishing in the future. 2) Implementation-wise, with detailed property data available for Singapore, OC can be well approximated via desk-research. This negates incurring significant data-collection costs on conducting large-scale surveys. Difficulties: 1) However rigorous its implementation may be, OCM would probably underestimate the ‘true’ value of CCNR since it equates it to value of next best alternative. 2) OCM is an indirect method since it only evaluates alternatives, rather than value the KN in question (CCNR) directly. Hence, it does not incorporate any factors to mimic social preferences that may exist for CCNR, or how people would behave in CCNR’s absence. VALUATION METHOD 3 – TRAVEL COST METHOD (TCM) Description: The key principle at play is that people who live farther from CCNR would spend more to visit it and these escalating costs (by distance) would affect their demand for CCNR visits. Using secondary data or by conducting surveys, data on visitors’ travel costs and frequency of visits can be collected; and regressed to obtain
    • Valuing the Central Catchment Nature Reserve in Singapore 2013 the typically downward-sloping relationship between them. Then, using travel costs and visit frequency as proxies for Price and Quantity demanded respectively, the area under the curve would equate to CCNR’s value. Why TCM?: 1) CCNR houses several recreational facilities (Zoo, Night Safari, TreeTop Walk, Eco-Link etc.) and hence has significant recreational use value that can be estimated using TCM 2) It is based on actual user behavior, rather than on ‘stated’ preference / WTP; and hence is a good reflection of real consumer choices 3) NParks and Singapore Tourism Board already maintain copious amounts of information on domestic and foreign tourists (demographic, spending, number of visits etc.) and hence, TCM should be relatively inexpensive to implement. Difficulties: 1) By definition, TCM can’t provide an estimate of CCNR’s ‘non-use’ value since it requires user participation information. Hence, another method (such as CVM) may need to be used in conjunction to capture non-use value. 2) Some users that highly value CCNR may choose to live near it, reducing their travel costs. However, this valuation is not reflected in TCM, and may lead to CCNR’s value being underestimated. 3) It is intuitive that tourist visits may have more than one purpose and hence, travel costs need to be apportioned. If not done properly, CCNR’s valuation may be overestimated. OTHER METHODS THAT COULD BE CONSIDERED 1) Threshold Values: On account of being home to Singapore’s only primary forest and unique flora/fauna, CCNR fits the description of irreversible KN (natural capital). Threshold Values method specializes in valuing such KN and hence, worthy of consideration. 2) Choice Modeling: A corollary on CVM, the choice modeling method is considered by many to be an improvement. It would allow the construction of a demand-curve for the WTP for: 1) preservation of CCNR and/or 2) access to the recreational facilities in the CCNR; from which then the respective valuations can be arrived at.
    • Valuing the Central Catchment Nature Reserve in Singapore 2013 METHODS THAT SHOULD BE EXCLUDED 1) Replacement-cost Method: Cost-estimates will be prohibitively high (approaching infinity), considering that CCNR houses Singapore’s only (and oldest) primary forest and is home to several unique flora/fauna species that cannot be replaced once destroyed. Hence, no meaningful dollar-value can be arrived at using this method. 2) Hedonic Pricing: Conceivably, the large amount of property-prices data required won’t be an issue in Singapore. However, it assumes that property-buyers have a good understanding of environmental externalities of staying near/far from CCNR, which won’t usually be the case. Even more importantly, the method requires that various housing options are available to buyers and they can always obtain housing as per their preferences. Singapore’s small size and regulated public housing market negate this requirement. SHOULD ENVIRONMENTAL ASSETS BE VALUED? Being public goods, the preservation and restoration of environmental assets (such as CCNR) is primarily handled by government agencies. With tightening budgets and numerous competing commitments, agencies need to justify such decisions, not only in terms of environmental benefits, but also in terms of fiscal prudence and public support. Ignoring demands for justification can severely damage agencies’ goodwill and popularity. Hence, it is important to value the economic benefits of such investments, usually in dollar terms. In essence, such estimates can help: 1) Make sound allocation decisions 2) Ensure that public viewpoints are accounted for and support gained 3) Compare between competing projects and 4) Maximize environmental benefits/dollar spent. Such valuation studies have already led to several important instances of successfully justified environmental protection: a) The worldwide ban on leaded-petrol originated from a US study that demonstrated the health benefits to be greater than costs b) Montreal Protocol took into consideration results of studies that showed economic benefits of reducing CFCs as higher than the associated costs.