Scottish Government

COSTS AND AND BENEFITS OF IMPLEMENTATION OF THE EC WATER FRAMEWORK DIRECTIVE (2000/60/EC) IN SCOTLAND

FINAL REPORT TO THE SCOTTISH EXECUTIVE

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This report has been produced by WRc plc

June 2002

Authors: K Andrews

With thanks for material contributed by A Black and N D Hanley

Contract Manager: K Andrews Contract No.: 12738-0

The views expressed in this report are those of the researchers and do not necessarily represent those of the Department or Scottish Ministers.

© Crown Copyright 2002

Limited extracts from the text may be produced provided the source is acknowledged. For more extensive reproduction, please write to the Chief Research Officer at the Central Research Unit, 3 ^rd Floor West Rear, St Andrew's House, Edinburgh EH1 3DG

CONTENTS

1. INTRODUCTION

1.1 Introduction

1.2 Objectives

1.3 Structure of the report

2. METHODOLOGY

2.1 General

2.2 Outputs

3. RESULTS OF THE STATUS-GAP ASSESSMENT

3.1 Introduction

3.2 Assessment of current status given the requirements of the Directive

3.3 Assumptions business as usual case and the gap in 2015

4. RESULTS OF THE COST ANALYSIS

4.1 Introduction

4.2 Compliance costs

4.3 Overall costs

4.4 Other costs related to the Directive

5. RESULTS OF THE BENEFIT ANALYSIS

5.1 Introduction

5.2 Scope of the benefits analysis

5.3 Benefits analysis - results

6. OVERALL ANALYSIS

6.1 Introduction

6.2 Additional analytical aspects related to the overall analysis

6.3 Overall analysis - results

6.4 Sensitivity analysis

LIST OF TABLES

Table 3.1 Status-Gap Assessment - Assumptions

Table 4.1 Summary of the cost assessment

Table 4.2 Overall cost analysis - results

Table 5.1 Scope of benefit analysis

Table 5.2 Annual Benefit Estimates for Improvements to Water Bodies in Scotland under the WFD

Table 6.1 Overall analysis - central case

Table 6.2 Results of the sensitivity analysis

LIST OF FIGURES

Figure 2.1 Schematic Overview of the Methodology

ACCOMPANYING REPORTS

(available on request from the Scottish Executive Water Environment Unit on 0131 244 0386 or via wfd@scotland.gsi.gov.uk)

Business Case Assessments:

1. Agriculture - Irrigation
2. Agriculture - Arable, livestock and mixed farming
3. Industry - Food and drink
4. Industry - Pulp and paper
5. Industry - Mining
6. Industry - Forestry
7. Industry - Fisheries
8. Industry - Power
9. Industry - Water Services
10. Public - River engineering/flood defence
11. Public - Contaminated land
12. Public - Urban drainage
13. Households - Rural sewage

Benefits analysis:

A benefits analysis of the impacts of the Water Framework Directive for Scotland. December 2001, prepared for this project by N D Hanley.

1. Introduction

1.1 INTRODUCTION

Following the invitation to tender (23 ^rd May 2001) from The Scottish Executive, WRc in conjunction with Professor Nick Hanley (Glasgow University) and Dr Andrew Black (University of Dundee) were awarded the contract to undertake research on the Costs and Benefits of Implementing the EC Water Framework Directive (2000/60/EC) in Scotland.

This report constitutes the main written output of this study. The work was undertaken between June and December 2001 in anticipation of the transposition of the Directive into Scots Law.

The process of implementing the Water Framework Directive will lead to a much greater understanding of the costs and benefits of water use in the economy. This process should lead to a better ability to identify least cost measures to raise the quality of the water environment, and to identify cases where costs are disproportionate to the benefits. There will be a full economic analysis of water use, which will contribute to the River Basin Management Plan. This Plan will set the context for the detailed implementation of the Directive, which will involve appraisal of decisions at the local level.

Ahead of this full process, and within the resources available, this report can only seek to make preliminary estimates of the costs of the WFD on relatively broad based assumptions. These estimates do not seek to say how much the various sectors should pay, nor can they take full account of developments in policy between now and the date of implementation of the WFD. Nonetheless, this report seeks to give a general picture of the costs that are likely to fall on the economy as a result of the WFD. The challenge to those charged with implementing the Directive, is to achieve the environmental goals at the lowest possible cost. It is clear that the analysis that was possible within the context of this research will have to be further developed in order to support that work. Such analysis will pay dividends, as the environmental goals will be achievable at lower cost to the economy.

1.2 OBJECTIVES

The main objectives of this work are summarised in two research aims, which guided the work undertaken:

Research Aim 1

To revise the findings of the (original) WRc study regarding the costs and benefits of implementing the Directive in Scotland, taking account of any relevant changes to the Directive since the earlier study, updating the baseline for the economic analysis and making more detailed assumptions about Scottish circumstances.

Within this broad objective were the related objectives:

• To assess the implications of the revised text of the Directive for cost-benefit analysis in consultation with the Executive,
• To compile a set if detailed assumptions about the present day environmental situation in Scotland and projected improvements on which to base an assessment of the costs and benefits of implementing the Directive in Scotland in the period from 2001 to 2040.
• To provide assessments of the costs and benefits of implementing the Directive in Scotland which take account of the revisions to the Directive and the revised assumptions about Scottish circumstances.

Research Aim 2

To provide detailed information regarding the economic impact of the Directive in Scotland through the production of typical business case assessments for the major water users in Scotland. Within this broad aim: to provide a number of typical business case assessments to illustrate the impact of the implementation of the Directive on typical small, medium and large business across the range of business sectors that are likely to be affected.

1.3 STRUCTURE OF THE REPORT

The report is structured as follows:

• Section two provides a brief overview of the methodology adopted.
• Section three provides a summary of the gap assessment and the assumed business as usual case, which is an important aspect of this work.
• Sections four and five provide a summary of the work undertaken on the cost and benefit components of the work (respectively).
• Section six provides an overall analysis, together with the results of the sensitivity testing which have been applied.

The report is accompanied by detailed reports on the 13 individual Business Case Assessments and by a stand alone benefits report: A benefits analysis of the impacts of the Water Framework Directive in Scotland, produced by Nick Hanley.

2. METHODOLOGY

2.1 GENERAL

The adopted approach is based on linking a national level CBA model, with a series of micro business case assessments to deliver the outputs required for a full Regulatory Impact Assessment, required as part of the adoption of the Directive. Schematically this approach is presented in Figure 2.1. The link between the micro-level business case assessments is provided by the results of the status-gap assessment together with a series of sector reviews.

FIGURE 2.1 SCHEMATIC OVERVIEW OF THE METHODOLOGY

The 10 RIA-type outputs are provided through either the Cost-Benefit Model or the Business Case Assessments, or from a combination of the two. For example, the risk assessment follows directly from the status gap assessment, while the litmus tests follow from the individual business case studies.

The BCA themselves are provided on the basis of an assessment of the sectors affected, following detailed discussions with the Executive and SEPA. Obviously not all sectors potentially affected can be included, but this assessment has sought to achieve as wide a coverage as possible. In conjunction with the sector reviews, these case studies also provide information relevant to the extrapolation to the national level.

These extrapolations are also the main aspect of the cost-benefit model. The other aspects are the results of the stand-alone benefits analysis and the assumptions regarding the timing of the relevant events (event profile). The benefits analysis is largely independent of the business case assessments as it is driven by aggregate improvements in waterbody status rather than impacts in individual sectors.

2.2 OUTPUTS

The main outputs of the study therefore are:

The Status-Gap Assessment. Which is derived by considering the requirements of the Directive in the context of the business-usual-case. The results are summarised in Section 3.

Business Case Assessments. Detailed examinations of the costs to various sectors chosen to represent the majority of impacts expected under the WFD. The BCAs contain information on the likely costs together with information relevant to extrapolating from these cases to the national level. The results of this work is summarised in Section 4

Benefits Analysis. An analysis of the benefits likely to arise from the removal of the status gaps. The results of this analysis are summarised in Section 5.

The Cost-Benefit Model. The cost benefit model is the core of the exercise containing the fundamental relationships and assumptions needed for the cost benefit assessment. The CBA model is constructed at a national level. The results are given in Section 6.

3. RESULTS OF THE STATUS-GAP ASSESSMENT

3.1 INTRODUCTION

Constructing a CBA model requires a clear definition of two things:

• The business as usual case
• The requirements of the Directive

The business as usual case

This is a hypothetical case that describes the situation that is assumed to develop in the absence of the Directive. Information for the business as usual case may take one of at least three forms distinguished by the certainty associated with the information: planned changes (e.g. the agreed investments to be undertaken as part of the Water Industry Quality and Standards (Q&S) programme); in-the-pipe-line changes (i.e. policies which are decided on but where there is some uncertainty about the actual outcomes - an example being the further designation of Nitrate Vulnerable Zones); prospective changes (developments which are more speculative - for example future reforms of the Common Agricultural Policy).

The requirements of the Directive

The final text of the Directive is adopted and therefore there is some certainty about the general requirements of the Directive. However, there remains considerable uncertainty for two reasons. The first is because the specific and concrete translations of the general requirements have not been completed. The second arises because some details of the Directive have been left to later for specific development - this is the case for groundwater and for hazardous substances.

The following section detail the main assumptions made in each of these cases. In general the status-gap assessment has involved several stages:

1. The starting point in most cases has been the SEPA "reasons for downgrading" database, complied from a regional exercise and underpinning the status assessment given in the WFD consultation document.
2. Further discussion with SEPA regarding developments in identified pressures and the likely future reasons for downgrading given identified action and improvement plans and more general trends in pressures.
3. Detailed discussion with industry representatives in the case of water services.

These steps were sufficient to establish the current status and business as usual case in most circumstances. However, there were a number of gaps in relation to:

• Groundwater, where very little information is available in Scotland. In this case use has been made of the recent biophysical class work undertaken by MLURI for SEPA.
• Hydro-morphological impacts, where limited data is available. In this case further detailed discussions were undertaken with experts in SEPA and use made of the best data available (the 1995 River Habitat Survey) and some data available locally in relation to specific pressures (e.g. abstractions).

3.2 ASSESSMENT OF CURRENT STATUS GIVEN THE REQUIREMENTS OF THE DIRECTIVE

The individual business case assessments provide the detailed assessments of the status of Scottish water bodies in relation to specific, identified pressures. Column 2 of Table 3.1. provides a summary of this information. In addition the following points should be noted:

• In general the assumptions made in the original WRc study regarding the interpretation of the requirements of the Directive were retained following a more up to date assessment of the Directives requirements. This means that good ecological status is taken to equate to the achievement of Class A2 (Rivers), B (Lochs, Estuaries and Coasts) in the current Scottish classification schemes.
• The accuracy or otherwise of the status assessment is largely dependant on the availability of information relating to the status of Scottish waterbodies in relation to the specific requirements of the Directive. Unfortunately this availability remains limited at present, particularly in relation to hydro-morphological elements of good status.
• This assessment is based on current monitoring knowledge under the current classification system, with assumptions made about how this would relate to good/moderate status and including an element of underreporting due to the lack of information about hydromorphological conditions.
• The resulting figures have been re-checked with SEPA and are in line with current thinking that sewage related problems and some other impacts are likely to have improved by 2011, whilst other impacts are likely to come to the fore. It is also worth noting that experience tends to show that in rivers and lochs acute pollution problems (e.g. iron from mining or sewage) can mask more insidious problems like diffuse pollution, which still cause downgrading of the water body.
• No better information was available during this study regarding groundwater than that used in the original study. It has as a result only been possible to include groundwater aspects where specific information exists relating to the impact of human activities. In practice this restricts the assessment to agriculture and contaminated land pressures. It should be noted, however, that these are regarded as two of the most important sources of groundwater degradation.
• There are obvious difficulties related to making appropriate assumptions regarding the application of time or objective derogations under the WFD. In general the assessment of current status has not applied any assumption regarding derogations, despite the fact that it is likely that in some proportion of all cases there will be instances of a problem which would appear to involve disproprtionate costs. However, it should be noted that a derogation does not necessarily mean that there is no requirement for action under the WFD - just that this action may be delayed or be designed to meet good ecological potential rather than good ecological status. Sensitivity analysis is used in Section 6 to illustrate the potential impacts of derogations.
• The exception to the rule regarding the non-application of the derogation rules is where there is already a reasonably good understanding that derogations would be widely sought and applied. The two cases in this category are those most closely related to the issue of Heavily Modified Water Bodies - power (hydro-schemes) river modification (e.g. flood defence). In these cases some assumptions are built into the assessment regarding the level of derogations that would be used (see Table 3.1).

3.3 ASSUMPTIONS BUSINESS AS USUSAL CASE AND THE GAP IN 2015

Given the re-assessment of the requirements of the Directive, together with the status assessment for individual cases, it is possible to predict the future status gap given assumptions about the development of the business as usual case. The detailed assumptions regarding the development of the business-as-usual case are summarised in the individual business case assessments and a summary of this information is provided in Column 3 of Table 3.1.

The following points should be noted:

• There can be only limited consideration of the requirement to avoid deterioration from "above good" to "good" or "below good". For diffuse pollution, this may become a significant issue that the WFD will have to address. There is not much available data on this at present, as the A1 (excellent) results under current classification scheme are not a reliable indicator (until this year, a water in an area assumed to have few pressures was assumed to be A1 until there was information to the contrary). SEPA has commenced work starting to look at trends in monitored A1/A2 waters to identify those most at risk.
• In the absence of specific information the length of waterbody currently at or above good status but at risk of failing to meet the objectives of the Directive, the length has been increased by 25% (a figure agreed in discussion with SEPA). This 25% includes both waterbodies currently good, which might deteriorate to below good in the absence of the Directive as well as those above good (i.e. high) that would need to be prevented from deteriorating to good.
• Deterioration applies only to those pressures (i.e. diffuse) over which SEPA has no powers (in the absence of the Directive) to avoid deterioration. In practice this applies only to abstraction, agricultural diffuse pollution problems and problems related to domestic/private sewage.
• In a number of instances it might be expected that there would be an improvement in the situation because of the continuation of existing environmental protection measures. This is most obvious in the case of the water industry given the large rolling investment programme but is also true of other issues (e.g. further reductions in the land area defined as contaminated). Where such information is available an assessment in the reduction in pressure is made which thereby reduces the pressures which need to be addressed under the WFD.

TABLE 3.1 STATUS-GAP ASSESSMENT - ASSUMPTIONS

4. RESULTS OF THE COST ANALYSIS

4.1 INTRODUCTION

This section summarises the results of the cost analysis undertaken on the basis of the individual business case studies and the extrapolation to the national level together with the assessment of "other costs"

4.2 COMPLIANCE COSTS

The cost analysis in this assessment has been undertaken on the basis of the individual business case assessments. Detailed assessments are given in the annex. The cost assessment in general follows the typical RIA structure by:

1. Identifying the compliance requirements for a typical business case(s) ,
2. Identifying the control costs for a typical business case(s) and
3. Identifying a means for extrapolation to the national level and applying this method.
4. Identifying the main sensitivities to the approach.

Table 4.1 presents the results of the cost analysis applied. A brief summary is presented in the following:

Agriculture - including activities abstracting water from the environment for use in agriculture and whose activities risk the contamination of surface and groundwaters.

• It is assumed that irrigators like potato growers would need to alter abstraction practices on 3,500 hectares of land where the catchment is particularly sensitive to irrigation. Affected farms would be likely to experience a 15% reduction in income as a result (approximately £9,000). Overall costs are estimated to be in the region of £1.6 million per annum.
• Arable, intensive livestock and mixed farming enterprises working 625,000 hectares of land that presents a risk for surface and groundwaters, and who are not already applying good agricultural practice, are assumed to face a statutory requirement to adopt good practices. It is further assumed that a smaller number of farms (8-15%) will need to go beyond these practices because of the sensitivity of the receiving waterbodies. In most farms costs would be around £10 per ha but significant up-front investments (e.g. farm storage) may also be required. A total cost in the region of £25 million per annum is predicted.

Industry - a wide range if industry sectors were looked at: including Food and Drink, Pulp and Paper, Mining, Forestry, Fisheries, Power and Water supply and Waste Water Treatment.

• It is assumed that enterprises operating in areas where abstractions and their related infrastructure works can degrade the water environment will need to alter their practices or undertake mitigation activities. This is estimated to affect an unknown number of distillers (research is still ongoing), 2-3 companies operating in the pulp and paper industry and 10 or so large hydro-electricity schemes. The paper industry may see investment costs in the region of £5 million for storage, while hydroelectricity would see ongoing costs of around £1.5 million per scheme because of the loss of output and the costs of providing compensation flows.
• Mining activities, particularly the legacy of abandoned mines and bings, will need to have remedial treatment systems installed to deal with mine-waters affecting 270 kms of waterbody. It is assumed that this will require an acceleration of the abandoned mine remediation programme at a cost of £0.2 to £1.5 million per scheme, with a total investment cost of £68 million.
• Forest operations covering an area of 1800 km ² where critical acid loads are exceeded (largely as a result of the emissions of acidifying gasses from transport and industry) and which are affecting some 425 kms of waterbody are assumed to adopt mitigation activities (such as catchment or lake liming). This is estimated to involve a cost of around £30 per hectare, leading to total costs of £7 million.
• All 358 active caged salmon fish farms are assumed to require the installation of wastewater treatment systems to prevent the downgrading of affected waterbodies. Investment costs of £2,000 to £3,000 per cage may be required, leading to total costs of around £40 million.
• Water industry assets that continue to contribute to the downgrading of waterbodies after all the next round of water industry investment are assumed to upgrade or discontinue use of these assets. This is estimated to affect some 222 kms of waterbody. Costs are likely to be in the region of £0.5 million per km improved, leading to a total investment requirement of £95 million.

Public authorities - including impacts due to requirements on flood protection, contaminated land and urban drainage.

• Currently installed flood protection and other engineering infrastructure which leads to significant modification of waterbodies and subsequent downgrading, will require measures to rehabilitate the affected watercourses. This is assumed to cover some 2500 kms of waterbody and cost in the region of £50,000 per km. Total costs, therefore, are in the region of £125 million.
• It is assumed that there will need to be an acceleration of the clean up of contaminated land where it affects the achievement of good status in waterbodies. It is estimated that this will require the earlier remediation of some 140 sites than would have occurred otherwise at a cost of £200,000 per site. Total costs in the region of £28 million would be expected.
• It is assumed that for some 300+ sites where the urban drainage infrastructure contributes to the downgrading of waterbodies, there will be a need to retrofit sustainable urban drainage systems. On average, retrofitting such as system would be expected to cost £150,000, total investment, therefore would be around £45 million.

Households - households will be indirectly affected by the impacts on other sectors but also directly affected for example where rural sewage treatment systems need to be improved to meet good status.

• It is assumed that around 120 instances where there are a group of houses or commercial premises whose private sewage treatment infrastructure leads to the downgrading of waterbodies (and where connection to the mains sewer is uneconomic) will need to invest in modern private sewage treatment systems. Additional costs of £600 per household would be needed to operate the systems and investments of £6,000 for construction, leading to total costs of £14 million.

TABLE 4.1 SUMMARY OF THE COST ASSESSMENT

4.3 OVERALL COSTS

Given these costs and allowing for likely concomitant operating expenditures, the estimated total cost of complying with the Directive in Scotland is £840 million. This is the present value of the incremental expenditure between 2002 and 2042. The largest part of these costs are accounted for by agriculture where the net present value of costs is £270 million. The costs of mining related problems, hydroelectricity and further improving discharges from water authorities are all in excess of £100 million. Other sectors incur costs significantly less than £100 million. The full breakdown of costs is given below.

TABLE 4.2 OVERALL COST ANALYSIS - RESULTS

4.4 OTHER COSTS RELATED TO THE DIRECTIVE

In the original study, the administrative, planning and monitoring costs were assumed to fall principally on central government and government agencies, with small administration costs falling on local authorities and the water industry. The estimated present value of costs of administrative arrangements was £2m, for the planning process £11m, and for additional monitoring and assessment approximately £44m.

During this study it has been possible to re-visit these estimates. In the case of planning, there is some benefit in drawing on the experiences in the SEPA west region of developing an interactive CD-Rom relating to water in the region. The costs of this exercise are estimated to be around £150,000 and are largely manpower related. This, however, is not considered to reflect well the costs of River Basin Management Planning the will occur as a result if the Directive as it is largely a report writing exercise which draws on existing experience in different parts of the region. Information from England and Wales may provide a more appropriate estimate. The combined cost to the Environment Agency of both the Local Environment Action Plans and the Catchment Abstraction Management Plans is estimated to cost in the region of £20 million. Taken over a six year planning period and recognising that in England and Wales there would be 10-12 River basin Districts, comparable costs in Scotland are estimated to be around £1 million per annum. Taken over the period 2002-2042 such expenditure would have a net present value of £16 million - slightly larger than the original estimate of £11 million.

A proportion of these "other costs" would fall to users through cost-recovery charges. However, it is not possible to estimate the proportion of costs that would be passed on in this manner.

There are in addition a number of costs where it is not possible to formulate an estimate at present. Chief amongst these will be the costs of implementing the priority substance requirements of the Directive. The definition of these requirements is currently ongoing but the costs are likely to be significant. Recent work by WRc for DETR (now DEFRA) suggests that costs could be very significant, particularly where there are overly stringent interpretations of concepts such as cessation and natural emissions.

There is limited information available specifically in relation to Scotland. Unlike the England and Wales for example there is no searchable consents database from which it would be possible to identify affected (point source) discharges, emissions and losses. However, in relation to the specific case of agriculture, the conclusion of a recent assessment by the NFU was that there would be some difficulties in the case of substances such as Chlorfenvinphos, Chlorpyrifos, Endosulfan and Trifluralin but a limited impact in many others (e.g. atrazine).

5. RESULTS OF THE BENEFITS ANALYSIS

5.1 INTRODUCTION

This section summarises the results of the benefits analysis. The section provides a very brief overview of the results which are presented in more detail in the accompanying report on A Benefits Analysis of the Impacts of the Water Framework Directive for Scotland, prepared by Nick Hanley.

5.2 SCOPE OF THE BENEFITS ANALYSIS

As noted in the accompanying benefits report there are some major difficulties related to undertaking an assessment of the likely benefits of the Water Framework Directive in Scotland, which mean that any assessment will be far from comprehensive and subject to considerable uncertainties. Principle difficulties encountered in this study include: the lack of sufficient explanation (prediction) of the impacts which may be valued by people in Scotland, the limited evidence base relating to peoples valuations of environmental improvements (especially in a Scottish context) and the lack of detailed knowledge about the spatial distribution of benefits and possible interactions/overlaps.

The scope of the benefits examined in this study given the limitations is summarised in the following table.

TABLE 5.1 SCOPE OF BENEFIT ANALYSIS

The benefit analysis for rivers includes:

1. Benefits arising to local residents as a result of the improvements in river quality which may affect the benefits received through amenity appreciation and formal and informal recreation,
2. The benefits falling to anglers from improvements in fishery status/establishment of fisheries where there were not possible previously,

The benefits analysis for coasts and estuaries include improvements taking place in the aesthetic quality of a small area of estuaries due to the WFD.

Not included are benefits arising in terms of non use values, although the report does present some sensitivity analysis related to these values, they are considered to be too uncertain to be included in the central estimate.

5.3 BENEFITS ANALYSIS - RESULTS

The accompanying report gives the detail of the results of the benefits analysis. In summary:

• For rivers the approach adopted in this study is to value the improvements (on a rough per km basis) on the basis of the recent results of benefits assessment work undertaken in the River Clyde. These distinguish between improvements in the attributes of river quality in terms of river ecology, aesthetics and bankside vegetation. Total benefits of between £120 and £262 million per annum are estimated to arise. The range of results reflects uncertainty regarding the benefits associated with bankside restoration. There is a greater degree of uncertainty regarding these benefits and the range reflects whether they are included or not.
• For angling, the analysis uses the results of an examination of rental values by the District Salmon Fisheries Board for the River Tay (adjusted to include social as well as private benefits). On the basis of improvements in 4456 kms of river, benefits of £10 to £58 million per annum are estimated.
• For estuaries the benefits are based on study which looked at the benefits of sewage related aesthetic improvements in the Tay Estuary. Benefits of around 11,384 per km ² are estimated to arise for the 11.67 km ² estuary downgraded for related reasons - giving rise to a total benefit in the region of 133,000 per annum.
• For coasts the analysis is based on a study which examined the benefits of local beach improvements in Ayr and Irvine in South West Scotland. This estimates a benefit of between £11,000 and £70,000 per km. Using a central estimate of £40,000 per km for the 71 km likely to be improved for sewage related reasons gives an overall estimate of around £2.9 million per annum.

The following table summarises these results.

TABLE 5.2 ANNUAL BENEFIT ESTIMATES FOR IMPROVEMENTS TO WATER BODIES IN SCOTLAND UNDER THE WFD

1. only part of this figure is included in the monetary benefits, since only reasons for upgrading related to sewage litter reduction can be valued.
2. excludes values to non-residents (i.e. non-use values and visitor values), and values where main change is to chemical status

The conclusion (replicated here from the accompanying more detailed report) is that:

• This "best guess" range clearly excludes many benefits which might be very important, as is shown in the above table. However, what we can say is that the annual benefits which can be quantified and valued are likely to be no smaller than £131 million per annum, and may be as high as £325 million per annum. The best-guess central estimate is £228 million per annum.
• However, many of the expected benefits could not be converted into monetary values. Thus the actual total economic benefits will likely be larger than £325 million/yr. This will also be the case in that, even for those impacts where monetary figures are provided, these represent only part of the value of the impact.
• One issue which is unclear is the timing of these benefits, in terms of how quickly they come on stream in the run-up to 2015. Judgements on this issue will have important impacts on the present value of the benefits stream over time.
• How do the figures above compare with the range of estimates using largely non-Scottish "industry standard" figures? The alternative analysis (in the accompany report) shows a point estimate of £142 million: as may be seen, this is towards the lower end of the range of values calculated in the table. Using Scottish-specific valuation studies thus seems to have increased the value of benefits of the Directive (although note that the overlap of benefit categories and treatments between these treatments is only partial).

6. OVERALL ANALYSIS

6.1 INTRODUCTION

This section provides a summary of the overall analysis involving the bringing together of the cost and benefits assessment work within a spreadsheet based cost benefit model. The results of a number of sensitivity analyses are also presented.

6.2 ADDITIONAL ANALYTICAL ASPECTS RELATED TO THE OVERALL ANALYSIS

The overall analysis is largely based on the results of the separate analyses of costs and benefits. However, some further assumptions are required in order to provide for an overall analysis. This largely stems from the fact that the costs and benefits are estimated to arise at different times and hence it is necessary to undertake some standardisation.

Standardisation can proceed by specifying the time at which different events take place (event profile) and then applying standard discounted cash flow techniques to predict the net present value of the impacts. It is also necessary to specify a time period for analysis.

A summary of the assumptions is provided here:

1. In terms of the event profile a central (rational) case is based on capital costs (expenditures) occur in the period 2009-2012 and the benefits begin to arise in 2015. This implies that there is little activity in relation to the Directive until 2009 and that there is an approximate 3-year delay between the improvements being completed and the benefits arising.
2. The standard treasury discount rate of 6% is applied.
3. Costs and benefits are examined over the period 2002 to 2042. This period is chosen as it is sufficiently long to capture all of the relevant costs and benefits (some of the investments in pollution control equipment have a long asset life).

6.3 OVERALL ANALYSIS - RESULTS

The following table summarises the results of the overall analysis.

6.4 SENSITIVITY ANALYSIS

The following sensitivities are performed:

• An alternative earlier costs case is examined where the costs are brought forward so that they occur over the period 2004-2012, rather than 2009-2012. Benefits arise after 2015 as in the central case. This is expected to increase the present value of costs and hence lower the net present value and reduce the BCR.
• A sensitivity regarding status derogations is applied. This is highly uncertain and for illustrative purposes only. It is assumed that through the application of derogations it is possible to reduce costs by around 30%. Given the experience with the last water industry investment round in England and Wales this would also reduce benefits by around 5%.
• A sensitivity regarding timing derogations is applied, where by the 30% of expenditure avoided in the status derogation sensitivity actually occurs in a later plan period (i.e. 2015-2021). The additional 5% of the benefits also occur following later period.
• Finally, in recognition of possible future revisions of the standard Treasury discount rate sensitivity involving a 3.5% discount rate is also applied.

The results of the sensitivity analysis are given in the following table.

TABLE 6.2 RESULTS OF THE SENSITIVITY ANALYSIS

In summary the results of the sensitivity analysis are:

• Under the earlier costs case, benefits do not alter but the present value of costs is increased from £836 to £997 million. This reduces the NPV and the BCR, but the results remain strongly positive.
• The status derogation cases are for illustrative purposes but illustrate the degree to which it is possible to increase the net present value (from £687 million to between £767 and £859 million) and the BCR (from 1.8 to between 2 to 2.5) through the application of derogations.
• The effect of using a lower (3.5%) discount rate is the increase the present value of both costs and benefits. The effect, however, if more in favour of benefits than costs and as a result the net present value and the BCR increase.