Trade Off Modelling

One key issue currently being debated is how to reconcile competing priorities in commercial enterprises.

For example whether Iwi and Māori organisations should;

  • prioritise creating jobs for tribal members over a maximising commercial profit
  • prioritise the reclamation of sites of significance
  • evaluate the broad and long term environmental possibilities from different types of investments and interactions with the landscape

This section presents two tools that may assist organisations to quantify multiple priorities and values, including:

  • Ecosystems modelling – which enables different scenarios to be modelled for their impact on the environment
  • Monetising social and cultural return – to enable a comparison with profit returns in the same unit (without suggesting that social or cultural returns should be monetised)

Ecosystems Modelling

Iwi have deep traditions that recognise the fundamental importance of the ecosystem to human health and well-being. The Natural Capital Project has developed the first stage of a modelling tool (InVEST 1.0) that can assist with modelling the impacts of different types of economic development on ecosystems. The tool has been developed to help answer questions such as:

  • How will alternative patterns of urban growth impact the production of ecosystem services?
  • How does a proposed hydropower management plan affect hydropower production, biodiversity, water quality and recreation?
  • Where would reforestation achieve the greatest sustainable timber production and value for carbon sequestration and crop pollination?

The tool is based on engaging with stakeholders to develop scenarios, and then modelling those scenarios to determine their impact on the economy, human well-being and the environment.

InVEST 1.0 includes models for:

  • carbon sequestration,
  • pollination of crops,
  • managed timber production,
  • water pollution regulation and
  • sediment retention for reservoir maintenance.

It also includes a biodiversity model so that comparisons and trade-offs between biodiversity and ecosystem services can be analysed.

The next release of InVEST will include a suite of new ecosystem services:

  • flood mitigation,
  • agriculture production,
  • irrigation,
  • open access harvest and
  • hydropower production.

The tool is modular. You do not have to model all the ecosystem services, but rather can select only those of interest.

InVEST 1.0 is likely to be particularly helpful for Iwi and Māori organisations working with whānau and hapū to evaluate the desirability of land based developments, as it will provide a framework for identifying, depicting and analysing different scenarios for whānau. It may also be helpful for RMA processes.

InVEST 1.0 is also an open source tool that can be freely used, however there are some minimum ICT requirements to run the programme. More information is available at www.naturalcapitalproject.org/InVEST.html

Social And Cultural Return Modelling

Social Return on Investment (SROI) is becoming increasingly prominent as a way to assess government spending on social services and to measure the amount of benefit created.

SROI is based on monetising the social benefit created, and comparing it to the amount of money invested to create the benefit. From there assessments can be made on how worthwhile or cost efficient the initial investment was.

The SROI model could be used by Iwi and Māori organisations for a slightly different purpose to help with trade off decisions and help answer questions such as:

  • Should the organisation take a lower return on a particular investment in order to reclaim the ownership rights over significant sites? SROI will demonstrate that $X of cultural return will be gained for $y less commercial return. The board will then be able to use their judgment as to whether $X cultural return justifies the profit sacrifice.
  • Which asset should the organisation acquire where one offers the prospect of creating 10 jobs for tribal members but has a lower return profile than another asset that will only create 2 jobs? SROI will demonstrate 10 jobs generate $X social return for a financial cost of $y. The board will then be able to use their judgment as to whether $X social return justifies the profit sacrifice.

The SROI model could also be used to evaluate the benefit created by tribal programmes, however because it is a time intensive tool it may not be justifiable for organisations with limited resources. SROI may also be seen as inappropriate by some organisations because of ideological positions on monetising social and cultural return.

Using SROI

The working model for SROI is as follows:

1. Identify social and cultural values

For example, the acquisition of sites of significance, job creation for tribal members, water quality standards, less waste to landfill.

2. Develop financial proxies for social and cultural values

Creating financial proxies is about identifying a placeholder that represents the value people place on social and cultural values identified in step 1. Some options for developing financial proxies include:

  • Cost savings – identify the cost savings that will be created through the social or cultural value. For example, less waste to landfill will result in a cost saving on landfill charges.
  • Increase in income – identify the increases in income that will be associated with creating jobs for tribal members.
  • Contingent valuation – which relies on asking people how much they would pay for particular outcomes or expect in compensation for a particular event. For example, ask people how much they would expect in compensation for the local water body becoming degraded to such a state that they could no longer practice mahinga kai.
  • Revealed preference – assess the value premium or discount across particular amenities or qualities. For example, compare the values of 2 similar land parcels one with secured access to water, and the other without water rights.
  • Travel cost method – quantify the amount people pay for travel to various goods, services or amenities. For example, travel cost could be a partial contributor to assessing the value of a particular site of significance by quantifying the amount people currently spend to travel to the site.
  • Average household spending – use the average amount that is spent on particular categories of goods. For example the average amount spent on leisure activities adjusted to represent the value of continuing cultural practices.

3. Calculate impact

The basic formula is:

financial proxy (expressed in $ terms) x quantity of outcome = total social/cultural value

In a scenario where 10 tribal jobs are created for formerly unemployed tribal members the financial proxy would be the income increase generated. A hypothetical figure could be $15,000 (on the basis that the starting wage for the jobs is $15k higher than the unemployment benefit), the formula would be:

$15,000 x 10 = $150,000 social value created

The formula can also be subject to a sensitivity analysis that adjusts the total social value according to the amount of change that would have occurred anyway (deadweight), how much of the benefit created is counterbalanced by a negative impact elsewhere, how long the outcomes last, and how much of the benefit can be attributed to the particular initiative.

4. Further Analytics

The SROI model can also be used to generate the payback period for the investment in social/cultural return, net present value of social impact, and the ratio of SROI to financial investment.

Examples of Financial Proxies

Developing financial proxies requires a reasonable depth of analysis. As yet, there does not appear to be any work in New Zealand on the valuations behind financial proxies. However, the UK has developed an extensive database of financial proxies across social and environmental outcomes. These proxies are potentially helpful in identifying suitable proxies, but the valuations will need to be adapted to New Zealand (including in terms of currency as well as evaluating whether the subjective valuations (contingent valuation) are shared in NZ). The UK database is available at www.sroiproject.org.uk

More Information

For those who consider SROI may have value for their organisation, there are a number of SROI resources available on the internet, and a particularly helpful user guide is available at www.socialevaluator.eu.

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