Academic journal article Journal of Applied Management Accounting Research

Disaster Financing: A Contingent Valuation Approach

Academic journal article Journal of Applied Management Accounting Research

Disaster Financing: A Contingent Valuation Approach

Article excerpt

Introduction

Samarco Mineiracoes, a 50-50 joint venture between Australia's BHP Billiton and Brazil's Vale, operates three iron ore mine in Mariana, Brazil. One of the dams burst on November 5, 2015, unleashing 62 million cubic metres of sludge into the Doce River at about 70km/h. It destroyed the town of Bento Rodrigues, killing at least 13 people, displaced thousands of others, affected water supplies to an estimated 250,000 people and killed fish stocks along 600 kilometres of river in two states.

Municipal councils along the river interrupted water treatment and supplies following the accident, causing grassroots campaigns nationwide to collect bottled water for residents. Although some municipalities have said the water is again good to drink, but residents are objecting to its cloudy colour and foul smell.

Samarco, which has been fined 250 million Brazilian reals ($92 million) by Brazil's environmental watchdog, IBAMA, has agreed with the Brazilian government to put R$1 billion ($366 million) into a preliminary fund for compensation and clean-up costs, and risks additional daily fines of R$10 million ($3.7 million) if does not take steps to mitigate the ecological damage. In addition, a lawsuit filed in federal court in Brasilia seeks at least $7.2 billion that would be administered by a private fund over 10 years for environmental recovery and compensation. BHP shares have fallen 20 per cent since the dam burst (Timson and Ker, 2015)

Whilst the economic, environmental and social damage as a result of this disaster is often impossible to measure, it is interesting that within a week of the Brazilian disaster, damage estimates quoting significant monetary values have been calculated and lawsuits filed.

One characteristic common to all natural disasters is that damage estimates calculated shortly afterward tend to be significantly overstated; they are hardly more than just back-of-the-envelope calculations. The factors that contribute to the over-estimation of losses vary considerably. In some cases, buildings, infrastructure and crops that appear totally destroyed may in fact be only partially damaged. To some extent, this phenomenon is also driven by the media, who like to add a monetary flavour to the disaster. Further, according to some economists who have studied natural disasters, there is also an incentive for Regions to overestimate their losses in order to maximize their political leverage over government and business disaster assistance dollars.

It also appears that the "deep pockets' of BHP have been considered when coming up with the $7.2 billion claim. This is the 'affordability' approach.

Is there a more objective approach? This paper looks at the case of another significant mudflow disaster, this time in Indonesia, to demonstrate that a 'contingent valuation' approach is more objective than the 'back-of the -envelope' or 'affordability' approaches.

This paper examines the economic, environmental, and social impact of the Sidoarjo (Lapindo or Lusi) mudflow disaster in East Java province. The paper uses a 'contingent valuation method to consider the impact to the East Java economy, the surrounding environment and the people, and the amount of public financing that is required to alleviate the consequential human suffering. The heaviest economic impact has occurred in the region surrounding the mud volcano in Sidoarjo district, but areas to the East and West have also been affected.

This paper sets out to value the total financing needed to somewhat alleviate the economic, environmental and social losses as a consequence of the human disaster known as Sidoarjo (Lapindo or Lusi) mudflow disaster in East Java province, Indonesia. Utilising a mixed-valuation method, termed 'Contingent Loss Assessment' that integrates the economic loss assessment of the disaster with a contingent valuation of the environmental and social costs. The focus of the paper is to provide a comparison between the economic predictions of the disaster financing required, and the amount of disaster financing that will better alleviate the human suffering observed, using contingent valuation method (CVM) predictions. …

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