Calculating the cost of disaster vs. the price of resilience

Calculating the cost of disaster vs. the price of resilience

By June 2012, many had forgotten the devastation Hurricane Katrina wrought on New Orleans some seven years earlier. Few had the foresight to predict Sandy and the crises it would cause New York City and environs.

In the super-storm’s aftermath, most have been concerned with “getting back to normal.” A few are calling for resilient new ways to handle what’s now being dubbed the “new normal” weather pattern.

And a very few are trying to calculate the real costs of the disaster.

One of those is Prof. John Mutter, the Columbia University scientist and economist, who shared his prescient insights with me on the price of climate related disaster last spring. In the wake of Sandy, which occurred right in Mutter’s backyard (full disclosure: mine, too), he with me shared some more recent lessons learned and potential ways forward.

What is striking about Mutter’s viewpoint is his focus on the longer-term economic and business costs of such climate-related disasters—versus an immediate fix—and his suggestions of opportunities to be reaped. Instead of reconstructing what was lost, he advocates taking a longer view to understand what the often lagging and lasting costs of such disasters are.

That approach often means looking not at current losses and rebuilding what was destroyed, but rather at the costs—over time—to business and society, in the long aftermath of the event, including productivity gains that might have occurred without a disaster.

It also means looking at any current destruction less as loss but rather as opportunity to create something completely different, perhaps elsewhere, with more wisdom, foresight, practical insight and technological know-how.

In short, Mutter’s approach suggests a new and different way of calculating the costs of disaster, pointing out that the biggest loss to the economy—the chain of production, consumption and everything that goes into it—doesn’t happen in the moment of crisis but actually begins afterwards “with losses that go beyond the value of the built structures trashed at the time, beyond the capital asset loss, to a deeper economic loss that happens over time.”

He adds that a climate-related—or other—disaster is a process with three key parts: build-up, event and recovery. The recovery period is where the risk of cost builds most—and where the opportunity for genuine correction also occurs, including boosting economic growth after the initial trauma.

The post-disaster period is when we start to understand the “true impacts,” he says, adding that they will be “highly variable, and the length of time it takes to get back to where you were is uneven” for different businesses.

Who loses what, when and how?

One reason we need to look at the longer-term horizon to understand the price of disaster is that how much may be lost by whom and at what point takes some time to sort through. In the immediate term, the losses may hit one business—or kind of business—harder than others.

“The disaster affects different businesses in different ways at different times,” says Mutter. “What this speaks to is the inequality in the effects. Some will cope, some will be set back, some will lose business in a way not recoverable.”

For instance, when Sandy hit New York City on October 29, the storm would essentially decimate the Halloween business in and around New York, partly because costumes, candy and party favors wouldn’t be sold as expected (even the famous New York City parade was cancelled).

On the other hand, some businesses, like any hardware store that could stock basics such as flashlights, batteries and so on, could hardly keep up with demand.

Another case: a large grocery store chain may have enough business interruption or other insurance to cover any financial losses from a flooded store. But, he asks: “How many companies have that? A small business, like a bodega, probably wouldn’t have the same level of insurance.”

Two-quarter estimate

Mutter says it will likely take at least two quarters to estimate relatively short-term impact on most businesses after Hurricane Sandy, mainly because the process of sorting through the information (including devastation, restoration and future protection) necessary to calculate the costs of disaster takes time. An analysis would GDP numbers and quarterly profits, especially for large companies with lots of local branches, which “may be hard to see immediately in the larger figures associated with how a company is affected,” he says.

“We’ll start to see some numbers at the end of the first quarter, but more meaningful data won’t start to come through until March” of 2013, he adds.

Some businesses and industries will come back, and some will even prosper, he notes. For instance, “Construction will prosper, even though it’s a short-term thing and won’t help the local construction company that was trashed in the storm. Only those who weren’t hurt can actually help. Net/net, it may not make a difference, but locally it might, because the business that does the building” will likely be based elsewhere—where the disaster didn’t happen.”

Effects on larger companies or some sectors may take longer to dissect, Mutter warns. For instance, a multinational company with stores all over the world, may not immediately be able to assess and calculate how much business was lost at what point where—or from what immediate cause, such as supply chain interruption, power outage, transportation or other infrastructure failure or even regulations, he says.

What will be the eventual loss to businesses like gas stations—which lost power, couldn’t stock enough gasoline—and even the oil business? What will be the costs to retailers? What to the airline industry, hotel industry, utility and information technology industries? And what will be the advantages to some of those same industries over time—or to others?

Opportunity in disaster?

If we look at disaster opportunistically, what can we learn from Sandy? For one thing, says Mutter, “It’s certainly a time to think about simple things, how to protect things better, simple things like subway entrances with water-tight doors. This isn’t a feat of modern engineering.” He adds that a number of hospitals also had power failures or inadequate back-up systems, clearly things to correct.

Perhaps more important, he says, “If your infrastructure is damaged, it’s an opportunity to think about doing things better when you re-start, how to do things in a more modern way.”

That in turn means slowing down, “not rushing back to normal as quickly as possible, which would mean doing things over just as they were,” he says. “It becomes an issue of forced technological upgrades, using [the crisis] as a way to stimulate technology upgrades.”

One example is transportation infrastructure, which suffered a lot during Sandy. “It took awhile to get electricity back,” says Mutter. “But some flooded tunnels weren’t working at all. So, while New York City’s public transportation system is good, it needs new thinking on how to do things more resiliently.”

It’s also a time to rethink whether to build or rebuild housing close to the shoreline, since something like Sandy “will certainly happen again, whether it’s global warming or not, and even building barriers can’t protect some areas hardest hit,” Mutter says.

That’s a lot of people to move and regulations to change, a potential opportunity for the real estate industry—and another story.

Image by Florin Stana via Shutterstock