Ladia Galaska controversy: Reconsidering the costs and benefits

Ladia Galaska controversy: Reconsidering the costs and benefits
of an environmental destruction

Andri Gunawan Wibisana
Lecturer
Environmental Law
School of Law
University of Indonesia
Jakarta
mragw@yahoo.com

On March 9, 2004, President Megawati Soekarnoputri finally
gave her approval to the Ladia Galaska highway project, expecting
that the controversy surrounding the project would finally come
to an end.

Indeed, this approval will remove -- but not stop -- the
burden of decision making from the executive branch to the court,
as currently a lawsuit over the same issue is before the Banda
Aceh district court.

Projects, such as Ladia Galaska, are vulnerable to controversy
because the decisions concerning these projects typically involve
the need to develop and protect the environment. Issues which,
unless they are thoroughly addressed, could give rise to public
outcry. Unfortunately, this problem has long been aggravated by
misunderstandings, which consider that development and
environmental protection are two conflicting interests. The
proponents of the project, either local or central government
officials, have contended that development cannot be halted for
environmental reasons (The Jakarta Post, March 9, 2004).

Others argue that the project should go on, since it has been
examined by an environmental impact assessment (EIA), and nothing
can challenge what has been approved by this assessment.

Controversies over a project proposal involving the
development of wilderness have usually stemmed from the
application of Cost-Benefit Analysis (CBA) in evaluating the
proposal.

Conservationists have argued that in CBA, all consequences are
interpreted in monetary value, from which benefits and costs will
be aggregated. When it comes to natural and other non-pecuniary
assets, however, such interpretation are highly problematic. In
this case, CBA is considered as ethically questionable as it
monetizes human life, health, safety, and the environment, and
calculates these assets as commodities.

On the other hand, economists may argue that what has been
valued in CBA is not"life" or "the environment", but people's
preferences for changes in the state of their environment, or in
the level of risk to their lives. Undoubtedly, preferences will
be revealed in terms of money, indicating people's Willingness to
Pay (WTP) to secure or prevent such changes and people's
Willingness to Accept (WTA) compensation if such changes should
occur

However, one should be aware that costs and benefits arising
from conservation could be far more difficult to measure than
those arising from development. Typically, costs and benefits
from conservation are a mix of associated cash flow and non-
market benefits. This fact would bias the decision in favor of
development because the benefits of development are readily
calculable. Consequently, this also means that conservation
benefits will automatically be undervalued.

To avoid this bias, CBA needs to take into account the Total
Economic Value (TEV) to generate a more comprehensive evaluation,
embracing several values namely: Direct use value, for instance
value that can be measured from market and survey data; indirect
use value, which corresponds to the concept of ecological
functions; option value, expressing individuals' WTP to undertake
conservation for the future use of environmental services; and
existence value, which reveals people's preference for
environmental assets unrelated to either the current or future
use of those assets.

Has the decision to approve the Ladia Galaska project
considered such values? I am afraid the answer would be negative.
Apparently, as experts say, the project would incur losses of up
to Rp 1.03 trillion due to deforestation, possible floods,
landslides and droughts (The Jakarta Post, March 29, 2004).

Of course, as I mentioned earlier, the proponents of the
project might argue that such losses are not certain. In this
case, we still could pose the question of which party should be
held liable if such losses really occurred in the future. I
believe no one would dare claim to be responsible for such huge
losses. And if there is no party that could be held liable for
paying and restoring the damage, the decision would err on the
side of safety. Unfortunately, I do not see that the decision to
approve the Ladia Galaska project has considered this
possibility.

Indeed, life is a gamble. But we can predict which stakes will
benefit us the most. And more importantly, we should bear the
costs of making a wrong bet -- not other people, let alone future
generations.

Another critique of CBA is directed at the use of discount
rates related to future costs and benefits. The idea of discount
rates comes up as it is assumed that both extra costs and
benefits will occur over time. For this reason, the future value
is discounted and converted into its present value.

There are at least two interrelated reasons as to why we need
to discount the future value.

First, the value of money that we invest today will grow over
time because of the presence of a positive interest rate.

Second, owing to the productivity of capital and the
diminishment of marginal utility, economists believe that people
living in the future will be wealthier than those living today.
Thus, the same sum of money will be worth more today than in the
future. In this manner, the same marginal unit of damage will be
less damaging for the welfare of future generations than for that
of the current generation.

Clearly, by employing a discount rate, the cost of serious
damage that could occur in the future would be relatively
negligible today, depending on the discount rate assigned.

Consequently, discounting would make it difficult for us to
justify, say, the conservation of a pristine area such as Leuser
ecosystem, to prevent significant damage from occurring in the
future. Typically, discounting could lead to an opinion stating
that the best thing we can do to avoid damage in the future is to
do nothing.

All in all, the presence of economic growth expressed in
financial terms does not necessarily mean that the people are
environmentally better off. The environment can be degraded
although economic growth occurs. In this sense, even though
growth occurs, it cannot be said that future generations would be
automatically better off environmentally than the current
generation.

One should bear in mind that the lower the discount rate, the
greater the present value would be. And concerning environmental
impact, lowering the discount rate would give more weight to
environmental costs, thus making it less likely that projects'
potential to create such costs would pass the CBA test.

In this regard, some economists have suggested that a lower
discount rate should be employed, closer to zero, for cases that
are likely to give rise to the depletion of environmental
resources or a catastrophic event, or that would undermine future
generation's capabilities to avoid damage.

It is hoped that the judges will thoroughly consider the
environmental costs of the Ladia Galaska project when reaching
their decision. On the other hand, the President's approval of
the project, and arguments contrasting environmental issues with
the need for development, do not constitute valid reasons for the
judges to uphold the approval.

Already, in the late 1960s and early 1970s, some prominent
economists suggested the need to take into account the
irreversibility of the development of wilderness areas. They
argued that the irreversibility factor should induce decision
makers to err on the side of conservation. Thus, waiting for new
information concerning the impact of the proposed development and
better alternatives to this proposal is more desirable.

Legally, the judges could invoke the precautionary principle,
a legal principle recognized by the 1992 Rio Declaration and
various environmental conventions that we have ratified, as valid
grounds for their decision. Here, the threat of irreversible and
serious damage constitutes a legitimate reason to take measures
that can prevent such a threat from occurring.

Conversely, the lack of scientific certainty concerning the
relationship between the threat and the damaging effects cannot
be used as a reason for postponing the implementation of such
preventive measures.

Of course, there is an inevitable need to consider also the
costs (and the forgone benefits) that would be incurred by taking
such measures. This need, however, indicates that we have to
reconsider seriously the evaluation of the Ladia Galaska project:
this time by incorporating the EIA, CBA, and the precautionary
principle into our decision-making process.

The writer is a Ph.D researcher at the Faculty of Law,
Universiteit Maastricht, the Netherlands.