From Depreciation to Full Replacement Cost: Evaluating Compensation Gaps in Infrastructure Resettlement

Abstract

The construction of large-scale infrastructure projects has a significant impact on the residents. In this study, a total of18 households that were affected by damage induced by construction activities such as blasting were considered. The owners were compensated on a depreciation-based replacement under the Building Valuation Procedure, 2070, which mentions explicitly that it can be used for compensation. The study shows that compensation is determined by a single factor of age-to-building-life ratio without consideration of physical damage to the structure. Since the international compensation frameworks including The World bank and Asian development bank excludes depreciation from replacement cost. Using the Building Valuation Procedure, 2070 and the Bagmati Province rate schedule (FY 2078/79), we reconstruct the full valuation and compare two valuations of each dwelling that differ only in the depreciation step. The consideration of mixed-structure types is done to calculate the deduction by rate; restoration adequacy between long-life (n=75) and short-life (n<75) construction classes was assessed with a Mann–Whitney U test. Depreciation deducted from compensation ranged from just 4% for a newer concrete home to 55.6% for a seven-year-old earthen house. This was due to variation in depreciation of earthen material, which depreciates at 10% per year versus 1.33% for concrete. Traditional homes received an average adequacy ratio of 0.80 for every rupee required to rebuild compared to the earthen dwelling which received just 0.44. Compensation strategies based on depreciation fall disproportionately on vernacular construction. The 9.7% depreciation gap also understates the true shortfall in compensation as transitional costs, transportation costs, lost income and other factors required under World Bank and ADB frameworks tend to remain wholly unaddressed. Inserting a no-depreciation standard into Nepal's domestic compensation procedure would be a remedial measure against this inequity at a minimal increase in overall compensation granted.