Investigation Safety Costs

The investigation, carried out by the so-called “investigation team” studying the potential of a safety project, brings with it costs related to the investigation and audit activities, internally (the health and safety department of the company) or externally, or both. The purpose of this effort is to check whether additional safety measures or upgrades to the existing safety system are possible and necessary. The costs can be estimated and/or calculated by multiplying the hourly wage of an employee by the number of hours the investigation/audit takes, and again by the number of employees participating in the investigation or audit. If, however, employees with significantly varying wage levels participate, the investigation team costs can be calculated separately for each category of employees. Another possibility is to take the average wage level of all employees participating, in order to simplify the work and only have to work with one category.

This calculation is represented by the following formula:

where is the number of employee categories.

Selection and Design Safety Costs

If the investigation or audit suggests that upgrades in the safety system are possible or necessary, a prevention and/or mitigation measure will have to be selected and designed. Such a measure is, of course, accompanied by costs, which can be calculated by multiplying the hourly wage of all employees involved by the number of hours they work on the design, and then again multiplying by the number of employees participating. They can also be calculated separately for categories of employees with varying wage levels.

This calculation is represented by the following formula:

where is the number of employee categories.

Material Safety Costs

The actual safety measure, and the components that constitute it, also sometimes requires a budget (e.g., in case of a dyke that needs to be built around a storage tank). The material costs and costs related to the creation of the safety measure can be calculated by multiplying the price per unit of the necessary materials by the number of units the company requires to create the safety measure.

This calculation is represented by the following formula:

where is the number of different materials.

Training Safety Costs

In order to calculate these safety costs, the assumption is made that the company provides training to its employees working in the facility related to the new safety measure. It is assumed that some employees or external consultants or coaches will be given the task of disseminating the necessary information and explaining how to work with the new safety measure and how to handle it properly in the case of an emergency. The costs arising because of this assignment to some employees or external consultants or coaches can be calculated and estimated by multiplying the hourly wage of an employee by the number of hours this process takes, and again by the number of employees participating in the assignment. If, however, employees with significantly varying wage levels participate, the training costs can also be calculated separately for each category of employees. Another possibility is to estimate the costs by taking the average wage level of all employees participating, so you only have to work with one category.

This calculation is represented by the following formula:

where is the number of employee categories.

Changing Guidelines and Informing Safety Costs

In order to calculate the costs resulting from the required changes to guidelines and the necessary disseminating activities, the assumption is made that in addition to training, the company will inform the personnel of the new safety measure through some kind of brochure, newsletter, or guide. This brochure will also contain the altered guidelines and safety instructions. These costs can be calculated by multiplying the price per unit of brochures/guides by the number of them needed. One unit can, in this case, either represent one brochure or a pack of brochures that may contain, for example, 100 brochures. This will depend on which price is used, the price per brochure or the price per batch of brochures (procedures).

This calculation is represented by the following formula:

where is the number of different brochures.

Production Loss Safety Costs

When a safety measure is implemented, in some cases the production has to be stopped temporarily, resulting in a production loss. This production loss is accompanied by costs because of the non-producing status of the facility or installation. Production loss safety costs can be calculated by multiplying the production capacity/rate of the facility by the duration of the stop, and again by the profit per unit sold [7].

This calculation is represented by the following formula.

Start-up Safety Costs

The implementation of a new safety measure can cause a temporary slowdown in production due to the required restart of the facility (because of the required production halt due to safety measure implementation). The costs related to the temporary slowdown in production for safety-related reasons are called start-up safety costs and can be calculated by multiplying the difference in production rate before and after the halt in production by the duration from the time the production line is reactivated after the implementation of the new measure to the time it returns to the initial production rate, and again by the profit per unit sold [7].

This calculation is represented by the following formula.

Note that if the production rate at the time of the start-up is exactly the same as the production rate before the halt in production, the start-up safety costs will be zero.

Equipment Safety Costs

The installation of a new safety measure usually requires equipment (to be bought or rented). Equipment indicates all kinds of working tools, but also, for example, machinery and modes of transportation. These equipment costs can be calculated by multiplying the price per unit of the equipment by the units needed to install the safety measure.

This calculation is represented by the following formula:

where is the number of different equipment categories.

Installation Team Safety Costs

The installation team safety costs are related to the employees who are installing the new safety measure in the facility. These can be calculated and estimated by multiplying the hourly wage of the participating employees by the number of hours the installation takes, and again by the number of employees involved. If employees with significantly varying wage levels are involved, the installation team costs can be calculated separately for each category of employees. Another possibility is to take the average wage level of all employees participating, and thus work with just one category.

This calculation is represented by the following formula:

where is the number of employee categories.

Material Safety Costs

Maintenance of safety measures requires replacements for decrepit materials. The material costs of the replacement materials can be calculated by multiplying the price per unit of the materials by the units needed for the maintenance of the safety measure per year.

This calculation is represented by the following formula:

where is the number of different materials.

These costs represent the maintenance material costs of one maintenance period, which is defined as one year. Thus if it is assumed that maintenance occurs on a yearly basis and the yearly cost is always the same, termed , the total present value of all maintenance materials needed during the lifetime of the safety measure can be calculated by taking into account a discount factor, because the maintenance material costs occur throughout the remaining lifetime of the facility. The total present value is then given by the formula in the following box for annuities, as discussed in Section 5.2.4, (Eq. (5.4)).

Maintenance Team Safety Costs

The maintenance team safety costs are related to the maintenance activities of employees for the installed safety measure(s). These can be calculated and estimated by multiplying the hourly wage of such an employee by the number of hours the maintenance takes, and again by the number of employees participating. If employees with significantly varying wage levels are participating, the maintenance team costs can be calculated separately for each category of employees. Another possibility is to take the average wage level of all employees participating, and thus work with just one category.

This calculation is represented by the following formula:

where is the number of employee categories.

These costs represent the maintenance team costs for one maintenance period, which is defined as 1 year. Thus, if we assume that maintenance occurs on a yearly basis and the yearly cost is always the same, termed , the total present value of all maintenance teams needed during the lifetime of the safety measure can be calculated by taking into account a discount factor, because the maintenance team costs occur throughout the remaining lifetime of the facility. The total present value is given by the formula in the following box for annuities, as discussed in Section 5.2.4, (Eq. (5.4)).

Production Loss Safety Costs

When maintenance is periodically necessary for the optimal functioning of the safety measure, sometimes the production has to be stopped temporarily, resulting in a production loss. This production loss is accompanied by costs arising from the non-producing status of the facility. Production loss costs per maintenance period can be calculated by multiplying the production rate of the factory/refinery by the duration of the stop, and again by the profit per unit sold [7].

This calculation is represented by the following formula.

These safety costs represent the maintenance production loss safety costs of one maintenance period, which is defined as 1 year. Thus, if it is assumed that maintenance occurs on a yearly basis and the yearly cost is always the same, termed , the total present value of all maintenance production loss during the lifetime of the safety measure can be calculated by taking into account a discount factor, because the maintenance production loss costs occur throughout the remaining lifetime of the facility. The total present value is given by the formula in the following box, (Eq. (5.4)).

Start-up Safety Costs (after Maintenance)

Maintenance of a new safety measure can cause a temporary slowdown in production due to the restart of the facility after halting production for necessary maintenance. The costs arising from the temporary slowdown in production are called start-up costs, and can be calculated by multiplying the difference in production rate before and after the halt in production by the duration from the time the production line is reactivated after the maintenance period of the safety measure to the time it returns to the initial production rate, and again by the profit per unit sold [7].

This calculation is represented by the following formula.

Notice that if the production rate at the time of the start-up is exactly the same as the rate before the halt in production, the start-up costs will be zero.

Also notice that the safety costs above represent the maintenance start-up safety costs of one maintenance period, which is defined as 1 year. Thus, if it is assumed that maintenance occurs on a yearly basis and the yearly cost is always the same, termed , the total present value of all maintenance start-ups during the lifetime of the safety measure can be calculated by taking into account a discount factor, because the maintenance start-up costs occur throughout the remaining lifetime of the facility. The total present value is given by the formula in the following box, (Eq. (5.4)).

Transport and Loading/Unloading of Hazardous Materials

The transportation of materials and substances, such as the transport of gas cylinders, entails costs due to existing legislation and to extra measures for safety. Transport indeed requires compliance with existing regulations (e.g., ADR18) during transportation and during loading and unloading of goods, and sometimes extra safety measures are needed.

The transport costs of materials can be calculated by multiplying the transport price per material unit or good with the number of units or goods transported, for all materials that need to be transported.

where

These costs represent the transport safety costs of all materials transported during 1 year. Thus, if it is assumed that these costs occur on a yearly basis and the yearly cost is always the same, termed C_transp, the total present value of all transport costs can be determined by the formula in the following box, (Eq. (5.4)).

Storage of Hazardous Materials Safety Costs

The storage costs can be determined by multiplying the storage price per material unit or good by the number of units or goods stored, for all materials that needs to be stored:

where

These costs represent the storage safety costs of all materials stored during 14 years. Thus, if it is assumed that these costs occur on a yearly basis and the yearly cost is always the same, termed C_storage, the total present value of all storage costs can be determined by the formula in the following box.

Drafting Control Lists Safety Costs

It is necessary to draft control lists for transportation and storage [9]. The total cost of drafting such lists is obtained by multiplying the hourly wage of persons responsible for the drafting by the number of hours needed to draft the lists per category of person, and summing all categories and persons. This cost only needs to be considered once, as once the lists have been drafted, they can be reused afterwards.

This calculation is represented by the following formula:

where t is the number of employee categories.

Safety Documents Safety Costs

Safety documents periodically need to be filled in by employee(s) [9]. The cost arising from the filling in of safety documents can be determined by multiplying the hourly wage of those employees by the number of hours needed to fill in the documents and again by the number of employees participating. If employees with significantly varying wage levels participate, the safety documents safety costs can be calculated separately for each category of employees. Another possibility is to take the average wage level of all employees participating, and thus work with just one category.

This calculation is represented by the following formula:

where t = number of employee categories.

These costs represent the safety document safety costs of one period, which is defined as, say, 1 year. Thus, if it is assumed that these costs occur on a yearly basis and the yearly cost is always the same, termed C_SD, the total present value of all teams needed during the filling in of safety documents is calculated by considering a discount factor, because the safety document costs occur yearly for the remaining lifetime of the facility under consideration. The total present value is given by the formula in the following box.

Contractor Selection Safety Costs

Contractor firms need to be chosen with “safety” as one of the most important selection parameters. The selection is conducted by employees of the company, and the costs can thus be determined by taking these employee costs into consideration.

This calculation is represented by the following formula:

where t is the number of employee categories.

These costs represent the contractor selection safety costs for one period, which is defined as, say, 1 year. Thus, if it is assumed that these costs occur on a yearly basis and the yearly cost is always the same, termed C_Sel, the total present value of all contractor selection procedures is calculated by considering a discount factor, because the contractor selection costs may occur yearly for the remaining lifetime of the facility under consideration. If the contractor selection costs only need to be incurred once, there is evidently no need to use a discount factor and calculate a NPV. If another time period is used for the selection, e.g., a 5-year period, the formula needs to be adjusted for this. The total present value for a 1-year period is given by the formula in the following box.

Contractor Training Safety Costs

Contractor employees, when selected by a company, often need to receive safety training within the company, as well as receiving instructions and guidelines for working at or with certain installations. These extra costs, which are related to safety, should also be taken into consideration.

This calculation is represented by the following formula:

where t is the number of employee categories.

These costs represent the training safety costs of one period, which is defined as, say, 1 year. Thus, if it is assumed that these costs occur on a yearly basis and the yearly cost is always the same, termed C_ST, the total present value of all safety training needs is calculated by considering a discount factor, because the safety document costs occur yearly for the remaining lifetime of the facility under consideration. The total present value is given by the formula in the following box.

Production-related Avoided Costs (Type I + Type II)

When an accident occurs, it is possible that (a part of) the production will be halted, resulting in a production loss. This production loss is accompanied by costs because of the non-producing status of (a part of) the factory or plant. Production loss costs can be calculated by multiplying the production capacity/rate of the facility by the estimated duration of the halt, and again by the profit per unit sold [7].

This calculation is represented by the following formula.

Start-up Avoided Costs (Type I + Type II)

When the production is re-started after an accident, a temporary slowdown in production due to the restart of the facility can occur. The costs accompanied by the temporary slowdown in production are called start-up costs, and these can be calculated by multiplying the difference in the production rate before and after the halt in production by the duration from the time the production line is reactivated after the accident occurred to the time when the production line returns to the initial production rate, and again by the profit per unit sold [7].

This calculation is represented by the following formula.

Note that if the production rate at the time of the start-up is exactly the same as the that before the halt in production, the start-up costs will be zero.

Schedule-related Avoided Costs (Type I + Type II)

If an accident occurs, this will also affect the production timetable of the factory, which can cause problems with clients. The possibility exists that clients may cancel one or more contracts, or may demand a lower price due to the delay. One solution may be to hire a contractor who can help the company to provide the necessary products to meet the company's time schedule. However, a scheduling problem will not only affect clients and customers, but also partners and suppliers. If the company produces part of a product and a partner company finishes the partly completed product, the partner company will also face supply chain costs, as the company will have to wait longer for the partly completed products to arrive. In the case of suppliers, the problem is that, if the company cannot produce, its inventory stays the same. Because of the latter the company will not need fresh suppliers at the normal rate, and thus the agreements with suppliers will have to be changed/canceled, which will also cause the suppliers some scheduling problems.

The costs arising from these scheduling problems can be arrived at by adding up three aspects. The first is obtained by multiplying the fine for a canceled order/contract by the number of canceled orders/contracts. The second is obtained by multiplying the fine due to delays in deliveries per day by the number of days the orders are late, and again by the number of orders that have a delay. Finally, the third cost is calculated by multiplying the number of units supplied by the contractor, by the difference between the cost per unit charged by the contractor and the in-house cost per unit [7].

This calculation is represented by the following formula.

Avoided Costs with Respect to Damage to Own Material/Property (Type I + Type II)

An accident may lead to damage to buildings, infrastructure, products, machines, and so on. These costs are labeled as “damage costs” and are usually taken into account in any CBA.

These avoided costs are represented by the following formula.

Avoided Costs with Respect to Damage to Other Companies' Material/Property (Type II)

An type II accident might cause damage to other companies' material and property, in addition to damage to the company's own assets. The company needs to pay for the damage incurred by other companies, as they will probably file claims against the company that caused the damage [8]. These costs are also labeled as damage costs, and should be taken into account in an economic analysis.

These avoided costs are represented by the following formula.

Avoided Costs with Respect to Damage to Surrounding Living Areas (Type II)

An type II accident sometimes causes damage to residential properties. The company will have to pay for this damage, as the inhabitants are likely to file claims against the company that caused the accident. These costs are also labeled as damage costs and should be taken into account in the CBA. For example, in the case of the major accident that occurred in Buncefield in Hertfordshire, UK, in 2005, there was widespread damage to both commercial and residential properties near the site. Some properties close to the depot were destroyed, while others suffered damage. As a consequence, about 2000 people had to be evacuated from their homes, some for long periods of time. In addition, properties as far as 8 km away from the Buncefield site suffered minor damage, such as broken windows [13].

Another example is the Deepwater Horizon disaster that took place in the Gulf of Mexico in 2010. The consequences to the flora and fauna in the Gulf of Mexico and along the Louisiana coastline were truly disastrous and, as a result, the local fishermen's economy simply ceased to exist for a certain period, which led to huge compensation claims.

Such avoided costs can be represented by the following formula.

Avoided Costs with Respect to Damage to Public Material/Property (Type II)

In some cases, a type II accident will cause damage to public material and property. The company needs to pay for that damage as well, as the local government will probably file claims against the company that caused the accident [8]. These costs are also labeled as damage costs.

These avoided costs are represented by the following formula.

Fines-related Avoided Costs (Type I + Type II)

If an accident occurs, the government and other organizations will try to identify responsible individuals or a responsible group of individuals. In some cases the company as a whole will be held responsible for the accident, while in other cases employees, managers or other persons may be held responsible [14].

Responsible persons or the responsible organization may be exposed to civil liability, administrative liability and/or criminal liability for the major accident. Having both administrative and criminal liability carries with it the obligation of paying fines. The difference between the two types of liability is explained here. Criminal liability arises when someone or some organization has hurt or killed people, or the property has been destroyed on purpose, whereas administrative liability comes into play when one has not operated and behaved according to the law and to prescribed procedures and methods. Thus, if an accident is caused due to violations of safety procedures and/or through breaking the law, the organization may be exposed to fines and claims by the authorities due to the administrative liability [7, 14]. Another difference lies in the importance and weight of the sentence, which are significantly different. On top of the fine, criminal liability will result in a criminal record and there may be serious punishment as a consequence, such as a custodial sentence. This is not the case with administrative liability, which only results in a fine.

Consider, as an example, the major accident that took place at Total's ammonium nitrate warehouse in the AZF fertilizer factory in an industrial zone in Toulouse, France. As a result of this accident, 30 people were killed and about 3000 were injured. Serge Biechlin, the former CEO of the Total subsidiary, Grande Paroisse, received a criminal liability fine of US $58 000 and was sentenced to 1 year in prison. The court decided on a 3-year jail term, 2 years suspended, and a US $58 000 fine for manslaughter. Grande Paroisse also received a criminal liability fine of €225 000, which is the maximum amount possible. The court ruled that Biechlin had contributed to creating the situation that resulted in the damage and did not take steps to avoid it, and had also exposed employees and the surrounding population to a serious risk [15].

However, these fines are usually negligible compared to the compensation one has to pay for being exposed to civil liability after a major accident. Civil liability means compensating for every form of damage that arises as a consequence of the major accident. Thus the responsible party has to compensate for lost lives, injured people, materials, buildings, and so on [14]. In the case of the major accident at AZF, as a result of civil liability, Grande Paroisse has paid out more than €2 billion (US $2.7 billion) in compensation to more than 16 000 victims, according to Total's figures [15].

In former times, governments and other organizations always held individuals responsible for major accidents, and they therefore paid the price for having the criminal, administrative, and civil liability. They did this because organizations and companies could not be held liable for major accidents. This has now changed, and companies can be sentenced and forced to pay fines. Because companies cannot go to jail, managers and other employees are still being pursued over fines and possible jail time [14].

Another example of managers of industrial facilities being held responsible for a major accident is the case of the 1984 gas disaster at Union Carbide's pesticide plant in Bhopal, India. Even 30 years after the accident, India was still pushing the US to extradite Warren Anderson, the former boss of the facility. Right up until he died in 2014, he faced charges of criminal negligence, and thus probably would have been sentenced to prison if the US had agreed to send him to India. Anderson was initially arrested in India after the catastrophe, but then managed to flee the country. From 1984, the US authorities turned down frequent extradition requests for Anderson. Seven local managers who were working at the Union Carbide plant in 1984 were convicted [16].

These avoided costs are represented by the following formula.

Interim Lawyers Avoided Costs (Type II)

If a major accident occurs, the government will assemble a research team to discover what caused the accident and what the consequences are for the country, society, and environment. A company lawyer will also be assigned to help carry out this research and this person will therefore be unavailable in his or her usual company role. Therefore the company will need to hire an interim lawyer for the full duration of the research.

The costs related to the hiring of interim lawyers due to the occurrence of a major accident can be calculated and estimated by multiplying the daily wage of such a lawyer by the number of days he or she will be hired, and again by the number of lawyers that the company wishes to hire. If, however, the company decides to hire both junior and senior interim lawyers, the user may want to calculate the costs separately for both categories of lawyers.

These avoided costs are represented by the following formula.

Specialized Lawyers Avoided Costs (Type II)

In the event of a trial regarding major accidents, companies will hire lawyers who are specialized in these types of disaster. These lawyers will require substantial salaries and are expensive for any organization, even for a large multinational, as trials surrounding major accidents can take several years. However, the costs of specialized lawyers vary widely depending on the country in which the accident occurs or where the trial takes place. Often a deal is made between the two parties or a flat-rate amount is used. In any case, trials and lawsuits surrounding major accidents that take several years can easily cost the company hiring specialized lawyers several millions of euros [14].

The costs related to the hiring of specialized lawyers after a major accident can be calculated and estimated by multiplying the hourly wage of such a lawyer by the number of hours he/she will be hired, and again by the number of lawyers that the company wishes to hire. If, however, the company decides to hire specialized lawyers with widely varying wage levels, the user may want to calculate the avoided costs separately for those categories of lawyers.

This calculation is represented by the following formula:

where t is the number of lawyer categories

Internal Research Team Avoided Costs (Type II)

Independent of the research team assembled by the government and of any investigation carried out by other organizations involved in the major accident, a research team will always also be assembled by the company itself. This research team will mainly consist of health and safety experts and other specialists, and its purpose is to analyze the available information to identify the possible causes of the accident and make recommendations aimed at preventing similar accidents in the company's plants in future [14, 17].

An example of such a team is BP's investigation team after the Deepwater Horizon accident. The team began its work immediately in the aftermath of the incident, working independently of other accident response activities and organizations. When the investigation was being conducted, numerous similar investigations were ongoing. These included investigations by the US Coast Guard, the Bureau of Energy Management, the Regulation and Enforcement Joint Investigation, Transocean, the President of the United States' National Commission, and the Norwegian Institute for Water Research. More than 50 specialists, both internal and external, participated in the investigation of BP itself. The people involved were specialists in safety, drilling, exploration, well control, subsea engineering, and many more related fields. The outcomes of the research done by the government and the company will serve as evidence in determining the liable party [14, 17].

The costs related to the internal team investigating a major accident can be calculated and estimated by multiplying the daily wage of people participating by the number of days they will be hired, and again by the number of people the company wishes to assemble. If employees with significantly varying wage levels participate, the user may want to calculate the internal investigation team costs separately. Another possibility is to take the average wage level of all employees participating, meaning the user of the tool will only have to work with one category.

This calculation is represented by the following formula:

where t is the number of employee categories

Experts at Hearings Avoided Costs (Type II)

In addition, experts in their field will sometimes be invited to testify and state their opinion in court. The party that is held accountable for a type II accident will pay the salary of these experts. The company will also have the possibility of hiring additional experts, to challenge the findings of the initial experts.

The costs related to the hiring of experts due to the occurrence of a major accident can be calculated and estimated by multiplying the hourly wage of experts participating by the number of hours they will be hired, and again by the number of experts that the company wishes to hire. If experts with significantly varying wage levels participate, the user may want to calculate the experts' costs separately. Another possibility is to take the average wage level of all experts participating, meaning the user of the tool will only have to work with one category.

This calculation is represented by the following formula:

where t is the number of expert categories

Avoided Costs Related to Legislation Changes (Type II)

Companies all over the world have invested resources in the field of safety as a response to legislation and directives. For instance, in Europe the major industrial accident prevention legislation is called the Seveso Directive, the first version of which was issued in 1982 as a result of the major accident that occurred in Seveso, Italy, 6 years earlier, in 1976. Vierendeels et al. [18] indicate that there are two drivers for legislation changes: (i) scientific progress and societal changes; and (ii) a shock effect (i.e., major accidents). However, the exact relationship between the occurrence of a major accident and a change in legislation is not unambiguous, and this relationship is discussed here. First, the history of major risk regulation is explained, and the connection between the occurrence of major accidents and legislation is clearly underlined.

At the beginning of the nineteenth century, more specifically the year 1810, the first regulation regarding major risks was born, as a result of an accident in 1794 in Grenelle, France, in which about 1000 people died. Over the following decades, similar catastrophes occurred in Europe, triggering the enactment of similar legislation regarding major industrial risks. In 1982 the first European Directive concerning major risks, Seveso I, was issued as a response to major accidents in Flixborough in the UK (in 1974) and Seveso in Italy (in 1976). The legislation has been changed several times since then, mainly because of subsequent major industrial accidents. For example, the accident that occurred at Bhopal in India in 1984 and the Rhine pollution at Basel in Switzerland in 1986 resulted directly in new amendments in 1987 and 1988. Together with major accidents in Mexico City in 1984 and on the Piper Alpha oil rig in 1987, these accidents resulted in changes in legislation, and in 1996 the Seveso II Directive was approved. However, major accidents continued to happen and mainly because of the shock effects, such as caused by the accidents in Baia Mare in Romania in 2000, Enschede in the Netherlands in the same year, and Toulouse in France in 2001, the legislation was changed and amended again in 2003. On June 1, 2015, a new version of the legislation for major risks, the Seveso III Directive, entered into force in Europe. It is clear, then, that legislation is subject to frequent changes as new accidents and new challenges arise. This is a time-consuming and costly process not only for governments, but also for private companies, as they have to analyze and implement the altered regulations in order to comply [18].

There is, therefore, clearly a correlation between the occurrence of major accidents and legislation changes, and, as already indicated, it is a result of the so-called shock effect. An accident can have a shock effect on regulation if the consequences are severe enough. A study by Vierendeels et al. [18] indicates that an accident causing 20 casualties, or even, in some cases, eight to 10 casualties, can have such a shock effect. The difference in the number of victims that can produce such an effect is explained by the fact that the media and the public, and thus also the politicians, often perceive an event as less significant if the casualties are employees or rescue workers, and more significant if they are civilians from the surrounding community. The number of fatalities, however, is not the only cause of a significant shock effect that can lead to a change in regulation. Others include, for example, a visible and traceable disposal of chemical substances in air, water, or soil that could have long-term health effects as well as the cost of an accident. If the accident costs exceed €1 billion, it is highly probable that the resulting shock effect will be large enough to bring about a change in legislation, even if there are no casualties involved [18].

Future changes in major accident legislation will be accompanied by a large financial, administrative, and operational burden. However, costs related to legislation changes as a result of a major accident are difficult to quantify directly. Nonetheless, they can be calculated indirectly by multiplying the total safety budget of the type of facility under consideration by the estimated increase (in %) of the safety budget (due to the occurrence of an accident scenario that will cause the legislation to change and become more complex).

These costs are represented by the following formula.

Permits and Licenses Avoided Costs (Type II)

It will become harder for a company to obtain the necessary exploitation permits and operating licenses in the country where a major accident involving the company might occur. In general, companies (e.g., those with activities in the fields of petrochemicals, energy, and chemicals) need to be rigorous in obeying the rules for obtaining permits and licenses. They cannot afford to lose operating and exploitation permits through reckless behavior, as this could be a financial disaster for the company. For instance, if a company has had a relatively large number of minor accidents and is close to not obtaining a renewal of its permits and licenses, a major accident might well mean the end of their operating permit.

The costs related to obtaining new permits and licenses due to the occurrence of a major accident are difficult to quantify. However, they can be estimated by multiplying the total costs of having to close down the facility by the likelihood that the company will lose its operating permit due to a major accident.

These avoided costs are represented by the following formula.

Lawsuits Avoided Costs (Type II)

The costs accompanying lawsuits and trials can become substantial and can pose a significant threat to the liquidity of the company. This is primarily caused by the fact that such lawsuits and trials can last a number of years, sometimes more than a decade. Thus, it would be in the best interests of any company to avoid such time- and money-consuming trials. But how can this be achieved? One possible solution is by acting in a proactive way, as Fina did in 1995 after the explosion in Eynatten, Belgium. On the June 18, 1995 an explosion destroyed the Fina-owned road restaurant and gas station next to the E40 highway. This explosion was caused by a gas leak in the kitchen of the restaurant, and it killed 16 people and injured 20 more who had to be transported by helicopter to a hospital in Aken, Germany [19, 20]. Immediately after the explosion, the emergency procedure was set in motion. During this procedure, a helicopter, the police, the fire department of three nearby villages, the Red Cross, and the civil protection unit were present at the explosion site. In total, between 100 and 150 people were present [21]. Instead of acting in the traditional way, whereby a company waits to compensate the victims until it is clear who is liable and responsible for the accident, Fina took the initiative and compensated the injured and the families of the victims straight away. It would become clear later on after investigation which company was liable and thus responsible for the explosion, and once that decision was taken, the compensation that Fina had already paid could be recouped from their insurance company or the insurance company of the responsible party. The most important fact for Fina at that moment was that the people who suffered from this accident received compensation immediately. By acting in this proactive way, Fina possibly reduced the amount of expensive lawsuits and trials and therefore the number of lawyers required. None of the victims sued Fina for injuries or deaths. This approach also reduced the number of times that Fina appeared in the media in a negative way, as they surely would have through numerous trials and continued denial of their responsibility. In addition, this further reduced the negative impact of the explosion on Fina's image and reputation, as they had sent a clear message to the world by compensating other parties immediately, proving that their company takes full responsibility and that they care about others [14].

As noted, the reduction in the number of trials would have had a positive effect on the image and reputation of the company, in turn possibly having a positive effect on its sales, which might have been reduced as a result of the negative media attention. In turn, by acting proactively, the company took care of a possible market-value decrease, represented by a decrease in its share price on the stock market. Companies operating in certain areas, such as, for example, the chemical, oil, and gas industries, should always remember that it takes years to build a good image. By contrast, a good reputation can be destroyed in just one brief moment, which it will take several years to rebuild.

It should be noted that insurance companies will usually not let the company act in such a proactive way (i.e., compensating losses before the court decision), as they will want to keep the amount spent in the aftermath of an accident as low as possible, because they will have to bear the majority of those costs. Instead of taking into account the reduction of the legal costs, they will be more concerned with the possibility that the other party will ask for more money as compensation than they deserve. However, this turns out to be negligible compared with the major legal costs and indirect costs resulting from reputational risk to their client in the case of a major (type II) accident.

Compensation Victims Avoided Costs (Type I + Type II)

Whenever an accident causes casualties, the company will have to compensate the families for their losses [8]. These costs are also labeled as compensation victims costs, and should be taken into account in any CBA. These consequences can be calculated by multiplying the VoSL in the specific country or region (see Chapter 4 for a discussion on calculating the VoSL considering the probability of the accident scenario) by the expected number of fatalities.

These costs are then represented by the following formula.

Injured Employees Avoided Costs (Type I + Type II)

Whenever an accident causes injuries, both minor and major injuries, the company will have to compensate the injured people for their injuries [8]. These consequences are calculated by multiplying the cost of lightly and seriously injured workers in that specific region by the expected number of lightly and heavily injured people.

These avoided costs are represented by the following formula.

Avoided Recruitment Costs (Type I + Type II)

As some employees may be injured or killed or leave the company due to an accident, new employees will have to be recruited. The recruiting cost is thus the cost of hiring new workers, which includes the time invested in recruiting and training the new workers. The recruitment consequences are calculated by multiplying the sum of the hiring and training costs by the number of newly recruited employees. Hiring costs include advertising, interviews and assessments, and other costs [7].

These avoided costs are represented by the following formula.

These avoided costs are represented by the following formula:

where t is the number of employee categories.

Avoided Costs with Respect to Environmental Damage (Type I + Type II)

Whenever an accident causes environmental damage, the company will receive claims to compensate for the damage. These consequences are calculated by multiplying the mass of the spill by the expected cost per mass unit spilled.

These avoided costs are represented by the following formula.

Lowered/Lost Productivity Avoided Costs (Type I + Type II)

Productivity of employees often decreases due to an incident or accident. This productivity loss is not merely the result of the employee who is actively involved in the accident, but can also result from other employees displaying lower productivity patterns. Furthermore, irrespective of the fact that due to an accident an employee can be incapable to work for a certain period of time, when that person returns to work he or she often displays lower productivity. It is sometimes possible that physical problems and restrictions and/or an altered risk perception (the so-called Hawthorne effect, cf. [12, 25]) can lead to different behaviors resulting in lower productivity. If “adapted work” is foreseen for the employee, productivity will most likely be lower as well. If the employee needs to be replaced, productivity levels will also be lower, especially initially, owing to a lack of experience and expertise [11, 26].

Formulas to deal with lost productivity are as follows

and

Training of Temporary Workforce Avoided Costs

Training people who are to replace those employees who suffered an accident also represents a cost. The most important part of this cost is time. The time needed by the trainer having to train the person who replaces the injured employee, as well as the training time of the substitute, needs to be counted. The latter can also be seen as lowered productivity, as, during the training period, the substitute does not attain his/her optimal productivity [11, 26, 27].

Wage Avoided Costs

Accidents always go hand in hand with a lot of loss of time. The “wage cost” represents the amount of time that company employees cannot devote to their regular tasks as a result of an accident. This may be the result of necessary medical treatment at the company's first aid department, in which case the corresponding wage cost may be negligible. However, when the accident leads to a longer period of lost work, the wage cost can be significant [7, 11, 25, 26, 28]. There may also be a wage cost due to employee colleagues having to work extra hours in the event of an accident.

Medical Treatment at Location Avoided Costs (Type I + Type II)

Large companies usually have their own medical service department, so that in the case of occupational accidents, medical personnel of the organization may offer first aid. Sometimes, it is necessary for the medical service to travel to the site of an accident, leading to a possible cost. It should be noted that due to legislation and/or precaution, not all medical services should and/or could be canceled within an organization, even if the number of accidents were zero [11].

Avoided Costs Related to Medical Treatment in Hospitals and Revalidation (Type I + Type II)

Some of the more severe occupational accidents need to be treated in hospitals by specialized personnel. This may also represent a substantial avoided cost:

Avoided Costs Related to Using Medical Equipment and Devices (Type I + Type II)

Avoided costs related to used medical equipment and devices is mainly applicable to companies having their own medical services. Depending on the nature and severity of the accident, employees can be treated in the medical facilities of the organization, and medical equipment, devices, and material can be consumed in such cases. First, well-educated medical personnel need to be present in the case of certain equipment. Such personnel and their training and education represent an avoided cost. Second, medical material may include bandages, painkillers, and so on.

Medical Transport Avoided Costs (Type I + Type II)

If an accident requires employees to be treated in hospital instead of by the organization's medical services, they need to be transported to the hospital. This transportation cost should be taken into consideration in a CBA.

Accident Investigation Avoided Costs (Type I + Type II)

When an accident occurs, a person or a team is assigned to investigate it (not necessarily related to any legal affairs; see Section 5.4.2.3). Depending on local legislation and the type of accident, organizations are obliged to report it to the authorities through an accident investigation report [12]. Organizations also often want to determine and map the causes of accidents in order to take the necessary preventive measures to avoid future similar incidents. The literature thus mentions a variety of accident investigation approaches, each with pros and cons. The costs of accident analyses arise from the time that employees have to devote to the investigation, and sometimes also from technical studies. In the case of type II accidents, in particular, technical investigations may be an important avoided cost.

The time-related costs are composed of the wages of people carrying out the accident investigation. This cost can be determined by using the wage per employee category involved in the investigation [26]. Sometimes, certain additional employee-related costs are present that should be added to the costs. Such additional costs involve, for instance, the further processing of the accident investigation file, and sending the report to all concerned parties.

Manager Work Time Avoided Costs (Type I + Type II)

Managers of all levels (middle management, higher management and board of directors) will be forced to invest time if an accident occurs. They will have to investigate the accident, guide the employees, possibly deal with press attention and, in certain cases, attend lawsuits and other legal processes [7]. The manager work time consequences can be calculated and estimated by multiplying the total number of hours lost by all managers of a certain manager category by the cost per hour of the lost work time of managers of that category. As the work of managers with significantly varying wage levels will be affected, the manager work time consequences can be calculated separately for each category of managers.

These costs are represented by the following formula:

where n is the number of manager categories.

Clean-up Avoided Costs (Type I + Type II)

An avoided cost that is often forgotten is the clean-up cost resulting from an accident. Before rebuilding and restoring the initial situation, the whole accident area needs to be cleaned up. Besides the employees, an independent cleaning company may sometimes need to be hired to execute this clean-up assignment. The avoided clean-up costs can be calculated and estimated by multiplying the hourly wage of an employee by the number of hours the cleaning will take, and again by the number of employees participating.

Impact of Different Accident Scenarios on DF⁰

After having shortlisted the investments to be analyzed in the decision process, one might consider focusing on a single safety investment to assess its robustness by studying the relationship between its main features and the DF⁰. In this way, alternative options can be compared more adequately and can be assessed using a multidimensional decision-making approach. For example, in Figure 5.6 a specific investment (investment 3, “Automatic sprinkler installation without additional foam”) with a fixed parameter setting (see Table 5.12) is investigated. Assuming three different accident scenarios (and thus three different values of hypothetical benefits), a simulation on the relationship between the DF⁰ and the NPV is shown. As expected, the higher the potential benefit, the lower the DF⁰ required to make the investment profitable. Analyzing Figure 5.6, one can see that the safety investment can be justified from a financial point of view only if the hypothetical benefits are greater than €2 million. In fact, for minor accident scenarios (in this case hypothetical benefits of €2 million or lower), the total costs of the investment can compensate the potential benefits, only when assuming a DF > 30. As values of DF > 30 are generally considered by investors to be very high or even too high, the measure may not represent a reasonable investment from an economic perspective and thus should be ruled out when the accident scenarios that might affect an organization are triggering “minor” consequences. For accidents with a significant impact, triggering damages of, say, €5 million or €10 million, the measure presents a zero NPV for DFs equal to 10.9 and 4.0, respectively. Obviously, these DFs are < 30 and can thus be considered reasonable according to Goose [30], implying that the measure represents a viable safety investment in the case of major accidents.

In Figure 5.7, the impact of the probability of a potential accident is assessed. In particular, the higher the probability, the lower the value of the DF⁰ that is needed to make the investment profitable from a financial point of view. If the probability of the accident is very low, the decision-maker will tend to avoid safety investments, as the hypothetical benefits are more uncertain and more disproportionate than the costs. For this reason, a higher DF is required to stress the importance of safety in the case of HILP accidents.

Impact of Technical and Financial Parameters on DF⁰

Focusing on a specific safety investment, the relationships between financial and/or technical parameters and the DF⁰ can be explored further. In Figure 5.8 the relationship between the yearly recurring costs and the DF⁰ is shown for a specific safety investment (measure number 2, “Automatic sprinkler installation with additional foam” in this case), while considering hypothetical benefits of €5 million. The other technical and financial parameters are set to the values reported in Table 5.12. As expected, the greater the yearly recurring costs, the higher the DF⁰ due to increased sacrifices in safety required by a firm (see Figure 5.8). A simulation also considering different time horizons, in which the safety measure can maintain its effectiveness, has been performed. As shown in Figure 5.9, the longer the time over which the safety investment can maintain its effectiveness before becoming obsolete, the more attractive the investment will be and thus the lower the DF⁰. In fact, the shorter the time horizon, the higher the DF⁰ should be to make the investment desirable, due to a shorter time period for the return on investment.

Still considering safety investment number 2, the same accident scenario analyzed previously, and using the technical and financial parameters as in Table 5.12, Figure 5.10 illustrates the relationship between the discount factor used to calculate the NPV and the DF⁰. Figure 5.10(a) shows that the DF⁰ remains stable for different values of the discount rate given a fixed time horizon. Moreover, the longer the time horizon over which the investment is analyzed, the lower the DF⁰. As shown in Figure 5.10(b), the DF⁰ is not significantly affected by a variation in the discount factor as long as it remains under a certain level. However, the DF⁰ can vary depending on the maintenance cost that is considered. In addition, when the maintenance costs are high, an increase in the discount factor can trigger a decrease in the DF⁰.

Impact of the Risk Aversion Factor on the DF⁰

Finally, the relationship between a decision-maker's risk attitude and the DF⁰ can be assessed. Figure 5.11 represents the evolution of the DF⁰ when the risk aversion factor assumes different values for two different safety investments. Moreover, the lower the potential benefit, the lower the DF⁰ that would be used by the decision-maker to evaluate the investment (see Figure 5.11a,b). As expected, the lower the investment required for a safety measure, the lower the DF⁰ that is needed to make the investment proportional to the potential benefit. When the value of the risk aversion factor increases, it means that the decision-maker is more risk-averse and will therefore be more inclined toward safety investments. As both the discount factor and the risk aversion factor can be used as a bias in favor of safety, when the value of a increases there is a reduced need to use the DF⁰ as an incentive for investments in safety.