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Understanding SMEs to increase their flood resilience - iCASP

Dr Paola Sakai

You might have heard that Small and Medium-sized Businesses (SMEs) are the backbone of communities. This statement has never felt more tangible than today, with the lockdown showing closed stores and ghost communities. In the past, flood incidents have revealed similar gloomy pictures in some towns across Yorkshire and the Humber. Who doesn't remember the 2015 Boxing Day floods? The impact was enormous. In Calderdale, losses on SMEs amounted to £47 million, whilst the knock-on effects across the regional economy amounted £179 million. Despite their importance, SMEs economic costs and their flood resilience efforts are not well understood. Understanding financial losses is paramount to target measures and minimise flood risk where is needed the most. For instance, when assessing SMEs' economic costs, we tend to look at the average losses. Assessments show that flood incidents cause more significant economic damage to bigger businesses (i.e. those with more employees and revenues). Although this is true in absolute terms, my previous research showed that the smaller the company, the higher the losses. If we consider the size of the business, SMEs with less than five employees on average lose four times what they earn in monthly sales. In contrast, companies with more than five employees lose on average one month equivalent of sales. In both cases, flooding causes substantial damages to bigger and smaller SMEs. But, if interventions are occurring, the support should come first for the latter.

Image courtesy of Paola Sakai

There are other aspects of the SMEs economic costs that need a closer look. And these are the multiple factors that are involved in a flood incident. The pandemic has pushed many of us to work from home, and we know more how challenging it is to separate work from our personal life. Now, imagine a home-based business that gets flooded. My research has shown that when home-based enterprises are affected by flooding, there are double impacts normally hidden. The affectation in the owner's livelihood plus the disruption in his/her personal life. Take the example of a bed and breakfast that gets flooded. It might not be able to accommodate guests exerting an economic consequence on the owner's livelihood; plus, the flood might leave the owner without a place to live. These double impacts need to be considered when efforts are directed at protecting businesses. Another example of dual effects of flooding on SMEs relates to the owner of the business' premises. An SME that leases its premises and gets flooded will experience a negative consequence. The landlord will also be affected -as s/he would need to pay repairs, or end contracts early.

Direct effects of flood incidents can destroy a company's assets, but they may also bring other hidden disruptions. For instance, one small business was not directly affected by water entering the property in a flood incident. But its street got flooded and customers cannot reach it, and its suppliers were affected. These hidden factors will have an indirect negative consequence on that small company. SMEs are vulnerable not only because of the direct physical effects but also due to several indirect factors. Flood incidents might disrupt the public infrastructure (e.g. electric power, telecommunications, and transportation), and SMEs rely on those services to undertake their everyday activities. Hence, these types of disruptions can indirectly affect businesses, and economic assessments rarely considered these.

Although it was impossible to know we would be dealing with a pandemic today, we would have benefited if we had been more prepared. Flood preparedness is essential. With a better understanding of the economic costs of flooding on SMEs, we can redirect efforts to improve preparedness and increase their resilience. The size of the firm can also give us essential information in this regard. For bigger businesses, the most critical losses are damages to its equipment. In contrast, for smaller firms, structural damage to their premises is where the higher losses are. Investing in property resilience measures targeting those aspects will minimise the most significant losses. Being flooded is never a profitable business, and many SMEs do protect themselves. The bigger enterprises currently implement more PFR measures. In comparison, smaller enterprises undertake more 'soft' strategies (e.g. monitoring early warning systems or moving stock). Considering these nuances can be useful to target interventions that are more fruitful for towns and communities.

The uptake of property flood resilience measures is receiving increasing attention, particularly since we need to start acting now. The uptake of adequate property-level measures and insurance among SMEs remains low. SMEs' inherent characteristics act as barriers that prevent businesses from engaging in flood prevention: lack of time, lack of resources, and the need to prioritise day-to-day activities and survival. Also, some SMEs' show behavioural barriers preventing them from acting. For instance, some SMEs take an 'ostrich-denial stand', where 'flooding will not happen to me, so I don't need to worry about protecting me. Those are just a fraction of SMEs; others are not protected because they find it challenging to decide which information is reliable. What works or not to minimise their flood risk, and who they can trust. I have found that the lack of trust opens the door to opportunists, generates scepticism, and undermines SMEs' willingness to protect themselves. The type of building and the ownership of premises can also act as barriers for SMEs to implement resilience measures. For SMEs that rent their premises, landlords need to be convinced to invest in flood protection. Moreover, the lack of clarity in tenancy agreements and insurance policies can hide flood risk vulnerabilities for SMEs.

Image courtesy of Paola Sakai

There is a growing view that flood risk management's biggest challenge is not the direct impacts, but its indirect implications. Suppose SMEs are unable to assess their risks. In that case, there will be latent risks across supply chains and the communities where SMEs are embedded. The negative consequences of flooding on SMEs exert ripple effects in their communities. Losing businesses because of flooding could negatively affect towns. Flood impacts on SMEs could trigger a downward-spiral effect that can erode towns' character and vibrancy and their inhabitants' wellbeing. If SMEs move away, some risks need to be considered: loss of a town's attractiveness and character, erosion of the customer base, less variety and diversity of economic activities, increase in undesirable activities linked to more redundant buildings, impact on local budgets (reduction of tax revenues and increases in unemployment claims), disruptions of supply chains, families moving out in search of employment. There are opportunities to avoid this, and people living in flood risk areas can reinvent their places. There is a need to elicit discussions about how are we going to continue living in a wetter future, so choices and decisions happen sooner rather than later.

SMEs should protect themselves, and their protection should be of interest to the broader community, local and national governments. Widely support needs to be made available so they can do their part. It is vital to target interventions to increase the receptiveness of flood-risk and preparedness information. This information should also be easy to understand. It is advisable to convey experiences and stories of other affected businesses. Information is better received by SMEs if it is face-to-face and using the existing business structures and traditional communication channels (e.g. breakfast clubs, newsletters). It is also useful to communicate with SMEs through websites, insurance brokers, and the councils' regulatory business-facing areas, who are already in contact with SMEs.

Encouraging the creation of resilient SMEs is a worthy effort. Not only for the current pandemic and weather but also, because wetter winters and other pandemics and black swans will come in the future. But, it doesn't have to be grim! Let's take the opportunity to re-think the urgent need to support SMEs flood resilience.

You can read more about the research I mentioned here: Next time, I will tell you about my new exciting project where the University of Leeds through the Yorkshire Integrated Catchment Programme and the University of York have joined forces with a host of organisations to better understand the impacts of flooding upon the SMEs across Yorkshire and the Humber. If you are a small business of Yorkshire and the Humber and want to help us understanding the economic costs of flooding on SMEs and flood insurance efforts please get in touch: Thank you.