Making Risk Management Count: Connecting Physical Risk with Financial Feasibility Analysis
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Maintaining dams and investing in dam infrastructure is expensive and making decisions about these investments can be a challenging endeavor.

As decision makers, asset owners and managers alike, have started grappling with fundamental long-term questions such as resilience and sustainability, investment decisions have become even more challenging. Even though experience has shown that investing in climate-change resilience and adaptation measures can result in 1-to-6 cost-benefit ratio ($1 invested results in $6 saved), making such investment is often a hard sell.

Unfortunately, the widely used traditional cost-benefit analysis (CBA) techniques are ill-equipped to provide needed information to support these long-term investment decisions, and may lead to incorrect decisions. Traditional CBA magnifies the pain of present costs (the $1 invested) and significantly downplays both future economic gains from climate-change resilience and potential asset damages (the $6 saved). Thus, traditional CBA makes it hard for decision makers to justify funding of otherwise worthwhile investments in climate-change resilience and adaptation projects. Continued reliance on CBA methods hampers our ability to fund projects with long-term benefits that reduce the risk from climate-change impacts.

Because traditional CBA is used by many dam owners and is an important element in the decision-making process of government funded infrastructure projects, this paper presents a critic of the CBA method and the prescribed 7% discount rate used for federally funded projects and its potential effects on decision-making in the era of climate change. The paper also introduces the decoupled net present value (DNPV) method as an alternative pragmatic approach. It is shown that DNPV consistently translates technical assessment of physical risks into financial terms, by quantifying in monetary terms the potential exposure of physical assets to climate-related hazards. DNPV is a valuable tool for dam owners looking toward a more resilient and sustainable portfolio.

Publication Summary

  • Geosyntec Authors: David Espinoza, Lucas de Melo, Derek Morley
  • All Authors: David Espinoza, Lucas de Melo, Derek Morley
  • Title: United States Society on Dams (USSD) 2022 Annual Conference
  • Event or Publication: Event
  • Practice Areas: Dams; Dam Safety
  • Citation: United States Society on Dams (USSD) 2022 Annual Conference and Exhibition at the Town and Country Resort in San Diego, California on April 11 through 14, 2022.
  • Date: Tuesday, April 12 at 1:50 p.m. PDT
  • Location: San Diego, California
  • Publication Type: Platform Presentation