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Building the business case

Building the business case for resilience investment 

In the wake of a natural disaster or critical infrastructure failure, the first thing people often ask is ‘why’: Why weren’t we more prepared for this event? Why didn’t we invest in greater resilience? Why was the failure allowed to happen?

The simple truth is that – in almost every instance – the case to invest in greater resilience did not merit the additional spend. Resilience investments were simply stripped out of the design as part of the value-engineering process. Unfortunately, it is not until a disaster hits that the real cost vs. benefit of greater resilience investment is often driven home.


A significant knowledge gap


The challenge, it seems, is that traditional methods of quantifying the cost vs. benefit of infrastructure spend has tended to ignore important considerations such as the asset’s criticality to the wider economy, the number and value of the users, the potential impact of loss of life related to failure if a specific event were to occur, and the odds of that specific event occurring.


We believe that these are major factors that must play a considerable role in quantifying whether additional investment in greater infrastructure resilience is valuable.


Take criticality for example. At one end of the spectrum are assets with shorter life-spans or lower impact on the health and safety of a population, such as houses, parks and walking trails. At the other end of the spectrum, critical infrastructure such as flood levees, utilities and vital roads and bridges. Clearly the investment case for increased spending on resilience for critical infrastructure far outweighs the case for investing an equal amount in less-vital assets.


There is ample evidence to support this notion. A Global Assessment Report developed by the United Nations (UN) Office of Disaster Risk Reduction highlights examples where organizations have reaped benefits in the ratio of 1:10 for their critical infrastructure prevention investments. The American Society of Civil Engineers estimates that federal spending on levees pays for itself six times over; other flood-control measures achieve returns of 1:3 or 1:4. The UN Report refers to utilities company Orion in my home country New Zealand, which saved $65 million in the 2010/11 Christchurch earthquakes through earlier spending of $6 million on resilience1.


The type and value of users must also be a key consideration when calculating the benefits of incremental resilience investment. A road that carries holiday makers to the beach would surely not merit the same funding or investment in resilience as a key urban artery carrying business goods and employees around a heavily populated city.


Other, more well-understood but rarely considered factors must also be put into the calculation. The expected life-span of the asset versus the odds of a particular event will naturally have a large impact on any calculations in this area, as would the economic cost of the loss of life, replacement costs for physical assets and the availability of insurance.


Four factors to consider


Given the increased frequency of events over the past few decades and the dreadful economic and social impacts that we have witnessed as a result, we believe that infrastructure investors, owners and operators must work to develop a quantitative approach to calculating the real benefits of investments into resilience.


We would propose that any framework start with a consideration of four key factors that express the criticality of the infrastructure2:


  • The direct economic costs of replacement (including the timeframe required to replace)
  • The alternative options available
  • The immediate impact on the economy and society
  • The long-run business and economic impacts

As an illustrative example, suppose that the Auckland Harbour Bridge in New Zealand was to fail in some way. There would be a direct economic cost of either repairing or replacing the bridge, but there would also be significant knock-on effects as the limited number of alternative routes into and out of the city become congested and the movement of goods comes to a standstill. The immediate economic and social impact would include not only the lost business activity, but also the social impacts of virtually isolating both the major urban area and rural region to the north. Then there are the longer-run business and economic impacts that would range from lost productivity and broken trade connections through to lost reputation for Auckland in the Asia Pacific region.


However, in today’s calculations, much of the emphasis is based solely on the asset itself: the cost of replacement or the loss of revenue and stack that up against the odds of an event occurring and the cost. Given those narrow factors, it is little wonder that few investments into resilience are given the green light.


Infographic Infrastructure


Starting the discussion


While some jurisdictions have started to broaden their view of the economic value of infrastructure, we have seen little evidence of approaches or methodologies for calculating the real cost benefits of investing in greater resilience for infrastructure.


We do, however, note the value that has been generated by the trend towards considering a range of wider economic benefits (WEBs) as part of the framework for making investment decisions for infrastructure. Others, like Greater Manchester in the UK are looking at the value of infrastructure in driving connectivity and using quantified estimates of the local economic activity that each project creates to prioritize infrastructure spend.


While neither of these approaches provides a framework for calculating the cost benefit of resilience investment, they do demonstrate that many of the factors that should be included in any cost vs. benefit analysis for investment are already available or assessable.


Ultimately, we believe that – with some cooperation and sharing of ideas – the public and private sectors must start to incorporate a more detailed assessment of infrastructure resilience into cost vs. benefit analysis. That assessment must take a broader view than simply calculating the cost of replacement. We look forward to working with our clients, partners and the wider industry to advocate towards that end.


Sources: 1UNISDR Global Assessment Report on Disaster Risk Reduction (GAR13); From Shared Risk to Shared Value: The Business Case for Disaster Risk Reduction, 2013


2Adapted from UNISDR Global Assessment Report on Disaster Risk Reduction (GAR13); From Shared Risk to Shared Value: The Business Case for Disaster Risk Reduction, 2013


By Adrian Wimmers, KPMG in New Zealand

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