Economic evaluation is not enough for infrastructure investments

Investment decisions typically concern monetary values; how much the investment cost and how much expected profits are and eventually investments giving the best profit will be selected. The transition in value creation is forcing companies to seek new models and means of operating and supporting their business and investments. Additionally, the need to integrate wider value perspectives into decision-making is increasing. Investments should be evaluated, selected and prioritized not only in terms of their monetary value, but also with regard to sustainability, safety, quality, social acceptability and other typically intangible criteria.

The wider value perspective has rarely been included in such assessments up to the present day. This is mainly because these value elements are typically difficult to measure solely in economic terms, and there is thus a lack of models and approaches by which to address the importance of such indirect and intangible effects. In addition, there is often pressure to demonstrate short-term effects rather than to emphasize the investment’s entire life cycle.

Investments to infrastructure assets, e.g. electricity and water networks, differs in many ways compared to investments in production industry which greatly emphasize need to examine effect of investments also beyond monetary values. Pauline Herden and Ype Wijnia [1] have discussed these differences and described characteristics of infrastructure by following aspects:

  • “First, infrastructure assets for energy, roads, water and telecom have a very long lifespan, objects are often designed to last more than 50-100 years. This means there is a high probability that the demands on the infrastructure will change within its lifespan.“
  • “Infrastructure assets have no resale value, perhaps even not scrap value because these are offset against removal costs. Thus, if an asset is acquired, it remains technically in operation until failure.”
  • “Given that assets will last very long and cannot be sold, the design has to be right for a very long time. This requires either flexible designs or, more likely, very robust designs. This is reflected in overdimensioned infrastructure systems, capable of handling more capacity than actually needed (e.g. electricity, gas, water).”
  • “Another specific characteristic of infrastructures is the longevity of the equipment. Therefore, some construction and modification may have taken place in the past when other standards for asset administration and registration applied.”
  • “More fundamentally, many infrastructure systems are evolutionary systems. They have not designed in a grand master plan, but have grown by many small add-ons over time, based on what already existed. Current decisions on the assets highly contains the decision space for future decisions. This is called path dependency and lock-in.”

In a recently finished research project we developed methods and tools to bring into decision making also non-monetary values in addition to economic values which obviously cannot be neglected. One of our case company was Jyväskylän Energia that owns and runs electrical power, water and district heating networks in the city of Jyväskylä. In the case study carried out with them we developed a method for selection of re-placement investments funded in the next year budget. As stated before economic indicators are not the only relevant information related to infrastructure investment decisions.jescreenshot

In the case of Jyväskylän Energia the main aim of renovation investment is to remove or mitigate risks of safety consequences or interruptions in distribution. Thus the developed method is based on risk analysis and provides to decision makers information about risk reduction achieved by each investment proposal compared to investment cost. In addition to examination of a single investment proposals the method suggests an investment portfolio which do not exceed given budget and reduce overall risk in the most cost-effective manner.

The keys to future success are investments whose value is not only expressed in terms of mittamerkkireportmoney, but also in terms of sustainability, reliability, safety, quality, social acceptability and other typically intangible criteria. Importance of non-monetary values have not been denied but comparison of investments has been very difficult because lack of appropriate methods, which are able to provide intangible values in a structured form supporting investment decision making. A workbook prepared in the Mittamerkki project presents methods to consider effects of investments in a wider perspective than only economic values.

 

Susanna Kunttu, Tero Välisalo

 

[1] Herder, P.M. & Wijnia, Y. (2012). A Systems View on Infrastructure Asset Management. In T. van der Lei et. al (eds.) Asset Management The State of the Art in Europe from a Life Cycle Perspective.

 

Management of long-term climate risks

The climate is changing. Within the century countries can expect increasing temperatures, changes in precipitation patters and more extreme weather events. These changes will have an effect on business, infrastructure and communication also in Finland. The consequences will however wary greatly between the regions and trades. Some climate risks and responses are presented here.

Jouko Heikkilä wrote in his blog entDSC_6856-HDR-Edit (1)ry (16.11.2015) about the emerging risks and their management. Climate change is one of the most topical and important emerging risk governments, organisations and individuals have to face. Climate change adaptation requires similar caution in decision-making as the other emergent risks. Adaptation strategies should strive for balancing the risks and opportunities over long time horizons and under deep uncertainty of the impacts i.e. adaptation strategies should be robust. Additionally, they should be flexible and modifiable if the circumstances change.

Preparing for climate risks is a complex management challenge and there is a need for new methods at all levels of decision-making. Different regions, industries and organisations face different challenges and some impacts may be positive to one region and negative to another. For instance, Northern touristic sites and agriculture may benefit from the rising temperature, whereas the Mediterranean resorts could be hit hard by increasing temperatures. In addition, some organisations inside a region fare better than the others partly due to recognising the impacts and preparing for them accordingly.

For creating and assessing adaptation strategies a method called Strategy Robustness Visualisation Method (SRVM) is developed. In SRVM, the decision context, decision criteria and adaptation strategies are created together with the stakeholders in a workshop setting. The method can be used to visualise and evaluate the vulnerability of alternative adaptation strategies and to show the key trade-offs between the strategies to decision-makers.

Organisations should consider the risks and opportunities of the changing climate regularly and modify their responses if needed. The impacts of climate change have complex direct and indirect implications. Thus, climate risks should not be an isolated entity and should be assessed and treated together with the other risks, such as market or technology risks. Climate related decision-making faces similar challenges as is evident in other risk management situations. These include valuation of risk and understanding the probability of impacts and scenarios. Risk management may eventually be unsuccessful irrespective of the effort put in it. In a lucky case unwanted impacts may be avoided also by chance.

Methods such as SRVM which combine the principles of multi-criteria decision-making, scenario analysis, robustness and adaptive management could be useful for organisations for assessing complex decision problems. We are convinced that using these methods increases the awareness of the possible impacts of climate risks and how the different adaptation measures answer to these risks in different scenarios. Because of the increased awareness, the organisations may develop entirely new set of responses to deal with the recognised vulnerabilities. These methods could also be used in other complex decision situations involving long timeframes, such as general investment decisions on infrastructure and as a complement to other decision support methods such as cost-benefit analysis.

Jyri Hanski, Tony Rosqvist, Helena Kortelainen

Further reading:

Securing the EU’s energy future – adapting our energy system to climate change http://www.topdad.eu/upl/files/120162

How will climate change affect tourism flows in Europe? – Adaptation options for beach and ski tourists assessed by ToPDAd models http://www.topdad.eu/upl/files/120164

Adaptation and resilience of the transport sector http://www.topdad.eu/upl/files/120163