Frontier Economics economists Alexandra Humphrey Cifuentes and Rosemary Jones presented a paper at OzWater21 on 5 May 2021. Decision making in the urban water sector is subject to an increasing number of challenges. "Flexible planning for an uncertain future: Applying adaptive pathways thinking to the water sector" presents an approach which values flexible decision-making.
Key points from the paper include:
Ensuring secure, reliable & cost-effective management of the water cycle is critical to support economic growth & to meet community’s growing expectations for liveable & healthy environments.
Urban population growth, climate change and interdependencies between infrastructure systems are placing significant pressure on ageing water-related infrastructure, and the health of our waterways, environment, and people. However, their impact and the appropriate policy, regulatory and investment response is uncertain.
In this context, a challenge for decision-makers is to identify resilient and flexible decision-making pathways, which are well placed to respond to uncertainty and change. Economic tools and techniques such as adaptive pathways (or real options) analysis builds on cost benefit analysis to value this flexibility, by modelling costs and benefits of responding (or not responding) to new information in future. Decision-makers can then compare the value of flexibility to the cost of the investment, and more importantly, accurately compare the costs and benefits of different options. This is extremely valuable information when making critical decisions about significant infrastructure investments.
While engineering and planning expertise in adaptive infrastructure already exists across the sector, robust approaches to placing an economic value on that flexibility and using economic analysis to explore maximum value infrastructure pathways under uncertainty is an underutilised decision-making tool.
