Economic evaluation of water resources projects under uncertainty: from theory to practice

Abstract Economic evaluation using cost benefit analysis (CBA) focuses on the allocation of scarce resources to competing needs and often requires a multi-objective approach for accurate analysis. However, known and unforeseen project uncertainties hinder the monetary quantification of all project objectives. Future cost and benefit projections of civil infrastructure such as water resources projects are influenced by uncertainties in societal preferences and behavioral patterns, policies and their implementation, as well as distribution and sustainability of benefits under changing climate. It is especially difficult to measure the projected benefits of public goods like water infrastructure because they have no direct or standard valuation approach. With advancement in technology, improvement to analytical tools and methods, and the science of decision making under uncertainty, there has been more research interest in CBA under uncertainty. This paper: (1) reviews the historical evolution of analytical approaches for water infrastructure evaluation; (2) explains the limitations on CBA imposed by uncertainties such as climate change; (3) describes analytical techniques applied to manage uncertainty in CBA; and (4) proposes methods for improved incorporation of socio-economic factors into economic evaluation. Our review of 302 manuscripts showed that standard practice differs from academic assumptions. For instance, there is limited uptake of analytical techniques that support robust characterization of deep uncertainties such as climate change (e.g. the climate stress test) and the incorporation of socio-economic factors such as equity. The paper suggests ways to reconcile academia and practice, provides direction for future work, and presents recommendations for improving current approaches to CBA. To strengthen water resource management efforts and improve policy making, we recommend more collaborative partnerships that identify opportunities to integrate academic recommendations into standard practice. Better documentation of systematic approaches to water project evaluation under uncertainty and holistic consideration of equity at the various stages of water project planning are also required.