Information Exchange: Publications

Paying for Risk? Evaluating the role of risk transfer in public infrastructure investment decisions

Author: Dr. Koko Warner

"A government’s provision of needed public goods and services is associated with risks that the infrastructure will fail because of extreme events like natural catastrophes or terrorism. A government fulfills one of its primary obligations when it decides to invest government revenue in needed public goods and assets, such as infrastructure. The main source of funding for new infrastructure is still public investment. In making the investment decision, a government assumes risk, just like any other economic agent making an investment. Both the nature of the risk and the appropriate policy tools to absorb the risk are influenced by how the risk is created. Investments made in a naturalhazard- prone region carry the risk that the investment will be damaged or destroyed by a hurricane, earthquake, or other extreme events. Public infrastructure is increasingly vulnerable to disruption from extreme events. Municipal, state, and federal governments hold fiscal and physical responsibility when extreme events damage public infrastructure.


Two important questions arise about paying for infrastructure rehabilitation and repair when  catastrophes occur. First, how will a government pay for infrastructure damage, and second, how can a government evaluate different infrastructure risk management alternatives? This paper evaluates how a government addresses the uncertainty and risk in infrastructure investment. It provides economic theory that supports the use of risk transfer alternatives–including insurance and other hedges–which might reduce the longterm economic consequences for governments and reduce infrastructure vulnerability. This paper offers a way for policy makers to frame the problem of weighing the costs of insuring public infrastructure against catastrophe losses against the risks to future income that are inherent in the post-disaster financing strategies they currently use."

Date Created: October 2001; Date Posted: February 2007





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