Using Strategic Risk Management: To Maximize the Benefit–Cost Ratio of Community Water Projects

Abstract

Infrastructure projects in rural communities usually cost more and benefit fewer people than similar projects in urban or large communities. Because they have relatively low ratios of benefits to costs, small‐scale investments in water and sanitation infrastructure are difficult to justify by standard benefit‐cost ratio criteria. Strategic risk management (SRM) enhances standard cost‐benefit analysis by including economic, social, and environmental benefits and subtracting the value of volunteer labor from costs. When the life‐cycle benefits of small projects are factored in, their benefit‐cost ratio increases, as does their appeal as public investments. SRM was applied to a program in Virginia (Self‐Help Virginia [SHV]) that helps residents of small rural communities secure funding and implement solutions for local development problems. Since its establishment in 1998, SHV has helped small and low‐ to moderate‐income communities build water and sanitation infrastructure, spending just $3.1 million on projects conventionally estimated to cost $8.8 million. Program funds pay for the hardware required, and the community provides labor and other resources needed to complete the project, gaining skills, experience, and other benefits in the process. SRM is a perfect match for SHV programs because the risk‐based approach includes both these overlooked benefits as well as the hidden costs of risk avoidance when an infrastructure problem goes unresolved. For state‐level decision‐makers, the enhanced cost‐benefit analysis provided by SRM makes small‐scale projects more competitive and easier to justify. Utility managers can use SRM analysis to better evaluate competing projects and effectively leverage their investments.