Resilience approach to urban flood risk management systems using real in options – a review

Abstract

Future uncertainties are a matter of concern for urban flood management. This calls for an integrated urban flood risk management approach that is adaptive to changing circumstances in the future. Emerging approaches in urban flood risk management such as Water Sensitive Urban Design, living with water, and room for water try to address the flood issues through adaptation. Adaptation to climate change and other uncertainties could benefit from solutions that are flexible and are not dependent upon certain predictions of change. Such measures could be valued by taking the flexibility into consideration so as to help the decisions makers such as city mangers to arrive at a conclusion towards implementing interventions. Traditional valuation methods based on net present value and widely used to evaluate the infrastructure does not consider the flexibility and considers uncertainty as a threat to the investment by applying a high discount rate to it. Valuation technique such as Real in Option (RIO) that is found on the basis of options theory considers uncertainty as an opportunity and values the flexibility in creating and exercising an intervention. It encourages exploration of all possible interventions in an uncertain decision environment and values the interventions based on net present value and flexibility. By considering decision makers as long term active learners, RIO analysis alters the approach of one time intervention based on current decisions to flexible multiple interventions in the future that are founded on basis of better information made available in future. Upon looking into the traditional, contemporary and future water management practices and by looking at management and valuation options in the other domains such as finance and business it could be confidently stated that there is scope for improvement of urban flood risk management systems through inclusion of better decision management valuation tools such as RIO. The goal of this paper is to understand the application of RIO in water systems and this has been attempted through review of three case studies of RIO application with an aim of extending it to urban flood risk management systems. This paper also explores the scope for embedding RIO in the emerging urban flood management perspectives such as three point approach-3PA (Fratini et al., 2012).

Citation

Republished in part with permission from  Radhakrishnan, M., Pathirana, A., Gersonius, B., Zevenbergen, C. and Ashley, R. (2013). Resilience approach to urban flood risk management systems using real in options – a review. In: Water Sensitive Urban Design 2013: WSUD 2013. Barton, ACT: Engineers Australia, pp. 134-146.

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