Impact of Extreme Events on the Financial Performance of Infrastructure Projects

Developing and managing sustainable infrastructure in the face of climate change uncertainty is a significant challenge for governments and private entities. The increasing intensity and frequency of extreme events impact infra-structure systems, resulting in direct costs such as reconstruction expenses, as well as indirect costs such as environmental and social impacts, reduced productivity, and national/local economic consequences. This paper presents a comprehensive dynamic stochastic model to assess the financial performance of infrastructure projects subject to extreme events. The model allows for evaluating various project contractual models and diverse financial mechanisms. Likewise, it involves assessing the direct and indirect costs incurred throughout the life cycle, focusing on the impact of the increased frequency of extreme events caused by climate change. First, the paper reviews the common funding sources for infrastructure development and the traditional financial evaluations. Afterward, it explains how the model incorporates technical and financial aspects, including the mechanism to estimate direct and indirect costs. The model results show the importance of estimating indirect costs and their role in sustainability. Finally, it provides an example of the model in action with an actual infrastructure project. The results highlight the importance of considering indirect costs within a dynamic and stochastic financial evaluation. These costs are more pivotal than direct costs for evaluating the impact of extreme events on infrastructure. The presented work has important implications for evaluating sustainable infrastructure projects and improving risk allocation.