A framework for considering externalities in urban water asset management David Marlow, Leonie Pearson, Darla Hatton MacDonald, Stuart Whitten and Stewart Burn ABSTRACT Urban communities rely on a complex network of infrastructure assets to connect them to water resources. There is considerable capital investment required to maintain, upgrade and extend this infrastructure. As the remit of a water utility is broader than just financial considerations, infrastructure investment decisions must be made in light of environmental and societal issues. One way of facilitating this is to integrate consideration of externalities into decision making processes. This paper considers the concept of externalities from an asset management perspective. A case study is provided to show the practical implications to a water utility and asset managers. A framework for the inclusion of externalities in asset management decision making is also presented. The potential for application of the framework is highlighted through a brief consideration of its key elements. David Marlow (corresponding author) Leonie Pearson Darla Hatton MacDonald Stuart Whitten Stewart Burn CSIRO Land and Water, PO Box 56, Highett, Victoria 3190, Australia E-mail: david.marlow@csiro.au Key words | externalities, risk assessment, sustainability, utility management INTRODUCTION Urban communities rely on a complex network of assets to connect them to water resources. Traditionally, provision of this infrastructure has been dominated by a focus on water quality and supply (Erbe et al. ). More recently, water has being treated as a scarce resource that requires manage- ment of both supply and demand issues (Rauch et al. ). While such approaches are important from the perspective of broader sustainability goals (Pearson et al. ), their development is often taking place against a historical back- drop of underinvestment. For example, in the USA it has been estimated that there is a potential 20-year funding gap for drinking water capital, operations and maintenance ranging from US$45 billion to US$267 billion, depending on spending levels and revenue growth (EPA ). Recent infrastructure studies have confirmed that there is wide- spread deterioration of water and wastewater systems (ASCE ). Underinvestment in infrastructure is important from a societal perspective because, by definition, it must even- tually lead to increases in asset and/or service failures, especially under extreme operating conditions caused by weather events like storms, drought or severe winters. This last circumstance was evidenced in December 2010, when c. 40,000 people in Northern Ireland were without water for as long as 11 days due to widespread pipe failures following a severe freeze-thaw event (BBC ). In general terms, widespread or frequent failures result in a decrease in the quality, quantity or reliability of water and wastewater services provided at various scales, and corresponding increases in social and commercial disruption and health and/or environmental impacts. Environmental impacts can be direct, such as in the case of pollution incidents, or indirect, such as increased demand due to excessive system leakage. In the parlance of economics, asset and related service failures impose welfare costs that are both unconsented and uncompensated. Such costs are referred to as ‘external- ities’. Externalities are created when a legitimate action taken by economic agents creates impacts on third parties, and the cost (or benefits) of these impacts are not factored into the decisions of the those directly involved in the trans- actions (Gardner et al. ; Hatton MacDonald et al. ). Externalities can be either positive (e.g. improved biodiver- sity, recreation opportunities and visual amenity) or negative (e.g. environmental impacts and social disruption). The benchmark for defining what is negative or positive 2199 © CSIRO 2011 Water Science & Technology | 64.11 | 2011 doi: 10.2166/wst.2011.789