See www.buildbigideas.com/post/what-risk-is-podcast-ep-4 for full show notes and references.

Risk is about rationally allocating resources into an uncertain future.

In the world of infrastructure, risk equals probability times consequence.

Some business school students may learn the Capital Asset Pricing Model (CAPM) where risk is considered to be equivalent to volatility, as represented by the greek letter Beta.

Value investors often say, instead, that risk is the probability of permanent loss of capital.

For-profit businesses and investors allocate their capital in pursuit of the highest financial return.  Return on invested capital (ROIC) or return on equity (ROE) are guiding metrics.

Government-funded infrastructure used to often be allocated using earmarks.  This method allocates resources towards political power and was referred to as "pork."  There were pros and cons to this approach, but it sometimes resulted in the construction of "bridges to nowhere."

Governments-owned infrastructure projects typically instead consider cost-to-benefit ratios for new builds.  For prioritizing maintenance or rehabilitation work on existing infrastructure, probable life-loss or economic loss from failure or loss-of-service provide guidance.

A fix-as-failed approach may be appropriate for infrastructure that does not have life-loss and has low economic-loss during the down-time before the system can be repaired.

For high-life loss or economic-loss infrastructure, the maintenance and repair must be much more pro-active.

As an example in the world of dam safety, fix-as-fail may be an appropriate and effective approach to the navigation dams on the Mississippi River. In general, the primary purpose of these dams is to hold a pool that will be at least nine feet deep, allowing barges to pass. If such a dam fails, no life loss is anticipated and the economic impacts are limited to the temporarily delayed shipment of grains and other commodities. These commodities are typically not urgently needed at market and could be shipped, albeit more expensively, by rail or truck.

At the other end of the spectrum would be high-head dams in the Western USA. The primary purpose of these dams is typically flood control, water supply, and/or hydro-power generation. In the failure of such a dam, thousands or tens of thousands or more could potentially lose their life. Such dams need much more pro-active maintenance and repair. Waiting for failure before repairing such dams is not a viable resource allocation strategy.

An extreme example of a high risk dam is the Mosul Dam in Iraq. There is a high probability that this dam may fail and the consequence has been estimated to be on the order of one million lives lost. 

Another extreme example is the power-lines and forest fires in California. As I understand it, the power company had not been pro-actively trimming trees away from their power-lines. The resulting sparks initiated massive forest fires with correspondingly large economic and life-loss consequences. 

In order to better understand current best practices about how risk management is applied to infrastructure it is instructive to look to history and the origin of risk assessments.

The Rasmussen report of 1975 is the seminal infrastructure probabilistic risk assessment. Rasmussen was a professor at MIT and he lead the process, funded by the U.S. Nuclear Regulatory Commission, whereby the probability and consequences of the failure of nuclear power generators were estimated.

Link to our blog post on the Rasmussen Report.