Identifying optimal funding allocations for public water infrastructure improvements under uncertainty

Abstract

Diversified and locally managed funding strategies bring substantial benefits to water infrastructure investments across financial, social, institutional, and political spheres. However, these strategies often occupy a secondary role in the public sector's capital allocation process. We outline optimal funding strategies for water infrastructure by zeroing in on communities' specific needs and navigating two types of uncertainty—historical and priority uncertainty—across both long-run (multi-decade) and short-run (recent years) timeframes. Employing Modern Portfolio Theory (MPT), our approach pinpoints optimal funding distribution both across and within categories (namely, individual counties) based on their funding needs. By comparing these distributions with Tennessee's Clean Water State Revolving Fund's historical funding approach, we benchmark how risk and socioeconomic factors influenced past decisions. This analysis yields optimal allocations that inform which counties should be given priority by public funding agencies, moving toward portfolios that adeptly balance risk with funding necessity. Our methodology is executed in two stages, each bearing distinct implications. The initial stage seeks to prioritize groups of counties based on their funding needs, considering both immediate and long-term contexts, in line with what government agencies might aim to achieve. The subsequent stage refines the equilibrium between risk and need at a more detailed level within these groups, facilitating risk diversification that effectively addresses both short- and long-term funding requirements.