How can we accommodate climate-related risks in infrastructure?

If you were traveling through Don Muang International Airport in Bangkok, Thailand in the fall of 2011, you already have a picture of the damage to infrastructure assets brought by unprecedented levels of rainfall.  Water flooded every element crucial to airport operations – airplanes, runways, hangars – and all airport infrastructure was shut down until the crisis passed and repairs could be done. There was no option, as the airport was simply submerged.

But what if future infrastructure projects could be built with an option that allowed them to continue to operate even in the most catastrophic climate-related crisis? What if service delay interruptions were not inevitable, and economic losses were not inescapable?

Infrastructure will never be invulnerable, but public-private partnerships (PPPs) offer ways to think through and plan for infrastructure to accommodate climate risks .  

Infrastructure in an era of climate uncertainty
Well-developed infrastructure assets are powerful drivers of economic growth that can provide much-needed services to the poor across most of the developing world. But troubling trends in climate-related damage from storms, floods, and droughts to infrastructure assets threaten to disrupt this pattern.

Natural catastrophes resulting in significant financial losses to infrastructure assets have become more frequent and intense over the past three decades (1980 to 2013). In 2011 (the year of Thailand’s floods) the highest-ever catastrophe-related losses were reported, totaling $386 billion. This rising trend in climate risks, coupled with future uncertainty and unpredictability, increases the urgency to develop climate-resilient infrastructure that can withstand future climate shocks.

However, most developing country governments around the world are facing serious challenges in building even basic infrastructure, let alone climate-resilient infrastructure across primary energy, transport, and water and sanitation sectors. These governments already face daunting fiscal constraints with overstretched public budgets -- combined with very limited technical and institutional capacities to design, build, and maintain much needed infrastructure to last several decades. In the case of low-income country governments, they also lack creditworthiness; this further limits their ability to access capital market financing to build robust climate resilient infrastructure.

It’s clear that the challenges faced by the public sector to build climate-resilient infrastructure are high, and the private sector must play a leading role to help meet these critical infrastructure development needs. PPPs can become part of this broader solution to develop critical infrastructure and financing  while tackling climate change in developed or developing countries.
 
Evolving role of Infrastructure PPPs
Historically, PPPs have been a relatively small subset of overall infrastructure development. However, given their ability to utilize private sector expertise resulting in efficiency gains and value-for-money benefits, including much needed private investment, infrastructure PPP projects are becoming important alternatives in many developing countries. (To read more about the standard features of PPP contracts, see https://pppknowledgelab.org/ppp-cycle).

At the core of a long-term investment decision to choose an infrastructure PPP route (versus a public procurement route) is the principle of risk allocation, whereby a specific risk is allocated to the party that is best able to manage the risk. Combining this risk allocation principle with the need to integrate climate resilience into the standard PPP contractual frameworks gives rise to some important questions that need to be considered. For example:

• Are climate risks explicitly identified and allocated to either party within the PPP risk allocation matrix?
• How can private investors reconcile the long-term (20-30 years) PPP contractual commitments with future climate risks characterized by unpredictability?
• Are existing protection measures such as force majeure provisions and insurance in PPP contracts adequate to tackle threats posed by climate risks to infrastructure assets?

A new paper published by the Public-Private Infrastructure Advisory Facility (PPIAF) examines these questions and others in the context of how best to integrate climate risk and resilience in infrastructure PPPs. The new publication: “ Climate Risks and Resilience in Infrastructure PPPs: Issues to be Considered,” reviews PPP contractual arrangements and identifies the areas where PPP contracts require flexibility in order to effectively manage climate risks.

The publication aims to engage PPP practitioners, governments, and their advisors in a broader discussion about the need for structural changes in the way infrastructure PPPs are developed. The complete paper is available on the PPP Knowledge Lab website .