ISSUE BRIEF • MARCH 2016 Climate Risks and Resilience in Infrastructure PPPs: Issues to be Considered Satheesh Sundararajan (Senior Infrastructure Finance Specialist), Nuwan Suriyagoda (Climate & Energy Portfolio Coordinator) 1.0 INFRASTRUCTURE PPPs AND CLIMATE RISKS Infrastructure assets are characterized by large irreversible investments with a long lifespan and limited alternative uses. In a typical infrastructure planning and public- investment-management context, governments first identify priority infrastructure projects through sector and spatial planning exercises, and then decide on the optimal delivery mode through conventional public procurements or public-private partnerships (PPPs). Figure 1 briefly illustrates this decision process:1 Climate change has contributed to a rise in extreme weather events - including typhoons. A young boy drags some possessions through the flooded streets of Metro Manila on 28 September 2009 after Typhoon Ketsana (Ondoy) hit the Philippines. Photo by Asian Development Bank FIGURE 1: Selection Process for Intrastructure Delivery Priority (Focus of this paper infrastructure is the PPP route) project Risks borne entirely Risks shared and/or by public sector transferred to private sector PPP decision criteria Value for money (VFM) Efficiency gains Public procurement PPP Economic viability Commercial viability Fiscal constraints The sector and spatial planning stage has the highest potential to that examined climate change impacts on hydropower infrastructure identify and design climate adaptation and resilience strategies that are assets across Africa’s seven main river basins showed that in wet- applicable to specific projects, regardless of the project delivery mode. climate scenarios, there is potential for increased revenues of 20 In a conventional public procurement, the resilience strategies can be to 140 percent. But these revenue increases can only be realized if implemented through public investments, but in PPPs, the investment investment and infrastructure planning in those basins are modified to and operational decisions made by the private sector determine factor in the possibility of excess water capacity. On the other hand, how climate resilience will be implemented over the lifetime of an designing and building hydro infrastructure without adequate planning infrastructure asset. for climate uncertainty under the driest climate scenarios could result in possible revenue losses ranging from 5 to 60 percent. At the core of a PPP decision is the principle of risk allocation, whereby a specific risk is allocated to the party that is best able to manage it. It is Is management of climate risks important for infrastructure PPPs? interesting to note that, in a typical PPP risk allocation framework, climate In principle, the delivery route of infrastructure (through conventional risks are not explicitly considered or allocated to a specific party. public procurements or PPPs) is immaterial to climate-risk impacts on infrastructure. PPPs are a relatively small subset of overall infrastructure development. But PPPs are being considered as an Climate Risks are not explicitly allocated important alternative in many developing countries, where climate to either party in a PPP Contract! uncertainties and vulnerabilities are also rapidly increasing. Moreover, the lock-in effect of PPP contracts over a long period and the effect of PPP investment decisions on the whole-life of the infrastructure Any event that is to be classified as a risk should be clearly defined asset makes the management of climate risks in infrastructure PPPs with its likelihood and impact, and the public and private sectors extremely important. should both understand and be in agreement with it. So, what is a climate risk within the context of infrastructure? Do climate risks need a different type of management within PPPs? PPPs do manage a multitude of risks (commercial, technical, financial, How do we define and interpret climate risks within the context market, political, legal, operational, etc.). They rely on these established of infrastructure? Climate risks are meteorological, hydrological approaches for the assessment and management of risks, albeit 2 and/or climatological events that result in extreme weather, such specifically configured for each project. Additionally, risk management as storms, floods, landslides, extreme temperatures, droughts and is based on an understanding and appreciation of the impacts of risks wildfires. Whereas climate risks in the past could be characterized by the public and private sectors. Because of the unpredictability of using probability distributions, based on the availability of decades or climate risks and the uncertainty it introduces, there is a strong need for even centuries of data, climate change has created new uncertainties, a different approach—that is flexible and iterative—for risk management because weather patterns are changing in ways that are neither well in PPPs. understood nor predictable. Preparation for climate risks, therefore, poses new challenges with respect to numerous uncertainties, What are the motivations for each party to manage climate risks in including the path of future emissions and the sensitivity of the climate PPPs? Like any other risks in PPPs, the public and private sectors have system to increasing concentrations of atmospheric greenhouse gas different motivations for managing climate risks. The public sector’s 3 (GHG) emissions. This has created a new and deep uncertainty motivations are minimizing regret (of taking wrong action or inaction); regarding the exposure of and impacts on socio-economic systems4 avoiding economic losses; ensuring safety and security; preserving 5 that affect both supply and demand for infrastructure and ultimately environmental sustainability; and ensuring availability and continuity the optimal design of infrastructure. For example, higher temperatures of infrastructure services. It may be argued that the private sector may may increase demand for water and electricity, while increased not be willing to absorb or share climate risks because such risks may temperatures and drought may also affect the supply of water and not be within their best ability or scope to manage. However, the fact electricity from thermal and hydropower sources. that climate risks affect both economic and physical performance over the life of the PPP contract may provide sufficient motivations for the A recent study6 by the World Bank, the United Nations Economic private sector because retrofitting infrastructure is more expensive Commission for Africa and the Agence Française de Développement than than “building right” in the first place. Potential private sector motivations for managing climate risks include preventing investment PPIAF ISSUE BRIEF: CLIMATE RISKS AND RESILIENCE IN INFRASTRUCTURE PPPs: ISSUES TO BE CONSIDERED 2 losses; regulatory provisions (e.g., gold-plating assets under a rate of Settlements (BIS) have found that natural catastrophes resulting in return regulation); avoiding failure to meet contractual obligations; and significant financial losses have become more frequent over the past reducing reputational risks. Additionally, the uncertainty associated with three decades, with the year 2011 marking the highest-ever amount climate change can provide the private sector with more opportunities of catastrophe-related losses ($386 billion).7 The insurance industry’s to develop innovative infrastructure PPP solutions. Nevertheless, it is experience similarly shows that natural disasters related to both climatic important to note that users and taxpayers are the ones who ultimately and geophysical events are becoming more frequent and severe, causing end up absorbing a significant proportion of the losses arising from the an increase in financial losses, as shown in Figure 2.a. This upward trend impacts of climate risks on infrastructure. It is then appropriate to ask, is also visible in developing countries that are highly vulnerable to climate how critical are climate risks for infrastructure? risks, reflecting an increase in economic losses, as shown in Figure 2.b. This situation is exacerbated by rapid urbanization and population growth in 2.0 EXPOSURE OF INFRASTRUCTURE climate-vulnerable regions, which affects infrastructure systems regardless ASSETS TO CLIMATE CHANGE of climate risks. The exposure of infrastructure assets to climate risks is rising as extreme weather events such as storms, floods, landslides, heat waves, and The Global Climate Risk Index 2015 report states that nine out of the 10 droughts are increasing in frequency and intensity. The United Nations most affected countries between 1994 and 2013 were low-income or Environment Programme (UNEP) and the Bank for International lower-middle-income developing countries.8 Direct economic losses9 FIGURE 2.a: Worldwide Losses Due to Major Natural Catastrophes from 1980 to 2013 400 $386 billion Overall losses (2013 values)* 350 Proportion representing 300 insured losses (2013 values)* Losses (in $ bn) 250 Trend: Overall losses 200 Trend: Insured losses 150 * Values adjusted for Source: Munich Re inflation using the 100 Consumer Price Index (CPI) of each country. 50 0 1980 1985 1990 1995 2000 2005 2010 * Values adjusted for inflation using the Consumer Price Index (CPI) of each country. Source: UNISDR, based on DesInventar and EM-DAT combined datasets, Global Assessment Report, 2013 FIGURE 2.b: Loss Trends in 40 Low and Middle-Income Countries, 1981–2011 45 40 35 Losses (in $ bn) 30 25 20 15 10 5 0 1980 1985 1990 1995 2000 2005 2010 PPIAF ISSUE BRIEF: CLIMATE RISKS AND RESILIENCE IN INFRASTRUCTURE PPPs: ISSUES TO BE CONSIDERED 3 FIGURE 3: Direct Economic Losses in 40 Low- and Middle-Income Countries, 1981–2011 Million US$ Million US$ 12,500 25,000 37,500 50,000 500 1000 1,500 2,000 Mexico Costa Rica Lao People’s Democratic Republic Indonesia Panama Chile Guam Iran (Islamic Republic of) Venezuela (Bolivarian Republic of) Argentina Guyana Colombia Ethiopia Samoa Viet Nam Mali Mozambique Jordan Honduras Uganda El Salvador Vanuatu Kenya Guatemala Nicaragua Nepal Uruguay Ecuador Papau New Guinea Peru Fiji Bolivia (Plurinational State of) Amrican Samoa Syrian Arab Republic Sri Lanka Timor-Leste Yemen Solomon Islands Jamaica Federated States of Micronesia Recorded in EMDAT Additional losses from National Datasets Source: UNISDR, based on DesInventar and EM-DAT combined datasets in large capital-intensive infrastructure, housing, local infrastructure and is not without its challenges. This paper and the sections that follow agriculture in 40 low- and middle-income countries are shown in Figure 3. discuss some of the challenges and the gaps that exist in PPP frameworks with respect to addressing climate risks, and highlights the need for For example, excessive rain and flooding caused the collapse of the a structural change in the development approach of PPPs in climate- WitKoppen Bridge in Johannesburg, South Africa. Conversely, the effects vulnerable regions. of drought on the Mtera Dam in Tanzania resulted in prolonged power outages. In Asia, a University of Singapore study found that 11 of the 3.0 STANDARD FEATURES OF PPPs AND ISSUES IN largest Asian cities’ infrastructures are “critically unprepared” for floods. 10 MANAGEMENT OF CLIMATE RISKS Furthermore, the recent rain and flooding of Chennai, India disrupted While there are many variations14 within PPPs, they typically share electricity and transport networks for several days across the entire city. common features, such as: • Long-term contracts that lock-in infrastructure assets with Developing countries also face a massive infrastructure investment gap irreversible investments; of more than $1 trillion per year.11 This can be attributed to a combination • Long-term partnerships with pre-defined roles and responsibilities; of factors, such as fiscal constraints, inadequate cost recovery, poor • Performance-based and output-driven payments; technical capacity, and lack of deep financial markets, combined with • Payments linked to fixed or regulated tariffs; and urgent demands from rapid urbanization to develop new infrastructure at • Procurement of infrastructure with the most economical private- both the national and sub-national levels. To bridge this gap, the private sector solutions.15 sector has been playing an important role in investing and participating in In a competitive environment, these features influence the private infrastructure, in particular, through PPPs.12 sector to be innovative in managing risks and improving efficiencies, reflecting the core principles of PPPs. Now, climate risks add a new type In an increasing climate-risk scenario, incorporating climate change of investment risk to this existing equation, demanding further innovation considerations into planning and design can reduce negative climate in order to optimize the whole-life cost of infrastructure in tandem impacts on the physical and economic performance of infrastructure.13 with other risks. However, there seems to be little evidence of many Even though PPPs are a subset of infrastructure development, they innovative solutions for managing climate risks in PPPs. This is partly should also consider climate resilience to mitigate losses from future attributable to limited expertise and the lack of explicit identification of disasters. However, incorporating climate resilience in infrastructure PPPs climate risk or allocation of such risks to either public or private party. If PPIAF ISSUE BRIEF: CLIMATE RISKS AND RESILIENCE IN INFRASTRUCTURE PPPs: ISSUES TO BE CONSIDERED 4 Hurricane Tomas destroys bridge in St. Lucia, 2010 via Caribbean Hurricane Network we overlay standard PPP features with increased uncertainties of long- Can PPPs include mechanisms to mitigate the principal-agent term climate risks, risk management becomes a significant challenge in problem in managing climate risks through increased transparency PPPs. Some of these challenges include: and disclosure? Can rent-seeking behavior to manage climate risks • Incorrect Decision to Choose the PPP Route: Does the additional be avoided by enabling more open and balanced risk-management risk created by climate risks make PPPs less attractive based on the responsibilities between the public and private sector stakeholders? expectation that the private sector will want additional compensation • Deterministic Contracts vs. Uncertain Events: In principle, the to manage climate risks? deterministic features of PPP contracts are not conducive to • Procurement Bias: Innovative resilience measures proposed by the managing uncertain events. For example, uncertain events such private sector for managing climate risks might require additional as political unrest, floods, etc., to an extent that are outside the compensation (e.g., to meet additional adaptation costs). But in a contractual design and performance requirements of private sector, “competitive bid” procurement scenario, highly weighted economic are expected to be rare and can be dealt through force majeure evaluation criteria might prevent the private sector from proposing provisions. However as shown in fig 2a and 2b, the increasing trends innovative solutions that need additional compensation. Can the and unpredictability of climate risks indicate such events to be more PPP procurement framework incentivize private-sector innovation frequent and therefore the application of force majeure provisions to optimize whole-life cost and be competitive? Can tariff regulation becomes less appropriate. The deterministic nature of contracts also in PPPs value and compensate for climate resilience measures more does not allow other provisions to manage uncertain events. Can PPP explicitly? contracts allow a more flexible approach to deal with risks that have • Split Incentives: The whole-life costing approach to PPPs is high uncertainties and unpredictability, such as climate risks? 16 mostly limited to the life of the contract rather than the life of the infrastructure asset, although the irreversible nature of capital Climate risks may be managed using an “active management” approach, and maintenance cost decisions made during the PPP contract life wherein the public and private sectors work together proactively to affects the overall life of the asset. In this context, can the incentive continuously collect, analyze, identify and assess their likelihood and structure allow the private sector to ensure an optimal balance impacts in order to take appropriate action. Active management can between capital, operating and maintenance costs over the lifetime help in the informed development and implementation of actions/ of the infrastructure asset, rather than only for the lifetime of the PPP responses through learning as climate change uncertainties unfold. contract, especially in instances where these two time periods differ? Global experience shows that many countries do not have an enabling • Principal-Agent Problem: Principal-agent problems such as environment for active management of risks in PPPs.17 “information asymmetry” and “moral hazards” related to PPPs are typically mitigated through contracts, regulation, and transparency As explained before, strategies for adaptation and resilience are and disclosure requirements. However, for undefined and unallocated developed during the sector and spatial planning stage, although risks such as climate risks, the principal-agent problem becomes the project-level planning and design of such strategies depends on more obvious. time preference, risk appetite, and the relative priority of physical and PPIAF ISSUE BRIEF: CLIMATE RISKS AND RESILIENCE IN INFRASTRUCTURE PPPs: ISSUES TO BE CONSIDERED 5 economic performance, within and across sectors18. But once the storm) has interrupted the contractual performance. Relief events project delivery route is selected as a PPP, the adaptation and resilience offer “time only” relief, whereas compensation events offer “time and strategies have to be translated into project requirements within the compensation” to private-sector investors. context of risk allocation and contractual performance. PPP structures • Force Majeure (FM) Events: FM covers both political and extreme- are also not guided by principles of long-term resilience or concepts such weather events, wherein both parties get equitable rights to terminate 19 as “build back better.” Additionally, the involvement of private investors a PPP contract after a prolonged risk event, perhaps lasting 180 days and lenders requires adaptation responsibilities to be shared by some or longer. In a typical FM termination, both parties share the financial measures and incentive structures. This does not necessarily mean impact; the public sector pays out debt obligations of lenders, paid-in that PPPs do not manage climate risks at all; they always include some equity including any breakage costs of investors (who forego future measures to address unforeseen, unpredictable and apparent risks. profits) in lieu of an affected infrastructure asset. Temporary FM events may be treated as relief or compensation events if such events 4.0 TYPICAL MEASURES IN PPPs THAT INDIRECTLY have been pre-agreed to in the PPP contract. ADDRESS CLIMATE RISKS • Insurance: Insurance transfers covered risks to third-party insurers. Figure 4 presents a linear view of the PPP phases and an overview In PPPs, insurance provides significant value by way of third-party of the measures and incentive structures available to factor in and due diligence, while instilling disciplined risk-management practices manage climate risks in PPPs. In PPPs, the asset stewardship extends to meet insurers’ required standards. Additionally, innovative from the public sector to private sector investors and lenders. Whereas risk-management tools and products (e.g., weather index-based investors and lenders rely on their own due diligence for investment instruments) are also constantly being developed. In principle, the decision-making, they often require the public sector to provide sufficient level of insurance coverage is a tradeoff between the expectations contractual protections for investments. Such “protection measures” are of the public sector (aligned with the lenders) for maximum asset normally agreed upon as part of the risk allocation process during the protection and affordability, and the expectations of the private sector preparation and procurement stages and act as the primary vehicle for to optimize coverage with respect to availability and competitiveness. managing risks in PPPs. • Uninsurable Events: Uninsurability arises from non-availability, • Relief and Compensation Events: Both relief and compensation unaffordability and/or the lack of a specific fit for a risk being events require private-sector investors to reinstate a PPP asset to its considered. In such cases, the public sector remains by default the normal condition after a pre-identified risk event (e.g., flood or “insurer of last resort” or, in rare cases, the private sector retains the risk, with higher return expectations. FIGURE 4: Measures and Incentives Included in PPP Frameworks Responsibility: •Public Sector Project Identification Measures (Examples): & PPP Selection •Policy Guidance •Project Appraisal Phase •Climate Screening Responsibility: •Public Sector Project Preparation Measures (Examples): •Design & Construction Standards Phase •Service Standards •Environmental & Social Safeguards Responsibility: •Public & Private Sectors PPP Procurement Measures (Examples): •Procurement Evaluation Phase •Adaptation Solutions •Contract Negotiations •Due Diligence Responsibility: •Public & Private Sectors Implementation & Measures (Examples): Contract Management •Contractual Protections: Relief & Compensation Phase Events; Force Majeure; Insurance; Uninsurable Events; Change-in-Law Events; Variations & Renegotiations •Performance-Based Payments •Disclosure & Transparency PPIAF ISSUE BRIEF: CLIMATE RISKS AND RESILIENCE IN INFRASTRUCTURE PPPs: ISSUES TO BE CONSIDERED 6 Coastal flooding of road infrastructure via Thinkstock • Change in Law: The provision of change in law (for example, change These contractual protections may appear comprehensive, but since in design and construction codes or regulatory limits on GHG climate risks are not explicitly allocated, and most climate uncertainties emissions, etc.) protects private investors from the consequences of manifest during the contract implementation and management phases, certain changes ex-post bid award, if they result in delays, additional these measures are ineffective over the life of PPPs. The next section costs and/or prevent the private sector from meeting contractual highlights some weaknesses and gaps in these contractual protections obligations. and raises some of the challenges in managing climate risks in • Variations and Renegotiations: PPP contracts also offer variation and infrastructure PPPs. renegotiation mechanisms that may be used to manage unforeseen risks. Variation mechanisms are often based on pre-agreed-upon cost 5.0 WEAKNESSES IN PPP CONTRACT MEASURES TO levels or types of changes allowed to the contractual scope. Similarly, ADDRESS CLIMATE RISKS renegotiation of pre-agreed-upon contractual obligations may be The table below, though not comprehensive, identifies some of the gaps allowed under specific circumstances, but requires extreme caution on and weaknesses in the way climate risks are managed in infrastructure PPPs. how it is managed. TABLE 1: Gaps in PPP Measures to Address Climate Risks MEASURE GAP • Lack of a comprehensive list to capture all climate risks exposes the PPP asset to not being able to qualify certain events (e.g., Relief & Compensation storm, hail damage) as relief or compensation events • Non-standardized treatment of FM provisions across different jurisdictions creates investment uncertainty • Lack of standard catch-all provisions or itemized lists that fail to fully capture all climate risks under FM limits the extent of Force Majeure FM coverage • Due to increasing climate trends, rare climate events in the past may become normal events in the future, making current FM provisions inappropriate • Lack of access by developing countries to commercial insurance markets exposes PPP assets to long-term climate risks Insurance • Limited access and affordability of insurance increases risks in PPP projects and dissuades investors from investing in risky PPPs • Uninsurability provison can disincentivize the private sector from developing climate-resilient infrastructure and proactively managing climate risks Uninsurability • When the public sector assumes insurance risk under uninsurability provisions, it does not have the same ability and capacity of a commercial insurer to enforce a disciplined approach to risk management PPIAF ISSUE BRIEF: CLIMATE RISKS AND RESILIENCE IN INFRASTRUCTURE PPPs: ISSUES TO BE CONSIDERED 7 Don Muang Airport in Bangkok, Thailand has been affected by one of the worst floodings in 50 years in 2011 via Neramit Sisa\Shutterstock Additionally, the contractual protections discussed above only address understanding of the policy and institutional landscape (identifying entry climate risks as ex-post events (i.e., reacting after the climate event has points where it is most optimal in the development cycle) including an happened), as opposed to managing them as ex-ante events (i.e., active appreciation of the regional, sectoral and project-specific issues. Such management of climate event before it happens). Obvious exceptions are an approach will allow to make informed decisions based on options insurance; setting design and construction standards; and performance that are flexible and cost-effective. Some potential areas to achieve such requirements (e.g., asset availability, reliability, condition, etc.), which a paradigm shift to integrate climate risks in infrastructure PPPs are are ex-ante measures. However, such exceptions become weak due to outlined here (Figure 5) for detailed assessment and testing: lack of knowledge and unclear allocation of climate risks in PPPs. As • Policy Alignment: A number of developing countries have developed mentioned before, the use of and approach to force majeure to protect climate-change policies (such as National Adaptation Plans), against climate risks needs modification in an increasing climate change strategies and/or climate action plans. Similarly, many countries scenario. In addition, the use of force majeure cannot be used as a also have PPP policies or laws to enable private sector investments proxy for lack of building resilience in design and meeting performance in infrastructure. Most of these PPP and climate-change policies are requirements of PPPs. not aligned and therefore, require harmonization in order to develop robust, climate-resilient infrastructure. For example, a climate Of course, PPPs manage many risks, and a separate contractual provision policy that reflects local or regional climate vulnerabilities, and/or to manage each risk is not optimal. Notwithstanding this, integrating a sector and spatial policy that addresses adaptation and resilience climate resilience and actively managing climate risks is critical for the strategies for the sector20 should also be reflected in a country’s PPP long-term sustainability of infrastructure assets and therefore, justifies policy. However, integration of such policies requires political will, this investment decision at the outset of a PPP project. The next section strengthening institutional arrangements and applying appropriate identifies at a high level the paradigm shifts needed in PPP processes to economic tools.21 integrate climate risks. • (Eco) Systems Approach: Adaptation has great potential to reduce the negative impact of climate change,22 but there is also a risk 6.0 PARADIGM SHIFT NEEDED FOR INTEGRATING of unnecessarily adapting in the wrong way, which could be as CLIMATE RESILIENCE IN PPPs significant as the risk of not adapting when needed. The public sector The level of uncertainty associated with climate risks to infrastructure has the greatest incentive to plan for the balanced adaptive strategy assets, and the deterministic nature of PPP contracts, require a paradigm to infrastructure at a country or regional level, using a “systems shift in the way PPPs are developed, procured and implemented. approach”. But incentives for the private sector are designed to Furthermore, mainstreaming adaptation and resilience requires an protect their investments at the project level. A solution to this issue PPIAF ISSUE BRIEF: CLIMATE RISKS AND RESILIENCE IN INFRASTRUCTURE PPPs: ISSUES TO BE CONSIDERED 8 FIGURE 5: Actions Needed for Integrating Climate Resilience in PPPs Active Management of PPPs Policy Alignment with Strategic Partnerships Areas to Consider for Leverage Risk Mitigation Achieving Paradigm Shift Products, Global Climate (Eco) Systems Approach Finance, and Knowledge Needed to Integrate Climate Resilience in PPPs PPP Process Modifications Enabling Environment is to consider PPPs within a “multi-sector infrastructure resilience • Incorporate whole-asset-life-cost optimization approach instead of plan,” starting at the regional or country level, and then identifying only PPP project life. and specifying project-level resilience requirements. This approach • Include third-party reviews of climate risks for PPPs on a regional, avoids sub-optimal and expensive current practices that operate at a country and project-level basis. single project level, instead taking a systems/portfolio approach.23 It is • Form active partnerships with the insurance industry and likely that the public sector will have better and more information on engineering firms on wider infrastructure development and the the overall optimized resilience strategy for the portfolio from which use of climate screening tools25 and risk-forecasting tools (such as a project specific strategy can be adopted, following the process of climate vulnerability indexes, etc.) for project appraisal. There are active management. various decision-support tools for adaptation that can be used for • Enabling Environment: Education and awareness of climate risks making decisions under uncertainty.26 are imperative to countries that are developing infrastructure in • Develop incentive structures through procurement policies (such climate-vulnerable environments. With the help of multilaterals and as setting evaluation criteria for resilience, using asset life costing other development institutions, national governments can create an approach, etc.) that promote innovation while still operating within a enabling environment through an adequate policy and regulatory competitive environment. regime and the provision of tools and guidance. Key enabling factors • Establish regulatory incentives that are conducive to risk influencing the role of the private sector in adaptation include management, with an emphasis on integrating across overlapping consistent data and information, institutional arrangements including regulatory regimes (e.g., regulation of water, energy and land use).27 coordination between various stakeholders, policies, economic • Include pre-defined and costed risk mitigation plans for the active incentives, technology, and knowledge.24 management of climate risks. • PPP Process Modifications: There are a number of areas where • Utilize environmental impact assessment (EIA) procedures, PPP processes can create the right incentive structures for active environmental and social (E&S) standards and weather forecasting management of climate risks. Each helps to minimize investment tools for enhancing the resilience as well as environmental risks while retaining the asset value over the life of a PPP. A few of sustainability of PPP projects, following international best these areas are as follows: practices.28 • Integrate climate adaptation and resilience into infrastructure • Leverage Risk Mitigation Products, Global Climate Finance, and policy and the project appraisal framework. Knowledge: Studies also show that multilaterals can expand their • Include clear and explicit allocation of specific climate-related risks risk mitigation products to more specifically target climate risks.29 in PPP contracts. Additionally, incorporate the concept of resilience One similar example is a World Bank-structured weather derivative to complement risk allocation. to help the Government of Uruguay to mitigate the impacts of PPIAF ISSUE BRIEF: CLIMATE RISKS AND RESILIENCE IN INFRASTRUCTURE PPPs: ISSUES TO BE CONSIDERED 9 drought.30 Various global sources of climate finance such as the For regions and countries that have high climate vulnerability, PPP Green Climate Fund, Climate Investment Funds, and Green Bonds, policies should be modified with additional flexibility built in to allow can also be mainstreamed as financing sources for climate-smart for active management. Such flexibility can also be extended to infrastructure. A recent example is the proposed establishment of countries whose climate risks are currently low but may increase in the Africa Facility for Climate-Resilient Investment by the World the future. Figure 6 shows a continuum approach to building flexibility Bank, the Africa Union Commission, and UNECA; this is an integral into PPPs to actively manage climate risk over the project lifetime, part of the World Bank’s $16 billion Africa Climate Business wherein resilience measures (asset protection) are actively managed Plan that was officially unveiled during the COP21 global climate depending on the level of vulnerability. The pre-defined minimum conference in Paris. protection can be related to a low-regret option that not only meets • Active Management of PPPs with Strategic Partnerships: Actively current adaptation deficits at low-cost but is flexible enough to managing long-term climate risks during the life of a PPP contract respond to future changes.31 requires the expertise of both the public and private sectors in a joint decision-making forum. Flexibility should be built into PPP processes In essence, it is imperative to apply existing tools and build on starting with the project selection, preparation, and procurement, methodologies for decision-making under climate uncertainty32 through through to implementation and contract management, while setting close collaboration and strategic partnerships between multilaterals, appropriate incentive structures for both parties. This active approach academia, engineering firms, the insurance industry, technology also requires strategic partnerships with stakeholders representing providers, and public-sector agencies. multiple disciplines (e.g., insurance industry, engineering and scientific climate communities), wherein openness, transparency and cost effectiveness would underpin the partnerships with solutions focusing on technical, financial, legal and institutional capacities. FIGURE 6: Framework for Active Management of Climate Risks in PPPs Infrastructure Climate Change Policy Policy PPP Policy and Processes Pre-defined Pre-defined Minimum ACTIVE MANAGEMENT OF CLIMATE RISKS Maximum Protection Protection Flexibility should be built-in at the PPP Policy level and across PPP Processes to Actively Manage Climate Risks in infrastructure PPPs. Lo w gh Hi Clima te Vulne dex) rability Measure (e.g. Climate Risk In PPIAF ISSUE BRIEF: CLIMATE RISKS AND RESILIENCE IN INFRASTRUCTURE PPPs: ISSUES TO BE CONSIDERED 10 Typhoon Haiyan damage in Tacloban, Philippines 2013 via Thinkstock CONCLUSION should continue to work together to create enabling environments for Deep uncertainty regarding long-term climate risks reinforces the the active management of climate risks in PPPs. Climate screening need for a paradigm shift in how PPPs incorporate long-term resilience tools should be mainstreamed for project selection and prioritization. in infrastructure investments. Various areas need attention, such as Additionally, global climate finance and risk mitigation products should alignment of PPP and climate-change policies; partnering with the also be considered as a key source of financing to develop projects. private sector and the insurance industry at a strategic level to find The issues identified in this paper may provide motivation to various innovative and cost-effective solutions; using information technology and stakeholders for a coordinated and targeted engagement to develop satellite imaging to collect and analyze climate data to assess potential climate resilient infrastructure PPPs. risks; leveraging global climate finance sources; and taking an overall multi-sector, systems-wide approach to developing climate-smart infrastructure. Furthermore, mainstreaming resilience requires integration of various policy areas and consideration of flexibility and pragmatism. To implement such changes, the capacity and knowledge of stakeholders should be improved through the use of information technology and capturing lessons from events after they unfold. Development institutions such as the World Bank Group, governments, and the private sector PPIAF ISSUE BRIEF: CLIMATE RISKS AND RESILIENCE IN INFRASTRUCTURE PPPs: ISSUES TO BE CONSIDERED 11 ENDNOTES 1 Further information about the process can be found in the PPP Reference Guide V2 (http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2014/09/08/0004424 64_20140908133431/Rendered/PDF/903840PPP0Refe0Box385311B000PUBLIC0.pdf) 2 Excludes geophysical events such as earthquakes and tsunamis. 3 Climate Change Risks and Adaptation, Linking Policy and Economics, OECD, 2015 (http://dx.doi.org/10.1787/9789264234611-en) 4 IPCC Fourth Assessment Report: Climate Change 2007, IPCC, 2007 (https://www.ipcc.ch/publications_and_data/ar4/wg2/en/ch19s19-es.html) 5 Climate Change and Infrastructure, Urban Systems and Vulnerabilities, U.S. Department of Energy, 2012 (http://www.esd.ornl.gov/eess/Infrastructure.pdf) 6 Enhancing the Climate Resilience of Africa’s Infrastructure, World Bank/UNECA/AFD study, 2015 (http://www.worldbank.org/content/dam/Worldbank/Feature%20Story/Africa/Confer ence%20Edition%20Enhancing%20Africas%20Infrastructure.pdf) 7 “Natural catastrophes and global reinsurance – exploring the linkages” by Von Dahlen, Sebastian and von Peter, Goetz, BIS Quarterly Review, December 2012 (http://www.bis.org/publ/qtrpd- f/r_qt1212.pdf) 8 Global Climate Risk Index 2015, Germanwatch, 2015 (https://germanwatch.org/en/download/10333.pdf) 9 Global Assessment Report on Disaster Risk Reduction, United Nations, 2013, Fig 1.1 (these loss figures exclude impact of indirect losses to the wider economy) (http://www.preventionweb. net/english/hyogo/gar/2013/en/gar-pdf/GAR2013_EN.pdf) 10 The Urban Transition of Environmental Disaster Governance in Asia, Working Paper 210, National University of Singapore, October 2013 (http://www.ari.nus.edu.sg/publication/working-pa- pers.html) 11 The Global Infrastructure Facility (http://www.worldbank.org/en/programs/global-Infrastructure-facility) 12 2013 Global PPI Update, PPP Group, World Bank, 2014 (Figure 2; shows an increase from about $100 billion in 2005 to $200 billion in 2012 and then a drop below $150 billion after 2012) (http://www.scribd.com/doc/242091146/Private-Participation-in-Infrastructure-Global-Update-2013) 13 Enhancing the Climate Resilience of Africa’s Infrastructure: The Power and Water Sectors, Agence Française de Développement, 2015 (https://openknowledge.worldbank.org/han- dle/10986/21875) 14 A spectrum of options reflecting simple management contracts to complex privatizations 15 Even in jurisdictions where multi-criteria evaluation is applied, economic criteria is often given more weight 16 Subject to the usual hand-back provisions in PPP contracts 17 Mainstreaming Climate Resilience in Large Multi-Sector PPPs, World Bank, October 2015 18 Enhancing the Climate Resilience of Africa’s Infrastructure : The Power and Water Sectors, Agence Française de Développement, 2015 (https://openknowledge.worldbank.org/han- dle/10986/21875) 19 Building Back Better for Next Time, United Nations International Strategy for Disaster Reduction (UNISDR), October 2010 (http://www.unisdr.org/we/inform/publications/14499) 20 An example of resilience strategies for the Water Sector: Confronting Climate Uncertainty in Water Resources Planning and Project Design: The Decision Tree Framework, World Bank, 2015 21 Climate Change Risks and Adaptation, Linking Policy and Economics, OECD, 2015 (http://dx.doi.org/10.1787/9789264234611-en) 22 Enhancing the Climate Resilience of Africa’s Infrastructure: The Power and Water Sectors, Agence Française de Développement, 2015 (https://openknowledge.worldbank.org/han- dle/10986/21875) 23 Mainstreaming Climate Resilience in Large Multi-Sector PPPs, World Bank, October 2015 24 Enabling Environment for Private Sector Adaptation: An Index Assessment, International Finance Corporation, 2013 (http://www.ifc.org/wps/wcm/connect/6060670042bd92b6b297be0d- c33b630b/Enabling+Environment+for+Private+Sector+Adaptation+-+Stenek,+Amado,+Greenall.pdf?MOD=AJPERES) 25 Climate and Disaster Risk Screening Tools, The World Bank Group (https://climatescreeningtools/) 26 “The use of new economic decision support tools for adaptation assessment”, Climatic Change, 2014 (http://dx.doi.org/10.1007/s10584-014-1250-9); Agreeing on robust decisions: new pro- cesses for decision making under deep uncertainty, World Bank Working Paper, 2014 (http://documents.worldbank.org/curated/en/2014/06/19616379/agreeing-robust-decisions-new-pro- cesses-decision-making-under-deep-uncertainty) 27 Climate Change Risks and Adaptation, Linking Policy and Economics, OECD, 2015 (http://dx.doi.org/10.1787/9789264234611-en) 28 IFC Performance Standards on Environmental and Social Sustainability, International Finance Corporation, 2012 (www.ifc.org/wps/wcm/connect/c8f524004a73daeca09afdf998895a12/ IFC_Performance_Standards.pdf?MOD=AJPERES) 29 Mapping the World Bank Group Risk Mitigation Instruments for Climate Change, Climate Policy Initiative, 2013 (http://climatepolicyinitiative.org/publication/mapping-the-world-bank- group-risk-mitigation-instruments-for-climate-change/) 30 World Bank weather derivative helps Uruguay mitigate impact of drought (http://treasury.worldbank.org/bdm/pdf/Case_Study/Uruguay_Weather_Derivative.pdf) 31 Early VfM Adaptation Toolkit, Global Climate Adaptation Partnership (GCAP) and Department for International Development (DFID), 2014 (https://www.gov.uk/government/uploads/sys- tem/uploads/attachment_data/file/338360/Early-VfM-Toolkit.pdf) 32 Making Informed Investment Decisions in an Uncertain World : A Short Demonstration, World Bank, 2014 (https://openknowledge.worldbank.org/handle/10986/17310) PPIAF ISSUE BRIEF: CLIMATE RISKS AND RESILIENCE IN INFRASTRUCTURE PPPs: ISSUES TO BE CONSIDERED 12 © 2016 PPIAF | 1818 H Street, NW | Washington, DC 20433 | www.ppiaf.org | E-mail: ppiaf@ppiaf.org | @PPIAF-PPP ENABLING PPIAF, a multi-donor trust fund housed in the World Bank Group, provides technical assistance to governments in INFRASTRUCTURE developing countries. PPIAF’s main goal is to create enabling environments through high-impact partnerships that INVESTMENT facilitate private investment in infrastructure.