Ignoring climate risks in infrastructure drives down social and economic value for future generations

The recent flooding in Bengaluru, India’s Silicon Valley, provides yet another example of why managing climate risks is more important than ever. By mid-October, the city had experienced the most ever rainfall on record. Severe flooding not only led to widespread disruptions to citizens’ lives but also threatened the USD194 billion Indian IT services industry. No country is immune to this scenario, as seen in the recent extreme floods in Nigeria and other countries in Central and West Africa, Pakistan, Australia, and the United States. Around the globe, governments are being challenged to act swiftly to correct long-standing infrastructure and urban development approaches which fail to anticipate climate risks and build in climate adaptation and resiliency.

Our paper, published in the Journal of World Association of PPP Units and Professionals (WAPPP) emphasises proactive identification and proper risk management of three key climate-related risks:

1. physical risks (i.e., destruction of properties)
2. transition risks (i.e., economic impacts due to a systemic shift towards low-carbon footprint)
3. liability risks (i.e., litigation arising from failures to manage climate risks).

Integrating climate-related risk management into infrastructure projects, via more traditional ‘financial viability or business case’ tools, is in fact a critical step to assess the ‘economic case’ to ensure value for future generations. The paper presents a set of recommendations to operationalise this risk management approach throughout the lifecycle of public private partnerships (PPPs).

First, we need to start from the beginning of the infrastructure development cycle. PPP contracting authorities should consider the alignment of infrastructure project proposals with a country’s or a region’s long-term climate policies and potential vulnerabilities. This is a crucial first step to align all stakeholders on the right path towards climate-resilient development. In practice, this could be implemented by analysis of climate goals and risks in the technical, economic, and financial analyses of projects. While environmental impact assessments have long become a standard requirement in infrastructure projects, climate risk and vulnerability assessments – more commonly required in projects funded by development finance agencies in recent years – should be urgently mainstreamed in the modus operandi of infrastructure project preparation.

Second, we must think, analyse, and plan for the long-term. An important way to do so is to ensure that the infrastructure projects’ life-cycle cost analysis considers the long-term implications and potential costs of climate-related risks. Given the high uncertainties in the long-term, the challenge lies in quantifying the magnitude of such impact under multiple scenarios. As an example, the Financial Accountability Office of Ontario, Canada estimated the cumulative maintenance costs of existing public buildings over different scenarios from 2022 to 2100. This exercise estimated an 8.2 percent increase in costs over baseline under a medium-emissions scenario – representing an additional USD66 billion needed to maintain Ontario’s public buildings. Under a high-emissions scenario, adaptation costs rise even more – requiring an additional USD116 billion of maintenance costs over the same period. Anticipating and quantifying such long-term impacts can thus provide a basis to address long-term climate-related risks at early stages of the PPPs.

Third, we must innovate on the best practices to assess, allocate, and manage climate-related risks for infrastructure. As the world faces an increasingly wide array of climate hazards, our approaches to structure the risk allocation and management responsibilities between public and private sectors should evolve. For example, in Japan, some PPP agreements define force majeure events related to earthquakes according to seismic intensity. Given that some low-intensity earthquakes are excluded, the PPP agreements ensure that private developers take on the responsibilities to address manageable and expected risks. This will allow the infrastructure sector to tap into the efficiency benefits of developing projects as PPPs – by incentivising the private partners to innovate and proactively act on climate-related risk management.

The Bangaluru floods highlight the pressing reality that governments must act quickly to manage climate-related risks. The increasing frequency of natural disasters and their associated costs demand that proactive steps to mitigate climate-related risks be taken urgently. Governments should properly assess climate vulnerabilities and quantify their long-term costs to ensure that climate-related risks are fully incorporated into government risk management frameworks and public-private sector risk sharing arrangements. More effective involvement of the private sector as a partner in managing climate-related risks is key to addressing climate change. The window to address climate-related risks is passing quickly and all stakeholders must act now to avoid the worst impacts of climate change on our society and economy.