Public–Private Partnerships: Financing climate-resilient infrastructure

by David Uzsoki, IISD

According to UN Environment, the costs of adapting to climate change could range between USD 280 billion and USD 500 billion by 2050.

Climate-resilient infrastructure plays an important role in the national adaptation plan (NAP) process. Countries cannot rely solely on public resources for deploying these projects, and need to find ways to access private sources of capital. Public–private partnerships (PPPs) are an innovative approach to this challenge that many governments are using in order to work with the private sector to finance the infrastructure they need to adapt to climate change.

There are, however, many common misconceptions about PPPs. Here are some of the factors affecting how PPPs should and should not be used.

What is a PPP?

PPPs are defined by the World Bank as “a long-term contract between a private party and a government entity for providing a public asset or service, in which the private party bears significant risk and management responsibility, and remuneration is linked to performance.” Due to this link between the remuneration of the private party and the success of the project, significant efficiency gains can be achieved through innovation in the design, financing, construction, operation and maintenance of an asset.

PPPs should deliver efficiency, not just to fill financing gaps.

Developing countries are often interested in PPPs when they lack sufficient resources to deploy essential infrastructure. However, the primary reason to explore the PPP option should be the efficiency gains resulting from private sector participation in the different phases of the project.

Risks should be carefully allocated between public and private partners.

Another value proposition of PPPs is that they can create “value for money” through the optimal allocation of risks between the public and private party. Implementing infrastructure projects involves a wide range of project risks (including construction, operational, revenue, financial, legal and political), which need to be carefully assessed and allocated to the party that is best placed to manage it.

PPPs should involve climate risk assessments.

When well-designed, PPPs can be an innovative approach to deploying climate-resilient infrastructure for sectors such as energy, telecommunications and transportation.

Accurate identification of all material risks is key to the success of PPPs. However, based on our experience, climate risks are still not being sufficiently addressed in risk assessments. This is especially worrying as these long-term assets are particularly exposed to these risks, having an operating time of up to 50 years.

Both physical (e.g., changes in water availability, extreme temperature, sea-level rise) and transition (e.g., extensive policy changes to address climate mitigation and adaptation) climate-related risks can have a material impacts on the financial viability of infrastructure assets.

It is important to note that natural infrastructure solutions (mangroves, roadside trees, wetlands, dunes) could be an efficient way to manage certain climate-related risks for gray infrastructure projects. These nature-based solutions are often overlooked during the planning and design phases.

While in some areas the business case for climate adaptation may be less obvious, for infrastructure, climate resilience just makes financial sense, even with the higher capital expenditures involved. IISD has developed the Sustainable Asset Valuation Tool (SAVi) to climate stress test infrastructure projects by assessing the financial impact of different climate scenarios on the asset. Our preliminary results suggest that there is indeed a strong business case for climate resilience.

How to decide if PPPs are right for your climate-resilient infrastructure needs.

PPPs are well suited to deliver climate-resilient infrastructure. As for any project, whether the PPP option delivers the most value for money for governments and their taxpayers needs to be evaluated carefully (using a public sector comparator).

Procurers need to realize that PPPs might not be the cheapest way to buy infrastructure, but when considering the efficiency gains and key risks allocated to the private party, PPPs might be the optimal structure for the project.

Also, it is important to note that the success of PPPs depends on many factors, including thorough project preparation, solid regulatory and legal frameworks and relevant capacities at the procurement agency, among others.

PPPs are not a magic solution to address the world’s infrastructure needs, but can be an effective tool to deliver certain projects—including climate-resilient infrastructure—and generate value for money for stakeholders.

David Uzsoki is a sustainable finance and infrastructure specialist in IISD’s Public Procurement and Infrastructure Finance team within the Economic Law and Policy Program. You can read David’s presentation from our recent Targeted Topics Forum on “Financing NAP Processes” held in Mexico City in June 2017. Read more presentations from this event here.

Any opinions stated in this blog post are those of the author and do not necessarily reflect the policies or opinions of the NAP Global Network, its funders or Network participants.

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