Adverse Natural Events are a Threat to PPP Infrastructure Projects
Public-Private Partnership (PPP) projects because of their complexity, their many moving parts, partner and stakeholder performance expectations, and long life-cycle are susceptible to adverse natural events. Because of this, it is critically important that resilience be a major consideration when PPPs are planned, financed, and executed.
Over the last few years large infrastructure facilities have been exposed to major adverse natural events that have caused enormous infrastructure damage, disrupted essential services to millions and which in addition have had financial implications for investors who have been exposed to unwelcomed elements that have threatened the viability and sustainability of their ventures. Apart from enormous losses of lives, the financial impacts have been staggering. For example, the Indian Ocean Tsunami cost $8.7 billion cost; Japan’s Tsunami $300 billion; Katrina $100 billion; and Sandy $71.4 billion. Most of the costs incurred were for infrastructure damage and recovery efforts. Damage and financial risk to infrastructure can be averted - or more easily mitigated - if comprehensive resiliency best practices are incorporated from project conception into the design, construction, risk identification, financing, operations and management of projects. Resiliency planning should become an imperative, particularly because there seems to be a global upward trend in adverse natural events that are causing alarming financial losses.
(Source: PPIAF - Climate Risks and Resilience in Infrastructure PPPs: Issues to be Considered – 2016)
Recent records of adverse natural events have shown how poorly prepared public and private sector owners of infrastructure are to respond adequately. Lack of understanding of the financial implications of events has also lead to an irresponsible dependency on financial relief from central governments and international institutions for infrastructure reconstruction and recovery support. Excessive insurance and compensation demands and reliance on government for disaster bailout programs is not sustainable, especially in the case of PPPs where risk allocation to project partners should be appropriately apportioned. In many instances the magnitude of damage has overwhelmed the ability of insurers to cover the recovery and replacement costs of those who were insured. Unless concrete measures are undertaken to mitigate the impacts of repetitive and predictable adverse natural events, both the public and private sectors will continue to face financial risk threats to infrastructure projects that could result in investors refusing to finance projects in at risk countries and regions.
Natural adverse event threats are not going to go away. As both public and private sector developers of infrastructure continue to build new infrastructure across the globe, they are venturing into geographic areas that are increasingly prone to disasters. For example, the Lloyd’s City Risk Index found that $4.6 trillion of the projected GDP of 301 of the world’s leading cities is at risk from threats over the next decade.
Hard Lessons Have Been Learned.
Hard lessons have been learned by past events that can prevent the repetition of costly and unnecessary mistakes. It seems that the ability of the public and private sectors to anticipate, absorb, adapt to, and rapidly recover from potentially disruptive events is poor. Institutional complacency regarding adverse natural event impacts should be of particular concern to both public and private sector institutions that have entered into long-term public-private partnership (PPP) agreements that mandate project survival. It is therefore critical that PPP proponents understand that the long-term contract lifetimes of PPPs (averaging close to 30 years) makes the likelihood of a project being impacted by an adverse event more likely and requires a long-term commitment to measures that will support project sustainability. It is time for governments and their private sector partners to acknowledge that measures that can be collaboratively undertaken to improve the resiliency of infrastructure projects benefits all.
The unpredictability and uncertainty of adverse natural events requires a flexible approach to developing resiliency best practices that can address project risk head-on. Lessons learned can form the foundation of a body of knowledge that can be created through information sharing, particularly by insurance companies and large banks that have experienced adverse natural events.
PPP contractual agreements typically find governments typically assuming most risk for force majeure (acts of nature) events. No matter who has assumed the risk and who the insurer is, an adverse natural event has implications for both parties, which include infrastructure replacement costs, losses of project revenue, disrupted operations, and even a total loss of the project. The financial implications can be staggering. Project disruptions often has a negative effect on project partners and stakeholders that can lead to lots of finger pointing and legal action to apportion blame. This is unfortunate as many impacts can be avoided through careful resiliency planning.
In contract law a force majeure event may result in legal defense strategies that focus on the rule of impossibility or impracticability. However, there is the assumption that the contract promise can be discharged after adverse natural events because of unavoidable and unforeseen occurrences. The outcome of such a legal deliberations are project recovery delays and unnecessary legal expenses that have detrimental impacts on the operations and maintenance of projects which are in legal limbo.
Governments as originators of PPP projects and investors who cannot afford loses need to reconsider their current approaches and explore how resiliency planning can be built into projects.
Introducing Resiliency Planning into PPP Models
Physical and legal project impacts can be mitigated if genuine and collaborative efforts are made to prepare for the unforeseen. In a typical Design Built Finance Operate Maintain (DBFOM) PPP model there is a danger that planning, due diligence, transactional and mitigation efforts narrowly focus on the DBF phases of the project lifecycle, while O&Mconcerns are often consciously or subconsciously disregarded by project proponents.
This approach is almost understandable as the DBF phases of projects are tangible concrete events, while the O&M phases can fall into the future realm of project stakeholder’s limited perceptions of predictable future risk, which can be clouded by intangible unpredictability and vague threat. It seems at times that there is a laissez faire belief that terribly disruptive natural events will never occur “on my watch.”
But, we do not live in a perfect world and history has shown that adverse events do occur and that they must be considered as an integral part of PPP resiliency design.
PPP practitioners need to genuinely ask themselves what resilient actions they can take to reduce the magnitude and duration of disruptive natural events. In other words, what are we going to do to anticipate, absorb, adapt to, and recover from disruptive natural events?
In addition, PPP project proponents should ask what resiliency practices can be adopted to prevent or limit failure, expedite recovery, and transform the performance of public and private sector partners in addressing their specific PPP project?
Assumption of Responsibility by Both the Public and Private Sectors
Ideally, national, state and local governments need to enact PPP policies that strengthen and enhance critical infrastructure resilience planning in collaboration with private sector partners. This also includes clarifying the roles and responsibilities of project partners and strengthening and leveraging global resiliency best practices that can be introduced through collaborative partnerships between the public and private sectors.
Collaboration to adopt resiliency as a best practice can only be seen in a positive light. Both the public and private sector partners need to see resiliency planning as a responsibility and need to be ready to answer for failures that could be avoided.
PPPs offer a method of infrastructure delivery that can promote greater efficiency through innovation. Resiliency planning can leverage innovation to new heights. It is critical that PPP partners undertake measures to understand the advantages of resilience planning. It is important that insights gained into how resiliency relates to infrastructure systems are acted upon. The National Chamber Foundation identified four aspects of resilience that should form the foundation of incorporating resilience into projects. They include:
- Robustness, or the ability to withstand external demands;
- Redundancy, or the extent of alternate options or substitutions for system processes;
- Resourcefulness, or the capacity to mobilize resources rapidly in an emergency; and
- Rapidity, or the speed at which operations can be restored to pre-incident levels.
Developing Collaborative Tools
Direct collaboration to achieve these 4R resiliency practices through partnerships between public and private sector infrastructure owners and operators can lead to the development of best practices, standards, and regulations that can promote resilience. If trust based relationships are leveraged between public and private sector partners, existing and new infrastructure resiliency models (that match business models and risk profiles) could be shared, expanded upon, and be incorporated into a PPP resiliency toolbox that could be proactively adopted by practitioners.
Resiliency toolboxes will strengthen the willingness of partners to management incidents and responsiveness if developed collaboratively instead of being imposed.
It must be pointed out that no matter how good the tool box, the efforts would be meaningless if there is no broad-based institutional support for efforts to adopting recommendations. Visionary public and private sector leaders will consider the repercussions, both political and economic, if known deficiencies are ignored (i.e. Pre-Katrina New Orleans). They will want to be able to take credit for good decisions, not bad decisions and this should serve as an incentive to support resiliency best practices.
Nay-sayers to resilience planning for adverse natural events should take stock of what is currently happening. They might not even be aware of resiliency practices that have been already adopted and implemented in their backyards by industry. It is important that natural event opponents help to depoliticize the debate and consider a pragmatic approach to resiliency planning. A case in point is that some of the most politically conservative U.S. states have adopted some of the best resiliency practices that could be shared. Only then, can comprehensive toolboxes be developed.
It is Important to Acknowledge Challenges
The challenges of resilience planning must also be considered. This entails developing the most resistant and enhanced infrastructure possible, while not ignoring the fact that unforeseen natural events can cause individual failures and even overwhelm redundancies built into the best of projects. Damage will occur no matter. But we can control the controllable. It is important to acknowledge that the adoption of disaster recovery actions can turn a devastating event into a temporary setback and that recovery can be expedited by good planning.
If sound measures are adopted and concrete policies and practices are developed and universally adopted, it is beneficial to all parties. The financial cost of incorporating resiliency into all phases of a PPP project will always be debated by partners and stakeholders. However, we should now change the debate to understanding what the costs of inaction would be as well. Management of risk can be turned into a constructive opportunity and this is what risk averse investors and insurers of PPP projects will increasingly look for. If project infrastructure is going to be destroyed repetitively - through bad decisions and irresponsible inattention - then investors will flee risky PPP markets.
Both the public and private sectors need to take concrete actions to develop resiliency programs and identify tangible indicators of change that could impact future infrastructure projects. These indicators are essential for developing resiliency roadmaps and disaster recovery programs for long-term PPP projects.
Who Should Lead These efforts?
Some responsible party has to take the lead to promote resiliency thought leadership and planning. The responsible party needs to consider:
- finding ways to strengthen public and private sector capacity to implement resiliency best practices.
- promoting independent organizations that can spearhead collaborative actions between the public and private sectors.
- boosting public and private sector players to support collaborative institutions that are focused on developing and implementing sub-national, national, sub-regional and regional resiliency strategic action plans.
- developing policy and regulatory frameworks that can be adopted at regional, national and local level
An effective institution should also be able to develop tools that both public and private sector stakeholders would use to introduce resiliency best practices to PPP projects. Ideally, the institution would draw on the expertise of civil, academic, and scientific partners to collaboratively develop resiliency best practices that are generally agreeable to all and which are consistent with guidelines and objectives established by international finance institutions and donor organizations. It is also important that mitigation costs be built more consistently into project finance considerations when developing PPP financial models.
A major institutional goal should be the development of best practices that focus on avoiding the repetition of bad decisions that lead to repeated disasters.
A New PPP Resiliency Center in Louisiana
Currently, the first steps are being taken to form a sanctioned United Nations Economic Commission for Europe (UNECE) affiliated PPP Center for Resilience in Louisiana. The Center for PPP resilience will draw on international experience of participating public and private sector institutions who are willing to be partners, share knowledge, and expand the practice of resiliency best practices into PPPs (See www.ippprc.org)
In ending, it must be acknowledged that resilience planning will promote project sustainability. Private sector companies that realize that there is value in adopting resiliency practices will almost certainly in future have an advantage over their competitors. Public Institutions that adopt resiliency practices will most certainly be better placed to attract investors to strategic and critical projects that are built in at risk areas.
It must be stressed that the adoption of resiliency practices will save time and money for PPP partners in the long run. Resiliency best practices must be considered for the full life-cycle of all PPP projects. Resiliency planning should not be tied to the climate change debate but to adverse natural events that unless planned for, will have reoccurring unnecessary detrimental impacts.
Inter-American Development Bank – IDB Integrated Strategy for Climate Change Adaptation and Mitigation, and Sustainable and Renewable Energy – 2011
Inter-American Development Bank – Indicators to Assess the Effectiveness of Climate Change Projects – 2012
Inter-American Development Bank – Haiti Natural Disaster Mitigation Program II (HA-L1097 / HA-G1031
Lloyds – Future Cities, Building Infrastructure Resilience – 2017
National Chamber Foundation – Public-Private Partnerships and Infrastructure Resilience: How PPPs Can Influence More Durable Approaches to U.S. Infrastructure- 2011
National Infrastructure Advisory Council – Critical Infrastructure Resilience Final Report and Recommendations - September 2009.
PPIAF - Climate Risks and Resilience in Infrastructure PPPs: Issues to be Considered– 2016