Why invest in Climate Resilient Infrastructure?
Every passing year, extreme weather events like floods, cyclones, fires, and cold become more violent and frequent, wreaking havoc on homes, businesses, infrastructure, and ecology. Infrastructure disruptions owing to these cost households and businesses in low and middle-income countries between US $391 billion and US $647 billion per year. To make social, economic, and ecological systems climate shock proof, increasing adaptive capacities through investing in infrastructure such as power plants, buildings, transportation, and water is unequivocal. The process of strengthening resilience to climate change comprises management and structural interventions on existing and newly built infrastructure. Climate-resilient infrastructure essentially involves infrastructure planning, designing, building, and operating in a way that takes into account the changing climate conditions. Investment in the infrastructure that is climate resilient is critical for meeting the SDGs and the Paris goal of keeping global temperatures below 20 Celsius.
Such investment is highly beneficial. The net benefit of investing in more resilient infrastructure in low- and middle-income countries is US $4.2 trillion, with each US $1 invested, returning US $4. Additionally, as far as infrastructure is concerned, asset life and reliability increase, repair and maintenance cost reduce, and service provision efficiency enhances.
Investment opportunities in climate-resilient infrastructure
Between 2016 and 2030, it is anticipated that US $6.3 trillion in infrastructure investment would be required yearly, on average, to meet global development needs and an additional US $600 billion per year, over the same period will be required to make these investments climate-compatible. Another estimate suggests that the world will need to invest US $75-86 trillion in infrastructure between 2015 and 2030. In case of low- and middle-income countries, governments annually invest roughly US $1 trillion in infrastructure, accounting for between 3.4% and 5% of global GDP.
There are investment opportunities in bringing climate resilience in infrastructure pertaining to power plants, buildings, transportation, and water sectors. Investing in comprehensive risk management and formulating robust strategies in the planning and early project design stage would help unlock this potential.
Instruments to deliver financial needs
To attract and scale long-term finance for the infrastructure projects, it is important that financial instruments expose investors to sustainable infrastructure assets. Given the scale of the infrastructure investment gap and the constraints on public sector balance sheets, private capital can play an important role in closing the investment gap while also ensuring climate resilience. The following are some of the available mechanisms that can be used to raise capital for the project.
Hybrid Annuity Model (HAM)
HAM is a mix of the EPC (engineering, procurement and construction) and BOT (build, operate, transfer) models. The government and the private companies sharing the total project cost in the ratio of 40:60 respectively. HAM offers a trade-off, spreading the risk between developers and the government. Such models have been particularly successful in India.
Hindustan Zinc Limited, the Urban Improvement Trust, Udaipur Municipal Corporation and Udaipur Smart City collaboratively established Udaipur’s first wastewater treatment plant between 2014-2020 to prevent contamination of lakes and to save freshwater resources by developing an alternative source to potable water. The treatment capacity was scaled to 60 MLD by investing US $11.2 million through construction under a HAM. Here, the government contributed 40% of the project cost in the first five years. The plant ownership will be transferred to the government of Rajasthan in 2039.
The project construction was completed in 2020 and it now treats 100% of Udaipur City’s domestic sewage. About half of the treated wastewater is reused by the industrial zinc complex, and 60 million litres of fresh water is conserved every day. Manure selling also generates around US $140,000 per year.
Environment Impact Bond (EIB)
An EIB is an innovative financing tool based on a pay-for-success strategy which provides up-front capital from private investors for environmental initiatives, either to pilot a new approach whose performance is unknown or to scale up a solution that has been tested in a pilot programme. Here, payment by the public sector to the private entity is based on measured outcomes. Municipal agencies can use EIBs to fund projects viewed as “risky” by leveraging private capital and sharing risk with private investors. The bonds are backed by ESG accountability and transparency.
As a part of green infrastructure investment strategy, In September 2016, the Washington, DC Water and Sewer Authority issued an EIB to finance nature-based storm water infrastructure along with Goldman Sachs Urban Investment Group, Calvert Foundation, Quantified Ventures and Environmental Protection Agency (EPA) to raise 30-year, tax-exempt bonds, valued at US $25 million. The EIB structure provided investors with a financial premium for outperformance. It also provided DC Water with financial risk-share payment in case of the project underperformance.
The structure allowed DC Water to pilot the cost-effectiveness of nature-based solutions for urban flood management. The raised capital helped install 25 acres of bioretention garden in planter strips and curb extensions, permeable payment on streets and alleys, and 2 green infrastructure parks. The project had been able to achieve its performance goal by reducing stormwater runoff by around 20% post when compared to previous levels. Moreover, urban heat island effect reduced, and green jobs were created, 51% of which were reserved for Washington DC’s residents.
In conclusion, efforts to increase the infrastructure quality and its resilience to climate change impacts demand substantial amount of finance and its delivery can be facilitated via financial instruments like HAM and EIB by sharing and reducing involved risks. However, to overcome systemic bottlenecks and financial need for the same, a coordinated strategy amongst institutions will be essential.
Bibliography
https://www.oecd.org/environment/cc/policy-perspectives-climate-resilient-infrastructure.pdf
https://openknowledge.worldbank.org/handle/10986/31805
https://www.oecd-ilibrary.org/economics/investing-in-climate-investing-in-growth_9789264273528-en
https://www.brookings.edu/wp-content/uploads/2016/09/global_20160921_climate_finance.pdf
https://wwfint.awsassets.panda.org/downloads/bankable_nature_solutions_2__1.pdf
https://www.quantifiedventures.com/blog/what-is-an-environmental-impact-bond
policy-perspectives-climate-resilient-infrastructure.pdf (oecd.org)
Financing green infrastructure through environmental impact bonds (gihub.org)