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Cover photo: Frame Stock Footage/Shutterstock ACKNOWLEDGMENTS This toolkit was jointly prepared by a World Bank Group team led by Philippe Neves and Jade Shu Yu Wong composed of Guillermo Diaz Fanas, Carmel Lev, Christina Paul, Gisele Saralegui, and Khafi Weekes as well as GRID Engineers led by Rallis Kourkoulis and Fani Gelagoti with contributions from Konstantinos Kotoulas, Leon Kapetas, Elena Bouzoni, Antonios Mantakas, Agamemnon Giannakopoulos, and Diana Gkouzelou. The team would like to thank Bernice Van Bronkhorst, Caren Grown, John Gregory Graham, Ezgi Canpolat, Veronique Morin Floissac, Sohee Gu, Jennifer Solotaroff, Carolina Monsalve, Jun Rentschler, Jyoti Bisbey, Edgar Saravia, Alvina Elisabeth Erman, Catiana Garcia-Kilroy, Elif Kiratli, Fiona Elizabeth Stewart, Irina Likhachova, Juan Samos Tie, Mariana Silva Zuniga, Paolo Avner, Rob Pilkington, Steven Louis Rubinyi, and Laurence Carter for their contributions and valuable peer review inputs. The team is grateful to Fatouma Toure Ibrahima, Jason Zhengrong Lu, Jemima Sy, Imad Fakhoury, and Emmanuel Nyirinkindi for their support and guidance. Charissa Sayson, Paula Garcia, Rose Mary Escano, and Luningning Loyola Pablo provided excellent administrative support. The task team wishes to acknowledge the generous funding provided for this report by the Public-Private Infrastructure Advisory Facility (PPIAF) through the Climate Resilience and Environmental Sustainability Technical Advisory (CREST) funded by the Swedish International Development Cooperation Agency (SIDA), and by the Global Infrastructure Facility (GIF). About PPIAF PPIAF helps developing-country governments strengthen policy, regulations, and institutions that enable sustainable infrastructure with private-sector participation. As part of these efforts, PPIAF promotes knowledge-transfer by capturing lessons while funding research and tools; builds capacity to scale infrastructure delivery; and assists sub- national entities in accessing financing without sovereign guarantees. Donor-supported and housed within the World Bank, PPIAF’s work helps generate hundreds of millions in infrastructure investment. While many initiatives focus on structuring and financing infrastructure projects with private participation, PPIAF sets the stage to make this possible. About the GIF The Global Infrastructure Facility, a G20 initiative, has the overarching goals of increasing private investment in sustainable infrastructure across emerging markets and developing economies and improving services that contribute to poverty reduction and equitable growth aligned with the SDGs. The GIF provides funding and hands-on technical support to client governments and multilateral development bank partners to build pipelines of bankable sustainable infrastructure. The GIF enables collective action among a wide range of partners – including donors, development finance institutions, country governments, together with inputs of private sector investors and financiers – to leverage both resources and knowledge to find solutions to sustainable infrastructure financing challenges. About CTA IFC’s PPP Transaction Advisory (CTA) advises governments on designing and implementing PPP projects that provide or expand much needed access to and/or improved delivery of high-quality infrastructure services – such as power, transportation, health, water and sanitation – to people while being affordable for governments. In doing so, CTA assists on both the technical, financial, contractual, and procurement aspects of PPP transactions. To date, CTA has signed over 400 projects in 87 countries, mobilizing over $30 billion of private investment in infrastructure, and demonstrating that well-structured PPPs can produce significant development gains even in challenging environments. TABLE OF CONTENTS Foreword ............................................................................................................................................................. i Introduction ....................................................................................................................................................... iii Gender & Climate .............................................................................................................................................. ix Toolkit User Guide ............................................................................................................................................ xiii Executive Summary / Toolkit Navigator ........................................................................................................... xv Introductory Phase............................................................................................................................... 2 Module 0.1 – Climate Policies Digest ................................................................................................................................ 6 Step 1. Understand the International Climate Policy Landscape ....................................................................................... 7 Step 2. Comprehend the National Climate Policy Framework ........................................................................................... 9 Step 3. Review National Climate Policies.......................................................................................................................... 13 Key Takeaways .................................................................................................................................................................. 18 Insights.............................................................................................................................................................................. 19 Module 0.2 – National Governance Framework on Climate Change ............................................................................. 26 Step 1. Review Climate Legislation ................................................................................................................................... 27 Step 2. Review Institutional Capacity ............................................................................................................................... 30 Key Takeaways .................................................................................................................................................................. 33 Phase 1 ............................................................................................................................................... 37 Module 1.1 – Project Alignment with Climate Policies................................................................................................... 41 Step 1. Map the Global and National/Subnational Climate Policies................................................................................. 42 Step 2. Assess Project's Alignment with Climate Policies ................................................................................................. 45 Key Takeaways .................................................................................................................................................................. 52 Insights.............................................................................................................................................................................. 53 Module 1.2 – Climate Considerations in Project Selection ............................................................................................. 65 Step 1. Pre-Assess Climate Risks ....................................................................................................................................... 67 Step 2. Pre-Assess GHG Emissions Qualitatively............................................................................................................... 72 Step 3. Review Adaptation and Resilience Strategies to Reduce Climate Risks ............................................................... 73 Step 4. Review Small-scale Mitigation Measures ............................................................................................................. 79 Step 5. Prioritize Climate Strategies ................................................................................................................................. 82 Key Takeaways .................................................................................................................................................................. 88 Insights.............................................................................................................................................................................. 89 Module 1.3 – Value of Investment Accounting for Climate-Actions ............................................................................ 100 Step 1. Include Climate Considerations in Cost-Benefit Analysis (CBA).......................................................................... 102 Step 2. Check Project’s Affordability .............................................................................................................................. 105 Step 3. Check Project’s Suitability as a PPP and Preliminary VfM .................................................................................. 106 Key Takeaways ................................................................................................................................................................ 111 Insights............................................................................................................................................................................ 112 Phase 2 ............................................................................................................................................. 117 Module 2.1 – Interactions between Climate and PPPs ................................................................................................. 121 Step 1. Climate Hazards .................................................................................................................................................. 123 Step 2. Characterization of Internal Risks ....................................................................................................................... 126 Step 3. Characterization of External Risks ...................................................................................................................... 129 Step 4. Towards Low-carbon Infrastructure ................................................................................................................... 133 Key Takeaways ................................................................................................................................................................ 136 Module 2.2 – Climate Considerations on Technical Feasibility............................................................................... 142 Step 1. Feasibility of Small-scale Mitigation ................................................................................................................... 143 Step 2. Assess the Feasibility of Adaptation Strategies .................................................................................................. 147 Step 3. Manage Uncertainty in Adaptation Plans ........................................................................................................... 157 Key Takeaways ................................................................................................................................................................ 164 Insights............................................................................................................................................................................ 165 Module 2.3 – Climate Considerations on Commercial Feasibility and Bankability .................................................. 174 Step 1. Update and refine CBA, VfM, and Affordability Analyses ................................................................................... 176 Step 2. Bankability and Commercial Feasibility .............................................................................................................. 185 Key Takeaways ................................................................................................................................................................ 195 Phase 3 ...........................................................................................................................................199 Module 3.1 – Climate Considerations on Risk Allocation ....................................................................................... 202 Step 1. Understand Climate Risk in PPPs from a Contractual Viewpoint ....................................................................... 204 Step 2. Structure and Allocate Climate Risk.................................................................................................................... 210 Step 3. Insurance Coverage against Climate-Change Risks............................................................................................. 223 Key Takeaways ................................................................................................................................................................ 229 Module 3.2 – Climate Considerations on the Financial Structure........................................................................... 233 Step 1. Include Climate Provisions into the Payment Mechanism ................................................................................. 236 Step 2. Consider Availability of Concessional Funds ....................................................................................................... 240 Key Takeaways ................................................................................................................................................................ 246 Insights............................................................................................................................................................................ 247 Module 3.3 – Integration of Climate Requirements into the Procurement Process ................................................ 262 Step 1. Include Climate Requirements in the Design...................................................................................................... 263 Step 2. Include Climate Requirements in Technical Specification and Output Indicators (KPIs) .................................... 267 Step 3. Include Climate Requirements in Operational Procedures ................................................................................ 270 Key Takeaways ................................................................................................................................................................ 278 Insights............................................................................................................................................................................ 279 Phase 4 ...........................................................................................................................................289 Module 4.1 – Drafting of Climate-smart Tender Documentation ........................................................................... 291 Step 1. Define Climate-smart Criteria for the RPQ/RFP .................................................................................................. 292 Step 2. Include Climate-smart Considerations in the PPP Agreement ............................................................................ 303 Key Takeaways ................................................................................................................................................................ 305 Epilogue .........................................................................................................................................309 The Importance of Contract Management in Climate-smart Projects ........................................................................... 309 Appendix ........................................................................................................................................311 Appendix 1 – Concessional Financing Sources....................................................................................................... 312 Appendix 2 – Innovative Financing Options .......................................................................................................... 318 Glossary .......................................................................................................................................................... 328 LIST OF FIGURES FIGURE 0.1 Timeline of major milestones of international climate-change considerations.................................................. 8 FIGURE 0.2 Schematic illustration of the main characteristics of NDCs and LTS ................................................................. 10 FIGURE 0.3 Five principles for high-level screening of NDCs, LTS, and NAPs....................................................................... 13 FIGURE 0.4 Information on National Adaptation Plans in developing countries as of 31 March 2021 ............................... 16 FIGURE 0.5 Summary of Kyoto Protocol's main innovations and mechanisms ................................................................... 20 FIGURE 0.6 The four main thematic areas for screening the domestic climate laws and policies ...................................... 28 FIGURE 1.1 International agreements and national strategies/ policies/ plans that drive investments in the climate- smart infrastructure............................................................................................................................................................. 44 FIGURE 1.2 Indicative instructions on performing the project's alignment with international and national framework screening ........................................................................................................................................................... 50 FIGURE 1.3 Climate change may pose internal and external risks to the infrastructure ..................................................... 70 FIGURE 1.4 Categories of adaptation and resilience measures and examples .................................................................... 76 FIGURE 1.5 The identification of adaptation measures starts within the project selection phase when the climate risk profile of the project is assessed ......................................................................................................................................... 77 FIGURE 1.6 Cross-sectoral climate mitigation strategies supporting the vision for net-zero infrastructure ....................... 80 FIGURE 1.7 Benefits and challenges of investing in NBS ..................................................................................................... 81 FIGURE 1.8 Schematic of the simplified prioritization approach ......................................................................................... 85 FIGURE 1.9 The 4 IPCC RPCs describing the range of plausible climate futures .................................................................. 90 FIGURE 2.1 An RCM domain embedded in a GCM grid ..................................................................................................... 124 FIGURE 2.2 Fractional contribution of different uncertainty sources for global temperature .......................................... 125 FIGURE 2.3 Model interlinkages to translate climate risk to financial risk ........................................................................ 128 FIGURE 2.4 Conceptual example of external risks and their impacts ................................................................................ 130 FIGURE 2.5 Example of future landscape mapping ........................................................................................................... 132 FIGURE 2.6 Schematization of lifecycle assessment .......................................................................................................... 134 FIGURE 2.7 Categories of climate risk reduction strategies and example adaptation measures ...................................... 148 FIGURE 2.8 Traditional versus climate-proof design: assumptions, limitations, and resources required ......................... 150 FIGURE 2.9 Two different options to implement an adaptation strategy: 'Base Plan' and 'Adaptive Plan' ...................... 153 FIGURE 2.10 Technical feasibility assessment of adaptation works implemented via a base plan ................................... 155 FIGURE 2.11 The six main steps of the technical feasibility assessment for the adaptive plan ......................................... 156 FIGURE 2.12 Mean levelized cost of regret (left) and net benefit of regret (right) ........................................................... 160 FIGURE 2.13 The eight steps of adaptive planning ............................................................................................................ 161 FIGURE 2.14 Qualitative benefits for procuring climate-smart projects via the PPP route ............................................... 182 FIGURE 2.15 The incorporation of NBS in the design may enhance the bankability of the project.................................. 188 FIGURE 3.1 Internal vs. External Risks on a PPP project .................................................................................................... 208 FIGURE 3.2 Transfer of natural disaster risks in PPP projects, by project and payment type ........................................... 209 FIGURE 3.3 Innovative risk transfer mechanisms for PPP infrastructure .......................................................................... 225 FIGURE 3.4 Key stakeholders and agreements in a typical PPP scheme and green financing and funding sources. ....... 235 FIGURE 3.5 Decisions and actions to prepare for concessional support during Phases 1-4 of the PPP cycle .................... 244 FIGURE 3.6 The mechanism of supporting the development of projects through blended financing (national and international funding sources) ........................................................................................................................................... 250 FIGURE 3.7 Example use of KPIs correlating hazard level intensity with the level of service on a fictitious highway system ........................................................................................................................................................................................... 268 FIGURE 3.8 Key considerations for the procuring authority when preparing the requirements of the RFQ/RFP documents ........................................................................................................................................................................................... 270 FIGURE 3.9 Five key principles for the implementation of a robust Emergency Response Plan ....................................... 273 FIGURE 4.1 Evaluation criteria ........................................................................................................................................... 296 FIGURE 4.2 A schematic summary of some key climate considerations to be included in the components of a climate-smart PPP contract ........................................................................................................................................ 303 FIGURE A.1 The global climate finance architecture ......................................................................................................... 313 FIGURE A.2 Selection criteria for concessional funding .................................................................................................... 315 FIGURE A.3 Evolution of green, social, and sustainability linked bonds in the last years .................................................. 320 FIGURE A.4 Key components of green, social, and sustainability linked bonds according to ICMA ................................ 320 FIGURE A.5 General criteria for carbon credits ................................................................................................................. 326 FIGURE A.6 General procedure to issue carbon credits .................................................................................................... 327 LIST OF TABLES TABLE 1.1 Indicative criteria for assessing climate actions.................................................................................................. 86 TABLE 1.2 Impacts of climate change on PPP suitability ................................................................................................... 107 TABLE 2.1 Indicative list of transitions and examples of potential impacts....................................................................... 131 TABLE 2.2 Incorporating climate-related considerations in the CBA process (APMG guide) ............................................ 177 TABLE 2.3 CBA cost elements for base and adaptive plans ............................................................................................... 178 TABLE 2.4 CBA benefit elements for base and adaptive plans .......................................................................................... 179 TABLE 2.5 Level of risk transfer and impact on bankability based on low climate risk...................................................... 192 TABLE 2.6 Level of risk transfer and impact on bankability based on medium climate risk .............................................. 193 TABLE 2.7 Level of risk transfer and impact on bankability based on high climate risk .................................................... 194 TABLE 3.1 Indicative list of transitions and examples of potential impacts....................................................................... 218 TABLE 4.1 Indicative climate-smart criteria and sub-criteria for evaluating the quality of the design and the construction procedures ............................................................................................................................................. 297 TABLE 4.2 Indicative climate-smart criteria for evaluating the thoroughness of the maintenance procedures and the rapidness of the operations when confronting extreme climate events .......................................... 298 TABLE 4.3 Indicative climate-smart criteria for evaluating the social and environmental footprint of the bidder ................................................................................................................................................................................ 299 TABLE A.1 Multilateral funds and initiatives ..................................................................................................................... 316 TABLE A.2 Bilateral funds .................................................................................................................................................. 317 TABLE A.3 Examples of IFC Green Debt and CBI-certified project Green Debt ................................................................. 322 LIST OF BOXES BOX 0.1 Example of the NAP development in Kenya .......................................................................................................... 12 BOX 1.1 Climate-smart investments: 3 high-level principles ............................................................................................... 42 BOX 1.2 Example of a prioritized sector in NDC .................................................................................................................. 47 BOX 1.3 Introduction to risk assessment ............................................................................................................................. 67 BOX 1.4 Climate hazard analysis tools ................................................................................................................................. 68 BOX 1.5 The new era of resilience: ensuring community continuity, not just loss avoidance ............................................ 74 BOX 1.6 Green infrastructure and nature-based solutions ................................................................................................. 75 BOX 1.7 Technology-related adaptation measures ............................................................................................................. 78 BOX 1.8 Mitigation hierarchy .............................................................................................................................................. 79 BOX 1.9 Appraising project’s economic value ..................................................................................................................... 83 BOX 1.10 Opting for socio-environmental co-benefits ........................................................................................................ 84 BOX 1.11 Prioritizing climate actions using MCA: examples ............................................................................................... 87 BOX 1.12 Assumptions included in the module ................................................................................................................ 101 BOX 1.13 Rule of thumb for assessing the impact of climate risk incorporation on a project’s PPP suitability................ 110 BOX 2.1 Necessity of and resources for climate modelling ............................................................................................... 122 BOX 2.2 Climate modelling ................................................................................................................................................ 124 BOX 2.3 Making sense of future uncertainty..................................................................................................................... 125 BOX 2.4 From climate models and impact models through to economic assessment models ......................................... 128 BOX 2.5 The multiple project threats of external risks ...................................................................................................... 130 BOX 2.6 Example of “Future landscape mapping” implementation ................................................................................. 132 BOX 2.7 Lifecycle assessment for infrastructure projects ................................................................................................. 134 BOX 2.8A Robust decision making for the design of a hydropower project in SSA – Setting the stage ............................ 159 BOX 2.8B Robust decision making for the design of a hydropower project in SSA – Numerical example ........................ 160 BOX 2.9 Adaptive planning methodologies ...................................................................................................................... 162 BOX 2.10 An example of adaptive planning ...................................................................................................................... 163 BOX 2.11 The importance of qualitative assessment ........................................................................................................ 183 BOX 2.12 General bankability considerations for PPP project with climate considerations ............................................. 187 BOX 2.13 Equator principles .............................................................................................................................................. 188 BOX 3.1 Colombia’s 4th generation road concession PPP................................................................................................. 206 BOX 3.2 Public and private collaboration in insurance against climate risks .................................................................... 206 BOX 3.3 Risk-sharing between public and private sectors in availability-based PPPs ....................................................... 209 BOX 3.4 Example of allocating climate-induced risk in user-pays PPPs............................................................................. 212 BOX 3.5 The case of AICHI road concession project: risk sharing policy by circumstance ............................................... 218 BOX 3.6 Weather derivatives ............................................................................................................................................ 227 BOX 3.7 CAT DDOs ............................................................................................................................................................. 228 BOX 3.8 Tariff mitigation examples ................................................................................................................................... 241 BOX 3.9 How a PPP project can benefit from concessional funding ................................................................................ 242 BOX 3.10 Sustainable buildings: the LEED rating system .................................................................................................. 265 BOX 3.11 Sustainable buildings: the EDGE certification system ........................................................................................ 266 BOX 3.12 Concessionaire screening using DRM evaluation criteria in airport PPP projects ............................................. 271 BOX 3.13 The role of emergency response plans in availability-based PPPs..................................................................... 275 BOX 3.14 Preventive maintenance examples in PPP contracts ......................................................................................... 276 BOX 4.1 Example of including low-carbon incentives in the procurement process .......................................................... 293 BOX 4.2 Private operator evaluation criteria on DRM from Japanese PPP projects ......................................................... 295 BOX 4.3 Evaluation of bidders in the Netherlands ............................................................................................................ 302 BOX A.1 Examples of PPPs financed by green bonds ........................................................................................................ 321 BOX A.2 Example of a PPP (re)financed by green loan ..................................................................................................... 323 List of Abbreviations and Acronyms ACCF Africa Climate Change Fund ADB Asian Development Bank AF Adaptation Fund AFD Agence Française de Développement (French development agency AfDB African Development Bank AFPCN French Association for Disaster Risk Reduction AFTWR Africa Water Resources Unit (World Bank) AR5 Assessment Report 5 AREI African Renewable Energy Initiative ASAP Adaptation for Smallholder Agriculture Program ATP Adaptation tipping point BCCRF Bangladesh Climate Change Resilience Fund BCCSAP Bangladesh’s Climate Change Strategy and Action Plan BCP Business continuity plan BEIS Department for Business, Energy and Industrial Strategy BGI (UK)Blue-green infrastructure BMZ Bundesministerium für Wirtschaftliche Zusammenarbeit und Entwicklung (Federal Ministry of Economic Cooperation and Development, Germany) BOT Build-operate-transfer BS British standard BTO Build-transfer-operate C3 Consultative Council on Climate Change (Mexico) CAB Climate Adaptation Bond CAFI Central African Forest Initiative CAPEX Capital expenses / capital expenditure Casa Civil Executive Office of the Presidency of the Republic (Brazil) CAT Climate Action Tracker Cat DDOs Catastrophe drawdown options CAW Central Arkansas Water CBA Cost-benefit analysis CBD Convention on Biological Diversity CBFF Congo Basin Forest Fund (hosted by AfDB) CBI Climate Bonds Initiative CCA Climate change adaptation CCA Climate contingency account CCS Carbon capture and storage CDM Clean Development Mechanism CEN European Committee for Standardization (Centre Européen de Normalisation) CER Certified emission reduction CGMC General Coordination for Global Climate Change (Brazil) CICC Inter-Ministerial Commission on Climate Change (Mexico) CIDA Climate informed decision analysis CIDA Canadian International Development Agency CIF Climate Investment Funds CIM Inter-Ministerial Committee on Climate Change (Brazil) CIMGC Inter-Ministerial Commission on Global Climate Change (Brazil) CMIP Coupled Model Intercomparison Project COP Conference of the parties CPTEC Center for Weather Forecasting and Climate Studies (Brazil) CRA Climate risk analysis CTF Clean Technology Fund Development DAC Assistance Committee DEFRA Department for Environment, Food and Rural Affairs (UK) DFAT Department of Foreign Affairs and Trade (Australia) DFC United States International Development Finance Corporation DFI Development finance institution DFID Department for International Development (UK) DMDU Decision making under deep uncertainty DNSH Do-no-significant-harm DRM Disaster risk management DRR Disaster risk reduction DSCR Debt service coverage factor DSP Digital signal processor DSRA Debt service reserve account DtP Decision to proceed E&S Environmental & social EBRD European Bank for Reconstruction and Development EC European Commission ECA Export credit agencies EIA Environmental impact assessment EIB European Investment Bank eIRR Expected internal rate of return EMAS Eco-Management and Audit Scheme (EU) EMDE Emerging market and developing economy eNPV Expected net present value EOA Engineering options analysis EPC Engineering procurement and construction EPs Equator Principles ESF Environmental and social framework ESG Environmental, social, and governance EU European Union Ex-Im Export-Import Bank of the United States FAO Food and Agriculture Organization of the United Nations FBMC Brazilian Forum on Climate Change (Brazil) FCPF Forest Carbon Partnership Facility FFEM Fonds Français pour l'Environnement Mondial (French global environment facility) FIP Forest Investment Program FM Force majeure GBP Green Bond Principles GCCA Global Climate Change Alliance GCCI Global Climate Change Initiative (US) GCF Green Climate Fund GCM General Climate Model GCPF Global Climate Partnership Fund (Germany, UK and Denmark) GEEREF Global Energy Efficiency and Renewable Energy Fund (EIB) GEF Global Environment Facility GEx Executive Group on Climate Change (Brazil) GFDRR Global Facility for Disaster Reduction and Recovery GHG Greenhouse gas GIB Global Infrastructure Basel GIF Global Infrastructure Facility GIZ Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH GLP Green Loan Principles GRI Grantham Research Institute HLPW High Level Panel on Water (UN) IAPH International Association of Ports and Harbors IBRD International Bank for Reconstruction and Development ICF International Climate Finance (UK) ICMA International Capital Market Association ICT Information and communications technology IDA International Development Association IDB Inter-American Development Bank IEA International Energy Agency IFAD International Fund for Agricultural Development IFC International Finance Corporation IISD International Institute for Sustainable Development IKI Internationale Klimaschutzinitiative (international climate initiative, Germany) INECC National Institute of Ecology and Climate Change (Mexico) IoT Internet of Things IPCC Intergovernmental Panel on Climate Change IRR Internal rate of return IsDB Islamic Development Bank ISI Institute for Sustainable Infrastructure ISO International Standards Organization IUCN International Union for Conservation of Nature JBIC Japan Bank of International Cooperation JI Joint implementation JICA Japan International Cooperation Agency JR Japanese Railways KfW Kreditanstalt für Wiederaufbau (German development bank) KPIs Key performance indicators LCA Life-cycle analysis LDCF Least Developed Countries FundLeast LDCs Developed Countries LEED Leadership in Energy and Environmental Design LMA Loan Market Association LTS Long-term strategy MCA Multi-criteria analysis MCTI Ministry of Science and Technology and Innovation (Brazil) MDBs Multilateral development banks MDG-F MDG Achievement Fund MEA Multilateral Environmental Agreements MEAT Most economically advantageous tender MIES Mission Interministérielle de l’Effet de Serre (inter-ministerial taskforce on climate change, France) MIGA Multilateral Investment Guarantee Agency MMA Ministry of Environment (Brazil) MOFA Ministry of Foreign Affairs (Japan) MPTF Multi-Partner Trust Fund (UNDP) MRA Maintenance reserve account MRV Monitoring, reporting, and verification N/A Not applicable NAMA Facility Nationally Appropriate Mitigation Action facility (UK, Germany, Denmark, and the EC) NAP National Adaptation Plan NAPA National Adaptation Program of Action NAS National Adaptation Strategy NBS Nature-based solutions NCEA Netherlands Commission for Environmental Assessment NDBs National development banks NDCs Nationally Determined Contributions NDVs National Development Visions NGOs Non-governmental organizations NICFI Norway’s International Climate Forest Initiative NMFA Norwegian Ministry of Foreign Affairs NORAD Norwegian Agency for Development CooperationNet NPV present value O&M Operations & management ODA Overseas development assistance OECD Organization for Economic Co-operation and Development OPEX Operational expenses / Operational expenditure PA Paris Agreement PBCs Performance-based contracts PBMC Brazil Panel on Climate Change (Brazil) PCBA Participatory cost-benefit analysis PML Probable maximum loss PMR Partnership for Market Readiness PPCR Pilot Program on Climate Resilience PPI Private participation in infrastructure PPIAF Public-Private Infrastructure Advisory Facility PPP Public-private partnership Project Co Project company Q&A Question & answer RC Reinforced concrete RCM Regional climate modeling RCP Representative concentration pathway RDM Robust decision making Rede Brazilian Research Network on Global Climate Change (Brazil) Clima Request for proposals RFP Request for RFQ qualificationsReal- ROA options analysis RTD Regional Transportation RWS DistrictRijkswaterstaat SCCF Special Climate Change Fund SCF Strategic Climate Fund SDG Sustainable Development SEP GoalSelf-evaluating platform SEPED Secretariat for Research and Development Policies and Programs SINACC (Brazil)National System on Climate Change (Mexico) SLLP Sustainability-linked loan principles SPTs Sustainability performance targets SREP Scaling Up Renewable Energy Program for Low Income SuRe Countries Standard for Sustainable and Resilient Infrastructure SSA Sub-Saharan Africa TCFD Task Force on Climate-related Financial Disclosures TEG Technical Expert Group (EU) UK United Kingdom UN United Nations UNDP United Nations Development Program UNEP United Nations Environment Program UNFCCC United Nations Framework Convention on Climate Change UN-REDD United Nations Collaborative Program on Reducing Emissions Program from Deforestation and forest degradation US United States USAID United States Agency for International Development USGBC United States Green Building Council VCS Verified Carbon Standard Voluntary VER emission reduction VfM Value for money WB World Bank WBG World Bank Group WBG CCKP World Bank Group’s Climate Change Knowledge Portal WEAP Water Evaluation and Planning System WPSP World Ports Sustainability Program WRI World Resources Institute WWAP World Water Assessment Program (UNESCO) i Foreword The time for action to build a better future and green recovery has never been stronger as we navigate the uncertainty of a world attempting to manage its way out of a triple crisis: debt sustainability, climate change, and pandemic. The fiscal constraints of governments across the globe open the door to new opportunities and challenges to crowd in private sector solutions, innovation, and finance to create new solutions and pathways to meet Paris Agreement goals on climate change. Participation of the private sector in climate-smart investments and infrastructure is critical and public-private partnerships (PPPs) are among the key solutions. PPPs are critical because the public sector alone will not be able to fill in the infrastructure gap without mobilizing private sector expertise, innovative thinking, investment capacity, and finance. PPPs can be a challenge though, because climate change creates uncertainty— and it is hard to play with uncertain moving pieces within the framework of PPPs, which require a certain degree of predictability to attract investment and finance. This toolkit aims to address this precise challenge by embed- ding a climate lens and approach into upstream PPP advisory work and structuring. If structured correctly, PPPs can increase climate resilience offering innovative solutions to address both mitigation and adaptation challenges. PPPs are able to provide well- informed and well-balanced risk allocation between partners— offering long-term visibility and stability for the duration of a contract (often 25 or 30 years, sometimes even more), compensating climate change uncertainty through contractual predictability. ii Here are some of the questions this toolkit helps Building awareness and shifting mindsets are answer: needed. Currently an insufficient focus is given to - How do we make the most out of PPPs and private considering climate change in the framework of sector participation while helping with climate public-private partnerships (PPPs). For instance, the change mitigation and adaptation? PPP tender selection criteria are currently - How can we innovate to allow for optimal risk ultimately based on the least cost approach, which allocation and contractual predictability in an may promote assets not resilient enough to environment marked by uncertainty and the need withstand climate impacts. This may in turn even for resilience to unpredictable scenarios? result in total asset loss with devastating effects on the economy and society. We need to help change The Public Private Infrastructure Advisory Facility this mindset and send the right signals for the (PPIAF), The Global Infrastructure Facility (GIF), and private sector to innovate and participate in (International Finance Corporation Public-Private delivering climate smart solutions. This toolkit is Partnership (IFC PPP) Transaction and Advisory indeed about providing solutions to public officials Services have joined forces to build upon best and their advisors on how to better align interests practice on a topic at the cross-roads of climate and incentives towards climate-smart investments change, infrastructure, and private sector and tap into the tremendous private sector participation. It is a field in development with financing capacity. nascent expertise, in which there will be a great deal of testing and innovation ahead of us. This toolkit is ultimately a call for action for decision makers, to push for bold initiatives so that infrastructure investments become a critical and steady pathway to achieve Paris Agreement and SDG commitments. Emmanuel B. Nyirinkindi Imad Najib Ayed Fakhoury Vice President, Cross-Cutting Solutions, Global Director, Infrastructure Finance, International Finance Corporation PPPs and Guarantees Global Practice, World Bank iii INTRODUCTION CALL FOR CLIMATE ACTION THROUGH PPPs: INVESTING IN CLIMATE MITIGATION, ADAPTATION AND RESILIENCE The global impact of climate change has Joining Forces through Public-Private never been more present Investment in Infrastructure with devastation seen across the globe from melting Private sector participation in climate-smart solutions polar ice to fires, floods, droughts, hurricanes, and will be critical to fostering climate mitigation and beyond—loss of life and destruction seen in their adaptation by catalyzing mobilization of innovation, wake. The Intergovernmental Panel on Climate competition, and leveraging financing opportunities as Change (IPCC) report issued a dire warning this year well as mainstreaming these solutions. Within a rapidly with climate catastrophe looming unless we all act evolving global landscape, private sector actors are together to avert global warming beyond the 2 themselves making bold new commitments to achieve degrees target. The cascading impact on the global net-zero emissions and build climate adaptations driven economy, affecting business productivity, by their shareholders and new regulatory pressures. The development, and employment, will grow unless COVID-19 green recovery and public sector fiscal action is taken. Climate change—as a global constraints are also driving new opportunities and phenomenon affecting all parts of the developed and demands for the private sector to step in and provide developing world—requires immediate global solutions through public-private partnerships (PPPs). coordination to limit its impacts. In response to this Building viable and bankable pipelines of climate-smart global imperative, the UN's Conference of the parties PPP solutions will be critical to ensuring the trillions of adopted in 2015 the Paris Agreement, which has investments and finance needed to deliver on the Paris been signed by 196 nations and whose goal is to limit Agreement commitments. Hence, it is—now more than global warming to well below 2, preferably to 1.5 ever—to the mutual benefit of the public and the degrees Celsius, compared to pre-industrial levels. private sectors to work together on ambitious climate- The Paris Agreement is now complemented by smart infrastructure projects. Guidance on incentivizing several initiatives to include climate mitigation, private sector participation is provided in Phase 3. adaptation, and resilience provisions in national and international policies. The World Bank Group (WBG) has stepped up its commitment this year with the new Climate Change Action Plan, including a commitment to Paris alignment reinforcing a focus on embedding climate action in infrastructure as described in Module 1.1 and in the Introductory Phase. INT RODUCTION iv Failure to timely invest in mitigation may resultin the need for disproportionate spending in adaptation in the not-so-distant future. The time to act is now: the need for mitigation © ferrantraite/iStock.com In order to meet the goals of the Paris Agreement and limit global warming, we will need to mitigate greenhouse gases (GHGs) and find new pathways to decarbonization. Governments will need to step up their commitments as part of the latest 5-year cycle of ramping up Paris Agreement Nationally Determined Contributions (NDCs) to prioritize mitigation. Translating their NDC commitments into pipelines of investments are critical next steps for achieving GHG emissions reduction in infrastructure and beyond. Climate-friendly construction, resource efficiencies, sustainable operation, and maintenance optimization using climate data analytics are among the mitigation aspects that should be considered in the preparation, planning, and contract drafting phases, as explained in Modules 1.2 and 2.1. The time to act is now: the need for adaptation Building adaptation and resilience into infrastructure investment will be critical to ensure that assets are resilient to climate impact and avoid the worst outcomes from total loss of investment and assets while maintaining operational performance. In light of increasing climatic hazards, infrastructure projects need to be shielded against these potential impacts to ensure their integrity and ability to provide the level of service required for the local communities. Guidance on the identification and selection of climate adaptation options is provided in Modules 1.2 and 2.2. INT RODUCTION v Resilience of/through infrastructure Green financing: an opportunity to accelerate climate action Given the unprecedented extreme climate-related events occurring now more frequently than ever, opting As the world is rapidly shifting towards sustainable for infrastructure's ability to absorb, withstand, and infrastructure, institutions and authorities at an recover from shocks—including sudden changes in international level and even local level are developing demand—is the only viable strategy to ensure new instruments in the form of green financing economic continuity for the community and economy. opportunities to support the climate transition. There is At the same time, infrastructure should not be treated a rapidly growing new market for climate and independently from the broader context within which it sustainable finance. Green and sustainable linked operates and should rather be considered an intrinsic bonds and loans, climate derivatives, and other part of the systemic safeguards for community instruments are being developed and offered by banks, resilience to climate hazards, as explained in Module multilateral development banks (MDBs), 1.2. governments, and development agencies to accelerate the uptake of sustainable climate action. Guidance on eligibility criteria and on preparing projects to tap into Climate vs affordability such liquidity pools is provided in Module 3.2. The challenge of evaluating cost and savings in PPP investments with climate mitigation and resilience will need to be managed. Government and other From theory to application: including stakeholders may question the choice of investing in climate action in tendering/contracts climate action as being too risky for the projects' affordability due to the potential for increased costs, without fully understanding potential savings and Building the new generation of PPP infrastructure to last implications for total asset loss without including should include clear messaging in all phases of the climate considerations. The reality is that tender and award process. Procuring agencies need to infrastructure is based on long-term assets, which are bolster climate action by including relevant provisions in highly likely to be exposed to the effects of climate tender documents (requests for proposals (RFPs), change over that life. In an era of continued requests for quotes (RFQs)) and key performance urbanization, communities cannot afford indicators (KPIs) and ensure these are enforced through infrastructure failures and losses due to climate change. the proper supervision process. Additionally, market Moreover, a failure to address climate resilience in PPPs sounding early on PPP advisory is expected to assist in may make these projects non-bankable, as regulators producing the proper terms of reference and attracting and financiers scrutinize these risks more closely in their high-quality bidders. Guidance on sustainability decision-making. Guidance on calculating the benefits indicators and performance criteria for the of climate action over the whole life-cycle of PPP construction and operation of PPP infrastructure projects, duly accounting for non-monetary benefits, is projects is provided in Modules 3.3 and 4.1, while provided in Modules 1.3 and 2.3. specific KPIs and provisions for bidders are available in the sector-specific toolkits. INT RODUCTION vi NEW QUESTIONS AND UNTESTED APPROACHES ARE EVOLVING IT IS A WORK IN PROGRESS Dealing with climate uncertainty The need for contract flexibility to accommodate uncertainty One of the major challenges in structuring PPPs and designing projects for climate change is our inability to Unavoidably, inclusion of uncertainty and adaptive predict the actual evolution of climate stressors. planning into the equation will negatively impact the Decision-makers will often find themselves swinging long-term visibility required by investors. To re- between the lower-cost optimistic scenarios and their establish equilibrium, the tender and award processes costlier, higher-risk counterparts, which call for will need to allow for proper stakeholder engagement adopting more adverse climatic projections. In the and dialogue as well as objective indicators and absence of reliable data, decision making under deep appropriate guarantees that will allow for flexible uncertainty (DMDU) may need to be promoted to terms in contracts without compromising investors' enable the assessment of several scenarios along with appetite. Guidance on forming flexible contracts to their costs and benefits. Guidance on incorporating promote climate action is described in Module 3.2. DMDU in the decision-making duringproject preparation is provided in Modules 2.1 and 2.2. Flexible contracts will necessitate Adaptive planning as an alternative to innovative financial structures high up-front adaptation costs As defined above, funding and financing of adaptive Responding to climate uncertainty considerations, the planning may challenge investors and impact bankability scientific community has proposed the concept of unless proper schemes are designed. Public and private adaptive planning for the design and construction of stakeholders together may be encouraged to consider long-lifespan assets. The concept calls for designing the new innovative approaches such as reserve accounts— projects for a mild scenario at the present time to possibly in the form of a climate contingency account minimize upfront costs, while allowing for adaptation (CCA)—that will be used to finance adaptive works in the to more adverse scenarios based on relevant indicators future in case these are required or to repay that may appear in the future. What is more, adaptive shareholders if not. Guidance on setting up a CCA and its planning may lay the ground for incentivizing all associated benefits and challenges is provided in Module stakeholders to maintain an active role in the full life- 2.3 and 3.1. cycle of projects. Guidance on applying adaptive planning in the preparation of PPP investments is provided in Modules 2.2 and 2.3. INT RODUCTION vii UNTESTED APPROACHES Unexpected events: Force majeure and The need for modern, greener solutions blending insurance with financial tools with respect to biodiversity Climate change may be associated with the risks of Modern infrastructure is expected to fulfill more frequent service disruptions or failure due to environmental sustainability criteria, including the extreme events. As with all risks, these will need to be protection of biodiversity and pollution reduction. properly assessed and allocated to the party more Sustainable infrastructure should also promote suitable to bear them. However, as awareness regarding nature-based solutions (NBS) and ecosystem-based the magnitude of potential losses increases, insurance adaptation. NBS solutions may form part of the availability may become scarce while guarantee critical pathways for building climate resilience and requirements may rise. Conventional force majeure (FM) provide cost-effective solutions. The use of recyclable, provisions may be revisited in order to structure repairable, reusable, and recoverable materials in potential new FM approaches, which will construction will reduce CO2 emissions during their simultaneously incentivize adaptation and resilience. In operations and contribute to saving natural such approaches, FM may be triggered only when a resources during the production of raw materials, hazard exceeds a certain level, with the private party helping to build a circular economy. Applications of assuming potential risks below that threshold level. In NBS and green solutions in infrastructure projects this context, climate-smart PPPs should devise and are described in Modules 1.1 and 1.2. benefit from novel risk transfer solutions such as blending insurance with contingent financing tools. Guidance on force majeure and potential blended schemes and insights on mobilizing insurance is provided in Module 3.1. © BrianScantlebury/iStock.com INT RODUCTION viii FOSTERING AWARENESS IN A RAPIDLY CHANGING WORLD WITH CLIMATE CHANGE Ownership of simple solutions not exist at present could become catastrophic in the future. The benefits of mitigation and adaptation will The role of public sector procuring authorities in need to be assessed during the life-cycle of the process. enforcing climate action is crucial. As part of their role Guidance on how to recognize interconnections and as coordinators of the preparation, appraisal, and evaluate adaptation and mitigation measures is tender process, PPP units and other public sector provided in Modules 2.1 and 2.2. entities need to possess an understanding of climate policies, risks, and opportunities, and all respective funding, financing, and risk-sharing mechanisms. The Tackling climate change through early present toolkit is intended to support this process and engagement provide the means for non-experts to conduct a high- Climate change mitigation and adaptation is not an add- level screening of the climate impact for project on to existing practices or a compliance checklist. It planning, including climate mitigation for GHG requires knowledge of the global and national landscape emissions and hazard and risk mapping to build and consideration of all requirements at a very resilience. This is fundamental for the preliminary upstream stage to ensure that the climate-related identification of the necessary adaptation and aspects of the project are identified and properly mitigation measures and, ultimately, allows PPP units accounted for in subsequent stages. This will include the to take ownership over climate considerations, project's alignment with the Paris Agreement and NDCs resulting in better and deeper engagement. Detailed together with a growing body of international standards guidance on this process is provided in the or taxonomies. At a community level, procurers will accompanying sector-specific toolkits, while high-level need to secure stakeholder engagement, identify user- guidance is also offered in Phase 1 of the high-level satisfaction criteria, and optimize social/gender inclusion toolkit. practices. Guidance on crucial early actions is provided in Modules 3.3 and 4.1. Understanding shifting scenariosand context Bringing together the proper team As with every change, transition to the new era of Technical, financial, and legal consultants advising on climate-smart infrastructure through PPPs needs to the structuring of climate-smart PPPs will need to overcome the hurdles of well-established practices. coordinate their efforts to integrate novel mitigation Climate action requires an in-depth understanding of and adaptation solutions that do not risk the bankability the implications of climate change and the threats it of projects, and use the ideal mix of adaptation works may impose on infrastructure, including indirect and financing tools to optimize theallocation of climate- impacts due to externalities (i.e., revenue loss posed change-induced risks. Market sounding is essential for by the failure of interconnected infrastructure or loss testing the waters and primary mapping of the private of users due to climate-induced migration). As sector investor and financing appetite. Guidance on climate change is rapidly changing, threats that do identifying the necessary advisory services is provided in the sector-specific toolkits. ix GENDER & CLIMATE IN SUSTAINABLE INFRASTRUCTURE PPPs It takes two to tango Sustainable infrastructure for men and women, boys and girls Conven�onal infrastructure can hardly be climate- or gender-neutral: design, construc�on, and opera�on of infrastructure projects - from highways to dams, and from power produc�on to digital and informa�on and communica�ons technology (ICT) infrastructure - comes with environmental costs and impacts to the affected popula�on. It goes without saying that the quest of counterbalancing climate costs with benefits would be meaningless if the beneficiaries themselves were not properly included in the equa�on: maximizing the benefits is intertwined with maximizing the beneficiaries, i.e., ensuring that no one is le� behind. The burden of climate risks o�en falls dispropor�onately upon vulnerable groups (e.g., people with disabili�es, Indigenous people, etc.) who tend to be more severely impacted by shocks or stressors—in terms of mortality, livelihood impacts, food and water security, migra�on, threats to cultural iden�ty, among others. Climate-smart infrastructure will need to be equally accessible, provide the same service levels, and create equal opportuni�es for men and women, boys and girls. Where gender gaps are evident—be it a consequence of accessibility, skills, income level, �me poverty, safety, or any sort of socio-economic factor— sustainability is inhibited. For there is no point aiming at sustainable infrastructure in non-sustainable communi�es. In this context, as a pioneer in the global race towards elimina�ng gender gaps, the World Bank incorpora�ng gender considera�ons in PPP Group focuses on the principle that one should not have infrastructure projects. The two products may be used to choose between inves�ng in climate or closing the independently; however, each one provides entry gender gaps. To this end, the present high-level points to the other, while it is expected that users climate-smart toolkit is accompanied by a separate should be able to consult them both in the prepara�on gender-smart toolkit providing guidance on of PPP transac�ons in infrastructure. GENDER & CLIMATE x GENDER & CLIMATE Climate change as a gendered risk Providing better water and Women and girls face higher risks and greater burdens sanitation services, for example, from changes in climate, especially in situations of can reduce the time women and poverty. In fact, of the 1.3 billion people living in conditions of poverty, 70% are women who are highly girls spend fetching water, freeing dependent on local natural resources for their their time for educational or livelihood, particularly in rural areas where they economic pursuits2. shoulder the major responsibility for household water supply and energy for cooking and heating, as well as for food security1. Hence, as environmental conditions Studies have shown that access to electricity may and weather-related phenomena become harsher due contribute to raising female employment by saving time to climate change, chances for women to develop skills from housekeeping activities and providing the means and embark on employment opportunities will reduce. to set up home-based manufacturing. It is also well This will leave less time for women to access training known that safe and reliable transportation and education, develop skills or earn income. This is infrastructure will greatly impact women’s ability to further exacerbated by the fact that women may be physically access the labor market while saving time underrepresented in decision-making and have limited from other family care-related activities. At the same access to resources. Additionally, cultural norms may time, digital infrastructure could open immense hinder women from reacting (i.e., abandoning homes or windows of opportunities for participating in new seeking refuge) during natural disasters in several markets and developing new skills. regions, thereby drastically increasing their exposure to such events. However, infrastructure investments alone will not be adequate if proactive measures are not in place to ensure that women equally benefit from them. In fact, Infrastructure as a catalyst for women unequal access (e.g., due to lower income) to Across the world, gender inequalities are evident in all infrastructure could even deepen gender and social facets of employment: labor share, leadership, and inequalities. Thus, gender-responsive measures should wages. In most societies, working women find be in place during the planning, design, themselves balancing between work obligations and implementation, and monitoring of projects to help family care, while in several cases, regulatory or ensure that infrastructure indeed has a positive impact. cultural constraints may further reduce equal The design of these measures could greatly benefit employment opportunities. Properly designed from a strong female participation in the decision- infrastructure may drastically help reduce such making bodies, while it is also a good practice to include inequalities. proper indicators in all stages of infrastructure projects to allow monitoring of the actual gains for under- represented populations and ensure equitable services are provided to everyone. 1 https://www.un.org/en/chronicle/article/womenin-shadow-climate-change 2 Evidence comes from a World Bank rural water supply and sanitation project in Morocco. After project completion, time spent fetching water by women and girls was reduced by 50 to 90 percent. With more time and better health, female primary- school attendance in the project area increased by 21 percent. World Bank. ICR Review. Report number: ICRR11535. GENDER & CLIMATE xi GENDER & CLIMATE Indeed, infrastructure projects can further jeopardize women’s access to and use of land. Women in rural areas can be disproportionately impacted by such changes as they often rely on common property such as land. These investments can decrease the land available for agriculture and interfere with existing land uses (e.g., subsistence agriculture, livestock grazing), which can hamper women’s income-generating opportunities as womenare heavily reliant on agricultural work. In some cases, maximizing resilience through climate- smart PPP projects may involve challenging the existing status quo by designing the proper strategies to limit their potential negative impacts while boosting the positive ones. Guidance on addressing risks and impacts on disadvantaged and vulnerable groups is provided in the World Bank’s Environmental and Social Framework and IFC's Environmental and Social Performance Standards. Echoing the voices of men and women, boys and girls We need to act early on In the quest to achieve the goals outlined in the previous paragraph, decisions made at the preparation Sustainable PPP infrastructure projects of the future are phase will have to be based on surveys equitably expected to be both climate-smart and inclusive to representing the needs and concerns of different guarantee resilience throughout their long lifespans. To genders, cultures, and Indigenous populations. Where this end, their design has to be able to respond to the gender gaps are identified, it is essential that the needs and priorities of all users, accounting for and appropriate stakeholders are present in interviews and addressing the different impacts they may have on consultations aiming to address them. It is important women and men, boys and girls. Land or water usage to understand that accounting for women’s needs and rights could, in some cases, be a burden for under- concerns during the selection, preparation, building, represented populations to access infrastructure if not and operation of PPP projects will not only result in resolved early on. Similarly, the cultural context within boosting the benefits of infrastructure to the which the infrastructure will be operating as well as the community but will also generate opportunities for income levels of all intended users/beneficiaries, will women to enhance their professional and leadership need to be studied at the onset of the respective design skills and increase their chances of being employed in to ensure that the actual socio-economic landscape is the jobs which will be created. not impeding inclusivity. GENDER & CLIMATE xii GENDER & CLIMATE Private sector participation does count The private sector increasingly recognizes that closing gender gaps in employment and leadership means better talent, more productivity, more diverse leadership, more customers, and a stronger bottom line. More firms in the private sector are changing business practices, developing PPPs and committing resources to achieve gender equality. Such business transformation will not only result in a reduction of gaps between men and women in the economy but can also lead to increased firm productivity and help private companies innovate, grow, and perform better3. PPPs as an opportunity to accelerate equity According to the World Bank Group’s Primer on Gender Equality, Infrastructure and PPPs, private investors often rely on the government to consider and address issues relevant to ensuring that a project is gender-inclusive. The government often relies on the private sector to address these issues as fundamental to service the delivery of the project. A PPP project provides an opportunity to join public and private capacities to focus on issues relevant to women. PPP © Flore de Preneuf/World Bank. Further permission required for reuse. projects must be commercially and financially viable. If governments need private investors to provide additional support or services to meet the needs of women, they may need to provide additional incentives. For example, PPP payments can be linked to performance and services for women. Likewise, if the private partner performs poorly, financial penalties within the PPP contract may apply. 3 World Bank Group Gender Strategy (FY16–23), Gender Equality, Poverty Reduction and Inclusive Growth, World Bank Group, 2016 xiii TOOLKIT USER GUIDE Scope of the toolkits and intended users What they are The present high-level toolkit outlines a framework and describes specific actions to support emerging market and developing economy (EMDE) governments, development partners (multilateral development banks (MDBs) and development finance institutions (DFIs)), and other stakeholders working on advisory services in incorporating climate actions in the up- and mid-stream phases of PPI projects. The toolkit is accompanied by a set of sector-specific toolkits providing specific instructions on "how" to implement the actions described in the present high-level document in specific infrastructure sectors. Who can use them The toolkits are meant to be used by government officials, PPP practitioners in MDBs and project sponsors in the preparation stages of PPI infrastructure projects. They are also meant to assist advisors by defining a concrete framework to outline the steps to incorporate climate considerations in their services. As the toolkits cover the entire PPP process, each one of them is not intended to be used by the same person in its entirety. Users could instead benefit from one or more relevant sections of the toolkits depending on their background, the nature of the project, and the phase of project implementation within the PPP cycle. Entry points to the toolkits are discussed below. Shape and structure High-level toolkit: what and why The toolkit is structured in phases, following the traditional phases of the PPP preparation cycle. Each phase includes modules of varying degrees of detail describing the actions foreseen to incorporate climate considerations in PPPs properly. In that sense, the high-level toolkit is to be treated as the reference document providing guidance on what should be done at each step and why it should be done. This is complemented by links to relevant tools and online resources and further reading recommendations to reinforce users' understanding. Phases and modules have been structured to be self-standing, allowing users to browse them independently. Sector-specific toolkits: how Following the logical order described in the high-level toolkit, the sector-specific toolkits intend to provide actionable instructions on how to implement each principle, taking account of the different nature of each sector/subsector and the different approaches, tools, and methodologies that are relevant to it. In this context, sector-specific toolkits contain two main parts. The first part covers in a practical way the Phase 1 of the PPP cycle, including simplified versions of tools that PPP units may use to perform initial assessments in-house. The second defines minimum requirements and qualifications that the PPP unit will have to request from consulting services to properly incorporate and evaluate climate adaptation, mitigation, and resilience characteristics in projects. xiv TOOLKIT USER GUIDE Entering the toolkits and navigating through them High-level toolkit navigator As described above, the high-level toolkit is a reference document. Hence, it is recommended that users take advantage of the toolkit navigator/executive summary, which is intended to be used as an index allowing easy access to the proper module depending on the user's needs. The navigator is itself structured in phases, which are further broken down into modules and steps. It contains brief descriptions of each process's scope, contents, and intended outcomes, thereby offering a preview of the different parts of the toolkit and allowing users to immediately jump to the section(s) most relevant to their need(s) using hyperlinks. Sector-specific toolkits Sector-specific toolkits are separate documents that have the form of step-by-step instructions, frequently referring to specific parts of the present high-level toolkit. These toolkits provide detailed guidance for the entire up- and mid-stream stages of the PPP process through actionable items that are relevant to and applicable in specific infrastructure sectors. Their scope is to support PPP units performing specific actions during the very early (upstream) steps of the process and propose climate-related provisions to be included in the terms of reference (ToRs) for advisory services. EXECUTIVE SUMMARY / TOOLKIT NAVIGATOR xv EXECUTIVE SUMMARY A MULTI-PHASE MODULAR APPROACH The signature of the Paris Agreement in 2015 and the increasing pressure from civil society for solid governmental climate actions have recentered the global economy towards a climate-sensitive pathway. Recently, the 2021 United Nations Climate Change Conference (COP26) in Glasgow reconfirmed the global commitment to accelerate action towards achieving climate goals. If properly prepared and managed, new infrastructure investments can play a key role in fostering this vision. Still today there is little guidance on how to translate the global imperative into specific actions that could be delivered at a project level due to several challenges: Challenges and Pressing Issues Decision-makers need to ensure that investments can offer benefits across the agendas of sustainable development, climate mitigation, and adaptation without risking the affordability and the bankability ofthe project. New infrastructure projects should be technically robust to absorb, withstand, and recover fromunprecedented climate threats and other shocks—including sudden changes in demand. All infrastructure projects invariably should be structured and delivered within a climate-sensitive framework that provides quantitative evidence of the impact of the infrastructure on the climate objectives, systematically monitors climate performance, and incentivizes the integration of innovationand good practices at all stages of the development. For PPP projects in particular, there is the additional challenge of dealing with the lock-in effect of long- duration contracts, which increases the pressure of adequately assessing the cost and benefits of climate investments over the whole life-cycle of the project while simultaneously managing climate uncertainty. Services in and out of the Port of Vancouver have experienced severe capacity restrictions following flooding throughout theMetro Vancouver and Fraser Valley regions. © BC Ministry of Transportation / Flickr EXECUTIVE SUMMARY / TOOLKIT NAVIGATOR xvi Responding to these challenges, the present toolkit emphasizes the need for taking a holistic, systematic, and integrated approach to support the inception, selection, design, preparation, and management of sustainable long-lived investments. The toolkit describes a coherent flow that runs smoothly along the PPP process cycle, discusses interactions and trade-offs among technical, economic, financial, and contractual decisions of a PPP project, and provides guidance on pressing questions. Spotlight Areas of Guidance How the decisions on climate mitigation aspects of a project made during the early stages of Phase 1 may impact the long-term sustainability of the investment (tested during the Project Appraisal – Phase 2) How to translate these climate mitigation decisions into project requirements and technical specifications to be integrated within the contractual structure and the tender documents of the project (Phases 3 and 4) How to design for climate uncertainty (i.e., proposing adjustments in the technical feasibility of Phase 2), and what are the recommended tools and methodologies to incorporate this uncertainty into the project appraisal (e.g., by evaluating the project performance under multiple scenarios representing a variety of climatic futures) Which are the recommended methodologies, standards, and frameworks for assessing climate risks and GHGemissions and designing adaptation and mitigation measures What are the means to finance climate adaptation and mitigation works (including green bonds, green and sustainability-linked loans), and how the PPP projects may benefit from blending innovative funding/financing sources into their traditional project finance (explored during Phase 3) How the climate-risk assessments (of Phase 2) can inform the risk-allocation decisions of Phase 3 Building climate-resilient infrastructure in Ghana. © GravityGh Studios/ iStock.com xvii TOOLKIT NAVIGATOR PHASES, MODULES & AREAS OF GUIDANCE INTRODUCTORY PHASE This phase introduces the enabling environment of climate- smart investments, providing a quick overview of the Module 0.1 Climate Policies Digest global climate landscape and its national policies and instruments. The phase includes: ▪ A description of the climate goals and principles of the Paris Agreement and other major international Module 0.2 National Governance frameworks, and the role of national instruments (i.e., Framework on Climate Change NDCs and National Adaptation Plans (NAPs)) in addressing global climate change at a national scale ▪ A description of the national governance framework on climate change (i.e., the legislation system and the domestic governance) highlighting institutional capacities and synergies EXECUTIVE SUMMARY / xviii TOOLKIT NAVIGATOR AREAS OF GUIDANCE MODULE 0.1 Climate Policies Digest Overview of the international climate policy landscape. A STEP 1 timeline of events that led to the 2015 Paris Agreement; description of intra-governmental commitments; a brief Understand the introduction on the IPCC (2014) assessment report and the international climate current state of knowledge in climate change policy landscape National instruments for the implementation of the Paris Agreement. Understanding the complementary role of NDCs, NAPs, and long-term strategies (LTS); determining their STEP 2 implementation status by reviewing their comprehensives, Comprehend the ambition, timeliness, equity, and their alignment with the Paris national climate Agreement and the domestic climate legislation; screening NDCs policy framework and NAPs to identify specific targets and country-specific action plans (e.g., GHG target and peaking year, non-GHG targets, NDC coverage, and specific sector commitments, measures for enhancing climate adaptation and resilience at a country level; STEP 3 gender-equity provisions) Review country’s commitments MODULE 0.2 National Governance Framework on Climate Paris Agreement compatibility check of domestic legislation. Change Current status of climate legislation and its relevance to the NDC pledges; performing a sector-wide and subnational screening of STEP 1 climate legislation; reviewing existing and (anticipated) national and sub-national policy frameworks, instruments, development Review climate plans, and sectoral programs, as well as recognizing implications legislation for new infrastructure investments Institutional capacity on climate change. Scanning the domestic institutional framework; mapping key actors in the decision- STEP 2 making process on climate matters, including entities that oversee the implementation of NDCs and NAPs; understanding Review institutional the devolution of climate change policies and the role of capacity states/municipalities in forming and implementing the climate agenda; understanding the horizontal organization/coordination of ministries/agencies and their role in planning, developing, and monitoring of climate actions EXECUTIVE SUMMARY / xix TOOLKIT NAVIGATOR PHASE 1 - PROJECT SELECTION Phase 1 describes how climate change affects the decisions Module 1.1 Project Alignment that the PPP unit will make when screening and selecting a with Climate Policies new project. Being the most upstream phase of the toolkit, it includes considerations on: ▪ Assessing and enhancing projects’ alignment with national and international climate policies and goals Module 1.2 Climate Considerations ▪ Performing a preliminary screening of climate risks that in Project Selection could affect the project directly or indirectly (externalities) as well as of adaptation measures to alleviate them ▪ Identifying GHG emissions of a project and potential measures to mitigate them Module 1.3 Value of Investment Accounting for Climate Actions ▪ Preliminarily assessing the value of investment in qualitative terms accounting for costs and benefits of climate mitigation and adaptation This phase includes three modules, each of which is broken down into steps as outlined below. EXECUTIVE SUMMARY / xx TOOLKIT NAVIGATOR AREAS OF GUIDANCE MODULE 1.1 Project Alignment with Climate Policies Overview of climate policies. A snapshot of the landscape of climate policies at global, national, sub-national, and/or regional STEP 1 level and description of climate goal and targets; mapping of stakeholders, authorities, and entities responsible for their Map the Global and implementation National/Subnational Climate Policies Climate-related specifications for new projects. Understanding how Nationally Determined Contributions (NDCs) and National Adaptation Plans (NAPs) can accelerate the decarbonization and STEP 2 energy efficiency of new projects and reinforce their ability to combat the adverse effects of climate change Assess Project’s Alignment with Climate alignment of new projects. Checking the alignment of Climate Policies the project with the global and national climate-change agenda; unlocking green financing and funding sources through better alignment; high-level recommendations to enhance the project’s alignment with climate policies EXECUTIVE SUMMARY / xxi TOOLKIT NAVIGATOR AREAS OF GUIDANCE MODULE 1.2 Climate Considerations in Project Selection Climate risk screening. Defining climate risk and understanding its main components (hazard, exposure, vulnerability) and methodologies to assess it; understanding the impacts of STEP 1 climate-related phenomena and the difference between physical and indirect risks; recognizing the difference between internal Assess Climate Risks risks and externalities Climate uncertainty. Exploring the roots of uncertainty; the role of climate scenarios in describing the future climatic conditions, and how the projections of future greenhouse gas (GHG) STEP 2 emissions are affecting risk assessment Assess GHG Reduction of climate risks through adaptation. Increasing the Emissions adaptive capacity and reducing the sensitivity of assets; Qualitatively conceptualizing adaptation and resilience; maximizing the resilience of the project to natural hazards and resilience through the project of its beneficiaries and the local economy STEP 3 Small-scale mitigation in projects. Describing schemes and Review Adaptation mechanisms to increase the mitigation potential of projects and Resilience that are not primarily tagged as “climate mitigation”, Strategies combining the benefits of mitigation and adaptation by implementing nature-based solutions Cost and benefits of adaptation and mitigation. Employing STEP 4 environmental and social frameworks and “do no significant harm” principles further to appraise trade-offs of alternative Review Small-Scale climate adaptation and mitigation strategies; assessing the cost Mitigation Measures of climate interventions; understanding the multiple benefits of climate actions, including the potential savings in the project’s life-cycle as well as non-monetary gains (e.g., social, gender, empowerment of local population and economy) STEP 5 Prioritize Climate Strategies EXECUTIVE SUMMARY / xxii TOOLKIT NAVIGATOR AREAS OF GUIDANCE MODULE 1.3 Value of Investment Accounting for Climate Actions Climate considerations on the project’s economics. Developing a preliminary understanding of how climate change may affect STEP 1 (positively or negatively) the overall economic value of the project and its affordability considering different viewpoints and Include Climate perspectives, estimating the cost of climate investment Considerations in considering liabilities and revenues Cost-Benefit Analysis (CBA) Costs and benefits of climate actions. Estimating the factors affecting the value of the investment and which are directly impacting the net present value of the project (e.g., cost of STEP 2 mitigation and adaptation, cost of recovery, cost of maintenance, Check Project’s loss reduction, tax reductions related to GHG emission reduction, Affordability etc.); realizing how co-benefits of mitigation/adaptation can offset some of the initial investment cost (e.g., by fostering productivity, inclusion and resilience, thereby improving access to markets, jobs, education, health, and other services) STEP 3 Climate change considerations in the PPP suitability assessment. Check Project’s Defining the role of the private sector in mobilizing innovation Suitability as a PPP and competition, and leveraging financing opportunities; appraising suitability in due consideration of the level of climate- induced costs, the potential of climate-risk allocation in a PPP scheme, the availability of risk protection measures (i.e., insurances and guarantees), and overall financing and bankability concerns EXECUTIVE SUMMARY / xxiii TOOLKIT NAVIGATOR PHASE 2 - PREPARATION Phase 2 describes the project preparation phase and hence, Module 2.1 Interactions between in the context of the high-level toolkit, refers to the Climate and PPPs incorporation of climate actions in the assessment of the project’s technical and commercial feasibility. It therefore provides guidance on the following: ▪ Assessing climate-related risks accounting for both Module 2.2 Climate Considerations internal and external risk factors on Technical Feasibility ▪ Selecting adaptation options, including for cases of decision making under deep uncertainty ▪ Assessing GHG emissions due to the project and identifying applicable climate mitigation options Module 2.3 Climate Considerations on Commercial Feasibility and ▪ Maximizing resilience of and through the project Bankability ▪ Promoting the use of “green” construction solutions for adaptation and mitigation ▪ Assessing costs and associated benefits of climate action and including them in the project without compromising its commercial feasibility and bankability EXECUTIVE SUMMARY / xxiv TOOLKIT NAVIGATOR AREAS OF GUIDANCE MODULE 2.1 Interactions between Climate and PPPs Climate hazards projections. Extrapolating future climate hazards using global and regional climate models (GCMs and RCMs); STEP 1 defining future climatic conditions based on representative concentration pathways (RCPs) Climate Hazard Analysis Climate risk modeling. Incorporating climate uncertainty in hazard analysis by introducing three key sources of uncertainty: (i) model, (ii) emission scenario, and (iii) internal variability; calculating exposure and vulnerability of the projects to climatic STEP 2 stressors distinguishing between chronic and acute risks, that may lead to direct and indirect losses onthe project Characterization of Internal Risks Climate externalities. Recognizing external risks (externalities), defined as the dependencies of the project with associated infrastructure, other social and physical systems, technological developments, and policy decisions that might be driven by climate change and might increase/decrease the project’s overall STEP 3 risk Landscape Mapping Life-cycle assessment of project’s carbon footprint. Assessing the and Identification of project’s GHG emissions over its entire life- cycle, including the External Risks contribution of all activities performed during construction, operation, and maintenance of the infrastructure; tracking down opportunities for reducing the life-cycle GHG emissions by STEP 4 optimizing the operation and maintenance processes Towards Low-Carbon Infrastructure Applicability of small-scale mitigation options. Exploring nature- based-solutions (NBS), ecosystem-based adaptation, blue-green or green-gray infrastructure; using renewable, repairable and recyclable sources and materials EXECUTIVE SUMMARY / xxv TOOLKIT NAVIGATOR AREAS OF GUIDANCE MODULE 2.2 Climate Considerations on Technical Feasibility Decision-making under uncertainty. Recognizing how climate variability and uncertainty is impacting technical and financial decisions; the pitfalls of traditional decision making; introduction STEP 1 to decision making under uncertainty (DMUU) methodologies Feasibility of Categories of adaptation measures. Thinking of adaptation as a Small-Scale Mitigation combination of prevention, preparation, and recovery measures; calculating risk reduction potential of adaptation alternatives; resilience of/through the project STEP 2 Base and adaptive plans. Introducing the concepts of base and adaptive planning where “base” refers to a project plan in which Assess the Feasibility all capital expenses associated with adaptation and resilience of Adaptation measures are disbursable upfront, and “adaptive” refers to a Strategies project plan in which adaptation and resilience expenses are disbursable throughout the project depending on specific climate-related performance indicators; discussion on pros and STEP 3 cons of each approach Manage Uncertainty in Definition of “base plan” using decision making under deep Adaptation Plan uncertainty (DMDU) approaches. Recognizing robustness as the main attribute of a base plan (defined as the ability of the plan to perform acceptably over a range of climate scenarios); exploring the applicability of robust decision making (RDM), information-gap decision theory, Climate Risk Informed Decision Analysis (CRIDA), to decide on the technical design of the base plan; setting the proper performance indicators and thresholds when assessing robustness Definition of “adaptive plan” using DMDU approaches. Recognizing flexibility as the main attribute of an “adaptive plan” (defined as the ability of the plan to adjust over time to the changing climate conditions; developing technical designs with different planning horizons (short, medium, and long-term); identifying tipping points that signpost the need for a plan re- adjustment (i.e., implementation of additional contingencies); familiarizing with prevailing adaptive planning methodologies Evaluation of costs and benefits. Introducing methods such as cost-benefit analysis (CBA) under uncertainty, DMUU, and multi- criteria analysis (MCA) to properly assess feasibility under multiple climate evolution scenarios while incorporating monetary and non-monetary benefits EXECUTIVE SUMMARY / xxvi TOOLKIT NAVIGATOR AREAS OF GUIDANCE MODULE 2.3 Climate Considerations on Commercial Feasibility Introduction of climate cost and benefits in CBA. Updating cost & Bankability calculations to explicitly account for the cost of climate mitigation and adaptation (refined after the technical STEP 1 feasibility), the cost of impact and the costs of recovery; Update and Refine calculating savings associated with avoidance of operational CBA, VfM and disruptions due to climate hazards; calculating benefits of risk Affordability reduction and their indirect benefits to the broader ecosystem or socio-economic system; estimating the benefits of GHG emission reduction; evaluating changes in the residual value of the project STEP 2 Value for money (VfM) of climate-smart projects. Assessing the Bankability and implications of climate actions on the VfM of the project; Commercial evaluating the merits of the project as a PPP from an overall cost Feasibility perspective; confirming whether PPP procurement enhances private sector innovation and optimizes risk allocation VfM of climate-smart projects. Updating the VfM based on new cost estimates, but also on other implications of the proposed technical solutions; evaluating the merits of the project as a PPP from an overall cost to the government perspective; confirming whether the project includes PPP benefits such as private sector innovation, risk transfer, and performance-based structures Affordability of climate-smart projects. Revisiting project affordability accounting for the additional cost to the project company (which frequently translates into increased availability payments by the grantor or higher user fees) and the potential reduction of the grantor’s contingent liabilities when the climate- change-induced risks are transferred to the project company Commercial feasibility of climate-smart projects. Assessing commercial feasibility from the perspectives of different stakeholders (grantor, investor, lender); incorporating climate mitigation and adaptation in the PPP structure without risking the commercial feasibility of the project; performing a high-level risk allocation screening to illustrate different strategies, actions, and risk-sharing instruments so that bankability is not threatened EXECUTIVE SUMMARY / xxvii TOOLKIT NAVIGATOR PHASE 3 - STRUCTURING CONSIDERATIONS Phase 3, which evolves during the contract structuring Module 3.1 Climate phase of the PPP cycle, intends to provide guidance on the Considerations on Risk Allocation following: ▪ Describing the climate risk profile of the project and preparing a clear risk allocation structure and management plan that specifies and nuances climate Module 3.2 Climate Considerations risk events, including hedging mechanisms and force on the Financial Structure majeure exceptions ▪ Prescribing climate provisions on the payment mechanism that would enforce incorporation of climate mitigation and adaptation requirements in the project Module 3.3 Integration of Climate ▪ Exploring innovative financing instruments for climate Requirements into the Procurement Process projects beyond the traditional financial support, thus safeguarding their bankability and investability, and enhancing the projects’ eligibility to receive financing from such sources ▪ Defining a coherent set of requirements (key performance indicators or KPIs) for inclusion in the tender documents in order to ensure compliance with climate-related performance objectives during the design, construction, and operation of the project ▪ Providing climate-related recommendations for inclusion in the tender documents EXECUTIVE SUMMARY / xxviii TOOLKIT NAVIGATOR AREAS OF GUIDANCE MODULE 3.1 Climate Considerations on Risk Allocation Risk categories from a contractual standpoint. Distinguishing between “internal” risks, i.e., those directly affecting the project STEP 1 causing physical damage and/or downtime for inspection or repairs, and “external” risks, i.e., those posed by the project due Understand Climate to failures of the interconnected infrastructure or changes in the Risk in PPPs from a broader socio- economic environment including transition risks Contractual Viewpoint Predictable and unpredictable risks. Distinguishing risks as predictable (i.e., generated by events that may be anticipated based on the climate modeling and for which adaptation and STEP 2 resilience works should be designed and implemented) and unpredictable (caused by extremely rare events for which Structure & Allocate adaptation measures cannot be designed); further distinguishing Climate Risk unpredictable risks as “insurable” (when there are available insurance mechanisms to cover them) and “uninsurable” events which are commonly treated as force majeure STEP 3 Climate risk appetite of different stakeholders. Recognizing the different risk allocation rationales among PPP actors and their Insurance Coverage main concerns (grantor, project company, lenders, insurers) against Climate- Change Risks Risk transfer mechanisms for climate risks. Identifying different risk transfer mechanisms for different risk categories; understanding the limitations of traditional catastrophe risk insurance and guarantee mechanisms to deal with climate change uncertainty; introducing hybrid risk transfer solutions blending innovative insurance instruments with financial options including index-based products (e.g., weather derivatives), Catastrophe Drawdown Options (Cat DDOs), and state guarantees EXECUTIVE SUMMARY / xxix TOOLKIT NAVIGATOR AREAS OF GUIDANCE Climate Considerations on the Financial Structure Flexible payment mechanisms. Introducing flexibility to the payment mechanism to meet the capital expenditure (CAPEX) STEP 1 requirements of climate adaptation, distinguishing between availability-based and user-pays PPPs, balancing between Include Climate incentives for climate innovation and penalties for failure in the Provisions in the contract structure Payment Mechanism Green funding. Exploring opportunities, criteria, and requirements for applying for multilateral and bilateral financing STEP 2 mechanisms; coordinating grant application with PPP project preparation Consider Availability of Concessional Funds Integration of Climate Requirements into the Procurement Process Technical guidance on sustainability and climate change. Familiarizing with code/standards/guidelines that include climate STEP 1 provisions; acknowledging the role of sustainability rating tools Include Climate (e.g., LEED, EDGE, SuRe, etc.) in the technical design and delivery of Requirements in the climate-smart PPPs through illustrative examples; introducing the Design Finance to Accelerate the Sustainable Transition-Infrastructure (FAST-Infra) labeling system for sustainable infrastructure assets KPIs for climate-smart projects. Defining output specifications STEP 2 that comply with the climate-resilient objective of the project; introducing KPIs that correlate hazard intensity with acceptable Include Climate performance levels; analyzing sustainability metrics and indices for Requirements in constructions and operations Technical Specification and Output Indicators Prevention and management of climate disasters. Embedding climate requirements in the operational procedures of the project; STEP 3 revisiting environmental impact assessments to incorporate climate change considerations; involving the private sector in Include Climate disaster prevention and planning activities, describing Requirements in requirements and specifications for emergency response plans to Operational combat climate hazards Procedures EXECUTIVE SUMMARY / xxx TOOLKIT NAVIGATOR PHASE 4 - TENDER PROCESS This phase covers the period from the completion of the Module 4.1 Drafting Climate-Smart project structuring (where the key design/performance Tender Documents specifications and the financial and risk structure of the project have been decided) to the official launch of the tender. It, therefore, provides guidance on the following: ▪ Specifying a set of climate-related qualification / evaluation criteria for the bidders that are consistent with the characteristics of the project ▪ Structuring and designing of a clear and transparent RFP package that outlines proposal requirements and informs bidders on the climate aspects of the tender/selection process and timing ▪ Drafting of the contract, detailing in a clear and enforceable manner the role of the public and private parties and key climate-related provisions (output of Phase 3) EXECUTIVE SUMMARY / xxxi TOOLKIT NAVIGATOR AREAS OF GUIDANCE MODULE 4.1 Drafting Climate-Smart Tender Documents Climate specifications for PPPs. Defining technical and operational standards, analyzing examples of including low- carbon incentives and risk mitigation strategies in the STEP 1 procurement documents; example RFQ and RFP provisions Define Climate-Smart relevant to climate mitigation/adaptation projects Criteria for the RFQ/RFP Evaluation of bidders. Defining proper sets of qualification/evaluation criteria for the selection of bidders measuring sustainability and climate resilience practices, innovation, technical excellence, demonstrated experience, and STEP 2 social inclusivity Include Climate-Smart Evaluation of proposals. Demonstrating alternatives to the least Considerations in the cost bid evaluation; integrating climate-smart criteria into the PPP Agreement evaluation process; understanding the benefits of price and quality evaluations; introducing the concept of life cycle assessment of proposals INTRODUCTORY PHASE INTRODUCTORY PHASE Climate frameworks, policies, and enabling environment PROJECT SELECTION 1 2 PREPARATION 3 STRUCTURING CONSIDERATIONS 4 TENDER PROCESS 2 Introductory Phase Major international frameworks and their adaptation in the form of national policies and regulations define climate-related goals for each country at the national or regional level. Aligning the development of climate-smart investments with these norms/targets/processes will decisively contribute towards meeting emission reduction targets and national commitments while accelerating adaptation and resilience efforts to combat climate change. Therefore, this introductory phase is meant to assist government officials and their advisors in acquainting themselves with what constitutes the enabling environment for climate-smart PPPs and understand how the alignment of current legislation with the Paris Agreement and other climate change and sector-specific policies underpins investments in low carbon and climate-resilient infrastructure. Obtaining a clear understanding of the domestic administrative structure—be it the legislation system or the domestic governance—that oversees and coordinates the climate planning and development activities is also essential for moving from abstract concepts and wishful intentions to tangible climate investments. It is noted that the structure of administrative mechanisms differs among different countries, both in terms of the bodies/authorities responsible for developing and implementing climate policies, as well as in terms of the interactions among them. Readers who are already familiar with the enabling environment may proceed to the main body of the toolkit. 3 Step 1 Step 2 Step 3 Understand the Comprehend the National Review Country’s International Climate Climate Policy Framework Commitments Policy Landscape Preliminary understanding of the country’s climate M 0.1 commitments and goals Climate Policies Digest INTRODUCTORY PHASE Step 1 Step 2 Review Climate Review Institutional Legislation Capacity Preliminary understanding of the M 0.2 supporting mechanisms for climate investments National Governance Framework on Climate Change 4 Introductory Phase Outline This preparatory phase comprises two modules: Module 01 – Climate Policies Digest is intended for use by government officials and their advisors and provides an overview of existing climate change policies, describing general norms and highlighting some country-specific features. It includes: • a brief presentation of the Paris Agreement and the major international policy frameworks that are the key drivers for low carbon and climate-resilient transition • a detailed description of NDCs and their relevance to long-term strategies (LTSs) • an overview of National Adaptation Plans (NAPs) • a description of the many interlinkages of gender equality and climate change within policy dialogues and climate action policies and plans. Module 02 – National Governance Framework on Climate Change focuses on the national regulatory framework that oversees climate policy planning and proposes a stepwise review process to help government advisors unravel its regional characteristics (e.g., existing structures/policies, jurisdictions, responsibilities, and synergies among institutions). 5 Step 1 Step 2 Step 3 Understand the Comprehend the National Review Country’s International Climate Climate Policy Framework Commitments Policy Landscape Preliminary understanding of the country’s climate M 0.1 Conventions & National Climate NDC commitments commitments and goals major treaties Instruments Climate Policies National climate adaptation priorities Digest Timeline Long-term country’s vision and action plan INTRODUCTORY PHASE Step 1 Step 2 Review Climate Review Institutional Legislation Capacity Preliminary understanding of the M 0.2 supporting mechanisms for climate investments National Governance Framework on Climate Change 6 0.1 Climate Policies Digest The first module of this phase serves as a first-level navigator of the international climate- related policies landscape. It commences with the description of major frameworks such as the Paris Agreement and concludes with a country-specific screening of the implementation of climate policies. STRUCTURE OF THE MODULE Module 0.1 is structured in three steps:  Step 1 is intended to provide an overview of the major international frameworks defining climate policies and which form the basis for national climate-related legislation and norms.  Step 2 provides an overview of the national climate instruments (NDCs, NAPs, LTSs)and discusses their commitments, interactions and key differences in their implementation.  Step 3 introduces a high-level review of NDCs, NAPs, and LTSs to help users assess the country’s achievements in climate aspects, recognize specific economy-wide and sector-specific targets/commitments, and identify country-specific implementation mechanisms. 7 PHASE 0 01 UNDERSTAND THE INTERNATIONAL CLIMATE POLICY LANDSCAPE UNITED NATIONS FRAMEWORK CONVENTION ON CLIMATE CHANGE (UNFCCC) M 0.1 The United Nations Framework Convention on Climate Change (UNFCCC) is an international environmental agreement that was signed in June 1992 in Rio de Janeiro and entered into force Climate Policies in 1994. Today, 197 countries have ratified the convention with the main objective to stabilize Digest greenhouse gas (GHG) concentrations to a level that would prevent dangerous anthropogenic interference with the climate system. Formal Conferences of parties (COP) have been held every year since 1995 and comprise the supreme decision-making body of the convention. The aim of the COPs is to discuss progress and update existing or set new goals regarding climate change under the UN climate-change framework. The first major implementation of the Step 1 UNFCCC measures entered into force through the Kyoto Protocol (see Insight 0.1) in 2005 and Understand the International Climate was superseded by the Paris Agreement, which sets the current framework of Policy Landscape international climate policy. COP decisions are scientifically-backed by the Intergovernmental Panel on Climate Change (IPCC) – an independent body founded in 1988 under the auspices of the World Meteorological Organization (WMO) and the United Nations Environment Program (UNEP) – to provide policymakers with regular scientific assessments on the current state of knowledge about climate change. Parties to the UNFCCC have recognized Step 2 the importance of involving women and girls, as well as men and boys equally in UNFCCC Comprehend the processes and have therefore established a dedicated agenda item under the convention, National Climate Policy Framework addressing issues of gender and climate change. THE URGENCY OF ACTION With the last decade having been confirmed as the warmest on record, the urgency to address both the causes and impacts of climate change is now clearer than ever. According to the latest Assessment Report (AR5)1 by the IPCC, the “point of no return” (i.e., a 1.5° Celsius increase in global temperatures that is expected to result in severe food shortages, coastal inundations, Step 3 and the displacement of tens of millions of people) is now predicted to arrive as early as 2030, Review Country’s Commitments unless significant steps are taken before. With the threat so apparent, national leaders increasingly recognize that inaction is not an option and have been convinced to commit to ambitious national pledges outlined in the 2015 Paris Agreement, setting the goal for a global transition to net zero emissions by 2050. PARIS AGREEMENT: A MAJOR SHIFT IN THE INTERNATIONAL POLICY LANDSCAPE Global climate governance is a highly iterative and evolving process that has progressed significantly since the signing of UNFCCC in 1992. The main benchmarks and contributions of this process are presented in the timeline of Figure 0.1. The last major milestone was reached at COP21 in Paris on 12 December 2015, when parties achieved an international climate 1 IPCC, 2014: Fifth Assessment Report 8 agreement that forms the current landscape to combat climate change and accelerates and intensifies the actions and investments needed for a sustainable, low carbon future. The PHASE 0 agreement entered into force and became legally binding in April 2016 after ratification by 55 parties that accounted for an estimated 55% of total GHG emissions. It was adopted by 196 parties (including the European Union (EU) that comprises 28 member countries). M 0.1 Climate Policies Digest Step 1 Understand the International Climate Policy Landscape Step 2 Comprehend the National Climate Policy Framework Step 3 Review Country’s Commitments FIGURE 0.1 Timeline of major milestones of international climate-change considerations 9 The Paris Agreement achieved a major shift in the international climate policy landscape by bringing for the first time all nations under one umbrella into a common cause to mitigate PHASE 0 climate change and adapt to its effects with additional support to less developed countries to do so as well. The goal of the Agreement is to keep the global average temperature rise to well below 2°C above pre-industrial levels and to pursue efforts to limit the rise to 1.5°C as well as to achieve net-zero emissions in the second half of the current century. In addition, the Agreement aims to increase the resilience and adaptation capacity of countries to deal with climate change risks that may emerge in the near future. Aiming to reach these goals, new financial instruments, technological frameworks, and funding opportunities were put M 0.1 into action to support countries (especially the least developed and developing parties that belong to the Agreement). To this end, developed countries and international Climate Policies organizations were prompted to take the lead in providing financial assistance to more Digest vulnerable countries and in proposing innovative climate finance for large-scale carbon- emission reduction and climate adaptation investments. An overview of global climate frameworks that, together with the Paris Agreement, are supporting the vision for sustainable and climate-sensitive growth is provided in Insights 0.1 and 0.2. Step 1 Understand the International Climate Policy Landscape 02 COMPREHEND THE NATIONAL CLIMATE POLICY FRAMEWORK Step 2 NDCs, LTSs, and NAPs are the three main instruments for the implementation of the Paris Comprehend the National Climate Agreement by each country. These instruments, despite their distinctive characteristics, go Policy Framework hand in hand and reinforce each other into pursuing climate resilience and GHG emission targets. NATIONALLY DETERMINED CONTRIBUTIONS (NDCs) The NDCs are the most important instruments for the implementation of the Paris Agreement Step 3 at the national level, serving as the vehicle to put the global efforts towards reducing Review Country’s emissions and adapting to the impacts of climate change into a national policy. As of today, Commitments 196 countries have ratified the Paris Agreement, and 1922 have committed to and implemented NDCs, outlining short and mid-term climate action plans that are to be regularly updated. Indeed, following the NDC cycle, all parties were requested to submit new or updated NDCs by 2020 and then update them every five years thereafter (2025, 2030, etc.). To facilitate clarity, transparency, and understanding, parties shall submit their NDC for each cycle at least 9 to 12 months in advance of the relevant session3. 2 Eritrea has submitted its first NDC but has not yet become a party to the Paris Agreement. 3 https://unfccc.int/process-and-meetings/the-paris-agreement/nationally-determined-contributions- ndcs/nationally-determined-contributions-ndcs 10 LONG-TERM STRATEGIES (LTSs) The UN also invited countries to submit their LTSs for achieving their climate change goals. PHASE 0 Unlike the NDCs, these plans are mandatory. This is the role of the second instrument provided by the Paris Agreement, the LTS. As of June 2021, 29 parties, representing 42 countries, have submitted an LTS document, but only 11 of them include a quantified vision for emissions in 2050. The latter comes in various formats, either as a percentage reduction with respect to the emissions of a reference year (i.e., “base year goals”) or fixed- level goals (stating what emissions level will be achieved in 2050). M 0.1 NDCs and LTS Climate Policies in a nutshell Digest What do they include? NDCs LTSs Step 1 Understand the Quantifiable short and mid- Long-term strategies for International Climate term emission reduction reducing greenhouse Policy Landscape targets (incl. implementation emissions that will form timeframes and sector the basis for the coverage) and adaptation implementation of more objectives ambitious NDCs Step 2 Coherent and transparent A roadmap for action to Comprehend the reporting and monitoring steer national climate National Climate framework change mitigation policy in Policy Framework the long-term (incl. actions to financially strengthen investment to deliver long- term NDC targets) Institutional arrangements in Guidelines to enable the legislation and measures to transition to a low carbon support the implementation economy across all sectors Step 3 of commitments of activity (avoiding Review Country’s locking in carbon-intensive Commitments infrastructure) May include instances of A vision for the country's climate adaptation priorities future that focuses on a and plans sustainable development trajectory FIGURE 0.2 Schematic illustration of the main characteristics of NDCs and LTSs 11 NATIONAL ADAPTATION PLAN (NAP) AND NATIONAL ADAPTATION PROGRAM OF ACTION (NAPA) PHASE 0 The third major UN instrument is the NAP, which is the main planning tool introduced in 2010 during the COP16 in Cancun, Mexico. Originally meant to be a special instrument for least developed countries (LDCs), it has since then been increasingly promoted to all countries, having as its main objective to provide a clear and robust framework and specific action plans that will:  reduce vulnerability to the impacts of climate change by building adaptive capacity and M 0.1 resilience  facilitate the integration of climate change adaptation, in a coherent manner, into Climate Policies relevant new and existing policies, programs, and activities—in particular, Digest development planning processes and strategies—within all relevant sectors and at different levels, as appropriate  integrate a gender perspective within the national adaptation strategy that aims to address gender gaps (Insight 0.3). The NAPs have progressed the preliminary work of the NAPA process—that focused on the Step 1 design of urgent win-win measures for LDCs to combat increased levels of climate-change Understand the International Climate vulnerability—into a comprehensive and regularly updated framework that integrates Policy Landscape climate change adaptation into national planning. An example of a NAP development process is presented in Box 0.1. WHAT IS INCLUDED IN A NAP? Step 2 The Least Developed Country Expert Group, on behalf of the UNFCCC, developed Technical Comprehend the National Climate Guidelines for the National Adaptation Plan Process. These guidelines, although not Policy Framework prescriptive, outline the key elements and phases for implementing a coherent NAP process that focuses on medium- and long-term adaptation needs and priorities. These include:  a national stock-take (e.g., mapping of actors, identification of capacity gaps and urgent needs)  climate-risk assessments  an implementation phase, outlining the (long-term) NAS (including prioritization of Step 3 climate change adaptation options and plans to enhance capacity building and Review Country’s Commitments promote coordination among actors)  a reporting, monitoring, and review phase that specifies key milestones and expected outputs over time. A brief explanation of how NAPs, NDCs, and climate frameworks support sustainable development is provided in Insight 0.4. 12 PHASE 0 BOX 0.1 EXAMPLE OF THE NAP DEVELOPMENT PROCESS IN KENYA Kenya was among the first countries to submit a NAP in the registry of the UNFCCC. Kenya's NAP is an example of successful implementation because it clearly defines the country's climate vision, articulates specific objectives to achieve it, and describes strategies/actions/tools to facilitate implementation. In brief: VISION M 0.1 The vision of the Kenyan NAP is enhanced climate resilience towards the attainment of Kenya's 2030 development vision. Climate Policies Digest GOALS - Strong economic growth, resilient ecosystems, and sustainable livelihoods for Kenyans - Reduced climate-induced loss and damage and mainstreamed Step 1 risk reduction approaches in various sectors Disaste Understand the - Reduced costs of humanitarian aid and improved knowledge and International Climate learning for adaptation and the future protection of the country Policy Landscape SPECIFIC OBJECTIVES - Highlight the importance of adaptation and resilience-building actions in development - Integrate climate change adaptation into national and country-level Step 2 development planning and budgeting processes Comprehend the - Enhance the resilience of public and private sector investment in the National Climate Policy Framework national transformation and the resilience of the economic and social pillars of Vision 2030 to climate shocks - Enhance synergies between adaptation and mitigation actions in order to attain a low carbon, climate-resilient economy - Enhance the resilience of vulnerable populations to climate shocks through adaptation and disaster risk reduction strategies IMPLEMENTATION STRATEGIES Step 3 Review Country’s - Seek participation from civil society Commitments - Clearly define institutional arrangements, roles, and responsibilities - Perform risk and vulnerability analysis - Include sector-specific implementation plans and budgets at the national and subnational level - Establish a monitoring and evaluation system - Include a gender-specific implementation plan Source: Kenya National Adaptation Plan 2015-2030: https://www4.unfccc.int/sites/NAPC/Documents%20NAP/Kenya_NAP_Final.pdf 13 PHASE 0 03 REVIEW NATIONAL CLIMATE POLICIES As national circumstances and priorities for climate action differ from country to country, in this step, government officials and their advisors are encouraged to review the NDC and NAP documents of their country and identify specific commitments that are described in them. Figure 0.3 outlines the five principles of the high-level screening process: timeliness, M 0.1 comprehensiveness, ambition, alignment, and equity— followed by specific questions pertinent to each category. The review process may be facilitated by using the high-level Climate Policies screening questionnaire provided below. Digest Step 1 Understand the International Climate Policy Landscape Step 2 Comprehend the National Climate Policy Framework Step 3 Review Country’s Commitments FIGURE 0.3 Five principles for high-level screening of NDCs, LTSs, and NAPs 14 HIGH-LEVEL SCREENING QUESTIONNAIRE OF NDCs, NAPs and LTSs PHASE 0 NDC TIMELINESS  Has the country submitted an updated NDC? NAP TIMELINESS  Does the country have a NAP?  If not, is a NAP process currently underway in the country? M 0.1  What is the time interval for reviewing the NAP process? Climate Policies EXTERNAL ALIGNMENT Digest  How does the NDC target perform with respect to the goal of holding global warming below 2o C? (Users may refer to the rating provided by the Climate Action Tracker in the Resources.) INTERNAL ALIGNMENT Step 1  How do the NDC and NAP align with domestic laws and Understand the policies? International Climate  Do the NDC and NAP specify an implementation process Policy Landscape through national entities/bodies? Step 2 Comprehend the NDC COMPREHENSIVENESS National Climate Policy Framework  Does the NDC provide a peaking year of GHG emissions?  What is the quantitative unconditional GHG target described in the NDC?  What is the NDC coverage? Is it economy-wide or does it have sectoral content?  Does the NDC cover non-GHG targets as well? (For example, in the energy sector a non-GHG target would be to Step 3 establish quantitative targets to increase the capacity and/or Review Country’s generation of renewable energy.) Commitments  Does the NDC specify detailed sector commitments for GHG reduction targets?  Does the NDC cover climate adaptation aspects? NAP COMPREHENSIVENESS  Does the NAP (if available) include quantitative assessments of the projected climate impacts (e.g., impact analysis, vulnerability assessments)?  What data and knowledge have been used to assess current and future climate risks?  Does the NAP specify current and near-term planning and actions? What is their time horizon? 15 NDC AMBITION PHASE 0  Does the NDC include a quantitative vision for emission reductions in 2050?  How is the NDC’s ambition level rated (according to Climate Action Tracker and/or Climate Change Performance Index)?  Does the NDC provide a tentative roadmap for implementation including timelines and milestones (e.g., a renewable energy roadmap)? M 0.1  Is this supported by preliminary information on the costs and benefits of implementing it? Climate Policies Digest NAP AMBITION  Does the NAP clearly define national long-term goals or vision?  Does the NAP include specific provisions for monitoring and evaluating performance? OVERALL AMBITION Step 1  Has the country communicated an LTS to UNFCCC? Understand the  Does the NAP or NDC include information on gaps and International Climate Policy Landscape barriers forimplementing the climate policy?  Do they propose an action plan to improve future performance?  Do they include recommendations on what information and metrics are needed to improve performance? Step 2 Comprehend the National Climate Policy Framework EQUITY PROVISIONS IN NDC  Does the NDC predict the possible impact of mid-term and long- term mitigation actions on gender equity?  Are social equity impacts properly addressed? Step 3 Review Country’s  Does the NDC prescribe measures to manage low-carbon Commitments transition for workers and communities that were traditionally relying on GHG-intensive activities? EQUITY PROVISIONS IN NAP  Do the NAP activities consider the disproportionate impacts of climate change on women (e.g., does it include a gender analysis)?  Does the NAP propose a process of monitoring/evaluation integration of gender considerations into climate adaptation? FIGURE 0.4 Information on National Adaptation Plans in developing countries as of 31 March 2021. Darker shades are those countries with a NAP, while the lighter shades are those that started the process. Those without shades are developing countries with no information on whether they have initiated the process. [Source: UNFCCC| National Adaptation Plans] 17 PHASE 0 Step Output By completing the first module, toolkit users should have formulated a solid background on the progress of climate policies in their country, as this is manifested through the NDCs, NAPs and LTSs. Before embarking on the next module, users are prompted to compile the information gathered above (following the stepwise process) into a coherent matrix that outlines key findings. A sample matrix is provided below. M 0.1 Checklist Example answers Climate Policies A. Climate Policy Status Digest Paris Agreement party yes/no Last NDC submission year Registered NAP process - (year of yes/no - (year or in submission) progress) Update interval of NAP e.g., every 10 years / not specified Step 1 Understand the B. NDC screening International Climate Peaking year of GHG emissions year Policy Landscape Quantitative GHG 2030 target e.g., reduce GHG emissions by x% NDC coverage economy-wide or sectoral NDC includes adaptation yes/no On track with current policies yes/no Step 2 LTS communicated to UNFCCC yes/no Comprehend the National Climate Quantitative vision for emission reduce GHG emissions by Policy Framework reductions x% by 2050 C. NAP screening Near- and mid-term planning actions list of actions (or not set) Priority adaptation sectors list sectors On track with current policies yes/no Step 3 Review Country’s Commitments 18 PHASE 0 KEY TAKEAWAYS • The current international climate policy landscape has been shaped by a M 0.1 long history of complex interactions among multiple global institutions, international organizations, alliances of countries, and public pressure. Climate Policies Digest • The major international climate frameworks have driven the development by the UN of the National Determined Contributions (NDCs), the National Adaptation Plans (NAPs) and the long-term strategies (LTSs), the three main instruments for the implementation of climate-change policies and the translation of global climate goals into national targets. Step 1 • Getting acquainted with the development and the implementation Understand the mechanisms of the climate policies in the global and national agenda is a International Climate necessary step to understand the national circumstances and priorities for Policy Landscape climate action. • The course, timing, and level of development of climate policies differ from country to country. The national and subnational climate frameworks can be screened through the lens of five high-level principles: timeliness, Step 2 alignment with the international climate agenda and domestic laws, Comprehend the comprehensiveness, ambition, and inclusion of gender equity provisions National Climate Policy Framework Step 3 Review Country’s Commitments 19 Insight #0.1 INSIGHTS Kyoto Protocol: The First Important Step Forward in the Effort to Tackle Global Warming Insight #0.2 Three Global Frameworks that Drive Sustainable Development in Climate Change Insight #0.3 Integrating a Gender Perspective into the NAP Process Insight #0.4 How is Sustainable Development Supported by the Paris Agreement, the Sendai Framework, and the Global Sustainable Goals? 20 KYOTO PROTOCOL: THE FIRST IMPORTANT STEP FORWARD IN THE EFFORT TO TACKLE GLOBAL WARMING THE ROAD TO KYOTO The Kyoto Protocol is an international treaty During the first commitment period (2008- adopted on 11 December 1997 which, due to its 2012), 37 industrialized countries and complexity, entered into force in 2005. economies in transition and the European Currently, 192 parties have ratified the Kyoto Community committed to reduce GHG Protocol and are committed to the regulations emissions to an average of 5 percent against and responsibilities of the agreement. In short, 1990 levels. In 2012, the Doha amendment to the Kyoto Protocol puts into practice the the Kyoto Protocol was adopted, committing UNFCCC framework by committing parties to reduce GHG emissions by at least 18 industrialized countries to reduce G H G percent below 1990 levels (second INSIGHT #0.1 emissions to "a level that would prevent commitment period starting in 2013 and ending dangerous anthropogenic interference with the in 2020). However, the agreement only came climate system" and in accordance with into force in 2020 after achieving the threshold individual targets of eachparty. for parties depositing their instrument of acceptance (144 instruments). Binding commitments regarding GHG reduction for 37 developed countries Flexible market mechanisms In the form of carbon emission offsetting mechanisms and trading options New Supporting Mechanisms • International emissions trading • Clean development mechanism (CDM) KYOTO PROTOCOL’S • Joint implementation (JI) INNOVATIONS Climate resilient Future Recognized the urgency to assist countries in adapting to the adverse effects of climate change and aims to lead to a climate resilient future Financial Tools for climate adaptation to promote the development of technologies and solutions that pave the way for a climate-friendly, sustainable future. Establishment of the Adaptation Fund to finance adaptation projects and programs in developing countries FIGURE 0.5 Summary of Kyoto Protocol's main innovations and mechanisms © chameleonseye/iStock.com. 21 The Paris Agreement: What is the progress so far? According to UNFCC, although climate change action needs to be massively increased to achieve the goals of the Paris Agreement, the years since its entry into force have already sparked low-carbon solutions and new markets. More and more countries, regions, cities, and companies are establishing carbon neutrality targets. Zero- carbon solutions are becoming competitive across economic sectors representing 25% of emissions. This trend is most noticeable in the power and transport sectors and has created many new business INSIGHT #0.2 opportunities for early movers. By 2030, zero-carbon solutions could be competitive in sectors representing over 70% of global emissions. Text source: https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement Paris Agreement (full document - EN): https://unfccc.int/sites/default/files/english_paris_agreement.pdf The Sendai Framework for The Paris Agreement (DRR) 2015-2030 is the first major agreement that aims to provide member parties with robust action plans and solid procedures towards the prevention and reduction of future and existing disaster risks, respectively. The framework works hand in hand with other climate-related agreements, including the major Paris Agreement of COP21 and the Sustainable Development Goals (SDGs). It comprises four main priority pillars: understanding disaster risk, strengthening disaster risk governance to manage disaster risk, investing in disaster reduction for resilience, and enhancing disaster preparedness. The Sendai Framework for Disaster Risk Reduction 2015-2030: https://www.undrr.org/publication/sendai-framework-disaster-risk-reduction-2015-2030 The Sustainable Development Goals (SDGs) or Global Goals are 17 complementary goals with the general target to achieve prosperity and a better and sustainable future for all countries. They were adopted by all United Nations member states in 2015 as part of the 2030 Agenda for Sustainable Development. The SDGs are to be implemented side-by-side with the Sendai framework and the UNFCCC climate-related policies (the Paris Agreement). Specifically, climate actions and disaster risk reduction are the purpose of Goal 13 (combat climate change and its impacts) and Goal 11 (make cities inclusive, safe, resilient, and sustainable), respectively. A detailed description of the 17 goals and the SDG framework is provided in the following link: https://sdgs.un.org/goals 22 INTEGRATING A GENDER PERSPECTIVE INTO THE NAP PROCESS Modern societies have come to a point of understanding that women and girls shouldn’t be identified as a “climate-vulnerable group,” but rather as “active agents” of climate adaptation i n societies. Their understanding of their immediate environment, their skills in managing natural resources to provide for their families, and their customary involvement in climate-sensitive n activities, such as farming and fisheries, should be harnessed i climate mitigation and adaptation planning. INSIGHT #0.3 The international community has recognized the implementation strategies and monitoring of role of women as effective climate-change performance - and proposes specific activities agents. COP21 calls for an approach that that should be implemented in that respect. addresses gender gaps when accounting for This will help ensure that there is equal climate vulnerabilities and integrating climate participation of men and women in the mitigation and adaptation measures into decision-making processes, that the adaptation relevant social, economic, and environmental measures will not exacerbate gender policies. Building on this, the Technical inequalities, and that implementation strategies Guidelines for the National Adaptation Plan and action plans are responsive to the needs of process for Least Developed Countries by women and children (e.g., by including UNFCCC propose the implementation of a operating procedures that bridge gender gaps holistic approach that stretches across all four and promote a balanced gender phases of climate adaptation - from planning representation). and vulnerability assessments to 23 Gender Considerations in Fiji's NAP Fiji's NAP is a well-thought-of example of how gender issues can be smoothly and efficiently integrated into the NAP process. Specific considerations include: Gender perspectives when framing the scope and vision of the NAP process The aspirational goal of Fiji's NAP is the promotion of "ecosystem- based" and "gender and human rights-based" approaches to adaptation. Organization of a large and inclusive multi-stakeholder National Consultation Workshop prior to embarking INSIGHT #0.3 with the NAP process This included national and subnational government representatives, industry experts and specialists (including those focusing on gender issues), and independent reviewers by international organizations. Prioritization criteria for closing gender gaps Gender-related criteria for selecting among different adaption those options that equitably benefit low-income and otherwise disadvantaged groups. Engage tools/perspectives into the NAP process that address gender considerations. Apply standard operating procedures that close gender gaps; use sex- and age-disaggregated data and responsive reporting in vulnerability assessments; introduce gender analysis and multi- criteria analysis into decision-making processes regarding climate change adaptation and disaster management; think of women and children when performing needs assessments and proposing action plans which place particular focus on low-income and, especially women and children; apply participatory and gender-responsive budgeting. 24 HOW IS SUSTAINABLE DEVELOPMENT SUPPORTED BY THE PARIS AGREEMENT, THE SENDAI FRAMEWORK, AND THE GLOBAL SUSTAINABLE GOALS? Sustainable development is underpinned by exposure to climate hazards. The adaptation three global agendas, the Paris Agreement on vision, goals, and priority activities of NAPs Climate Change Adaptation (CCA), the Sendai should reflect, as appropriate, the country's SDG Framework for Disaster Risk Reduction targets (IISD, 2015)1. (DRR), and the SDGs. The mutually supporting It is therefore important to understand that nature of these agendas is clear: from a policy aligning CCA and DRR agendas with global SDGs perspective, SDGs establish a strong mandate is not like sailing on two boats. Investment for investing in infrastructure that contributes in infrastructure should contribute towards to sustainability targets, while CCA, the Paris making cities and human settlements INSIGHT #0.4 Agreement and the Sendai Framework for DRR inclusive, safe, resilient, and sustainable (SDG provide the normative framework for guiding 11) while combating climate-change impacts climate mitigation and adaptation plans at a (SDG 13). country-level (as laid out in NDCs and NAPs). In 1 IISD,2015: sNAPshot: Initiating sector integration practical terms, investments in low-emission, ofadaptation considerations: Overview Brief, NAP climate-resilient infrastructure will help Global Network countries achieve their SDGs and reduce 2030 Agenda for Sustainable Development Highlights the role of adverse climate change Notes that DRR is impacts in undermining essential for sustainable sustainable development development Recognizes close linkages between climate Climate-resilient action and development sustainable Includes targets development related to disaster risk reduction Recognizes climate change Sendai Framework Paris Agreement as a driver of for Disaster Risk under the UNFCCC disaster risk Reduction (DRR) Aligning NAP priorities with SDGs  For Cameroon, agriculture is a priority climate-sensitive sector. This is acknowledged by the country’s NAP document (2015), which emphasizes the need to promote climate-resilient agricultural practices. Investment in this direction is entirely compatible with SDG target 2.4 that calls for implementation of resilient agricultural practices to ensure sustainable food production systems.  For Sri Lanka, the coastal sector in general and the protection of fisheries in particular is a national adaptation priority (Sri Lanka’s NAP/NDC (2016)). Hence investing in the protection of the coastal ecosystems is not only climate-responsible, but it is also completely aligned with SDG 14 on the conservation and sustainable use of marine resources. 25 unde rsta ndin Step 1 Step 2 Step 3 g of Understand the Comprehend the National Review Country’s the International Climate Climate Policy Framework Commitments Policy Landscape Preliminary sup understanding of the porti country’s climate ng M 0.1 commitments and goals mec hani sms Climate Policies for Digest INTRODUCTORY PHASE Step 1 Step 2 Review Climate Review Institutional Legislation Capacity Preliminary understanding of the M 0.2 supporting mechanisms Domestic Climate Policy Mapping of for climate investments Framework (laws, orders, implementation entities policies, plans) National Climate actions at sub-national Top-down and across-sector Governance level coordination Framework on Sector-wide policies Climate Change 26 0.2 National Governance Framework on Climate Change While parties are legally obligated to submit and policies around the world—a twenty- an NDC and commit to it, the application of fold increase in 20 years. 4 the NDC is not legally binding. Successful It goes without saying that different countries implementation of the Paris Agreement having different legislative cultures may requires that targets pledged internationally approach climate policymaking in different through the NDCs are fully integrated into ways. Some adopt legislation through domestic frameworks and policies. As a result, parliaments or national assemblies, while climate and environmental laws have grown others rely on executive orders implemented consistently over the last two decades, as through sector-specific plans or strategies at countries have come to understand that the national or subnational level.5 The immediate action is needed to move away policymaking process is also regulated by from the irreversible effects of climate the existing institutional capacity and change, and many more countries are the mechanism of coordination across entering the loop looking to develop new national and subnational levels of policies or strengthen their existing climate governance. In that respect, some laws and policies. The numbers speak for countries adopt centralized policies themselves: as of 30 September 2018, there directly enforced by the national were 1,500 national laws and executive government, while others advocate for a acts addressing aspects directly relevant to more devolved administration with climate change, when at the time of the significant actions/initiatives taking adoption of the Kyoto Protocol (in 1997), place at a subnational or state level. there were only about 70 such laws 4 GRI,2018: Policy Brief Global trends in climate change legislation and litigation: 2018 snapshot (based on Climate Change Laws of the World database) 5 Alina Averchenkova, 2019: Legislating for a low carbon and climate resilient transition: learning from international experiences, Elcano Policy Paper 27 STRUCTURE OF THE MODULE PHASE 0 Module 0.2 is designed to help users (mainly government advisors) navigate the dynamically evolving national climate policy landscape and review instruments, plans, processes, and institutions (always relevant to the country-specific context). The module is structured in twosteps as described below: Step 1 performs a Paris Agreement compatibility check of domestic climate change-related laws, policies, and instruments. (This might include general acts, national or subnational laws on climate M 0.2 change, as well as climate policies and sector-specific plans and instruments (e.g., water- management plans, flood plans, etc.) addressing climate change mitigation, adaptation, National Governance resilience, and/or disaster risk management aspects). Framework on Climate Change Step 2 reviews institutional capacity (i.e., national, regional, and subnational institutions/authorities that are responsible for developing/implementing climate change policies) and existing mechanisms for the coordination of implementation of climate initiatives. Upon completion of Module 0.2, the users will have obtained a sense of: Step 1  How (if at all) is the Paris Agreement reflected in domestic legislation? Review Climate Legislation  What is the level of complexity of the institutional framework on climate change?  What are the main entities that are involved in the decision-making process on climate matters, and how do they interact with the (existing) PPP legislation framework?  Which entities oversee the implementation of NAPs and NDCs? How do they interact with the other government and subnational planning entities? Step 2 Review Institutional Capacity 01 REVIEW CLIMATE LEGISLATION The screening process covers four thematic areas initiating with a high-level screening of the national climate laws (or executive acts) and gradually focusing on sector-wide policies (Figure 0.6). For each area, a list of sample questions is provided to act as a guide for a comprehensive climate change policy review. 01. CLIMATE LEGISLATION  Has the country adopted national framework legislation on climate change?  If not, is the country working on developing frameworks or a new climate law? When is it anticipated?  Is there a sector-wide law (e.g., Energy Transition Law)? 28 02. NATIONAL TARGETS AND RELEVANCE TO NDC PLEDGES - How does the level of the emission reduction targets specified in the national legislation PHASE 0 compare to that included in the NDC? Is it the same, or is it less ambitious? - Does the law/act include economy-wide, multi-year statutory targets? - Does it specify a net zero emissions target? - Does the law specify sector-wide targets (e.g., clean energy targets)? - Does the law promote the development of green infrastructure? M 0.2 01. Climate Laws National Governance Screen the status of Framework on domestic legislation on Climate Change 02. Relevance to climate change. NDC Screen economy-wide or sector specific statutory targets and Step 1 compare to NDC. 03. Climate Review Climate Instruments Legislation Screen national 04. Climate strategies or sectoral Adaptation programs that address Screen legislation on climate change. climate adaptation incl. (sub)national Step 2 development plans Review Institutional and DRM plans. Capacity FIGURE 0.6 The four main thematic areas for screening the domestic climate laws and policies 03. CLIMATE POLICY PLANNING AND INSTRUMENTS - What are the main implementation instruments that address policy areas related to climate change (e.g., National Program for Sustainable Energy)? What is their planning horizon? What is their specific purpose? - Is there a national strategy on climate change? - Are there low carbon development plans for specific sectors? - Are there sectoral programs that address climate mitigation/adaptation? - Are there specific policy instruments to promote compliance with (sub)sector-specific emission standards or acquisition of climate-related certificates (e.g., clean-energy certificate, or intelligent electrical networks, etc.)? - How do subnational or state policies complement national climate policies (e.g., implementation of state-specific emission reduction targets)? 29 - Does the domestic PPP law make a special mention of climate-smart / sustainable infrastructure? Does it prescribe specific requirements? Is there a mention of climate-change PHASE 0 risks? 04. CLIMATE ADAPTATION AND DISASTER MANAGEMENT - Is climate adaptation incorporated into domestic climate legislation? How is this supported by subnational policies in areas of devolved competence? - Is there in place a national disaster risk management policy? Does it prescribe actions to enhance resilience against climate-induced impacts? M 0.2 - How do the current policy frameworks mainstream adaptation into existing planning processes? National Governance Framework on - Is climate adaptation incorporated into development plans of specific sectors (e.g., water Climate Change resources)? Step 1 Step Output Review Climate At this point, toolkit users should be aware of the climate legislation framework Legislation (general law and sector-wide laws if applicable) and how it is distilled into specific principles/action plans relevant to the country context. A summary of the key findings may be included in a table similar to the sample provided below: Checklist Name of Climate Law Step 2 Year passed / (year of decree) Review Institutional Capacity Emission reduction targets to 2030 (and 2050 if applicable) Emission peak Clean energy targets State-specific reduction targets Policy instruments (e.g., National Program for Sustainable Energy) Low carbon development plans for specific sectors Reference to PPP law (if existing) 30 PHASE 0 02 REVIEW INSTITUTIONAL CAPACITY This step is intended for use by advisors of government officials. It turns the focus on assessing the institutional capacity and establishing a preliminary understanding of the key governance functions for executing climate-change policies. The questions listed below (clustered in three M 0.2 groups) are intended to guide users on how to delineate the vertical (across national and subnational levels of governance) and horizontal organizational structure (among ministries and National Governance sectors) and recognize the existing provisions for keeping the government accountable for the Framework on Climate Change implementation of its climate targets. The screening may be initially conducted as part of a desk study, and if deemed necessary, more detailed research may follow, including interviews and consultations with actively involved stakeholders covering all dimensions of climate policymaking. Step 1 Review Climate SUPREME AUTHORITY Legislation The climate law most probably establishes a supreme authority that defines the overall duties and powers of the government with respect to climate change policy, advises on the climate policies, and oversees the country's accountability with respect to international commitments. This may be an independent non-governmental public body (e.g., the Climate Change Commission established by the UK's Climate Change Act of 2008 or the new Expert Committee for the Energy Step 2 Transition established by the Energy Transition for Green Growth Law of 2015 in France) or a Review Institutional government-based entity (e.g., the Ministry of Environment), or even a synthetic instrument Capacity coordinating actions among existing national or subnational entities (e.g., the National System on Climate Change (SINACC) in Mexico, which includes the Inter-Ministerial Commission on Climate Change (CICC), the Consultative Council on Climate Change (C3), and the National Institute of Ecology and Climate Change (INECC)). First Level Screening - According to the climate law, which authority is responsible for advising on/overseeing the national climate change strategy? Is it an independent advisory body or a governmental body? - Which institution is responsible for the implementation of a NAP process? - Which institution oversees/ updates/ monitors the alignment of national policies to NDCs? - What is the established institutional infrastructure that coordinates the implementation of climate objectives/plans/policies? - Which ministries/entities/agencies/public bodies are responsible for the implementation of climate change mitigation targets? Is there a thematic focus? - Which entities/agencies/public bodies are responsible for addressing climate adaptation? 31 DEVOLUTION OF CLIMATE CHANGE RESPONSIBILITIES Countries differ in their approach of devolving authority and responsibilities for the development PHASE 0 and implementation of national climate targets and policies to subnational levels. Traditionally, most countries adopt a top-down process for the implementation of policies (e.g., Germany, China, France) where the central government sets the national target that is then allocated downwards to provinces/states/subnational administration. There are cases, however, where the subnational or state initiatives on climate change become the major drivers of action, substituting for the lack of federal laws and policies (e.g., the case of the United States).6 M 0.2 Vertical Screening - Is climate policy implemented at the national or subnational/state/provincial or city National Governance level? Framework on Climate Change - How are the activities across national and subnational levels of governance coordinated? Is there an entity to oversee accountability at the subnational level? - Does the climate law/executive order mandate devolved administrations to develop their own laws/policies (e.g., the cases of Scotland and Wales in the UK)? Which are the most relevant (subnational policies), and how do they interact with the central Step 1 climate change law? Review Climate - Have the states/municipalities committed to sector-specific provisions/targets (e.g., Legislation regional energy efficiency programs)? HORIZONTAL ORGANIZATION Step 2 Review Institutional Horizontally coordination between agencies is yet another essential feature of any robust Capacity institutional framework. Setting smooth horizontal coordination requires proper allocation of responsibilities and the establishment of an uninterrupted communication channel among ministries. It also calls for the development of procedures and mechanisms to engage participation from independent advisory bodies and relevant stakeholders (within or outside the government structure). Horizontal Screening - What are the ministries that have already developed sectoral mitigation/adaptation programs or low carbon development plans? - Which ministries are responsible for the implementation of sector-wide laws (e.g., energy transition laws)? Is it a responsibility of a single ministry, or are several ministries involved? - What are the mechanisms in place to support coordination between governmental entities and other stakeholders? Does the regulatory framework promote the inception of multi-stakeholder forums to encourage an open exchange of views among all interested parties? 6 Between 2005-2016, 17 states and territories joined the US Climate Alliance, a partnership of governors that decided not to align with the (at the time) federal decision to breach the Paris Agreement, and committed to reduce greenhouse gas emissions. 32 - Is there a body to provide independent advice to ministries? What is its composition? How is it involved in climate policy planning? Does it advise on PHASE 0 climate adaptation matters as well? - Is there an independent scientific body in place to promote research and development and build capacities in the scientific community? How is this body involved in decision planning? - Is there an agency in place to assist the government in crafting PPP projects? If the answer is positive, how does this agency interact with other ministries or the supreme authority to promote climate change mitigation/adaptation/ M 0.2 resilience in PPP projects? National Governance Framework on Step Output Climate Change The output of this step is a list of entities and relevant stakeholders actively involved in the climate planning/development/implementation process. Independent institutions that oversee/advise on the process should also be identified. Results may be presented in the form of a responsibility map or in asimpler table format as in the example below: Step 1 Review Climate Legislation Institution/ Organization Ministry of Energy Ministry of National … Agriculture Institute of Science Actor type Government … … Step 2 Policy document Law on renewable … … Review Institutional energy (2016) Capacity Jurisdiction National … … Role/responsibilities Shaping the national … … energy strategy Contact person … … … (if available) 33 PHASE 0 KEY TAKEAWAYS • The national governance framework on climate change is evolving dynamically M 0.2 with the development of new or existing instruments, plans, processes, and implementing institutions or agencies. National Governance Framework on • Screening the status of domestic climate-related laws in combination with the Climate Change national alignment to the Paris Agreement or other climate- related international frameworks while focusing on sector-specific development plans will enable a wide understanding of the national climate- related policy environment. Step 1 Review Climate • The key implementing authorities and the overall national institutional Legislation capacity on climate change developments can be assessed in a vertical way (across national and subnational levels of governance) and in a horizontal organizational structure (among ministries and sectors) in order to recognize the existing entities for keeping the government accountable for the implementation of its climate targets. Usually, a supreme authority oversees and advises on the national climate policies and their implementation. Step 2 Review Institutional Capacity 34 PHASE 0 Resources NDC PARTNERSHIP – KNOWLEDGE PORTAL The knowledge portal provides quick and easy access to data, tools, guidance, good practice, and funding opportunities. Applicable resources for both reducing emissions and adapting to the impacts of climate change. Developed by: NDC Partnership - Hosted by: World Resources Institute (WRI) and UN Climate Change CLIMATE ACTION TRACKER An independent scientific analysis that tracks government climate action and measures it against the globally agreed Paris Agreement aims. It also contains country-specific information on: pledges/targets; policy projections; and sector-specific goals/activities Developed by: Climate Analytics and New Climate Institute CLIMATE WATCH An online platform designed to empower policymakers and other stakeholders with the open climate data, visualizations, and resources they need to gather insights on national and global progress on climate change. Users can analyze and compare NDCs under the Paris Agreement, access historical emissions data, and discover how countries can leverage their climate goals to achieve their sustainable development objectives Developed by: World Resources Institute (WRI) - Powered by: Resource Watch RESOURCE WATCH A dynamic platform featuring hundreds of data sets covering different aspects of sustainability and climate change Developed by: World Resources Institute (WRI) CLIMATE CHANGE LAWS OF THE WORLD An open database that contains climate and climate-related laws/policies promotinglow carbon transitions Developed by: Grantham Research Institute on Climate Change and the Environmentand Sabin Center for Climate Change Law 35 NATIONAL FRAMEWORKS FOR CLIMATE SERVICES (NFCS) Multi-stakeholder user interface platforms enabling the development and delivery of climate services at the country level focusing on five priority areas: agriculture and food security, disaster risk reduction, energy, health, and water. The NFCS platforms facilitate users to assess baselines on climate services capacities at the national level, to identify key stakeholders, map existing services and establish capacities Developed by: Global Framework for Climate Services under the auspices of WMO WORLD BANK NDC PLATFORM A useful set of tools that include a detailed adaptation/mitigation database, a content visualization tool, and summary country briefs Developed by: World Bank Group, 2016 NATIONAL ADAPTATION PLANS TECHNICAL GUIDELINES FOR THE NATIONAL ADAPTATION PLAN PROCESS The technical guidelines have been developed by the LEG, with input and feedback from theGlobal Environment Facility and its agencies to support the NAP process Developed by: UNFCCC, 2012 PHASE 1 PROJECT SELECTION 1 Pipeline and Project scope Identify candidates and select project 2 PREPARATION Assess economically the project and screen it as PPP 3 STRUCTURING CONSIDERATIONS 4 TENDER PROCESS Phase 1 The first phase of the toolkit evolves along the first phase of the PPP cycle, namely the PPP screening and identification of a project. The goal of this phase is to create a viable pipeline of PPPs that advance climate change goals. This phase will focus on exploring options for climate mitigation and embedding climate resilience of investments. Alongside this process, the toolkit intends to guide the preliminary assessment of the climate hazard environment and the evaluation of the overall climate-risk level of the project, to identify and appraise adaptation, resilience, and low carbon/mitigation solutions, and to guide public entities on whether the additional risks or opportunities prompted by climate change render PPPs or other forms for private participation less or more attractive as procurement methods. Identification of risks and appraisal of risk reduction methods early in the process will allow for better-informed decisions and proper risk allocation to avoid the possibility of having to revise the project scope at a later stage when commitments may have already been in place. Early-stage assessments made at this phase are primarily based on qualitative data, while detailed quantitative re-evaluations will follow in subsequent phases as more data will become available. 38 Step 1 Step 2 Map the Global Assess/Improve and National Project’s Alignment Climate Policies with Climate Policies Revised project scope that aligns with national climate M1.1 priorities and goals Project Alignment with Project scope Climate Policies Step 1 Step 2 Step 3 Step 4 Step 5 Assess Climate Risks Assess GHG Review Adaptation & Review Small-scale Prioritize Climate Project selection Emissions Qualitatively Resilience Strategies Mitigation Measures Strategies Preliminary description of the (out of a number M1.2 project of alternatives) (inc. adaptation and PHASE 1 mitigation strategy) Climate Considerations in Project Selection Economic Step 1 Step 2 Step 3 pre-assessment; Include Climate Check Project’s Check Project PPP screening Considerations in CBA Affordability Suitability as a PPP A project option gets the green light M1.3 to proceed to appraisal Value of Investment Accounting for Climate-Actions 39 Phase 1 Outline Phase 1 comprises three modules: Module 1.1 – Project Alignment with Climate Policies aims to ensure compliance of the project scope with climate policies and goals, identify the relevant enabling environment, and propose climate considerations to be included in the project scope and description. Module 1.2 – Climate-Change Risk Pre-assessment provides guidance on how to qualitatively assess climate-change-induced risks on the project and appraise adaptation/resilience and low carbon/mitigation measures. Module 1.3 – Preliminary Value for Money (VfM) and PPP Suitability outlines processes to incorporate the previously identified risks and opportunities in the preliminary value for money assessment of project alternative options and examines the suitability of a PPP as a procurement method after the project has incorporated all climate-related costs and potential savings. It is understood that various agencies (across countries or within the same country) may apply different processes in this upstream project selection phase. Hence, the guidance provided in the present document suggests good practices and provides reference tools that may vary in degree of sophistication while at the same time recommending minimum requirements to be used as inputs in the subsequent phases. 40 INTRODUCTORY PHASE: International + National Policy landscape and domestic laws and implementing agencies Step 1 Step 2 (skip step if already conducted Assess/Improve in Phase 0) Project’s Alignment Map the Global and National with Climate Policies Climate Policies Revised project scope that aligns with national climate M1.1 National Long-term Relevance of the Project to priorities and goals visions - NDCs, LTS global Climate Frameworks Project Short- and Md-term Relevance of the Project to Alignment with Commitments (NDCs) National Climate Policies Project scope Climate Policies NAPs, DRRs Screen Project’s Climate Climate-related Guidelines Mitigation/Adaptation Attributes Stakeholder mapping Assess Alignment and Revise Project’s Scope Step 1 Step 2 Step 3 Step 4 Step 5 Assess Climate Risks Assess GHG Review Adaptation & Review small-scale Prioritize Climate Project selection Emissions qualitatively Resilience Strategies Mitigation Measures Strategies Preliminary description of the (out of a number M1.2 project of alternatives) (inc. adaptation and PHASE 1 mitigation strategy) Climate Considerations in Project Selection Economic Step 1 Step 2 Step 3 pre-assessment; Include Climate Check Project’s Check Project PPP screening Considerations in CBA Affordability Suitability as a PPP A project option gets the green light M1.3 to proceed to appraisal Value of Investment Accounting for Climate-Actions 41 1.1 Project Alignment with Climate Policies The scope of the first module is to ensure financing instruments, including tapping into compliance of the project with climate a growing market for green and sustainable policies and goals, identify the relevant finance. Fiscal instruments, such as fees, enabling environment, and propose low taxation, and subsidies, can also be tailored carbon options contributing to climate- to encourage actions that reduce climate risk change mitigation to be included in the and discourage activities that are project. maladaptive. After completing this module, Alignment of projects with such frameworks the initial project scope may need to be shall allow them to contribute towards revised to comply with the climate policy meeting national and international goals to priorities in terms of climate change combat climate change and to provide mitigation and the PPP investment to be access to funding and/or innovative tagged as climate-smart (see Box 1.1). STRUCTURE OF THE MODULE The relevant processes included in this module follow two consecutive steps:  Step 11 outlines the information that needs to be gathered to describe the country's climate-related national and international framework.  Step 2 examines the project scope vis-à-vis the mapped climate policies and the country's national development goals in order to identify potential weak links or gaps. Building on this, it evaluates whether the project scope is compliant and aligned with climate targets in the country's NDCs or whether a change of scope may be warranted. 1 In case the process described in the introductory phase has been completed prior to entering Phase 1, its output will be adequate to inform the present step. 42 PHASE 1 BOX 1.1 CLIMATE-SMART INVESTMENTS: 3 HIGH-LEVEL PRINCIPLES At present, the definition of climate-smart has been used for a variety of economic sectors ranging from agriculture to infrastructure without a unique high-level definition. For the purposes of this toolkit, investment is to be defined as "climate-smart" if the policies and plans governing its identification, preparation, design, and assessment combine the following attributes: 1. Align with countries' adopted climate targets and policies (e.g., NAPs, NASs, NDCs) M1.1 2. Contribute to global mitigation goals (e.g., Paris Agreement) for reducing CO2 emissions Project Alignment 3. Build in resilience to the risks of climate change projected during its lifetime with Climate Policies 4. Adopt responses/principles to build in adaptation to climate change Climate-smart PPP projects should aim to exhaust the possibility of including the above attributes (always in accord with applicable national and international goals and regulations) to the maximum extent and deliver infrastructure that is designed to better withstand and adapt to the impacts of climate change (including extreme climate events) while at the same time contributing to the combat against climate change. Step 1 Map the Global and National Climate Policies NATIONAL/SUBNATIONAL CLIMATE POLICIES Step 2 Assess Project’s Alignment with Climate Policies The "Introductory Phase" of the present toolkit provides a detailed description of the global climate policy landscape and its implementation into specific national policy documents. It also proposes a climate-policy navigation tool for tracking actors and national policies/processes in a clear and structured manner and identifying linkages, synergies, and complementarities among them. The process of mapping the national and international climate policies has been described in detail in the Introductory phase. While such a mapping exercise is useful for all projects-- regardless of procurement method, the current (first) step of the toolkit aims to briefly outline the type of information that needs to be available in order to proceed with the evaluation of the investment's alignment with national and international climate goals. If the entire mapping process described in the Introductory phase has been performed, toolkit users may proceed to the next step of the present module. Otherwise, in order to initiate the project's alignment check, it is helpful to first map out the relationships between the global agendas and the national climate policies by identifying the country's development pathways that pre-existed or have emerged in response to the global 43 climate developments (Figure 1.1). In this process, it is essential to recognize that the degree of alignment is country-specific, ranging from informal to systematic, depending on its level of PHASE 1 commitment, international collaborations, and country-specific context. In any case, this is a valuable starting point for integrating climate mitigation goals and adaptation processes into greenfield climate-smart investments as well as into pre-existing projects in the case of contract adjustments/renegotiations. The mapping exercise is a desk study performed in collaboration with respective government stakeholders (e.g., line ministries, agencies, etc.) comprising the collection and review of relevant existing or developing national policies and strategic documents, including2: M1.1  National Development Visions (NDVs) and long-term strategies that outline the Project Alignment overarching ambitions for country development processes and identify the role that different with Climate Policies sectors need to play in reaching these goals. These may have been in place before the 2030 Agenda for Sustainable Development was established and may or may not include climate considerations. GENDER CONSIDERATIONS At this stage, it is strongly recommended to look into  National commitments to potential interactions between climate change and international agendas that establish gender at the country level. The analysis may reveal Step 1 Map the Global and gender gaps in health, education, income, availability of concrete targets for countries to infrastructure, and access to data and technology. In National Climate Policies achieve. These include national SDG addition, inequalities may be applied by regulations and targets, NDCs, and national regional policies as well as discriminatory laws that commitments to the Sendai disproportionately affect women/girls. Users are advised to consult the Gender Action Plan, agreed in Framework targets. COP25 which sets out objectives and activities under five priority areas that aim to advance knowledge and  National/subnational plans understanding of gender-responsive climate action. Step 2 & strategies that elaborate on how This is also the time for users to identify whether Assess Project’s national commitments will be Alignment with a country specific climate-change Gender Action Plan Climate Policies achieved. These include overarching (ccGAP) exists that aims to provide a methodology for development plans, as well as NAPs, training and building the capacity of women and NASs, and national disaster risk women’s organizations on the linkages between gender and climate change. reduction strategies. Plans deve- loped for specific sectors or by sub- The global agenda on climate change and genderis rapidly growing and users are strongly encouraged to ational authorities may also contain follow it and incorporate gender considerations during valuable guidance for targeted action the present project selection phase of the process. and should thereforebe reviewed.  Good practices and climate- related guides that describe opportunities and entry points for integrating green attributes in projects. Such documents may include applications of green practices in the reference country or the neighboring ones as well as reference material at the international level. Climate-related guides are gaining momentum around the world and contain insightful knowledge that should be reviewed and applied in the project if possible 2 IISD, 2019: Alignment to Advance Climate-resilient Development: Overview Brief 2, NAP Global Network 44 PHASE 1 M1.1 Project Alignment with Climate Policies Step 1 Map the Global and National Climate Policies Step 2 Assess Project’s Alignment with Climate Policies FIGURE 1.1 International agreements and national strategies/policies/plans that drive investments in climate-smart infrastructure Step Output Identification of global climate frameworks and their priorities 45 PHASE 1 ASSESS PROJECT’S ALIGNMENT WITH CLIMATE POLICIES This step involves the examination of the project scope vis-à-vis the country's national M1.1 development goals and strategies with an emphasis on how the specific project objectives and the planned activities align with the Paris Agreement framework, that is: Project Alignment with Climate Policies  result in negative, zero, or very low carbon emissions and are consistent with a fully decarbonized economy that contributes to climate-change mitigation  contribute to the transition towards a decarbonized economy3 e.g., energy efficient construction, manufacturing of low-carbon technologies/materials  contribute to increasing adaptation and resilience and reduce the cost of adaptation actions to long-term climate change effects Step 1 Map the Global and  build resilience against the impacts of natural hazards, which are increasing in frequency and National Climate intensity due to climate change Policies  promote the sustainable use and management of ecosystems  adopt nature-based solutions to address climate-change mitigation goals  tackle poverty, gender discrimination, and inequality while supporting the capacity of developing countries to promote equity and implement inclusive and people-centered infrastructure Step 2 Assess Project’s Alignment with Climate Policies SCREEN THE CLIMATE ATTRIBUTES OF THE PROJECT The screening process proposed herein comprises a set of four key questions to consider that aim to evaluate the alignment of the intended project (or projects pipeline) to the overarching goals of international agreements, national climate targets/priorities, and the broader national strategies and action plans. Based on the evaluation results, actions for possible improvement may be possible. It is noted that the proposed questionnaire-based screening may be further enhanced to employ more detailed research depending on the degree of analysis required by the state authorities at this stage. 3 avoiding locking in carbon-intensive assets undermining the long-term decarbonization goal 46 DOES THE PROJECT’S SCOPE ALIGN WITH THE FRAMEWORK OF THE SUSTAINABLE PHASE 1 DEVELOPMENT GOALS AND THE PARIS AGREEMENT? The project-specific strategic and climate-related goals and objectives need to be clearly defined and benchmarked against the country's national climate strategy (including its compliance with international climate frameworks) and specific climate mitigation and climate adaptation and M1.1 resilience objectives. Climate mitigation objectives promote activities that encompass the following characteristics: Project Alignment with Climate Policies serve long-term decarbonization targets; support emerging technologies with significant climate mitigation potential; meet global high-performance standards or high-efficiency benchmarks or significantly exceed national/regional/sectoral energy-performance standards. These may include implementing energy-efficiency measures, developing carbon-capture and renewable energy projects, supporting sustainable mobility projects/technologies, protecting biodiversity, promoting green and sustainable construction methods and materials, and nature-based solutions, etc. Step 1 Map the Global and Climate adaptation and resilience National Climate objectives promote projects GENDER CONSIDERATIONS Policies designed to withstand today's The climate toolkit should identify projects and climate (and related hazards) while project attributes that tackle gender inequalities and enhancing the resilience and help minimize discrimination between men/boys and adaptation capacity to better cope women/girls. For example, a country may have high with the as-yet-unknown adverse levels of gender inequality and experience regular effects of climate change, including flooding (which reinforces gender inequality by Step 2 extreme weather and chronic (slow causing disruptions that are relatively more harmful Assess Project’s Alignment with for women/girls). In such a situation, how can onset) events. They also recognize Climate Policies climate-resilient and adaptive infrastructure be the role of sustainable made more gender responsive? development in reducing the risk of loss and damage and in Users are advised to consider whether gendered risks combating climate change. and opportunities can be mainstreamed in the three high-level principles of climate-smart infrastructure: Solely promoting climate-resilient mitigation, resilience, and adaptation. The goal development pathways without would be to address gender gaps by minimizing risks considering the main national to women and other vulnerable groups and increase development goals and priorities opportunities for their inclusion in climate-smart might waste crucial resources or projects. lead decision-makers away from Among others, the Gender Tagging Tool (created by addressing basic needs and primary the WBG's Gender Group in 2018) can be used to targets that safeguard lives, identify project attributes that are likely to reduce prosperity, and overall social gender gaps in a particular country's context. development. For example, a resource-demanding green solu- tion should be tested against a conventional solution that delivers 47 electricity to more people. It is, therefore, essential to ensure that principal goals or emerging targets are not overlooked during project selection, as the harm of neglecting such priorities may PHASE 1 outweigh the benefit of prioritizing climate considerations. The project's alignment and compliance with climate-change frameworks may also unlock green financing and funding sources (Insight 1.1). A detailed screening of the project's role towards climate mitigation and adaptation follows in the following sections. M1.1 DOES THE PROJECT’S SCOPE ALIGN WITH Project Alignment THE NATIONAL AGENDA ON CLIMATE with Climate Policies CHANGE (NDCs, NAPs CLIMATE LAWS)? For a project to be considered aligned with the country's low-carbon, climate-resilient development pathways, the following conditions should be met: Step 1  The project's sector is among the priority sectors described in the national climate Map the Global and policies (i.e., NDCs and/or NAPs, etc.). National Climate Policies  The project complies with the sector-specific criteria and provisions on climate change and sustainable development.  The project invests in the infrastructure sector(s) where collaborative action has been agreed through the country's bilateral, multilateral, or international partnerships (e.g., Africa-EU Energy Partnership) if such partnerships or collaborations are in place for the reference country. Step 2 Assess Project’s  The project's sector is not highlighted as “vulnerable to climate change,” or in case it is, Alignment with the project explicitly addresses the relevant climate-change risks. For example, a Climate Policies hydropower project that meets climate-change mitigation criteria may be considered incompatible with the country's resilient development pathway if it does not adequately contribute to long-term energy security (e.g., lack of risk reduction measures). An example of an NDC prioritized sector is briefly described in Box 1.2. BOX 1.2 EXAMPLE OF A PRIORITIZED SECTOR IN NDC According to the latest submission of Kenya's NDC (2020), investing in the energy sector, particularly in renewable energy, is considered a national priority underpinning the country's vision for "increasing renewables in the electricity generation mix of the national grid." This also aligns with the strategic energy-related goals agreed among the Africa-EU Energy Partnership for promoting sustainable energy investments in the region. Moreover, energy sector- specific provisions in the NDC promote the use of advanced design methodologies and risk management policies for climate-proofing the greenfield energy investment against the uncertain impacts of climate change. Source: Nationally Determined Contribution 48 DOES THE PROJECT INCORPORATE MITIGATION FEATURES THAT CONTRIBUTE PHASE 1 TO THE TRANSITION TOWARDS A NET- ZERO FUTURE? The project should be analyzed through the lens of decarbonization and climate change mitigation by evaluating its lifecycle carbon footprint with respect to the GHG reduction goals as outlined in the country's sector-specific plans on climate mitigation. Relevant climate mitigation M1.1 tracking methodologies may be used, e.g., Joint MDB Methodology,4 Climate Bond Taxonomy - CBI, recommendations of the Task Force on Climate-related Financial Disclosures, Green Bond Project Alignment Principles, EU Taxonomy, etc. (see Insight 1.2). The screening process should at least: with Climate Policies  Identify eligible sectors/activities/processes  Calculate GHG emissions of the proposed solutions (for example, gCO2 e/unit of production) and identify the key elements that contribute to these emissions  Identify entry points where GHG reduction measures/mitigation options could be incorporated. For example, the use of solar power for infrastructure lighting or Step 1 implementation of carbon capture and storage technology in a large CO2 point source Map the Global and infrastructure (such as a cement factory or a biomass power plant) National Climate Policies  Consider introducing nature-based solutions that protect biodiversity and reduce GHG emissions. Consider entry points for blue-green Infrastructure,5 sustainable alternatives, and good practices such as replacement of high embedded-emissions6 materials with eco-friendly materials, coastal mangrove protection, green roofs, rammed earth, reclaimed wood, etc.  Consider the broader chain in which the project is dependent or interconnected: for Step 2 Assess Project’s example, an electric bus project also needs to take into account charging stations and Alignment with the origin of the electricity provided Climate Policies  Identify entry points for engaging with circular economy approaches, such as the use of construction techniques that reuse/recycle/repurpose end-of-life materials and infrastructure components to promote efficient material utilization DOES THE PROJECT INCORPORATE A SPECIFIC STRATEGY FOR ADAPTING TO CLIMATE CHANGE? The importance of climate adaptation is emphasized within the text of the Paris Agreement itself, which includes a call for all countries to engage in National Adaptation Planning to identify, address, and review their evolving adaptation needs through a country-driven, participatory 4 Joint Report on Multilateral Development Banks’ Climate Finance, 2020 5 Blue-green Infrastructure refers to the combination of water elements (e.g., channels, ponds, canals) with natural green elements (e.g., vegetation) in a common network attempting to deliver a wide range of ecosystem services 6 Embedded emissions of a product refer to all the GHGs that have been produced in the process of bringing the product to market 49 approach taking into consideration vulnerable groups, communities, and ecosystems. Project alignment to the NAP should therefore screen components/elements/approaches that: PHASE 1  Reduce the project's exposure/vulnerability to the impacts of climate change  Take into consideration the effects of a changing climate in the planning/design of the infrastructure  Enhance climate resilience or build adaptation capacity  Embed climate resilience in design, construction, and operations  Promote/facilitate the integration of programs/activities/strategies that support M1.1 adaptive management in a changing climate through integrated observation/monitoring Project Alignment and decision support tools with Climate Policies  Incorporate disaster risk reduction technologies/systems/plans and decision making under deep uncertainty (DMDU)7  Enhance the climate adaption/resilience within the broader ecosystem  Protect women and vulnerable populations from the impacts of climate change and mainstream gender concerns in their programs and activities  Protect or do not threaten biodiversity and the natural environment Step 1 Map the Global and  Incorporate nature-based solutions National Climate Policies Step 2 Assess Project’s Alignment with Climate Policies 7 DMDU is elaborated in Phase 2. 50 How to perform the project’s alignment screening? What is the primary purpose of the project and how does this compare with the SDGs? Public authorities Screen the understand the overall relevance of the climate Is climate mitigation the principal Project to SDGs, the orientation objective of the project? Paris agreement and of the the Sendai project Framework. Is climate adaptation the principal objective of the project? Public authorities Does the project invest in a country’s priority sector? understand the Screen country medium and NDCs and long-term vision on NAPs Does the project invest in a climate change and country’s resilient development its relevance of the pathway? Project objectives. Assess baseline GHG emissions of the projected activities Public authorities Screen the Assess the effectiveness of climate review the mitigation climate mitigation measures (e.g.NBS, potential of the mitigation green power) project and make attributes of corrections if the project necessary. Assess the effectiveness of GHG reduction measures (e.g. energy efficiency procedures) Pre-assess potential climate-risks Public authorities Screen the review the potential climate Structure a climate adaptation plan of the project to adaptation to combat the changing climate. adapt to climate attributes of Pre-assess actions/resources that change and make the project are necessary during the corrections if preparation/design phase of the necessary. project. FIGURE 1.2 Indicative instructions on performing the project's alignment with international and national framework screening 51 DECIDE ON PROJECT’S ALIGNMENT AND REVISE SCOPE In order to evaluate the project's alignment8 with the Paris Agreement and NDCs, the project PHASE 1 should be assessed as to its ability to address the climate policy-related criteria presented above efficiently. At a high level, this may be materialized by answering the questions listed in the previous section. Depending on the answers, it will be possible to derive a conclusion as per the level of its alignment. Sector-specific guidance on how to perform the alignment assessment is provided in the respective sector-specific toolkits. This is a fundamental exercise—to be performed as early as possible in the process of project selection—that will provide the necessary data to decision-makers to understand how the M1.1 project responds to the country's climate-resilient development pathway. A decision may then Project Alignment be made on whether it is necessary to revise the project's scope or if it is possible to enhance its with Climate Policies scope and design in order to ensure that it properly and adequately accounts for the desired climate-change considerations. After the integration of such actions in the planning process by the structuring team, the project's alignment may be reassessed and revised again until the desired alignment level is reached. It is noted that the alignment exercise may need to be repeated once more data regarding the climate actions on the project will become available. Step 1 Step Output Map the Global and National Climate Policies A decision on the level of alignment for the project (or project options, if available) and an action plan to improvealignment if possible. Step 2 Assess Project’s Alignment with Climate Policies 8 In the Climate Change Action Plan 2021-25, the WBG committed to aligning all new operations to the goals of the Paris Agreement and preparing rigorous methodologies to assess alignment. To ensure that there is no confusion, it is noted that on projects where the WBG, or other MDBs, are involved and provide financing,all bank-specific climate change assessment frameworks and other policies would still apply in their entirety and the MDB would execute its due diligence. 52 PHASE 1 KEY TAKEAWAYS • Climate policies apply at global, national, subnational and/or regional leveland M1.1 include goals and targets the project fits with. Inventory of the overall climate policy landscape should therefore be performed while focus should be given on Project Alignment the project’s type- and sector-specific provisions. with Climate Policies • The climate policy mapping should be accompanied by the identification ofthe associated stakeholders responsible for the implementation of these climate policies. • Climate-related specifications, GHG mitigation methodologies, and adaptation measures as described in climate policies and guidelines should be linked with Step 1 Map the Global and the project. National Climate Policies • The key elements identified in the climate policy inventory should be incorporated in the project’s scope as well as its climate mitigation, adaptation and resilience objectives. • The project should exhaust all options to increase its alignment with international and national climate policies and guidelines in order to benefit to Step 2 the greatest extent possible not only by contributing to reaching climate-related Assess Project’s goals but also because this may unlock access to additional liquidity pools. Alignment with Climate Policies 53 INSIGHTS Insight #1.1 Unlocking Finance Mechanisms for Climate-Smart Investments Insight #1.2 Green Taxonomies 54 Unlocking Finance Mechanisms for Climate-Smart Investments In response to the global need for financing of climate-smart investments, several innovative mechanisms and instruments have emerged ready to provide the necessary financing to projects that are aligned with climate adaptation policies and support the achievement of mitigation goals and alignwith the SDGs. 1/ International Funds under the UNFCCC INSIGHT #1.1 To facilitate the alignment of infrastructure activities and investments with the global climate agenda, the UNFCCC established a financial mechanism to provide funds to developing and LDCs. The operation of the mechanism is entrusted to the Global Environment Facility (GEF). At COP16, UNFCCC parties established the Green Climate Fund (GCF) as an additional Financial Mechanism for climate change. In addition, parties have established special funds that aim to support projects that align with the global climate agenda and current framework: Special Climate Change Fund (SCCF), Least Developed Countries Fund (LDCF), Adaptation Fund (AF). 55 2/ National Funds National climate change funds have been established to create a financial vehicle through which climate-related finance (domestic and/or international) can be channeled, programmed, disbursed, and monitored. Examples include the Indonesia Climate Change Trust Fund and the Mali Climate Fund. The Philippines' People's Survival Fund is also an example of a fund financed on an annual basis solely through domestic sources. 3/ Bilateral and Multilateral Funding The Paris Agreement states that the developed country parties may also provide financial resources to developing nations and LDCs for the financing of activities and infrastructure related to the implementation of the UNFCCC framework through bilateral, regional, and other multilateral channels. A number of MDBs provide financing as well as professional advice to enhance sustainable development that aligns with global targets to combat climate change. INSIGHT #1.1 4/ Other Green Financing Opportunities Projects aligned with the global climate frameworks and the SDGs may be funded by other available financing instruments such as green and sustainable loans and green bonds. According to the International Capital Markets Association (ICMA), green bonds are any type of bond instrument (debt security) where the proceeds will be exclusively applied to finance or re-finance in part or in full new and/or existing eligible green projects, or support climate-related or environmental projects. In 2014, a group of banks initiated the development of the Green Bond Principles (GBP), a set of voluntary guidelines framing the issuance of green bonds under the targets of the Paris Agreement. The Green Bond Principles have become the leading framework globally for the issuance of green, social, and sustainability bonds. Green projects that contribute to climate-change mitigation may also benefit from the issuance of carbon credits (or carbon offsets). Under the Clean Development Mechanism (CDM) carbon offset scheme that was defined by the Kyoto Protocol, developed countries are allowed to fund GHG emissions-reducing projects in developing countries and LDCs and claim the saved emissions as part of their effort to comply with their obligations to meet climate-change mitigation targets. The mechanism essentially constitutes another way to fund climate-change mitigation projects in low-income countries and comprises another reason for a project to align with the global climate agenda. 56 Green Taxonomies The need for standards What is needed is a clearly defined, transparent, and structured green taxonomy broadly accepted to support informed decision-making and contribute towards investment opportunities that aim to achieve national environmental/climate-change mitigation and adaptation objectives. INSIGHT #1.2 What is a taxonomy? According to the ICMA, a green taxonomy is a classification system for identifying activities or investments that will move a country toward meeting specific targets related to priority environmental objectives. In that respect, definitions for “climate- aligned”, “green” or “sustainable” assets are key for safeguarding the market from the risk of “greenwashing”, supporting governments in targeting their actions against climate change and enabling financial market players to know which investments to focus on if they are to get onto the sustainable finance playing field. The main actors/users of the taxonomy are, therefore, governments that aim to prioritize climate-change mitigation and green development activities, financial institutions that target investments in sustainable projects, financial regulators, and investors. The overall aim of a taxonomy would be to:  provide a uniform and harmonized classification system for low-emission activities and low-carbon assets  set GHG emissions reduction criteria for meeting climate-mitigation goals  ensure that investors remain engaged with sustainable investments and green financing  provide the basis for further policy action  provide a framework for reporting on climate mitigation and resilience Sources: Joint Group of Multilateral Development Banks, 2019: Joint Report on Multilateral Development Banks' Climate Finance - 2019 CBI, 2021: Climate Bonds Taxonomy CBI, 2019: Growing green bond markets: The development of taxonomies to identify green assets EU TEG on Sustainable Finance, 2020: Taxonomy: Final report of the Technical Expert Group on Sustainable Finance World Bank Group, 2020: Developing a National Green Taxonomy - A World Bank Guide 57 Green Taxonomy Examples Joint Report on Multilateral Development Banks’ Climate Finance (2019) The Joint MDB Methodology for Climate Mitigation FinanceTracking comprises definitions, regulations, and a list of eligible activities that facilitate consistency in accounting and reporting of climate activities. The eligible activities, as identified by the MDB methodology, should: (i) result in negative, zero, or very low carbon emissions and be consistent with a fully decarbonized economy; (ii) contribute to the transition towards a decarbonized economy; (iii) contribute to enabling very-low- carbon performance or a substantial reduction of GHG emissions in other activities. The list of eligible activities is regularly renewed aiming to ensure that technology developments and innovative low-carbon solutions are taken into consideration. INSIGHT #1.2 The CBI Taxonomy The Climate Bonds Initiative (CBI) is an international organization aiming to mobilize the largest green bond market capital towards the development of climate change solutions. The CBI has developed a strong green taxonomy system, namely the Climate Bonds Taxonomy, that is a guide to climate-aligned assets and projects. It is a tool for issuers, investors, governments, and municipalities to help them identify and prioritize key investments that will deliver a low carbon economy. Criteria have been developed for the following key infrastructure sectors identified within the CBI taxonomy: energy; transport; water; buildings; land use & marine resources; industry, waste & pollution control; ICT. The EU Taxonomy for Sustainable Finance The EU Taxonomy is a tool to help governments, investors, companies, bond issuers, and financiers lead the transition to a low-carbon, resilient and resource-efficient economy. The taxonomy sets performance criteria (referred to as "technical screening criteria") to six environmental objectives for environmentally sustainable economic activities: climate change mitigation; climate change adaptation, sustainable use and protection of water and marine resources; transition to a circular economy, waste prevention, and recycling; pollution prevention and control; and protection of healthy ecosystems. Eligible projects contribute substantially to one of the above six activities; do no significant harm to the five others; and meet minimum safeguards. 58 THE TASK FORCE ON CLIMATE-RELATED FINANCIAL DISCLOSURES The TCFD was created in 2015 by the Basel-based Financial Stability Board (FSB) whose role, since its establishment in 2009 after the global financial crisis, is to promote international financial stability. The TCFD’s focus is reporting on the impact an organization has on the global climate. The overarching goal of the TCFD is “to help identify climate related information required by investors, lenders, and insurance underwriters to appropriately assess and price climate- related risks and opportunities aiming to provide a universally adoptable framework on company financial disclosures concerning climate change”. In this context, the task team has developed recommendations on how to monitor climate actions, which is a key element of assessing a project’s contribution to negative, zero, or very low GHG emissions. INSIGHT #1.2 The recommendations of the TCFD were published in 2017 along with additional supporting material to assist entities with the implementation of climate-related financial disclosure. In general, recommendations and guidance of the TCFD is provided around four key thematic areas that represent major organization operation elements: GOVERNANCE Disclose the organization’s governance around climate-related risks and opportunities STRATEGY Disclose the actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning where such information is material RISK MANAGEMENT Disclose how the organization identifies, assesses, and manages climate- related risks METRICS & TARGETS Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material Source: TCFD, 2017: Recommendations of the Task Force on Climate-Related Financial Disclosures 59 MODULE 1.1 Resources NDC REGISTRY (INTERIM) A UNFCCC public registry where all communicated NDCs are registered and available Developed by: UNFCCC UNFCCC NAP CENTRAL A platform for the management of NAPs submitted by developing countries Developed by: UNFCCC APEX: AN INVESTMENT PLANNING APP FOR CITIES A tool to assist identification of investments suitable for green financing and climate- resilient long-term planning Developed by: IFC NATURAL CLIMATE SOLUTIONS (NCS) WORLD ATLAS This online tool demonstrates opportunities for countries around the world to view how natural climate solutions, alongside emission reduction strategies, can help them reduce their net GHG emissions. NCS are effectively a subset of nature-based solutions geared toward climate change mitigation Developed by: Nature4Climate FUND — CLIMATE FRAMEWORK FOR UNCERTAINTY, NEGOTIATION, AND DISTRIBUTION, VERSION 3.9, 2014 A tool to perform cost-benefit and cost-effectiveness analyses of GHG emission reduction policies, to study equity of climate change and climate policy, and to support game-theoretic investigations into international environmental agreements Developed by: Anthoff D, Tol RSJ, 2014 JICA CLIMATE FINANCE IMPACT TOOL: CLIMATE FIT (MITIGATION), JAPAN INTERNATIONAL COOPERATION AGENCY (DRAFT VER. 3.0) Guidelines for methodologies to quantitatively evaluate carbon sequestration and reduction in GHG emissions for different sectors Developed by: Japan International Cooperation Agency, 2019 60 GREENHOUSE GAS PROTOCOL GHG Protocol establishes comprehensive global standardized frameworks to measure and manage GHG emissions from private and public sector operations, value chains, and mitigation actions. GHG Protocol includes multiple calculation tools Developed by: WRI & WBCSD NATIONAL ADAPTATION PLANS: TECHNICAL GUIDELINES FOR THE NATIONAL ADAPTATION PLAN PROCESS Technical guidance and support to the NAP process Developed by: UNFCCC - LDC Expert Group, 2012 NAP ALIGN: RECOMMENDATIONS FOR ALIGNING NATIONAL ADAPTATION PLAN PROCESSES WITH DEVELOPMENT AND BUDGET PLANNING An analysis tool to help countries align their NAP with their overall national development goals Developed by: GIZ, 2014 ENGAGING THE PRIVATE SECTOR IN NATIONAL ADAPTATION PLANNING PROCESSES This study aims to offer guidance to governments and their partners on how to engage the private sector in the NAP process Developed by: BAP Global Network, GIZ, 2019 PATHWAY FOR INCREASING NATURE-BASED SOLUTIONS IN NDCS A seven-step approach for governments to identify potential NBS with the aim of enhancing their climate mitigation and adaptation action in a cost-effective manner and with multiple co-benefits Developed by: United Nations Development Program (UNDP), 2019 ACCELERATING CLIMATE AMBITION AND IMPACT: TOOLKIT FOR MAINSTREAMING NATURE BASED SOLUTIONS INTO NATIONALLY DETERMINED CONTRIBUTIONS This toolkit offers key information, methodologies, and guidance for national authorities related to climate change, environmental management, forests, other land-use sectors, as well as other sectors related to the NDCs. This toolkit also provides information relevant for sub-national governments seeking to align theircommitments and actions with the NDCs Developed by: United Nations Environment Program, 2019 CBI TAXONOMY A guide to climate-aligned assets and projects for a low carbon economy addressed to issuers, investors, governments, and municipalities Developed by: Climate Bonds Initiative, 2021 61 GROWING GREEN BOND MARKETS: THE DEVELOPMENT OF TAXONOMIES TO IDENTIFY GREEN ASSETS Green bond guidelines in selecting and reporting on eligible green and sustainable projects. The briefing explores the role of such guidelines in steering capital towards investments in climate-aligned assets Developed by: Climate Bonds Initiative, 2019 EU TAXONOMY: FINAL REPORT OF THE TECHNICAL EXPERT GROUP ON SUSTAINABLE FINANCE The EU Taxonomy is a tool to help investors, companies, issuers, and project promoters navigate the transition to a low-carbon, resilient, and resource-efficient economy by setting technical screening criteria for sustainable economic activities Developed by: TEG, 2020 DEVELOPING A NATIONAL GREEN TAXONOMY - A WORLD BANK GUIDE The guide recommends the principles and methodology for developing a well-defined and structured taxonomy of environmentally sustainable activities. It addresses the need among financial market participants for clarity and transparency in what is understood and what qualifies as green Developed by: World Bank Group, 2020 CLIMATE-RESILIENT INFRASTRUCTURE: GETTING THE POLICIES RIGHT - OECD ENVIRONMENT WORKING PAPERS NO. 121 This paper provides a framework for action aimed at national policymakers in Organization for Economic Co-operation and Development (OECD) countries to help them ensure new and existing infrastructure is resilient to climate change. It examines national governments' actions in OECD countries and provides recent insights from professional and industry associations, development banks, and other financial institutions on how to make infrastructure more resilient to climate change Developed by: OECD, 2017 ADAPTATION PRINCIPLES: A GUIDE FOR DESIGNING STRATEGIES FOR CLIMATE CHANGE ADAPTATION AND RESILIENCE The report lays out six universal Principles of Adaptation and Resilience Developed by: World Bank Group, 2020 IMPROVING CLIMATE RESILIENCE IN PUBLIC PRIVATE PARTNERSHIPS IN JAMAICA The tool identifies several instruments and tools already used to address climate change issues in the context of Jamaica's infrastructure production Developed by: Frisari, G.L., Mills, A., Silva, Z. M. C., Donadi, E., Ham, M.S.C., Pohl, I., Climate Change Division – IADB, 2020 62 Module 1.1 - Further Reading NATIONALLY DETERMINED CONTRIBUTIONS (NDCS) The NDCs at a glance on the UN Climate Change website Developed by: United Nations Climate Change 2020 EDITION POCKET GUIDE TO NDCS UNDER THE UNFCCC A guide to understanding the framework of NDCs under the UNFCCC through a set of answers to key questions Developed by: ECBI, 2020 NATIONAL ADAPTATION PLANS (NAPS) The NAPs at a glance on the UN Climate Change website Developed by: United Nations Climate Change THE NATIONAL ADAPTATION PLAN PROCESS: A BRIEF OVERVIEW A brief overview of the NAP process Developed by: UNFCCC - LDC Expert Group, 2012 THE ROLE OF THE NAP PROCESS IN TRANSLATING NDC ADAPTATION GOALS INTO ACTION: LINKING NAP PROCESSES AND NDCS A study that aims to enhance the understanding of NDCs and how they can be linked to the NAP process for implementing adaptation goals Developed by: GIZ, 2017 2019 JOINT REPORT ON MULTILATERAL DEVELOPMENT BANKS' CLIMATE FINANCE Collaborative effort to make MDB climate finance figures in developing countries and emerging economies public on an annual basis Developed by: African Development Bank; Asian Development Bank; Asian Infrastructure Investment Bank; European Bank for Reconstruction and Development; European Investment Bank; Inter American Development Bank; Islamic Development Bank; World Bank, 2019 CLIMATE-RESILIENT INFRASTRUCTURE: POLICY PERSPECTIVES, OECD ENVIRONMENT POLICY PAPER No 14 The report highlights emerging good practices and remaining challenges across OECD and G20 countries. It provides non-prescriptive guidance to countries as they seek to enhance resilience in line with their national circumstances and priorities Developed by: OECD, 2018 63 THE WORLD BANK GROUP ACTION PLAN ON CLIMATE CHANGE ADAPTATION AND RESILIENCE:MANAGING RISKS FOR A MORE RESILIENT FUTURE The action plan lays out the WB's strategy to boost efforts on adaptation and resilience Developed by: World Bank Group, 2019 ACTION PLAN: FINANCING SUSTAINABLE GROWTH The action plan proposes a unified classification system for sustainable activities and creates standards and labels for green financial products Developed by: European Commission, 2018 ADAPT NOW: A GLOBAL CALL FOR LEADERSHIP ON CLIMATE RESILIENCE The report focuses on making a case for climate adaptation, designed to inspire action among decision- makers Developed by: Global Commission on Adaptation, 2019 LIFELINES: THE RESILIENT INFRASTRUCTURE OPPORTUNITY The report lays out a framework for understanding infrastructure resilience and makes an economic case for building more resilient infrastructure Developed by: World Bank Group, 2019 INFRASTRUCTURE UNDERPINNING SUSTAINABLE DEVELOPMENT The report presents and explains the ability for infrastructure to influence all 17 SDGs Developed by: UNOPS, 2018 EMERGING TRENDS IN MAINSTREAMING CLIMATE RESILIENCE IN LARGE SCALE, MULTI-SECTOR INFRASTRUCTURE PPPS This report is produced as part of the initiative to develop global knowledge that provides practical information on how to mainstream climate resilience into PPP frameworks in the context of multisector investment planning and implementation in developing countries Developed by: WB Group, PPIAF, 2016 PPPLRC CLIMATE-SMART PPPS WEBSITE This section of the Public-Private Partnership Legal Resource Center (PPPLRC) website provides links to policies, legislation, project documents, and other resources that are relevant to the legal and regulatory framework of climate-smart PPPs Developed by: PPPLRC, World Bank 64 Step 1 Step 2 Map the Global Assess/Improve and National Project’s Alignment Climate Policies with Climate Policies Revised project scope that aligns with national climate M1.1 priorities and goals Input from National Project Climate Policies Alignment with Project scope Climate Policies Step 1 Step 2 Step 3 Step 4 Step 5 Assess Climate Risks Assess GHG Review Adaptation & Review Small-scale Prioritize Climate Project selection Emissions Qualitatively Resilience Strategies Mitigation Measures Strategies Preliminary description of the (out of a number M1.2 project of alternatives) Adaptation/ Mitigation Economic (incl. adaptation and PHASE 1 Climate Hazards Types & Sources Resilience Hierarchy Evaluation of mitigation strategy) Project Exposure Assessment Measures Climate Strategies Climate Protocols Socio- Build Alternative High-level Considerations in Project Vulnerability Strategies Considerations Environmental Project Selection Co-Benefits Project Risks Rank Strategies Prioritization through MCA Economic Step 1 Step 2 Step 3 pre-assessment; Include Climate Check Project’s Check Project PPP screening Considerations in CBA Affordability Suitability as a PPP A project option gets the green light M1.3 to proceed to appraisal Value of Investment Accounting for Climate-Actions 65 1.2 Climate Considerations in Project Selection A major item in the planning, structuring, and production of construction materials. As the awarding of climate-smart PPP infrastructure alleviation of such impacts is obviously an is to ensure its ability to withstand climate- international priority and a global imperative, change-related stressing. Given the usually it is necessary that GHG emissions are long duration of PPP contracts, it is possible estimated at the project planning phase so that climate-change effects may manifest that appropriate mitigation measures can be themselves several years after the financial proposed. close of the project bringing unforeseen harm Combating climate change involves the to the contract. They, therefore, constitute a incorporation of climate mitigation options type of risk on the project that attracts and proper design of adaptation and growing attention from all stakeholders and resilience measures to cope with the needs to be estimated, assessed, addressed, associated risks. In this context, Module 1.2 and properly shared between the private and aims to navigate users through the the public parties in order to ensure that the preliminary review of technical solutions that project contract will evolve smoothly and to could not only ensure adaptation and the best benefit of its beneficiaries. resilience of the project to the climate On the other hand, the project itself poses a hazards it is (or may in the future be) exposed risk to the environment due to GHG to, but that could also contribute (to a greater emissions attributable to the project directly or lesser extent) to the country’s climate due to its construction and operation process mitigation goals. or indirectly as a consequence of the As such, the concept of double materiality 66 (captured through the definitions of brought forward for the value for money “resilience of” and “resilience through” assessment (Module 1.3) have incorporated PHASE 1 introduced in the WBG’s Resilience Rating climate actions (including the estimation of System1) is herein further extended to the proper climate mitigation, adaptation, account for the potentially dual purpose of and resilience measures as well as their climate-smart PPP infrastructure: avoid associated cost levels and potentialbenefits). direct and indirect loss through adaptation Assessments performed at this stage are and resilience while contributing to climate mainly qualitative; detailed GHG and climate mitigation and broader social benefits. The risk analyses are described later in this toolkit M1.2 overarching goal of the present module is to as part of Phase 2, while sector- specific outline a process that will allow users to guidance is provided in the accompanying Climate ensure that the project options that will be sector-specific toolkits. Considerations in Project Selection SCREENING DIFFERENT PROJECT OPTIONS Step 1 During the selection phase, the structuring team may examine Assess Climate- more than one option for a project.2 Different project options Change Risks could be exposed differently to the same hazard and result in different levels of risk. Subsequently, these may be associated with different costs (both upfront capital and operational expenses), and therefore, climate risk screening should be Step 2 performed for each project option. Assess GHG Emissions Qualitatively STRUCTURE OF THE MODULE The module comprises five steps:  Step 1 identifies all climate hazards that may potentially affect the project and qualitatively Step 3 Review Adaptation & assesses the influence of climate change on each one of them. It subsequently investigates Resilience Strategies the project exposure & project vulnerability at a high level in order to estimate the overall climate risk  Step 2 performs an early-stage screening of the project’s GHG emissions  Step 3 identifies potential adaptation and resilience measures to reduce the project-specific climate risks Step 4 Review Small-Scale  Step 4 proposes mitigation measures to partially compensate for the project’s GHG Mitigation Measures emissions  Step 5 prioritizes climate (adaptation and mitigation) strategies considering costs, benefits, and potential trade-offs Step 5 Prioritize Climate Strategies 1 World Bank Group, 2021: Resilience Rating System: A Methodology for Building and Tracking Resilience to Climate Change 2 The terms “project option” and “project” are thus used interchangeably in the present toolkit 67 PHASE 1 01 PRE-ASSESS CLIMATE RISKS Climate-change risks are associated with climate hazards that are experienced already or may appear in the future (e.g., sea-level rise, flooding in an area that is flood-proof today) as a consequence of climate change and may challenge the technical design of the project and hence M1.2 its revenues or its availability. In engineering practice, climate risks are estimated as a function of the hazard level and the project’s exposure and vulnerability (see Box 1.3). Schematically, the Climate risk is estimated using the following formula: Considerations in Project Selection Risk = Hazard x Exposure x Vulnerability (Eq. 1.2.1) Although more detailed analyses will follow in the subsequent phases, risk calculations are expected to be performed in qualitative terms in the current stage. To this end, the following Step 1 sections aim to describe the process of estimating these three risk components at a high level. Assess Climate- Change Risks BOX 1.3 INTRODUCTION TO RISK ASSESSMENT Risk assessment is a broad and sometimes complex scientific field. In its most simplified form, Step 2 the risk may be defined as a function of: Assess GHG Emissions Hazard is the type of stressor, i.e., the natural phenomenon (e.g., Qualitatively wind, flood, high temperatures) that may potentially threaten the infrastructure. Likelihood defines the probability of the specific hazard occurring at a certain intensity. Exposure is an index of the plausibility of the hazard actually Step 3 Review Adaptation & affecting the infrastructure (it may also be thought of as proximity Resilience Strategies of the project to the hazard source). Vulnerability defines the sensitivity of the infrastructure to a specific type of threat. Risk is the probability of harmful consequences or expected loss Step 4 (physical damage, disruption of economic activity) resulting from Review Small-Scale the interaction of a hazard with the built environment. Risk is Mitigation Measures therefore considered as the combination of the severity and associated likelihood of a hazard (where the higher the severity of the hazard, the lower the likelihood of occurrence), the assets’ exposure to the hazard, and their vulnerability to damage. Illustrations adapted from UNISDR, 2019: Words into Action Guidelines - National Disaster Risk Step 5 Assessment: Governance System, Methodologies and Use of Results Prioritize Climate Strategies 68 Quantitative assessment of the above components may require significant expertise and hence, the involvement of PHASE 1 skilled technical staff. The present high-level toolkit provides instructions on performing a qualitative assessment of these components based on simplified, readily available (online) tools. Users are encouraged to seek updated resources and risk assessment tools that may be suitable for the region/sector of interest and which may become available in the future. M1.2 CLIMATE HAZARDS Climate Considerations in Climate hazard is one of the main parameters that needs to be assessed to enable the Project Selection identification of risks. To this end, users are prompted to examine the natural and built environment around the project and identify climate hazard sources that could damage the infrastructure or threaten its operations. For this task, users may be assisted by resources such Step 1 as Think Hazard!, United States Agency for International Development’s (USAID’s) climate links, Assess Climate- and the World Bank’s Screening Tools and Climate Change Knowledge Base (Box 1.4), which Change Risks are meant to provide information on hazards affecting the project’s location or broader area. Additional resources are listed at the end of this module. Step 2 Assess GHG BOX 1.4 CLIMATE HAZARD ANALYSIS TOOLS Emissions Qualitatively In order to evaluate each hazard’s characteristics, a study on climate-related data at the location of interest needs to be performed. Current and future climatic data are available by the national meteorological authorities of the country of interest (or those of neighboring countries) and within international sources that provide climate information on the appropriate scale. Some additional useful hazard and climate data sources are the Step 3 following: Review Adaptation & Resilience Strategies • Climate Change Knowledge Portal (World Bank Group): A knowledge portal that provides historical climate data (for temperature and rainfall) and future projections of climate data for various climate stressors and variables for each RCP • Think Hazard! (GFDRR - World Bank Group): A web tool that provides high-level hazard maps per country, including also smaller scale (district level) hazard detail Step 4 • Climate links (USAID): A global knowledge portal for climate and development Review Small-Scale practitioners that also includes climate risks per country or broad regions (Regional Mitigation Measures & Country Risk Profiles and GHG Emissions Fact Sheets) The severity—or even the very existence—of each hazard type will vary depending on the actual Step 5 evolution of climatic conditions. However, the latter cannot be predicted at the present time due Prioritize Climate to the uncertainty stirred by climate change. As such, multiple scenarios may need to be explored Strategies to account for future uncertainty. Although more advanced methodologies for decision-making under uncertainty exist (and are further discussed in the next steps and in Phase 2 of the toolkit), these may be too resource-demanding to be employed at such an upstream stage of the process. It is therefore deemed preferable to perform the present early- 69 stage screening considering a few plausible climatic evolution scenarios for each hazard type based on the Representative Concentration Pathway (RCP) evolution index—an index to describe PHASE 1 the different growth rates of GHG and other climate-forcing emissions (for a more detailed description of RCP see Insight 1.3). Different RCPs describe different emission scenarios of the future corresponding to different intensities and frequencies of climate hazards. (i.e., rainfall, temperature, sea level, floods/droughts, etc.). At a high level, this may be performed using future projections from sources such as the World Bank Group’s Climate Change Knowledge Portal referred to previously. The goal at this upstream phase is to qualitatively estimate (using input from the portal or any other available source) hazards and intensity levels (e.g., low, medium, M1.2 high) and assess whether such intensities are expected to increase due to climate change. Sector- specific instructions on how to perform this type of assessment are provided in the respective Climate sector-specific toolkits. Considerations in Project Selection It is important to recognize that climate change might affect each hazard differently. Hence, a climate hazard that would not Step 1 constitute a risk to the project at present might become a Assess Climate- threat in the future as climate change unfolds and its impacts Change Risks become visible. To this end, the identified climate hazards should include every potential threat that the project might face not only under current climatic circumstances but also throughout its lifecycle. Step 2 Assess GHG PROJECT EXPOSURE Emissions Qualitatively Proximity to the hazard source (or its zone of influence) is usually the main parameter determining a project’s exposure to it. To estimate exposure, users will need to consider factors that are inherent to the project (e.g., a significant distance from the coast will offer protection from coastal erosion), or extrinsic (e.g., the present existence of a breakwater wall), which are Step 3 not part of the project, but do protect the project from the hazard impacts. Review Adaptation & The preliminary estimation of the project exposure may be based on regional impact maps (if Resilience Strategies available) by examining whether the project location (or alignment) is included within the geographical spread of the hazard (i.e., assets within the impact zone will be affected while those outside not). If such information is not available, past experience and data from historical performance may be used to perform initial crude estimates of whether the project may be falling within a hazard’s zone of influence. Step 4 Review Small-Scale Mitigation Measures PROJECT VULNERABILITY The definition of vulnerability encompasses two main dimensions: the sensitivity or susceptibility to harm and the lack of capacity to cope and adapt. When users evaluate the sensitivity or susceptibility of a project option to a given hazard, they need to consider project features such as structural type and technical integrity, bearing capacities and thresholds, robustness of the Step 5 infrastructural components, weak points in the project’s structural system, dependencies Prioritize Climate between the project assets or project modules, etc. To evaluate the project’s capacity to cope Strategies and adapt, users also need to consider non- structural features such as emergency management, disaster policy development, evacuation plans, reconstruction ability in relation 70 to service disruption duration, availability of alternative temporary substitutes, etc. The consideration of such factors will guide the qualitative evaluation of the overall project PHASE 1 vulnerability to specific hazards for every project option. PROJECT RISK Two main climate risk typologies are identified (Figure 1.3): Internal risks originating from hazards that are posed directly on the project and could damage the infrastructure itself or/and affect its availability (e.g., extreme flooding destroying dikes and M1.2 suspending the service of infrastructure). Internal risks may have two types of impact: direct impacts defined as the loss due to damage on the physical infrastructure, and indirect impacts Climate Considerations in defined as the loss of revenue due to the unavailability of the infrastructure (applicable both to Project Selection government payments and user-pays PPPs). External risks originating from hazards affecting the broader socioeconomic system (i.e., green- economy transition risks) and surrounding infrastructure with which the PPP project is Step 1 interlinked. This category is exclusively associated with potential indirect impacts (e.g., revenue Assess Climate- loss due to reduced demand, loss of the project’s revenue base, or loss of access to the Change Risks infrastructure due to failure of the interconnected network). Step 2 Assess GHG Emissions Qualitatively Step 3 Review Adaptation & Resilience Strategies Step 4 Review Small-Scale Mitigation Measures FIGURE 1.3 Climate change may pose internal and external risks to the infrastructure Step 5 Prioritize Climate Internal risk assessment is possible at a high level using the generalized formula presented in Eq. Strategies 1.2.1. Understandably, to properly assess the vulnerability of an infrastructure project, it is necessary to know the specific design characteristics of its assets; when this is the case, the involvement of expert consultants will be essential for this task. However, in most cases, the technical design is unknown at the present upstream phase. Thus, in the absence of any better 71 data or methodologies, it is recommended that the risk is preliminarily calculated as a func�on of the hazard and the project’s exposure only. Unlike internal risks, which can be alleviated through the appropriate adapta�on measures, PHASE 1 external risks depend on factors beyond the control of the project’s stakeholders. Addi�onally, different project op�ons may be differently exposed to external risks. Therefore, it is important that external risk factors be iden�fied early in the project selec�on process since they could alone—in the most extreme case—be a reason to abandon a specific op�on.3 To this end, users are encouraged to hold consulta�ons with mul�ple stakeholders aiming to iden�fy factors such as imminent policy changes, demographic pa�erns, and uncertainty sources in the supply or demand side of the infrastructure, in order to decide whether such risks can be mi�gated. M1.2 Detailed guidance on how to perform a qualita�ve risk assessment at a high level for several Climate infrastructure sectors is provided in the respec�ve sector-specific toolkits. Considera�ons in Project Selec�on Step Output Step 1 A qualita�ve characteriza�on of the internal climate risk of the Assess Climate- Change Risks project (or project op�ons) per hazard type (low, medium, high) List of external climate risks and con�ngencies Step 2 Assess GHG Emissions Qualita�vely Step 3 Review Adapta�on & Resilience Strategies Step 4 Review Small-Scale Mi�ga�on Measures Step 5 Priori�ze Climate Strategies 3 A recent example of such a case comes from the feasibility study of a photovoltaic plant in Southeast Asia: the project had to be abandoned although the internal risks were covered and sunlight was granted due to a projected water shortage in the region that would hinder the panels’ cleaning opera�ons in case of increased dust coverage. 72 PHASE 1 02 PRE-ASSESS GHG EMISSIONS QUALITATIVELY The broader infrastructure sector is considered to be (directly or indirectly) responsible for almost 70% of the globally emitted4 greenhouse gases. This includes the emissions attributable to the construction, operation, and waste disposal. Indicatively, the construction industry itself M1.2 may be accountable for as much as 25% of global GHG emissions (including building and demolition). It is thus essential that action is taken to reduce the carbon footprint of any type of Climate infrastructure. The current step intends to define the principles and outline the process of Considerations in assessing GHG emissions of a project at a high level so that appropriate mitigation measures can Project Selection be explored to help reduce them. Step 1 GHG TYPES AND SOURCES Assess Climate- GHGs are produced either naturally or due to human activity. This toolkit refers to GHGs Change Risks produced due to the process of burning fossil fuels for the production of energy, manufacturing, and transportation. When released in the atmosphere, GHGs trap heat, therebycontributing to global warming. Hence, the consequence of an uncontrolled increase in the GHGs would be accelerating global warming and subsequently of the effects of climate change. Step 2 Assess GHG Several types of GHGs are produced during the aforementioned activities, depending on the Emissions process, the technologies involved, the raw materials, and several other factors. According Qualitatively to the IPCC, every G H G is characterized by its global warming potential (GWP), which indicates how much heat the GHG can trap within the atmosphere or if stated otherwise, how much it may contribute to climate change. In order to be able to quantify and compare GHGs characterized by different GWPs in a single unit, the global community is currently using the carbon dioxide Step 3 equivalent (CO2e) as the reference quantifier. This allows all GHGs to be expressed in relation to Review Adaptation & Resilience Strategies carbon dioxide, which is considered to have a GWP of 1. Carbon dioxide is hence used as the reference GHG that all other gases get compared to. GHG ASSESSMENT PROTOCOLS In order to estimate the CO2e of an infrastructure project, it will be necessary to be able Step 4 to identify all emissions generated during the construction process and also to acquire an Review Small-Scale indication of the emissions to be produced during its operations (either directly, e.g., due to its Mitigation Measures operations in case of a power plant, or indirectly, e.g., due to car emissions in case of a highway project). This is a resource-demanding exercise requiring significant expertise that may not be available at the project selection phase. In case users are already skilled in the field or can gain access to relevant expertise, they are encouraged to review available tools to assess the GHG Step 5 emissions at several levels (tiers). Prioritize Climate Strategies 4 According to the IPCC (https://www.ipcc.ch/report/ar5/wg3/ ) the combined contribution of energy production and transportation is 50%. The actual contribution reaches approximately 70% of the globally emitted GHGs when considering all infrastructure sectors. 73 Among them, the Greenhouse Gas Protocol, a partnership between the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD), has PHASE 1 created online tools that help practitioners perform reliable GHG emissions assessments per sector. Also, the United States Environmental Protection Agency (EPA) has created an online tool allowing users to calculate CO2e in a simplified manner. Sector-specific guidance on how to perform the assessment is provided in the respective sector- specific toolkits. For a preliminary high-level screening of the GHG emissions of various options and activities (to be considered at the current step), users are advised to consult sources such as the IPCC’s Guide “Climate Change 2014 Mitigation of Climate Change,” which includes detailed M1.2 information for several infrastructure sectors. Climate Considerations in Project Selection Step Output A gross estimation of the baseline GHGs of the project (assuming that Step 1 no climate mitigation measures are taken) Assess Climate- Change Risks REVIEW ADAPTATION AND RESILIENCE Step 2 STRATEGIES TO REDUCE CLIMATE RISKS Assess GHG Emissions Qualitatively In this step, users are guided on how to perform a preliminary screening of adaptation and resilience measures to reduce the climate risk of the project. Adaptation refers to measures aiming at preparing for and preventing the impacts of climate- Step 3 induced risks on the project and could include technical solutions, adjustments in the project Review Adaptation & management practices or operational strategies, infrastructural modifications, or policy Resilience Strategies adjustments and additions. Resilience of a project refers to design attributes that will allow the project to resist a shock, absorb its impacts, and rapidly recover functionality after the end of the event. At the same time, the community may benefit from increased resilience through the project, as explained in Box 1.5. It is important to note that while all projects must achieve resilience against climate risks Step 4 Review Small-Scale (resilience of), it is not mandatory and perhaps not always applicable that all projects’ outcomes Mitigation Measures contribute to community resilience (resilience through). In the ensuing text, “resilience” usually refers to endurance and recovery from acute disastrous events, while “adaptation” relates to Step 5 chronic, slowly evolving processes (see also Insight 1.4). In this Prioritize Climate context, risk reduction strategies are expected to contain a Strategies combination of adaptation and resilience options. 74 In some instances, climate adaptation and resilience measures can offer additional benefits to the broader project environment. These are typically termed as co-benefits and could include PHASE 1 additional socioeconomic benefits (e.g., addressing gender gaps, minority inclusion, job creation, technology promotion, etc.) as well as enhanced contribution to climate mitigation. This is particularly the case for nature-based solutions that can be combined with or replace the conventional “gray” infrastructure (Box 1.6). Therefore, it is advisable that these are thoroughly reviewed at this step as they could contribute significantly to the decision in favor (or against) a specific option. M1.2 Climate Considerations in Project Selection BOX 1.5 THE NEW ERA OF RESILIENCE: ENSURING COMMUNITY CONTINUITY, NOT JUST LOSS AVOIDANCE Aiming to monitor adaptation and resilience-related actions, the World Bank’s Action Plan on Climate Change and Resilience has developed a Resilience Rating System (RRS) to encourage Step 1 Assess Climate- climate policy-aligned development and to track climate-related finance methodologies. Change Risks When referring to project resilience, we may refer to different plans to react to climate change that the project incorporates throughout its lifecycle. As defined by the WBG’s Resilience Rating System report, project resilience includes two different dimensions, namely the resilience of the project and the resilience through the project. The latter characterizes the extent to which projects explicitly contribute to the resilience of the infrastructure’s Step 2 broader environment that may include the beneficiaries, asset networks, regions, or even Assess GHG countries. To this extent, such projects are intentionally designed with the objective or sub- Emissions Qualitatively objective of improving the climate-change resilience of a community and not just of their assets. Hence, a new era of resilience is born where community continuity and protection from natural disasters and the detrimental impacts of climate change are prioritized. Through this dimension, investments that support transformation towards resilient development Step 3 Review Adaptation & pathways are promoted, as they relate to current and long-term climate impacts, and not just Resilience Strategies loss avoidance directly connected with the project itself. The ultimate aim is to pass from project-only resilience to building overall community resilience. Resilience of the project Consider climate and disaster risks in project design and incorporate measures to absorb them and quickly bounce back. Step 4 Review Small-Scale Example: opting for redundancies in the design of a power generation facility will Mitigation Measures allow it to quickly resume operations following an extreme weather event, even if it has been partially damaged by it. Resilience through the project Design interventions to enhance sector’s and beneficiaries’ climate resilience Step 5 Example: incorporating flood protection measures for a road network could Prioritize Climate simultaneously offer enhanced endurance to flooding to a community located Strategies downstream. Sources: World Bank Group, 2021: Resilience Rating System: A Methodology for Building and Tracking Resilience to Climate Change World Bank, 2019: The World Bank Group’s Action Plan on Climate Change Adaptation and Resilience 75 BOX 1.6 GREEN INFRASTRUCTURE AND NATURE-BASED SOLUTIONS PHASE 1 Natural systems such as forests, floodplains, and soils can contribute to clean, reliable water supply and protect against floods and drought. In many circumstances, this type of “green infrastructure” (alone or in combination with traditional “gray infrastructure”) may also be used to protect systems such as dams, levees, reservoirs, treatment systems, and pipes. Solutions inspired and supported by nature termed “nature-based solutions” may be used as climate adaptation measures that can simultaneously deliver environmental, social, and economic benefits and help build resilience. The United Nations World Water Development M1.2 Report 2018 highlighted how nature-based solutions can help meet the 2030 SDGs (WWAP 2018). Similarly, the High-Level Panel on Water (HLP 2018) convened by the United Nations Climate and World Bank concluded that green infrastructure could “help address some of the most Considerations in pressing water challenges, particularly if planned in harmony with gray infrastructure.” Project Selection Sources: WB-WRI, 2021: Integrating Green and Gray: Creating Next Generation Infrastructure https://ec.europa.eu/info/research-and-innovation/research-area/environment/nature-based- solutions_en Step 1 Assess Climate- Change Risks CLIMATE RISK REDUCTION: ADAPTATION & RESILIENCE MEASURES After assessing climate risks, users are prompted to identify adaptation options to address them Step 2 effectively. Adaptation measures may be broadly categorized in the following three classes Assess GHG (Figure 1.4): Emissions Qualitatively Prevention includes all measures that can lead to reducing the likelihood of the consequences of the risk once a hazard materializes. Preparation includes all measures that can lead to reducing the consequences of the risk once a hazard materializes. Step 3 Finally, recovery includes measures that will allow the project to resume operations in a timely Review Adaptation & Resilience Strategies way following the occurrence of an event. Depending on the project’s details, the prevailing hazards in the location site, and the results of the risk assessment (as well as the country, local experience, available technology, and capacity), different adaptation options may apply. To identify adaptation measures that are relevant to the project’s context, users should think of measures that reduce the two main contributors of risk: exposure and vulnerability. Regarding project exposure, transferring the proposed project’s Step 4 Review Small-Scale location to areas of reduced hazard levels could be one way to reduce risk. Other exposure Mitigation Measures reduction measures may include infrastructure side projects that are currently under development or are planned to be developed or upgraded in the near future and may serve as protection measures for the project site.5 Smaller-scale side infrastructure projects that are not in the core of the project but can become part of its environment and are designed to provide climate change adaptation to the project site can also be considered as potential risk reduction Step 5 measures. Prioritize Climate Strategies 5 It is not recommended to rely on side-projects whose realization may be questionable. However, when the state entity procuring the PPP infrastructure is also responsible for the side projects, it is advisable to act towards securing mutual benefits for both. 76 Adaptation and Resilience measures PHASE 1 Prevention Measures reduce the likelihood of the consequences of the risk once a hazard is realized. Examples include the addition of structural components such as sea walls and coastal protection structures, sewage works, improved drainage, the introduction of firebreaks against wildfires, etc. Technology measures such as remote sensing and monitoring of M1.2 climate/weather conditions and hazard and vulnerability mapping may also be included in this classification. Climate Considerations in Project Selection Preparation Measures reduce the severity of consequences once a hazard is realized, with the adopted measures aiming to protect the infrastructure and/or its users Step 1 from the detrimental effects of the hazardous phenomenon. Such Assess Climate- measures should explicitly consider gender and may include early Change Risks warning systems, emergency evacuation plans as well as frequent training and awareness of the infrastructure operator’s staff. Structural methods such as increasing the robustness of the construction in order to withstand acute climate events could also be considered as a preparation measure. Step 2 Assess GHG Emissions Recovery Measures Qualitatively comprise all measures that can lead to efficient recovery of the infrastructure itself and its closely dependent human and natural environment from the impacts of climate hazards. Insurance coverage, emergency accommodation measures, quick recovery, and reconstruction measures while addressing potential gender gaps are a Step 3 Review Adaptation & few examples of such actions. Another important aspect that falls Resilience Strategies under this category is the infrastructure’s ability to maintain or quickly regain its capacity (at full or partially) in the aftermath of an acute hazard. Relevant examples would include the provision of alternative bypassing routes in major motorway networks, the provision of emergency power redundancies, etc. Step 4 Review Small-Scale Mitigation Measures FIGURE 1.4 Categories of adaptation and resilience measures and examples Step 5 Prioritize Climate Strategies 77 With regards to vulnerability reduction, two types of measures are proposed: (a) those that reduce the sensitivity of the project to the hazard, typically of a structural nature PHASE 1 (b) those that increase the capacity of the project to cope with the stressing without compromising its operation, typically of a non-structural nature. For example, both the choice of a different structural type for the project infrastructure and the development of early warning systems can lead to increased resilience and, by extension, reduced risk. M1.2 Users are also advised to identify and assess the potential of Climate adopting technology-related adaptation measures or climate Considerations in Project Selection innovations that may be applicable to the project and seek support from the corresponding implementing agencies or othercountries that are already advanced in this field (Box 1.7). Step 1 Assess Climate- Then for each applicable adaptation measure, the user is called to estimate its risk-reduction Change Risks potential, i.e., how much this measure is expected to reduce the risk. While performing this task, two considerations are worth noting: (i) an adaptation measure can have a reducing effect on multiple risks while on the other hand, a combination of measures may be necessary to achieve a reduction of a single risk to an acceptable level; (ii) an adaptation measure may be combined Step 2 Assess GHG with a green strategy (e.g., blue-green infrastructure) to deliver additional climate mitigation Emissions benefits. The process of identifying adaptation measures is summarized in Figure 1.5. Qualitatively It should be noted that the in-depth assessment of the adequacy and effectiveness of adaptation and resilience measures requires significant expertise. Therefore, it is desirable that users are supported by technical consultants experienced in the design of similar hazard-resisting projects in the region considered. Sector-specific guidance on how to preliminarily select such measures Step 3 is provided in the respective sector-specific toolkits. Review Adaptation & Resilience Strategies Climate Adaptation Risk Reduction &  Undertake in-depth Interventions climate risk assessments  For new projects: implement  Identify adaptation selected adaptation options options  For ongoing projects: carry Step 4  Prioritize and select out interventions of previous Review Small-Scale adaptation options stages, then implement Mitigation Measures adaptation options Monitor Performance  Monitor and evaluate implementation of adaptation measures Climate Risks within projects Step 5  Assess potential climate risks and Prioritize Climate effects on vulnerability Strategies FIGURE 1.5 The identification of adaptation measures starts within the project selection phase when the climate risk profile of the project is assessed. During the project appraisal, the adaptation measures are tested as per their technical feasibility and their economic value. 78 BOX 1.7 TECHNOLOGY-RELATED ADAPTATION MEASURES PHASE 1 Technological advancements related to climate change may provide original ideas and innovative solutions regarding climate change mitigation and/or adaptation opportunities. Even though technological inventions can significantly contribute to the battle against climate change and can notably accelerate climate change adaptation across societies, innovation remains concentrated within a limited number of countries, mainly in the Global North (WB/IBRD, 2020). Providing, therefore, broad access to emerging digital innovations and transferring technological knowledge across all countries and especially the ones that M1.2 present the highest vulnerabilities, could enhance and connect the heterogeneous climate actions across the globe in a coherent and transparent way, providing in this way a Climate cooperative technological approach that will enable and support new generation climate Considerations in markets (WB/IBRD, 2018). Project Selection Towards this direction, technological advancements and digital innovations allow embodying in climate action the high functional complexity required for this transition. Smart contracts that incorporate the transparency and robustness of decentralized Step 1 Assess Climate- registries that blockchain technology offers, collaborative governance systems that enable Change Risks holistic development of monitoring, reporting, and verification (MRV) systems or regulatory standards, smart meters, and other devices associated with the Internet of Things (IoT), combined with big data analytics and automated data flows, new irrigation systems, advanced weather forecasting tools, and innovative more-resilient crop varietiesare only some of the potential tools that technology currently offers. Keeping up to date with the Step 2 Assess GHG latest technological advancements and the business environments that they create may be Emissions critical for the race against climate change. Qualitatively Sources: WB/IBRD, 2020: Invention and Global Diffusion of Technologies for Climate Change Adaptation: A Patent Analysis WB/IBRD, 2018: Blockchain and Emerging Digital Technologies for Enhancing Post-2020 Climate Step 3 Markets Review Adaptation & Resilience Strategies CHOOSING ADAPTATION & RESILIENCE STRATEGIES At the end of this step, users are expected to perform a qualitative ranking of candidate Step 4 adaptation and resilience measures to decide those that will be forwarded to the next step for a Review Small-Scale preliminary cost analysis. Mitigation Measures When prioritizing adaptation and resilience strategies, it is recommended that criteria such as feasibility and ease of implementation, local capacity, additional costs, social impact, etc., are considered by the decision-maker. An overview of suggested criteria is also provided in the “do- no-significant-harm” (DNSH) framework,6 which aims to outline the considerations that need to Step 5 be accounted for when reviewing resilience plans. Prioritize Climate Strategies 6 The framework is available in the following link: https://ec.europa.eu/info/sites/default/files/c2021_1054_en.pdf 79 Participatory decision-making is recommended in order to ensure that all stakeholders and beneficiaries concerned are properly represented in the process. Moreover, the integration of PHASE 1 gender considerations in this process is a key element to achieving a meaningful reflection of society’s needs in the required decision. Although this decision is to be made at a high level, it is desirable that the technical evaluation of applicable adaptation and mitigation measures be made by skilled technical experts who will be able to provide decision-makers with the necessary background to make an informed decision. M1.2 REVIEW SMALL-SCALE MITIGATION MEASURES Climate Considerations in Project Selection Exhausting the potential of climate mitigation through infrastructure is an international imperative. According to recent World Bank data,7 climate change has not slowed down, and its connection with human wellbeing and poverty is increasingly visible. Unchecked, it will push 132 Step 1 million people into poverty over the next ten years, undoing hard-won development gains. As a Assess Climate- Change Risks response to this imperative, it is recommended that even projects whose primary scope is not climate mitigation attempt to incorporate small-scale mitigation actions aiming to reduce their carbon footprint and support the vision of a safer future. In this context, the mitigation hierarchy (Box 1.8) is a crucial consideration for infrastructure projects aiming to contribute to a net positive approach. Even when GHG emissions cannot be avoided, it is essential that GHG Step 2 Assess GHG minimization options are considered prior to offset alternatives. Emissions Qualitatively BOX 1.8 MITIGATION HIERARCHY Mitigation hierarchies for measures and actions have been widely used for over a century in Step 3 risk management within various fields such as natural resource management, waste hierarchy Review Adaptation & (Lansink’s Ladder), biodiversity and wildlife management (e.g., IFC Performance Standard 6), Resilience Strategies and progressively in climate-action frameworks as well (e.g., UNFCC REDD+, Kyoto Protocol emissions trading mechanism). The basic concept of mitigation hierarchy includes different variations of the Avoid – Minimize – Offset principle and aims to achieve the reduction of potential adverse impacts of risks to acceptable levels via structured and prioritized steps. Following the same principle, Step 4 the World Bank’s Environmental and Social Framework (ESF) explicitly incorporates the Review Small-Scale concept of mitigation hierarchy by proposing that projects, first and foremost should strive to Mitigation Measures avoid adverse impacts. If avoidance is not feasible, the project should be designed to minimize or reduce adverse effects on people and the environment. Where residual impacts remain, projects should compensate affected communities or offset adverse impacts. Within this context of the World Bank’s mandate, ESF converts the aspiration of the mitigation hierarchy into practical, project-level applications. Step 5 Sources: Prioritize Climate Strategies World Bank, 2016: Factsheet Environmental and Social Standard 1 WWF, 2020: Discussion Paper: Mitigation Hierarchies - First Things First: Avoid, Reduce and only after that– Compensate 7 World Bank | Understanding Poverty | Climate Change | Overview: https://www.worldbank.org/en/topic/climatechange/overview (last visited on July 1, 2021) 80 As part of the preparation of climate-smart PPP infrastructure, it is recommended that several mitigation solutions are examined early on during the preliminary technical design. Such PHASE 1 solutions generally fall into the following categories: renewable energy production, energy efficiency initiatives, circular economy, and sustainable materials (Figure 1.6). M1.2 Climate Considerations in Project Selection Step 1 Assess Climate- Change Risks Step 2 Assess GHG Emissions Qualitatively Step 3 Review Adaptation & Resilience Strategies Step 4 Review Small-Scale Mitigation Measures FIGURE 1.6 Cross-sectoral climate mitigation strategies supporting the vision for net- zero infrastructure Step 5 Prioritize Climate Strategies 81 Moreover, synergies between mitigation and adaptation may be produced through the incorporation of technically and commercially feasible green infrastructure options—such as PHASE 1 nature-based solutions, ecosystem-based adaptation, and blue-green or green-gray infrastructure. Examples of such options are provided in Insight 1.5. Their use is expected to grow as more scientific evidence regarding their merit and ways to incorporate them in the design will become available. On the other hand, implementation of nature-based solutions may have to overcome specific challenges, as indicatively illustrated in Figure 1.7. M1.2 Climate Considerations in Project Selection Step 1 Assess Climate- Change Risks FIGURE 1.7 Benefits and challenges of investing in nature-based solutions [Source: WBG -WRI, 2019: Integrating green and gray: creating next generation infrastructure] Step 2 Assess GHG Emissions Qualitatively CHOOSING A CLIMATE MITIGATION STRATEGY Even at a very preliminary level, the selection of small-scale mitigation options greatly depends on the infrastructure sector and the region in which the project is to be located. In all cases, attention should be paid to ensuring that the incorporation of climate mitigation measures in the Step 3 project does have a measurable net-positive impact without compromising the affordability of Review Adaptation & the project or risking discouraging private sector participation. In other words, the cost and ease Resilience Strategies of application (or overall feasibility) of proposed measures need to be justifiable in terms of achieved emissions reduction. Although there is no cross-sectoral approach to selecting such options, users should try in principle to answer the following high-level questions: • Which solutions exist for the specific sector or sub/sector and how efficient are they? Step 4 • What are the expected emission reductions when compared to the business as usual or Review Small-Scale do-nothing solutions? Mitigation Measures • Is the necessary technology available, tested, and proven to provide reliable results? • Is there enough expertise from the side of potential bidders to apply such solutions? • What is the envisioned cost of construction, utilization, and maintenance? Step 5 Prioritize Climate Strategies 82 Users are also advised to consult relevant resources (see also the “resources” section at the end of this module) in order to be able to keep pace with developments relevant to the project under PHASE 1 consideration. Detailed guidance on available small-scale mitigation options for a number of sectors is provided in the respective sector-specific toolkits. Particular attention should be paid to ensuring that the climate mitigation strategy will not hinder the social dimension of the infrastructure. The most vulnerable population groups are often M1.2 disproportionally impacted by the costs of addressing climate change. According to recent WBG data,8 “In the absence of well- Climate designed and inclusive policies, climate change mitigation Considerations in measures can place a higher financial burden on poor households. Project Selection For example, policies that expand public transport or carbon pricing may lead to higher public transport fares which can impact poorer households more.” Step 1 Assess Climate- Change Risks Step Output Step 2 Outline of a climate mitigation strategy and preliminary estimation of Assess GHG the cost of implementation and the associated benefits Emissions Qualitatively Step 3 PRIORITIZE CLIMATE STRATEGIES Review Adaptation & Resilience Strategies The last step of the module is devoted to the economic evaluation and—based on that—the prioritization of climate strategies. According to a recent World Bank report, every dollar invested in resilient infrastructure Step 4 generates four dollars in benefits. 9 The economic case is clear: making infrastructure more Review Small-Scale resilient yields significant economic benefits. This becomes more evident when considering the Mitigation Measures actual loss associated with natural disasters, which averages around $18 billion a year in low and middle-income countries due to damage to power generation and transport infrastructure alone. When added to the loss due to disruptions in households and businesses, the figure soars to at least $390 billion a year.4 Unfortunately, the loss is disproportionately higher when considering the most vulnerable regions or populations among those affected. Step 5 Prioritize Climate Strategies 8 World Bank | Understanding Poverty | Topics | Social Dimensions of Climate Change: https://www.worldbank.org/en/topic/social-dimensions-of-climate-change#1 (last visited on July 1st 2021) 9 World Bank, 2019: Lifelines: The Resilient Infrastructure Opportunity 83 Therefore, the economic evaluation of climate actions should properly assess all their costs and benefits duly considering the multiple sources of the latter (see Box 1.9). These include the PHASE 1 principal benefit of loss reduction (throughout the lifecycle of the project), but also several additional (social, economic, and environmental) co-benefits, the value of which may be very significant. Indeed, opting for the proper mitigation and adaptation investments can unlock immediate, short-term benefits (e.g., in the form of boosting employment of empoweringlocal communities, and strengthening the skills and knowledge of the local population). Itmay also ensure long-term benefits for the beneficiaries in the form of a safer planet, decarbonized future, sustainable economic growth, and resilience against climate-related shocks. M1.2 Climate BOX 1.9 APPRAISING PROJECT’S ECONOMIC VALUE Considerations in Project Selection The economic costs of the project are not the same as its financial costs — externalities and environmental impacts should be considered. Externalities (positive or negative) are economic impacts that affect persons who are not necessarily part of the project scope. The economic benefits are a measure of the value the project will deliver to society as a whole. Step 1 Assess Climate- The revenue a project will generate is usually a lower-bound estimate of its economic Change Risks benefits; however, benefits can be much higher than revenues. For example, the benefits from improved transportation for drivers can far exceed the tolls paid on a highway — faster connections, reduced vehicle maintenance, lower accident rates may be significant factors. In addition, the project may enhance regional economic activity and quality of life for the people living in the vicinity of the project. Similarly, the value of education at a high school should be Step 2 Assess GHG measured by the enhancement in the lives and prospects of the children who attend that Emissions school, even if no school fees are charged. Qualitatively Source: PPP Knowledge Lab | PPP Reference Guide: Assessing Project Feasibility and Economic Viability Step 3 Review Adaptation & ECONOMIC EVALUATION OF CLIMATE ACTIONS Resilience Strategies As evidenced by the preceding discussion, in most cases, increasing spending in adaptation and resilience measures (usually constituting CAPEX) shall result in reduced losses during the lifetime of the project (OPEX). The ability to correctly capture all costs and benefits during the economic appraisal of the project (the process of which is described in Module 1.3 and analyzed in detail in Module 2.3) will determine the future of infrastructure and the affected population. Step 4 Therefore, it is recommended that a high-level assessment be performed early on during the Review Small-Scale Mitigation Measures project selection phase using the simplified generalized formula below . 10 Step 5 Prioritize Climate Strategies 10 World Bank, 2005: A framework for the economic evaluation of transport projects, Transport Note No. TRN- 5, 25pp, Washington D.C., USA 84 PHASE 1 M1.2 Climate Clearly, the outcomes of this formula and any variations thereof shall depend on the accuracy Considerations in and availability of data and on the appropriateness of the methodology to convert non-monetary Project Selection data to compatible, quantifiable terms. Although this assessment will be conducted in more detail during the project preparation phase, a simplified approach—in the form of a participatory decision process—is considered appropriate for the requirements of the current step. Step 1 Instructions on how to prioritize projects based on such a high-level economic evaluation are Assess Climate- provided in the next section. Change Risks BOX 1.10 OPTING FOR SOCIO-ENVIRONMENTAL CO-BENEFITS Step 2 Assess GHG Consistent with the broader World Bank Group’s climate strategy, it is recommended that Emissions synergies are sought between actions to address climate change and other local and Qualitatively regional environmental priorities, and proper merit is given in trying to maximize benefits generated as a result of climate actions. Such co-benefits could include: addressing gender gaps, serving national strategic priorities, protecting populations from risks, etc., using clean energy, protecting biodiversity, restoring landscapes and protecting the broader natural Step 3 environment, reducing gender gaps, achieving easier access to funding, serving national- Review Adaptation & security purposes, enhancing social and political acceptance. Consultations with stakeholders Resilience Strategies and participatory decision-making are highly recommended (if not essential) to ensure that all voices are equitably heard and reflected on the project selection, which will, in turn, simultaneously endow the project with additional public support. Step 4 PRIORITIZATION OF CLIMATE STRATEGIES: A SIMPLIFIED APPROACH Review Small-Scale Mitigation Measures As already explained, project structuring teams are in need of a solid decision-making process that will allow them to prioritize climate strategies based on their costs and benefits at an early stage. Depending on the nature of such options, the benefits may or may not be quantifiable in monetary terms (Box 1.10). This—in combination with the uncertainties associated with climate risks and the lack of quantifiable data—could render traditional cost-benefit analysis inapplicable Step 5 for this upstream stage. Hence, a qualitative prioritization approach is introduced, allowing the Prioritize Climate evaluation of multiple criteria without employing advanced resource-demanding analyses. The Strategies proposed approach enables the inclusion of several significant environmental, socio-economic and gender-related co-benefits in the technical and financial appraisal of the project and may be used as a method to prioritize climate strategies at a high level. 85 The method builds on the concept of multi-criteria-analysis (MCA),11 and can be used when non-monetary factors such as ecological, social, cultural, gender, environmental, political, or PHASE 1 other considerations are important for the decisions. After having identified the potential adaptation and resilience strategies, their prioritization process involves the following steps (Figure 1.8): 1. Select evaluation criteria to be applied. To ensure agreement and shared understanding among all parties, each criterion must be clearly described and agreed upon among all participating stakeholders. Criteria may include not only the effectiveness or the monetary benefit of the option (similar to cost-effectiveness and cost-benefit analyses), but M1.2 also other important factors such as urgency, no-regret attributes, ease of implementation, social acceptance, mitigation co-benefits, etc. Climate 2. Assess the importance of each criterion by assigning weight factors. Each criterion Considerations in receives a weight value between 0 and 1 (assuming that the sum of the weights of all Project Selection criteria is equal to unity (1)) 3. List strategies and score each strategy’s performance for each criterion. The score should be a numerical value between 0 and 1, where 0 reveals bad and 1 excellent performance Step 1 4. For each strategy, calculate its partial scores per criterion by multiplying the score per Assess Climate- criterion (from step c) with the respective criterion’s weight (step b); then add partial Change Risks scores to calculate the total score of the strategy 5. Prioritize strategies by ranking them in descending total score order Step 2 Assess GHG Emissions Qualitatively Step 3 Review Adaptation & Resilience Strategies FIGURE 1.8 Schematic of the simplified prioritization approach Step 4 Review Small-Scale An example application of this type of analysis in an actual project in Rwanda is provided in Box Mitigation Measures 1.11. Given that this ranking is based on qualitative score estimates, it is recommended that the criteria, their weights, and the scores corresponding to each one of them are assigned following a participatory approach enabling a productive dialogue among all stakeholders involved. This will endow the process with reliability and objectivity and allow the proper representation of all stakeholders in the decision-making. An indicative list of scoreable criteria is provided in Table 1.1. Step 5 Prioritize Climate Strategies 11 More details may be found in the following resources: UNFCCC, 2011: Assessing the costs and benefits of adaptation options - An overview of approaches ; USAID, 2013: Analyzing Climate Change Adaptation Options Using Multi-Criteria Analysis 86 Users are advised to update this list using region, sector, and context-specific criteria in order to tailor the process to the needs of any specific project. Detailed guidance in a sector- specific PHASE 1 context is also provided in the sector-specific toolkits. TABLE 1.1 Indicative criteria for assessing climate actions Is the option achieving the desired goal in the most economical Efficiency way? Irreversibility Are the negative impacts of the option reversible? M1.2 Feasibility of How feasible is the option from an economic, social, technological, Climate implementation and environmental perspective? Considerations in Project Selection Urgency of action How urgent is the implementation of the option? How much does the design and implementation of the option Cost cost? Step 1 Will the option achieve the desired objectives if climate conditions Assess Climate- Climate-sensitivity change? Change Risks Can the option be adjusted/modified/upgraded if the impacts of Flexibility climate change are higher than expected? Is the option contributing to sustainable development (e.g., Overall contribution poverty reduction, etc.), and is it relevant to strategic national Step 2 development goals? Assess GHG Social and political Emissions Is the option widely accepted socially and politically? Qualitatively acceptance Step 3 Review Adaptation & Resilience Strategies Step 4 Review Small-Scale Mitigation Measures Step 5 Prioritize Climate Strategies 87 BOX 1.11 PRIORITIZING CLIMATE ACTIONS USING MCA: EXAMPLES PHASE 1 During the preparation of Rwanda’s NAPA, 11 different adaptation options for combating the impacts of climate change were identified as most relevant to the country’s context. Yet, the government decided to proceed with the most urgent and immediate needs due to limited capacities and resources. The latter was determined using a well-structured and transparent MCA approach that evaluated: the impact of the option to vulnerable groups and resources; the contributions of the option to the sustainable development; the synergies with Multilateral Environment Agreements (MEAs); the effectiveness of the option in reducing climate risks; and cost efficiency. Each criterion was assigned a weight factor (i.e., reflecting its importance for the M1.2 decision-makers), and subsequently, the total weights. Climate CRITERIA TOTAL Considerations in #1 #2 #3 #4 #5 WEIGHTED Project Selection SCORE Weight 0.333 0.222 0.111 0.222 0.111 1.000 Intensive agriculture and 1 0.50 0.57 1 0.33 0.765 Step 1 animal husbandry Assess Climate- Introduction of drought 1 0.50 0 1 0.66 0.739 Change Risks resistant species Integrated water 1 1 0.14 1 1 0.903* resource management Information systems, 1 0.50 1 1 0.33 0.813 early warning & rapid Step 2 response mechanisms Assess GHG Emissions Development of sources 1 0.50 0.57 0.66 0.66 0.726 Qualitatively of energy alternative to firewood Promotion of non- 1 1 0.57 0.66 0.33 0.800 agricultural activities Example: The total score of the first ranked option (“Integrated water resource management”) is Step 3 Review Adaptation & calculated as follows: Total score = 1*0.333 + 1*0.222 + 0.14*0.111 + 1*0.222 + 1*0.111 = 0.903 Resilience Strategies Example adopted from Republic of Rwanda, 2016: NAPA-Rwanda Another example of a multi-criteria framework applied in a decision support tool for governments has been developed by Marcelo et al. (2016) in the World Bank’s Policy Research Working Paper: Prioritizing Infrastructure Investment. Within this MCA framework, projects are prioritized based on project outcomes considered along two combined dimensions: social-environmental and financial-economic Step 4 Review Small-Scale Mitigation Measures Source: Marcelo, Mandri-Perrott, House, Schwartz, 2016: Prioritizing Infrastructure Investment: A Framework for Government Decision Making. Policy Research Working Paper No 7674. World Bank Step Output Step 5 Prioritize Climate Strategies A ranked list of adaptation and mitigation strategies 88 PHASE 1 KEY TAKEAWAYS • Climate change and its devastating effects may manifest themselves several years after the financial close of the project bringing unforeseen harm to the contract. Hence climate-change risks need to be assessed and timely addressed M1.2 already at an early stage in the PPP process. Climate • Risk comprises three components: hazard – exposure – vulnerability. These Considerations in components need to be assessed from a climate-change perspective for all Project Selection project options to ensure that climate-change risks are addressable and can be borne. Step 1 • Several tools are available online to allow a preliminary high-level assessment Assess Climate- of climate hazards and their future evolution trends. Change Risks • A preliminary climate risk screening of the technical solution, location, operations, and revenue streams will avoid unpleasant dead ends that could possibly be revealed at a later stage. Step 2 Assess GHG • Potential adaptation and resilience strategies that could be implemented in the Emissions project should be identified to ensure that the project-specific climate risks can Qualitatively be addressed and that climate change will not threaten the project’s viability throughout its life-cycle. • Additional complementary measures that contribute to climate-change Step 3 mitigation, protection of biodiversity and broader natural environment and Review Adaptation & socioeconomic development (including closing the gender gaps) should also be Resilience Strategies incorporated and evaluated based on environmental & social frameworks and “do-no-significant-harm” principles to facilitate and further support the decision for the pre-selection of project options. • Nature-based solutions, ecosystem-based adaptation, and blue-green or green-gray infrastructure are proposed as technically feasible plans that Step 4 promote climate-smart solutions and climate mitigation. Review Small-Scale Mitigation Measures • Climate actions may be prioritized on the basis of an evaluation of their multiple benefits, which are not necessarily expressed in monetary terms, using a simplified approach. Step 5 Prioritize Climate Strategies 89 INSIGHTS Insight #1.3 Climate Scenarios – The Case of RCPs Insight #1.4 Chronic and Acute Risks Insight #1.5 Nature-based Solutions and Blue Green Infrastructure Application Examples 90 CLIMATE SCENARIOS THE CASE OF RCPs Climate scenarios are used extensively within same language when it comes to climate climate models adopted in climate science, as outputs without having a globally accepted well as in engineering practice, to simulate consistent framework. To address this need for changes in climatic variables (e.g., temperature, consistency in the usage of climate scenarios, precipitation) that are expected to occur in the and subsequently, their climate outputs, four future (i.e., climate projections). Theinformation Representative concentration pathways (RCPs), presented in a climate scenario is derived from a namely the RCP2.6, RCP4.5, RCP6, and RCP8.5, set of assumptions, including socio-economic were selected by IPCC Assessment Report 5 and technological future developments that (AR5) to comprise the standard set of climate may or may not be realized in the future. Given scenarios. The four RCPs are considered the wide variety of possibleassumptions that can representative in the sense that each one be made for the future, multiple possible represents a broad range of other climate climate scenarios can be defined. Such scenarios (with different starting assumptions) conditions make it difficult for theinternational that are possible to lead to the same climate INSIGHT #1.3 climate community to speak the characteristics via different trajectories. FIGURE 1.9 The 4 IPCC RPCs describing the range of plausible climate futures [Adapted from: CDKN, 2015 The impact of climate change on the achievement of the post-2015 sustainable development goals, Technical Report] 4 SCENARIOS In particular, RCP2.6 represents various scenarios that aim to keep global warming likely below 2°C above pre-industrial temperatures. RCP2.6 corresponds to a scenario where very high mitigation measures have been considered in combination with a limited climate change. RCP4.5 and RCP6.0 represent intermediate scenarios, while RCP8.5 is the highest GHG emissions scenario when no additional efforts to constrain emissions are considered (also termed a “business as usual” scenario) and climate change is assumed to be extreme. In RCP8.5, the global temperature increase is projected to be beyond 4°C in comparison to pre-industrial temperatures (Figure 1.9 above). 91 CHRONIC AND ACUTE RISKS The Earth’s climate system may be considered as a set of complex interdependent climatic procedures that lie within a dynamic equilibrium in which weather events are expressed. Within this system, the global climate is characterized by major climatic constants (e.g., sea level, mean temperatures, weather patterns, seasons, permafrost, glacial retreat, etc.), and at the same time, it shapes the range and scale in which extreme weather events (e.g., heat waves, hurricanes, storm surges, extreme temperatures, etc.) may—or may not—occur in different parts of the world. As climate change unfolds, shifting trends in the evolution of climatic constants become more and more evident. This evolution materializes gradually and becomes apparent only when examining mean values and measurements over an extended period of time. Such chronic climatic shifts alter the dynamic equilibrium of the global climate system, causing significant climatic impacts around the world that may potentially result in devastating consequences. Definitions These potential incremental future climatic impacts, and their subsequent potential consequences, INSIGHT #1.4 comprise the chronic risks of climate change. The time of occurrence, the severity, and the pace of these possible impacts are unknown and cannot be predicted (not even probabilistically); thus, chronic risks inherently entail uncertainty. Concurrently, when focusing on a smaller scale in time, it is already obvious that more frequent and more intense weather events are being experienced around the world. Such extreme or acute weather expressions are causing immediate physical impacts on both natural and man-made systems. Risks that are imposed from the noticeable increase (or decrease) in the frequency and/or intensity of extreme weather phenomena constitute the second type of climate-change risk, acute risks. Similarly, acute risks encompass high uncertainty as the frequency and intensity of extreme weather events cannot be determined given their dependency on a climate that is currently evolving in an unpredictable way. © John Fielding/Flickr. 92 Chronic and acute hazards may have both direct and indirect impacts on investments and projects, either in the form of physical damages or in the form of service disruptions. For example, if extreme temperaturesexceed the threshold of asphalt, the surface of paved roads may start melting. Similarly, a chronic hazard such as average temperature rise may cause disruptions in the production of geothermal energy because of cooling water shortages. Chronic and acute risks have different characteristics in terms of their pace of realization (quick/gradual), their duration (short/long), their time of expected occurrence (present/future) as well as their impacts on losses (CAPEX/OPEX). As such, investors may approach chronic and acute risks differently in respect to risk management strategies. For example, INSIGHT #1.4 insurance practices may be implemented to control losses that are associated with acute risks, which are mainly experienced as shocks given their short duration. On the other hand, chronic risks seem to be more suitable to be covered by financial products and long-term strategic plans. Source: WRI, 2021: Assessing Physical Risks from Climate Change: Do Companies and Financial Organizations Have Sufficient Guidance? 93 NATURE-BASED SOLUTIONS & BLUE-GREEN INFRASTRUCTURE APPLICATION EXAMPLES ► Sand Dams to Combat Drought, Somalia INSIGHT #1.5 Somalia is a low-income country that suffers from a very dry, highly variable climate, low precipitation, and extreme weather conditions that could significantly deteriorate due to climate change. Traditional water management mechanisms, especially in rural areas, are often obsolete and lack the capacity to sustain water supply during prolonged dry periods. These conditions make rural communities extremely vulnerable to climate stresses and shocks. In response to this challenge, the Water for Agro-Pastoral Livelihoods Pilot Project has financedthe construction of several sand dams and subsurface dams across Somalia. The infrastructure was intended to improve the availability of water resources during long dry seasonsby increasing soil moisture, retaining a higher water table throughout seasons, and minimizing water losses due to evaporation and runoff. A similar project was approved by the Somalia Emergency Drought Response and Recovery Project in 2017, continuing investments in sand dams in 15 priority areas around Somalia. 94 ► Sand Nourishment for Coastal Protection, Netherlands To protect the Delfland Coast from erosion and potential flooding, the Dutch government advocated for the implementation of a nature- based strategy avoiding the construction of gray infrastructure (such as concrete levees and wave breakers). In 2011 the government proceeded with a nearly $100 million investment to deposit a 21.5 million cubic meters volume of sand (all at once) and let the sand naturally distribute itself across the coastline INSIGHT #1.5 and replenish the natural sand dunes. Initial findings are encouraging indicating that the shoreline has indeed grown beyond the original deposit, although the dunes have grown more slowly than expected. © Rijkswaterstaat/Flickr. ► Combining Green and Gray Infrastructure for Flood Risk Management, Poland The government of Poland and the World Bank introduced the Odra and Vistula River basins hybrid nature-based solution projects aiming to mitigate flooding in the aftermath of the great river floods in 1997, 2006, and 2010. The project came as part of the strategy to invest in flood protection measures of the population and economic centers of the country. To this end, the existing gray infrastructure was combined with natural features: the river floodplain was enlarged by restoring dikes and repairing existing levee systems and drainage canals, improving flood retention capacity, and helping the protection of local communities. This is another example of efficient interaction between nature-based solutions and traditional gray solutions as a means to reduce climate risk while contributing towards a resilient and low-carbon future. 95 MODULE 1.2 Resources CLIMATE CHANGE KNOWLEDGE PORTAL CCKP provides global data on historical and future climate vulnerabilities and impacts Developed by: World Bank Group THINK HAZARD! Webtool that provides high-level hazard maps per country, including also smaller scale (district level) hazard detail Developed by: Global Facility for Disaster Reduction and Recovery (GFDRR) - World Bank Group REGIONAL & COUNTRY RISK PROFILES AND GHG EMISSIONS FACT SHEETS Climate risk profiles summarize key climate stressors and risks most relevant to a mission’s objectives. GHG emissions fact sheets provide information that may be useful in identifying climate change mitigation opportunities Developed by: United States Agency for International Development (USAID) CLIMATE & DISASTER RISK SCREENING TOOLS A proactive approach to considering short- and long-term climate and disaster risks in project and national/sector planning processes Developed by: World Bank Group LAC RISK PROFILE VIEWER An online tool to inform users of the available risk-studies and their appropriate uses for countries in the Latin America and the Caribbean region, and also to allow the investigation of key risk-study results across multiple countries Developed by: World Bank Group CLIMATE CHANGE ADAPTATION TOOLKIT: WEADAPT This toolkit is a combination guidance document and worksheet that assists organizations in outlining a process for identifying, exploring, and evaluating adaptation options to assist organizations in prioritizing actions Developed by: RMIT University, Net Balance Foundation, City of Greater Geelong CLIMATE RISK SCREENING AND MANAGEMENT TOOL FOR PROJECT DESIGN This tool guides USAID project planners and support staff through the process of assessing and addressing climate-related risks. This process will help to ensure the effectiveness and sustainability of strategic objectives in the face of climate variability and change Developed by: USAID, 2017 96 THE ADAPTATION SUPPORT TOOL: CLIMATE ADAPT The Adaptation Support Tool is a web tool within the European Climate Adaptation Platform Climate-ADAPT that aims to assist policymakers and coordinators on the national level in developing, implementing, monitoring, and evaluating climate change adaptation strategies and plans Developed by: European Commission, European Environment Agency DISASTER AND CLIMATE CHANGE RISK ASSESSMENT METHODOLOGY FOR IDB PROJECTS: A TECHNICAL REFERENCE DOCUMENT FOR IDB PROJECT TEAMS This methodology provides practical support to project teams in different sectors on how to integrate disaster and climate change risk considerations into project preparation and implementation, where relevant Developed by: IDB, 2019 JICA CLIMATE FINANCE IMPACT TOOL: CLIMATE FIT (ADAPTATION) Guidelines for methodologies to assess climate risks and examine adaptation measures for different sectors Developed by: Japan International Cooperation Agency, 2019 DESIGNING CLIMATE CHANGE ADAPTATION INITIATIVES: A TOOLKIT FOR PRACTITIONERS The toolkit is a step-by-step guide on how to develop adaptation initiatives in developing countries. The guide helps to understand how to differentiate between a climate change “adaptation” and a traditional development initiative and what key elements must be considered when developing and designing an adaptation initiative Developed by: UNDP, 2010 BOOKLET ON CLIMATE SCREENING AND ADAPTATION AND REVIEW EVALUATION PROCEDURES The booklet includes a set of decision-making tools and guides that enable screening projects in vulnerable sectors for climate change risks and identify appropriate adaptation measures to reduce vulnerability Developed by: African Development Bank (AfDB), 2011 RESILIENCE RATING SYSTEM: A METHODOLOGY FOR BUILDING AND TRACKING RESILIENCE TO CLIMATE CHANGE The RRS evaluates the resilience of the project design and, through project outcomes, aims to achieve better monitoring of adaptation and resilience-related action. It also includes guidance on ways to incorporate appropriate risk reduction measures into project design Developed by: World Bank Group, 2021 97 Module 1.2 - Further Reading SPECIAL REPORT: MANAGING THE RISKS OF EXTREME EVENTS AND DISASTERS TO ADVANCE CLIMATE CHANGE ADAPTATION This special report explores the challenge of understanding and managing the risks of climate extremes to advance climate change adaptation Developed by: IPCC, 2012 AR5 SYNTHESIS REPORT: CLIMATE CHANGE 2014 The most comprehensive assessment of climate change published thus far *by the IPCC.* The AR6 Synthesis Report is due for release in 2022 Developed by: IPCC, 2014 SPECIAL REPORT: GLOBAL WARMING OF 1.5°C An IPCC Special Report on the impacts of global warming of 1.5°C above pre-industrial levels and related global GHG emission pathways, in the context of strengthening the global response to the threat of climate change, sustainable development, and efforts to eradicate poverty Developed by: IPCC, 2019 INTEGRATING GREEN AND GRAY: CREATING NEXT GENERATION INFRASTRUCTURE This report guides developing country service providers and their partners on how to integrate nature into mainstream infrastructure systems Developed by: World Bank Group – World Resources Institute, 2019 INFRASTRUCTURE FOR GENDER EQUALITY AND THE EMPOWERMENT OF WOMEN The report provides a series of methodologies and tools based on the evidence-based infrastructure approach, helping governments assess and improve their capacity to plan, deliver and manage infrastructure systems. This includes identifying actions to mainstream gender in infrastructure projects,understanding priority areas for intervention, and assessing the level of sustainability, efficiency, and resilience of existing infrastructure assets and systems Developed by: UNOPS, 2020 LEVERAGING CO-BENEFITS BETWEEN GENDER EQUALITY AND CLIMATE ACTION FOR SUSTAINABLE DEVELOPMENT: MAINSTREAMING GENDER CONSIDERATIONS IN CLIMATE CHANGE PROJECTS The report provides methodologies and tools to mainstream gender in climate project design and implementation. Developed by: UN Women, 2016 GENDER DIMENSIONS OF DISASTER RISK AND RESILIENCE: EXISTING EVIDENCE This report reviews existing evidence and data on how men and women, boys and girls, are impacted by, prepare for, and cope with disasters Developed by: World Bank Group, 2021 98 GENDER AND CLIMATE CHANGE: OVERVIEW OF LINKAGES BETWEEN GENDER AND CLIMATE CHANGE UNDP presents updated versions of 12 training modules and issue briefs on gender dimensions of climate change, covering a range of themes and sectors. These knowledge products are designed to build capacity in member countries with respect to gender and climate change within the context of sustainable development Developed by: UNDP, 2016 WORLD BANK GROUP GENDER STRATEGY (FY16-23): GENDER EQUALITY, POVERTY REDUCTION AND INCLUSIVE GROWTH The World Bank Group’s new gender strategy delineates the support provided to client countries and companies to achieve greater gender equality. This strategy builds on past achievements and raises the bar on gender equality by focusing on how the World Bank Group can move beyond mainstreaming to an approach that identifies outcomes and monitors results of WBG supported interventions in client countries Developed by: World Bank Group, 2016 GENDER EQUALITY, INFRASTRUCTURE AND PPPS The report points out that best practices at the intersection of gender equality and infrastructure PPPs are still evolving Developed by: Schwartz, J., Damian, B., Nyirinkindi, E., IBRD, World Bank, 2019 99 Step 1 Step 2 Map the Global Assess/improve and National Project’s Alignment Climate Policies with Climate Policies Revised project scope that aligns with national climate M1.1 priorities and goals Project Alignment with Project scope Climate Policies Step 1 Step 2 Step 3 Step 4 Step 5 Assess Climate Risks Assess GHG Review Adaptation & Review small-scale Prioritize Climate Project selection Emissions qualitatively Resilience Strategies Mitigation Measures Strategies Preliminary description of the (out of a number M1.2 project of alternatives) (inc. adaptation and PHASE 1 mitigation strategy) Climate Considerations in Preliminary cost estimates Project Selection Economic Step 1 Step 2 Step 3 pre-assessment; Include Climate Check Project’s Check Project PPP screening Considerations in CBA Affordability Suitability as a PPP A project option gets the green light M1.3 to proceed to Climate adaptation/mitigation Identify conditions that Climate mitigation appraisal benefits breach affordability considerations on VfM Value of Investment Perform CBA for each Climate adaptation Accounting for project option considerations on VfM Climate-Actions (to the extent possible) Check sensitivities 100 1.3 Value of Investment Accounting for Climate-Actions The scope of this third module of Phase 1 is At this stage, the following, mainly to investigate whether one or more project qualitative, information is available based on options may be potentially subjected to the outputs of the preceding modules: climate change-induced risks that could • the project's risk to climate change question their technical or financial viability • the cost levels of the direct and indirect and hence, exclude them from further losses of such events on the infrastructure analysis. As part of this high-level evaluation, • the costs and benefits of adaptation and the following financial pre-assessment resilience measures analyses will be performed: • the costs and benefits of climate 1. Preliminary cost-benefit analysis (CBA), mitigation1 affordability, and value for money (VfM) The module intends to guide users in analysis for each project option brought incorporating these outputs into the forward from Module 1.2. financial pre-assessment analyses and to 2. Assessment of suitability of the project outline the considerations that will need to for PPP procurement and identification of be addressed in each case. the project option with the highest benefit to the government. Projects failing to pass the selected criterion are excluded from further consideration. 1 This may refer either to the cost and benefits of alarge-scale mitigation project, or to the cost and benefits introduced by the adoption of small-scale mitigation within projects whose primary scope is not climate mitigation. 101 PHASE 1 STRUCTURE OF THE MODULE The module is structured in three consecutive steps:  Step 1 provides guidance for a high-level cost-benefit analysis (CBA) which aims to identify solutions that maximize the benefits-cost difference.  Step 2 tests the affordability of each project option both at the level of the government's fiscal resources and at the level of assessing the impact of tariffs on users. Assessment M1.3 refers to the project's whole life-cycle, accounting for the special characteristics of its climate mitigation attributes and under the prism of climate-change-induced costs that may occur in the future. Value of Investment Accounting for  Step 3 helps the user decide on the suitability of a project that has been assessed for Climate-Actions potential future climate risk and has passed the preliminary CBA and affordability checks to be procured within a PPP framework. Step 1 Include climate BOX 1.12 ASSUMPTIONS INCLUDED IN THE MODULE Considerations in For the purposes of the guidance of this module, certain assumptions are made upfront in order CBA to allow flexibility and adaptability of this part of the toolkit and to avoid its noncompliance when project evaluation processes followed by public authorities are not aligned with the typical PPP cycle. These assumptions are as follows:  The country in which the project is located can accommodate PPP structures from a 2 EPC and O&M companies: engineering procurement and construction and operations & management regulatory perspective. Step 2 companies  There is a government budget with transparent investment allocations and short, medium, Check Project Affordability and long-term timelines.  There is private investment in the country and a banking system that can support international transactions.  For the right project structure, there are EPC and O&M companies2 capable of undertaking the contracts (international or national companies that are allowed to operate in the project's country).  The country is not at war and/or in any other unresolved form of force majeure status (e.g., riots, earthquake disaster, ongoing fires, pandemics, etc.). Step 3  Affordability, CBA, and VfM analyses are not conclusive at this stage and are conducted Check Project simultaneously (and updated as more information becomes available during the project Suitability as a PPP evaluation and preparation phases) in order to serve as decision support tools within the boundaries of the state's budget and access to liquidity. 102 PHASE 1 01 INCLUDE CLIMATE CONSIDERATIONS IN CBA As CBA aims to identify the technical solution that maximizes the benefits minus costs positive difference, any increase in costs would have to be matched or exceeded by increases in benefits. Otherwise, the attractiveness of the technical solution would decrease. Direct and indirect costs M1.3 are generally more straightforward to identify and quantify; therefore, the following process of incorporating the previous module's outputs in the CBA analysis starts withthe costs part of the Value of Investment equation. Accounting for Climate-Actions CBA COSTS Costs associated with climate actions fall into three main categories:  Cost impact estimates of the identified climate hazards: (i) what is the cost impact to Step 1 Include climate the project due to operational disruption, which may or may not include structural Considerations in damage (i.e., direct and indirect losses as defined previously) and (ii) what is the cost to CBA recover from such disruption back to full operations, adjusted for the probability of occurrence and the timing of such occurrence  Cost of the climate mitigation options and of adaptation measures to reduce climate impacts, e.g., the cost of structural capital works that protect from the hazard Step 2  Indirect costs ("externalities") associated with operational disruption due to climate Check Project hazard (e.g., business disruption due to people not being able to travel a given road, Affordability suspension of industrial production because of power shortages for extended time periods due to power grid unavailability because of extreme weather conditions). Such costs should be adjusted for the probability of the associated events occurring throughout the life-cycle of the project Once costs have been identified and adjusted for shadow prices and opportunity costs as per the standard CBA analysis, they are input into the financial model and added to the total costs of the Step 3 project. Associated benefits, over and above the benefits that the project otherwise offers, Check Project should then be identified and, to the extent possible, quantified. Suitability as a PPP 103 CBA BENEFITS PHASE 1 Recapping the description of Module 1.2, for projects including climate mitigation and adaptation plans, such benefits are:  Risk reduction which shall be reflected in all subsequent considerations as well as in the financing3 terms of the project  Socio-environmental co-benefits including resilience through the project, whereby the climate-related measures also lead to protection of the wider or adjacent ecosystem or lead M1.3 to wider economic benefits, e.g., uninterrupted travel to and from work without frequent interruptions, growth of nearby land value, which is also likely to benefit from such Value of Investment measures, the safety of users, no power shortages, etc. Accounting for Climate-Actions  Socio-economic benefits including impacts on food and nutrition security, health, human settlements, biodiversity, and the natural environment, poverty, unemployment ratio, water supply, electricity costs. Such impacts may unfold during the full life-cycle of the project (including decommissioning) and not just during the validity period of the PPP contract  GHG emission reduction and de-carbonization (which in turn contribute towards achieving Step 1 national CO2-related targets) Include climate Considerations in  Potential access to "green" liquidity pools CBA  Increase of the residual value of the project. Especially as climate hazards most likely cover the full life-cycle of the project and, in fact, may be expected to intensify in the long term, a project that is protected from such hazards will have a higher valuation at the end of its life-cycle. For example, a power generating facility may have its life extended, through upgrades and turbine replacement, without the need to relocate because of climate difficulties or uncertainties. The same applies to a transportation network that, with some Step 2 Check Project adjustments, will continue to serve its purpose without the need for alternative transport Affordability means due to frequent floods. Understandably, climate-related benefits should be considered supplementary to the first and foremost benefit of the project, which should be its ability to provide service of higher quality to the end beneficiaries. Such benefits also need to be updated accordingly in the financial model and adjusted for market imperfections. Sensitivities are then assessed, primarily on the costs, which are easier to quantify. Step 3 Check Project Suitability as a PPP 3 While “funding” is defined as the capital provided by the government or grantor, “financing” refers to the capital that may be raised by the project company from the private sector (e.g., commercial banks). The latter will introduce climate-related terms that need to be met in order to unlock eligibility or to reduce the cost of access to such capital. For example, a commercial bank is highly likely to request guarantees or increased interest rates to finance the project if the climate-related risks appear high or not adequately addressed; other institutions are limited by their mandates to only finance specific climate-mitigation activities. 104 CBA SCENARIOS PHASE 1 CBA is intended to inform the decision-makers on:  the level of increase in climate-related costs that are required for total costs to match or exceed benefits  The level of maximum tolerance of climate-related costs that leads to a breach of M1.3 affordability. By identifying such boundaries, it can be determined whether a project that is already positive Value of Investment from a CBA perspective can tolerate climate-related costs, whether they are associated with Accounting for mitigation or adaptation expenses, and at what level without compromising its overall positive Climate-Actions net effect on society, the environment,4 and the state. To the extent information for any of the above is not available, it remains an open item to be determined in the later phases. In any case, it is expected that the CBA is constantly updated and information within it refined as project assessment and selection advances in the next stages. In Step 1 case information is already available, users may refer to Module 2.3 for further guidance on how Include climate to perform the CBA in quantitative terms. Considerations in CBA It is worth noting that what may be considered a high cost for adaptation measures can ultimately be significantly lower than the costs associated with the risk of disruptions due to climate hazards. The cost of externalities must be carefully assessed in Step 2 Check Project order to compare a project alternative with limited climate Affordability hazard risk, against a project alternative with no adaptation but with costs associated with operational disruption. Step Output Step 3 Check Project The impact that climate hazard-associated costs, be it disruption costs, Suitability as a PPP adaptation costs, or both, have on the cost-benefit balance and the level of such costs that the project alternatives can tolerate before they are considered net unbeneficial. 4 When considering climate mitigation projects (e.g., renewable energy, waste to energy), socio-economic benefits are, by default, enriched given the direct link between the project’s purpose and, primarily, GHG emission reduction. This direct link is not necessarily the case, when considering projects with climate mitigation adjustments (e.g., highway lighting by renewables), whose primary purpose is not to reduce GHG emissions, but rather climate mitigation is a positive “byproduct.” 105 PHASE 1 Affordability has to be ensured on the basis of the whole lifecycle costs of each project, with project options that breach affordability levels --regardless of the procurement method used -- being dropped. In the context of this analysis, a preliminary assessment has to be conducted to M1.3 evaluate whether the additional costs to the project, either from climate events occurring or from the required adaptation and/or mitigation works, impact affordability. Of course, both Value of Investment liabilities and revenues from user-pays projects and taxes have to be considered while ensuring Accounting for that the net result is in line with budgetary limits, constraints, and other concurrent investment Climate-Actions plans of the public authority or the state. Similarly, the impact of tariffs on users needs to be properly assessed and ensure it is acceptable. Affordability analysis is viewed as a continuous assessment as more data becomes available and project structures are determined. However, what is important at this stage is the likelihood of Step 1 climate hazard-associated costs or of costs in relation to climate mitigation requirements Include climate impacting affordability. Considerations in CBA For example, for projects where climate-related costs are a relatively small percentage of the total capital costs, affordability is unlikely to be affected. On the other hand, if such costs (or the contingency costs in case of no adaptation or resilience plans) are a significant percentage of total capital costs, then affordability becomes questionable (this applies to both availability- based and user-pays based concessions whereby the government would have to take steps to fill any viability gap given the high risk and associated costs). In such cases, the project would have Step 2 Check Project to be rejected or re-assessed since its potential for passing PPP suitability and VfM will decrease Affordability significantly, as described in the next step. Step Output A preliminary high-level assessment of the impact that climate-related costs have on the project's affordability and whether the level of such additional costs renders a project unaffordable for the public authority, Step 3 regardless of the procurement method and the project structure. Check Project Suitability as a PPP 106 PHASE 1 Entering this step, the project options are assumed to (i) have been assessed for climate-change risk and have not been rejected due to high non-addressable risk, (ii) have passed the preliminary M1.3 CBA test, whereby their net socio-economic benefits exceed total costs and the strategic climate objectives of the government authorities are being met, and (iii) are likely to be within the government's affordability levels when incorporating costs associated with climate actions. Value of Investment Accounting for These project options will next be assessed for their suitability to be procured as PPPs (see also Climate-Actions Insight 1.6). In other words, whether and to what extent do climate mitigation or climate risks and their associated reduction costs impact a project's suitability for a PPP. Understandably, given that climate hazard scenarios essentially translate into risk and cost at varying levels in each case, it is important to identify the parts of a PPP suitability assessment that may be affected. Table 1.2 outlines these areas demonstrating the relevant risk and cost considerations, which are Step 1 explained in detail below. Include Climate Considerations in Similar to CBA, climate mitigation projects (e.g., wind farms, photovoltaic plants, etc.) will, in CBA most cases, satisfy some of a project's PPP suitability considerations more easily. For example, finance availability is, in fact, significantly enhanced as there are several liquidity pools globally and by multiple sources (commercial banks, development and multilateral institutions, government grants) with clear and transparent eligibility criteria for such funding. There is also a substantial market appetite for such projects, given the relevant strategic direction of many Step 2 private sector infrastructure investors. Check Project Affordability VfM at a program level To the extent that a government or public authority intends to undertake a VfM analysis to determine the most beneficial procurement method for a project (in this case, PPP versus traditional procurement5), VfM can also be done at a program Step 3 level, especially if it relates to projects with a series of common Check Project Suitability as a PPP characteristics. This may also be applicable in the case of a list of project options if the climate risk requirements and characteristics are of a similar level and the impacts to all projects are of similar nature and size. 5 It is noted that frequently project grantors view a PPP solution as the only solution in procuring a project that would otherwise not be procured at all. In these cases VfM analysis is not undertaken. 107 TABLE 1.2 Impacts of climate change on PPP suitability VfM Driver PPP Suitability: Climate Conditions Impact on PPP Considerations Suitability Project size Is the project too big for the Expensive adaptation costs may Negative market? materially impact the project size over Is the project too complex to be and above the levels that justify a delivered as a PPP? tender, or that active contractors can take on, or that can be financed Including climate risk potentially Negative requires more data and expertise, additional studies and adjustments to standard documentation, increasing preparation time and budget Market Would there be investor market New climate risks (that haven't been Negative appetite appetite? identified before in the country or region) will have a negative impact on private investor appetite Proper identification of adaptation cost Positive will maintain private sector appetite Precedent Are there precedent Existing PPP program or pipeline in the Positive projects transactions already developed country would allow more flexibility in as PPPs for this type of project introducing new risks tothe project in thecountry/region or similar structure countries? Risk Are there any significant The capability (or appetite) of the Negative allocation climate risks within the project private sector to undertake unmitigated that are not manageable by a climate-induced risks is questionable private partner? Uncertainty on the level of adaptation Mostly Negative costs and of their time of occurrence (unless specific compromises PPP suitability measures to decrease uncertainty are taken) Are there circumstances where The private sector's capital and skills Positive climate risks can be better by bring higher efficiency in disaster the private party? response and recovery. Also, insurance coverage increases the capability of the private party to assume a certain level of climate risks 108 VfM Driver PPP Suitability: Climate Conditions Impact on PPP Considerations Suitability Is there a risk of non-availability Geophysical hazards (landslide, Mostly Negative of the land/right of way and subsidence, etc.) may be intensified (unless recognized land acquisition cost overrun? by climate change and proper measures are structured) Certainty of Is it possible that the project Climate-related disruption on Negative offtake/ will experience a change in demand/offtake/supply of a project supply demand due to climate change? climate compromises certainty of investment Project Will the project quality PPP structure gives room to the Mostly Positive Quality increase if the project is concessionaire to think about the (provided that the developed through a PPP most efficient and effective way to methods used are scheme? deal with climate risk, e.g., for tested) mitigation measures, rebuilding Pressure from private financiers Positive brings higher construction quality and stimulates high performance in order to ensure repayment/ returns Output-based Is it possible to define clear Output-based contracting linked with Mostly Positive contracting output requirements for road financial incentives (or penalties) performance in climateevents? may stimulate better climate risk mitigation and preparation as well as quicker and higher quality response and repairs Finance Are there any significant Unmitigated climate risk would Negative (unless availability climate risks that may harm challenge financing availability. recognized and proper the availability of financing? Certainty of adaptation costs and measures are their timeline (if not performed structured) upfront) is required to ensure the finance availability for a PPP structure Legal or Has the country adopted a Project implementation will be Mostly Positive regulatory national framework legislation facilitated if there is an enabling framework on climate change (e.g., a legal/regulatory framework for Climate Act) green investments (defining among other subsidies and incentives for private partner participation) Given the qualitative assessments of this stage, it may be quite beneficial for project preparation teams to consider conducting an early-stage market-soundness testing in order to evaluate the extent to which their assumptions are valid and receive non-binding feedback not only from potential bidders but also from several other categories of potential beneficiaries of the project. 109 KEY CONSIDERATIONS WHEN PERFORMING VFM PHASE 1 Assuming that the preliminary VfM analysis is at this stage undertaken primarily on a qualitative basis (see Box 1.13), the following considerations should be made with regards to incorporating climate actions in the project's structure:  Include the cost of climate adaptation and resilience measures when calculating the public sector comparator (i.e., what would it cost the government or the public authority to procure the project through traditional means). Admittedly, at this qualitative level M1.3 of the VfM assessment, it will be essential to make assumptions regarding such costs; however, a high-level review of potential costs and likelihood can be determined. Value of Investment  Incorporate the cost of climate adaptation and resilience measures in the PPP Accounting for preliminary model. Again, assumptions have to be used at this early stage; however, Climate-Actions substantial differences as compared to the output of Step 1 may surface, thereby indicating that a PPP may be more beneficial than traditional procurement.  Similarly, include climate mitigation costs when calculating the public sector comparator and the PPP preliminary model. Step 1 Include climate  Identify the benefits of procuring via PPP related to climate risk and adaptation Considerations in measures, such as the innovation that the private party may introduce in this sector, the CBA competitive tension to keep costs low and performance high, efficiencies, etc.  Ensure that the potential benefits regarding mitigation characteristics that could be brought by PPP procurement are adequately considered, assuming equal quality of service between PPP and traditional procurement. Step 2 Check Project Affordability Detailed VfM analysis will be undertaken in the next phase, as details regarding costs and project structure under a PPP contract evolve. At this stage, the project option with the highest potential net value to the government should be taken forward to the next phase for more detailed analysis and structuring. Step 3 Check Project Suitability as a PPP Step Output For each project option:  (Optional) The likelihood of passing the CBA test  A decision whether the climate costs maintain or breach affordability  A preliminary decision on whether an option can be structured as a PPP in a way that is more valuable to the government as opposed to traditional procurement considering climate evolution, its risks, and the required adaptation measures 110 BOX 1.13 RULE OF THUMB FOR ASSESSING THE IMPACT OF CLIMATE RISK INCORPORATION ON A PROJECT'S PPP SUITABILITY A project alternative that is otherwise considered to be suitable for a PPP is assessed based on the following questions: If the answer is yes to all the above questions, then PPP suitability is not likely to be affected by incorporating climate risk provisions and measures in a project structure. This depends on the nature of the project, the level of impact, and the actual level of costs for addressing the risk. 111 PHASE 1 KEY TAKEAWAYS • The high-level CBA should incorporate climate considerations including cost M1.3 impact estimates of the identified climate hazards and the costs of recovery, the cost of climate mitigation options and climate adaptation and resilience measures, indirect costs associated with operational disruptions due to Value of Investment Accounting for climate hazards together with the benefits of risk reduction and their indirect Climate-Actions benefits to the broader ecosystem or socioeconomic system, GHG emission reduction, potential access to green financing sources, and the residual value of the project throughout the whole life-cycle. • An important factor to consider for the need of a climate-inclusive CBA analysis is that what may be considered a high cost for adaptation measures can ultimately Step 1 Include climate be significantly lower than the costs associated with the risk of disruptions due Considerations in to climate hazards. CBA • The additional costs to the project, either from climate events occurring or from the required adaptation and/or mitigation work affect affordability. Both liabilities and revenues, from user-pays projects and tax, have to be considered, while ensuring that the net result is in line with budgetary limits, constraints, and other concurrent investment plans of the public authority or Step 2 the state. Check Project Affordability • Climate change considerations should be also incorporated within the PPP suitability assessment by taking into account the level of climate-related (adaptation and mitigation) costs in a traditional vs. PPP procurement method comparison, the potential climate-risk allocation in a PPP scheme, the availability of risk protection measures (i.e., insurances and guarantees) and the financing and bankability concerns related to climate risks supplemented by the project’s co-benefits. Step 3 Check Project Suitability as a PPP • Building on the findings of this phase to conduct an early-stage market soundness testing of the project, emphasizing potential climate action could provide valuable insights from multiple stakeholders thereby providing valuable input for the forthcoming preparation phase. 112 M3.3 Integration of Climate Requirements into the Procurement Process Step 1 Include Climate Considerations in the Design INSIGHTS Insight #1.6 How May Climate Risk Impact the PPP Suitability of a Project? Step 2 Include Climate Requirements in Technical Specs/Outpu tIndicators Step 3 Include Climate Requirements in Operational Procedures 113 HOW MAY CLIMATE RISK IMPACT THE PPP SUITABILITY OF A PROJECT? Climate and climate change introduce additional risks to the PPP that, if not properly assessed, addressed, transferred, or shared among parties, may compromise the project VfM and the overall PPP suitability. Listed below are conditions that should be considered during project preparation and structuring. Project size/cost of adaptation ratio Project size plays an important role in the sense that a small percentage (upto 10%) increase in the total project costs in order to implement adaptation measures and mitigate climate risk should not impact a project's PPP suitability. If, on the other hand, such costs represent a significant percentage of total INSIGHT #1.6 project costs, therefore requiring larger funding by the private sector, then some form of cost or risk-sharing with the governmentor structured solutions would be required to maintain PPP suitability. Climate-induced disruption The impact of climate hazard risk on availability, for availability projects, or supply and offtake, for user-pays concessions, has to be considered, particularly when such risk severely affects interdependent infrastructure. In most cases, the project company would have to be ring-fenced from such risks. For example, failure of the grid given an adverse climate scenario should not be the risk of a power plant concession, and similarly, flooding of a road should not be the risk of an adjacent toll road. To the extent that climate hazards compromise this relative certainty of availability and offtake/supply, PPP suitability is also impacted. Local market appetite The market's appetite for PPP projects is another factor to be considered in order to understand how a bidding process will be impacted (number of bidders, quality of bidders) and how climate risk will be effectively introduced in the bidding documents/provisions. If a PPP pipeline already exists, it may be more straightforward to incorporate new provisions in contracts without affecting the market appetite for new projects. In cases where PPPs are a new way of procuring infrastructure, consultations should take place in order to assess the market's appetite for a PPP with climate provisions and perhaps to initiate thinking about ways that such provisions can represent a benefit and an incentive for market players. 114 Measurability of climate impacts On the basis that a PPP structure would not accommodate provisions with uncertain outcomes and uncertain responsibilities, it is essential to assess whether climate-induced disruptions have a measurable impact on a project's performance. If yes, climate risk will be explicitly introduced in the PPP agreement (i.e., performance metrics can be structured and embedded in the payment mechanism, insurance provisions, etc.). If the risk is not measurable, then it is likely that a PPP structure without significant protections and cover by the government or other agencies will face difficulties in being executed. 5 Availability of financing Climate risk provisions in a PPP structure may improve the project's eligibility for additional liquidity sources under the provision that there are no significant uncertainties in a project's cash flow waterfall and/or there are reserve accounts to account for contingencies. Lenders would require guarantees and cover if climate uncertainties are not accommodated INSIGHT #1.6 adequately within the financing plan. The rigorous assessment of climate risks improves project bankability, insurability, reduces the need for public guarantees, facilitates the structuring of performance-based contracts and overall enhances the PPP suitability of the project. Affordability implications Climate risk costs (disruption or adaptation) that are significant or not addressable may severely impact the capability of the private sector to sustain payments. Public sector intervention would be necessary to fill the viability gap (in user-pays concessions) or to provide the required guarantees. One counter to that is whether a project that otherwise becomes unaffordable by the inclusion of climate risk provisions or measures would provide benefits/synergies/innovative solutions if procured via a PPP that would make it more affordable. 115 MODULE 1.3 Resources VALUE-FOR-MONEY ANALYSIS: PRACTICES AND CHALLENGES Presents lessons from countries that have relatively well-developed approaches and tools for VfM analysis: with respect to how this analysis has evolved, what are the ongoing and new challenges, and how the approaches might apply in countries with less well-established PPP programs Developed by: WBI - PPIAF, 2013 ASSESSING THE COSTS AND BENEFITS OF ADAPTATION OPTIONS. AN OVERVIEW OF APPROACHES This publication provides an introduction to a range of different assessment approaches and methodologies of assessing the costs and benefits of adaptation options and shares best practices and lessons learned Developed by: UNFCCC, 2011 Module 1.3 – Further Reading INVESTING IN A TIME OF CLIMATE CHANGE This study provides information on risk and opportunity priorities to incorporate when building investment portfolios. It outlines a methodology that will allow investors to be better informed to identify, assess, and act on climate change within the investment process. The approach incorporates four climate scenarios and four climate risk factors to estimate the impact on returns for portfolios, asset classes, and industry sectors between 2015 and 2050. The report also provides sector-based details Developed by: Mercer, 2015 ECONOMIC ANALYSIS OF CLIMATE-PROOFING INVESTMENT PROJECTS How the economic analysis of climate-proofing measures informs the design ofinvestments Developed by: Asian Development Bank, 2015 1 PROJECT SELECTION 2 PREPARATION Refine project scope and preliminary design Assess technical feasibility Refine socio-economic feasibility 3 Assess PPP commercial feasibility and affordability STRUCTURING CONSIDERATIONS 4 TENDER PROCESS 11 Phase 2 Climate considerations should play an instrumental role during the second phase of the PPP cycle, which typically includes the project's scope refinement and the assessment of its technical and commercial feasibility. Therefore, it is essential that the assessment of any climate-related risks and the design of climate mitigation options and adaptation and resilience measures are properly and accurately accounted for at this stage to include climate-related considerations in the project appraisal correctly. In this context, Phase 2 of the climate toolkit is devoted to guiding users on how to conduct detailed assessments of GHG emissions and climate risks (including advanced climate hazard modeling) while accounting for both internal and external risk factors, followed by a thorough review of considerations on the design of climate mitigation and adaptation plans under deep uncertainty (including provisions for promoting the use of "green" construction solutions). Costs and associated benefits of climate considerations are subsequently assessed, and guidance is provided on how to include them in the project without compromising its commercial feasibility and bankability. 118 Step 1 Step 2 Step 3 Step 4 Climate Hazards Characterization of Characterization of Towards Low-Carbon Internal Risks External Risks Infrastructure Revised EIA incorporating climate risks and climate M2.1 mitigation opportunities Technical pre-feasibility & Interactions Environmental Impact between Climate Assessment (EIA) & PPPs Mitigation attributes of the project (incl. cost estimates) Step 1 Step 2 Step 3 (Work in progress) Feasibility of Assess the Feasibility of Manage Uncertainty in Adaptive Plan Small-scale Mitigation Adaptation Strategies Adaptation Plan (final tech. specs+ cost estimates) Technical M2.2 PHASE 2 feasibility Base Plan (final technical specs + cost estimates) Climate Considerations on Technical Feasibility Commercial Step 1 Step 2 feasibility Update and Refine CBA, VfM and Assess Bankability and Affordability Analyses Commercial Feasibility Green light to move to M2.3 structuring of the Base or the Adaptive Plan Climate Considerations on Commercial feasibility and Bankability 119 Phase 2 Outline Phase 2 comprises three modules: Module 2.1 – Interactions between Climate and PPPs outlines the impacts of climate on the project and the impact of the infrastructure on climate change. It involves future mapping, climate change, and risk modeling and intends to provide guidance on assessing adaptation measures and measures to enhance projects' contribution to carbon neutrality. Module 2.2 – Climate Considerations on Technical Feasibility Assessment provides guidance on how to review technical solutions while evaluating non-monetary benefits of climate mitigation options and describes the methodology to include climate adaptation and resilience options in the technical feasibility of the project, which may be performed under conditions of deep uncertainty regarding climate scenarios. Module 2.3 – Climate Considerations on Commercial Feasibility Assessment provides detailed instructions on how to update cost-benefit, value for money, and affordability analyses of the PPP project and to ensure that bankability and commercial feasibility are not compromised after incorporation of climate-related measures. 120 Step 1 Step 2 Step 3 Step 4 Climate Hazards Characterization of Characterization of Towards Low-Carbon Internal Risks External Risks Infrastructure Revised EIA incorporating climate risks and climate M2.1 Assess availability/ Estimate Project Map interdependent Emissions Inventory mitigation opportunities reliability of RCMs Exposure infrastructure Life-cycle Assessment Technical Compute Hazard to relevant climate Assess external risks & Sensitivity Analysis pre-feasibility & Interactions indicators hazards Estimate Project’s GHG reduction targets Environmental Impact between Climate vulnerabilities Assessment (EIA) & PPPs (on single assets) Baseline hazard stress test for each scenario and synthesis Mitigation attributes of the project (incl. cost estimates) Step 1 Step 2 Step 3 (Work in progress) Feasibility of Assess the Feasibility of Manage Uncertainty in Adaptive Plan Small-Scale Mitigation Adaptation Strategies Adaptation Plan (final tech. specs+ cost estimates) Technical M2.2 PHASE 2 feasibility Base Plan (final technical specs + cost estimates) Climate Considerations on Technical Feasibility Commercial Step 1 Step 2 feasibility Update and refine CBA, Assess Bankability and VfM and Affordability commercial Feasibility Green light to move to M2.3 structuring of the Base or the Adaptive Plan Climate Considerations on Commercial feasibility and Bankability 121 2.1 Interactions between Climate and PPPs While understanding the impacts of climate through a future landscape mapping on infrastructure is of paramount activity. importance, it is equally critical to Climate risk assessment at this stage is understand the infrastructure's expected to be data-driven and contribution to future climate. Therefore, computationally demanding. While the the present module aims to support users, intention is to develop a thorough firstly, with developing climate risk quantitative analysis, the time demanded assessments that will subsequently inform for such an assessment, or the lack of adaptation measures and, secondly, with available information might lead users to a assessing the potential contribution of the more rudimentary approach. In either case, infrastructure to a carbon-neutral future. this tool is designed to be used by a In the project preparation phase of the PPP multidisciplinary team that incorporates cycle, a more comprehensive climate risk advanced climate and risk analysis assessment is performed for the selected expertise, in-depth sectoral knowledge, and project. This module aims to guide users in a solid understanding of the project's conducting a quantitative hazard analysis dependencies on the surrounding and assessing both internal and external socioeconomic systems, natural and built risks posed on the project through its environment (Box 2.1). interaction with the broader environment. Finally, this module supports users in As part of understanding the broader assessing the infrastructure's carbon environment, users are prompted to emissions throughout its life cycle as well explore dependencies on associated as the emissions associated with the infrastructure (e.g., energy, transport, infrastructure's service. This assessment is water), which are themselves likely key to identifying the contribution to subjected to climate-induced impacts. climate mitigation through the Additional climate-related considerations development of low-carbon infrastructure. are also studied as part of this module 122 BOX 2.1 NECESSITY OF AND RESOURCES FOR CLIMATE MODELING PHASE 2 Climate change modeling can be a very scientific task requiring skilled personnel and advanced tools. Mobilizing such resources during the early upstream phases of the PPP project may be challenging— especially in cases where project funding has not yet been secured. On the other hand—and as will be shown in several parts of the present toolkit— neglecting climate impacts due to poor assessments may provoke losses whose scale can be orders of magnitude larger than the cost of even the most advanced modeling efforts. Therefore, it is recommended that a small-scale expert's assessment is performed during the M2.1 identification stages of Phase 1 to evaluate the potential climate impacts on the project and vice-versa and subsequently define the types and level of analyses that would be essential for the present preparation Phase 2. Interactions between Climate and PPPs This would enable planning of the advisory resources to be included in Phase 2 and identification of the type of consulting activities and the required level of detail. It is recommended that such an expert's assessment be based on the guidance provided by the toolkit in order to propose qualifications of advisors to be included in the terms of reference of the relevant consulting requests for proposals. It should also be able to assess the cost of obtaining such services so that these are adequately accounted for by therelevant PPP units. Step 1 Although many resources are available online that allow preliminary high-level identification of Climate Hazards climate impacts, it is not recommended to rely on such information only for the assessments described in the present Phase 2 of this toolkit. Step 2 Characterization of STRUCTURE OF THE MODULE Internal Risks This module consists of the following four steps:  Step 1 provides guidance on performing a detailed climate hazard analysis for the project under consideration, including direct and subsequent hazards while Step 3 accounting for climate uncertainty. Characterization of External Risks  Step 2 navigates users through the characterization and quantification of internal risks (i.e., those potentially producing physical damage on the project or downtime), including guidance on how to assess exposure and vulnerability of the assets to each hazard.  Step 3 maps the interdependencies of the project with existing infrastructure and Step 4 hence identifies external risks to the project (i.e., those impacting the operation of the Towards Low-Carbon project due to climate-related damage on or failure of its interconnections with the Infrastructure broader ecosystem).  Step 4 guides users on analyzing the emissions associated with the infrastructure and identifies potential mitigation measures. 123 PHASE 2 01 CLIMATE HAZARDS In this step, users identify the hazards potentially threatening the project. The characterization of these hazards will support the risk assessment of steps 2 and 3. Users should aim to answer M2.1 in an adequate manner the following key questions: Interactions between Climate and PPPs Project-specific characteristics: Which are the project's assets under risk evaluation? Climate hazards: Which climate scenarios are taken into account in the climate risk assessment? What are the exact metrics of each hazard related to the project for the examined Step 1 climate scenarios? This information is brought forward from Climate Hazards step 1 but can be adapted if needed. A detailed analysis of climate hazard evolution over future periods of interest is performed for selected climate scenarios. The minimum timeframe for assessing climate hazards shall be the Step 2 PPP life cycle. However, the public party may want to extend the timeframe for the study, Characterization of given that the life cycle of the infrastructure may be longer than the duration of the PPP Internal Risks contract. Both direct (e.g., extreme temperatures) and subsequent hazards should be explored (e.g., fire hazards due to excessive heat). Climate expert advice is recommended in handling climate models and modeling outputs. Experts should first select and then evaluate driving parent ensembles of Global Climate Models (GCMs) and Regional Climate Models (RCMs) (Box 2.2). Climate sensitivity analysis is performed for the explored Step 3 models, and ultimately the interpretation of results takes place with respect to the Characterization of project's risks. External Risks Climate projections are assessed against a reference period of analysis to identify change. The existence and use of historical observation is deemed extremely valuable to evaluate RCM's reliability (and possibly reject its use) and apply bias correction to modeled results, i.e., to account for systematic errors and improve their fitting to observations. Modeling areas with scarce observations naturally limits the modelers' ability to reduce uncertainty Step 4 Towards Low-Carbon (Box 2.3). Infrastructure RCM results are becoming increasingly available, thus covering most areas of the globe. Ongoing research activities have developed high-resolution models, albeit they are computationally intensive and have not been mainstreamed in infrastructure projects. If RCM data is unavailable for a region or is still too coarse, users can explore statistical downscaling. Once the above process is completed, a set of climatic variables will become available on which indicators of interest can be readily applied. 124 PHASE 2 BOX 2.2 CLIMATE MODELING To assess present and future hazards, climate scientists make use of climate models. Simply put, these are numerical representations of the climate system based on the biophysical properties of its components, their interactions, and feedback processes. The following two types of models are typically used to produce climate projections:  Global Climate Models (GCMs): simulating the climate at a global scale M2.1  Regional Climate Models (RCMs): simulating the climate for a region Interactions between Climate and PPPs GCMs cover the globe in a three-dimensional grid. Current and future climate can be described in each grid cell. GCMs typically have horizontal spatial resolution ranging from 150 - 200 km, while vertical layers can be up to 30. Running GCMs requires large computational power and time. The low resolution suggests that these models cannot predict future climate for local impact studies, i.e., at the scales of PPP projects. To overcome this limitation, downscaling methods are applied to obtain local climate information. Downscaling can be dynamic or statistical. Dynamic downscaling uses Regional Climate Models ( RCMs) to increase the Step 1 resolution of climate projections (Figure 2.1). RCMs are able to simulate mesoscale processes in Climate Hazards a level of detail that a GCM cannot. Useful resources for accessing downscaled information are included at the end of this module. Step 2 Characterization of Internal Risks Step 3 Characterization of External Risks FIGURE 2.1 An RCM domain embedded in a GCM grid [Source: F. Giorgi, 2008: WMO Bulletin 52(2) - April 2008, page 86] Step 4 Towards Low-Carbon Infrastructure 125 PHASE 2 BOX 2.3 MAKING SENSE OF FUTURE UNCERTAINTY How the future climate will unfold is not known. To explore possible alternative futures, climate scientists use models to project climate under different emission scenarios. Different intensities and frequencies of future climate hazards and risks on PPPs are expected for these different scenarios. To plan for adaptation, it is useful to understand the spread of possible future hazards, i.e., the level of uncertainty in the effort to predict the future. Three key typologies of uncertainty are introduced, namely: M2.1  model uncertainty, stemming from the imperfect knowledge and representation of climate in climate models Interactions between Climate and PPPs  emission scenario associated uncertainty, due to the imperfect knowledge of socioeconomic and technological developments in the future, resulting in different levels of emissions of GHGs  internal variability-related uncertainty1 due to natural climate variability. FIGURE 2.2 Fractional contribution of different uncertainty sources (model Step 1 configuration in blue; scenario uncertainty in Climate Hazards green; internal variability in orange) for global temperature as a function of lead projection time obtained from the CMIP3 ensemble. Step 2 Characterization of Internal Risks Step 3 Figure 2.2 shows uncertainty contribution to the projected global surface air temperature. Characterization of Co-assessing the influence of the above three sources of uncertainty suggests that their External Risks relative contribution changes over projection lead time, i.e., uncertainty is dynamic. Its absolute value will tend to increase, e.g.,natural variability will not decrease with time, but it tends to contribute less to theoverall uncertainty. Model configurationand internal variability dominate near- term projections while, as expected, scenario uncertainty is low. Scenario uncertainty becomes dominant for the long term, end of century projections Source: Hawkins, Sutton, 2009: The potential to narrow uncertainty in regional climate predictions. Bull. Step 4 Amer. Meteor. Soc., 90, 1095 - 1107] Towards Low-Carbon Infrastructure Step Output A quantitative analysis of climate hazards likely to affect the project 1 Internal variability is the natural variability of the climate system that occurs in the absence of external forcing and includes processes intrinsic to the atmosphere, the ocean, and the coupled ocean-atmosphere system. 126 PHASE 2 02 CHARACTERIZATION OF INTERNAL RISKS Following the hazard analysis of step 1, the present step focuses on analyzing the project exposure and vulnerability. On this basis, it aims to characterize internal risks through the analysis and synthesis of risk components under the climatic scenarios of interest. Users should attempt to answer the following key questions adequately: M2.1 Interactions between Climate and PPPs Project Exposure: Which assets of the project are in direct contact with the hazardous event? Project Vulnerability: If a hazardous event occurs and the project is exposed, what is the project's overall susceptibility and recovery capability to the hazard? Step 1 Climate Risk: What is the overall climate risk of the project for Climate Hazards the investigated hazards? What is the associated uncertainty in the calculations, e.g., is the influence of different climate models and scenarios significant? Already in Phase 1, users have identified whether the project location will experience a Step 2 Characterization of hazardous event. Now that the project's masterplan has been selected, users can assess if the Internal Risks project's infrastructure is anticipated to experience any climatic stress or any change in the project environment during or after the hazardous event. Making use of the indicators defined in the previous step, it is possible to assess the project's exposure per hazard. To compute the degree of the project exposure, it would be necessary to perform modeling analysis. The selection of modeling application should reflect the project's needs and level of detail required Step 3 and is subject to expert opinion, thus balancing between time constraints, computational Characterization of ability, and data availability. For example (see also Box 2.4), hydrological flood models may be External Risks used to characterize hazard exposure for the project's assets under different flood scenarios (return period events). It is noted that similar to hazards, exposure can also be dynamic as the surrounding environment of the project experiences changes (see external risk). In cases where modeling is not possible (or not preferred by the user), well-informed estimations or empirical approaches can also determine the level of exposure. Step 4 With respect to vulnerability, users assess factors that contribute to the project's ability to Towards Low-Carbon Infrastructure withstand the impact of a hazard it is exposed to. Such factors can be inherent characteristics of the infrastructure (e.g., the capacity of structural materials) or systemic characteristics (e.g., early warning system). The two components of vulnerability, namely the sensitivity and lack of capacity to cope or adapt to the hazard, have already been explored in Phase 1. In the present phase, users need to elaborate further on the identified contributing factors to the vulnerability components for the base plan. The assessment is performed for the hazard indicators and scenarios of step 1. Ultimately, the integration of all vulnerability factors per hazard will lead to the overall degree of vulnerability of the project for each hazard. This integration could be 127 supported by applying weights2 on the different vulnerability factors based on technical knowledge or based on empirical estimations regarding the merit of each factor to the overall PHASE 2 vulnerability. Once the above individual risk components have been assessed, they Gender Considerations are consolidated under a baseline When conducting a climate hazard hazard stress test for each scenario. assessment, estimation of climate stressors 1 The series of stress tests produce the and potential disruption should account for ensemble of risk synthesis, which gender. As a plethora of literature shows, M2.1 women and children are more vulnerable to essentially constitutes the envelope of potential risks that may affect the climate change due to gender norms and Interactions between division of labor. For instance, during times of project. In some instances, risks might Climate and PPPs flooding and other natural disasters, women interact between them, and this are often the last to evacuate their homes should be taken into account. For because of their caregiving responsibilities or instance, following the previous because they lack permission from male example, forest fire risk can increase members in the family. Moreover, women are future flood hazard exposure as it will also likely to suffer during post-disaster change the rainfall-runoff response of rehabilitation. They struggle more in the labor Step 1 market and are more vulnerable to domestic Climate Hazards the catchment as well as erosion violence and sex trafficking in shelters. In characteristics. addition to these considerations, other Modules 2.2 and 2.3 elaborate on vulnerable groups particularly in the context measures aimed to reduce the of natural disasters should be focused on identified risks and minimize their including persons with disabilities. Similarly, changes in land use (e.g., through a Step 2 cost implications. Characterization of renewable energy project) can particularly hit Internal Risks indigenous populations who have inalienable rights to ownership of land. [1 Source: International Federation of Red Cross and Red Crescent Societies IFRC, 2010- A practical guide to gender-sensitive Step 3 approaches for disaster management] Characterization of External Risks Step 4 Towards Low-Carbon Step Output Infrastructure Climate risk synthesis and production of an evidence base for improved planning and decision-making 2 i.e., importance factors 128 BOX 2.4 FROM CLIMATE MODELS AND IMPACT MODELS THROUGH TO PHASE 2 ECONOMIC ASSESSMENT MODELS Climate models provide useful evolution information on specific variables. On this basis, an impact model is used to calculate specific impacts relevant to the context of the study at hand. These models will account for exposure and vulnerability. This information is then utilized in the subsequent modules (i) to develop technical solutions that reduce climate impacts and (ii) to understand the economic implications of climate change on the project. These two components are typically seen in conjunction. Careful consideration of each model's limitations and an understanding of the propagation of uncertainty among models is necessary. M2.1 Interactions between Climate and PPPs Step 1 Climate Hazards Step 2 Characterization of Internal Risks FIGURE 2.3 Model interlinkages to translate climate risk to financial risk An example for the hydropower sector In the case of a hydropower project (whether existing or new), climate change is expected to alter the Step 3 hydrology of the catchment where the project is found. For instance, indicators derived from climate Characterization of models can show changes in annual precipitation levels, snowmelt, intra-annual precipitation External Risks distribution, and evapotranspiration, all of which can contribute to changes in hydrology. Through the use of hydrological modeling (i.e., the impact model, see Figure 2.3), these changes will be translated to changes in river flows and, by extension, on storage volumes at the reservoir, i.e., changes in the form of intra- and inter-annual storage variations. These variations have significant design and economic implications for the reservoir. As such, this analysis shall inform the capacity design and turbine selection and provide a better understanding of the expected revenue (when and how much energy will be produced). Ultimately, climate scenarios can be used to provide a better understanding Step 4 of the range of economic performance of the planned infrastructure, i.e., provide uncertainty bounds Towards Low-Carbon on the investment's returns. Infrastructure 129 PHASE 2 03 LANDSCAPE MAPPING AND IDENTIFICATION OF EXTERNAL RISKS This step aims to motivate users to become climate-conscious by guiding them to imagine future landscapes where the project becomes externally exposed to hazards during its life- M2.1 cycle, i.e., potential external risks are identified (see Box 2.5). In these future scenarios, exposure, vulnerability, and demand for the infrastructure might be affected. The Interactions between timeframe to be examined shall include at least the duration of the PPP contract or Climate and PPPs preferably extended to the whole life cycle of the infrastructure (i.e., beyond decommission). Users should aim to answer in an adequate manner the following fundamental question: Future Landscapes: What is the project's interdependent infrastructure and which factors that comprise the socioeconomic system will interact with the project's climate risk? Step 1 Climate Hazards As such, users are prompted to: (a) Identify dependencies with associated infrastructure which themselves may be exposed to climate risks. Notwithstanding, the hazards associated with internal and external Step 2 risks are not necessarily the same. In addition, where relevant, risk interactions need to be Characterization of considered. In this case, the resilience of the associated infrastructure should be strengthened. Internal Risks This requires consultation with relevant stakeholders and guarantees the necessary action will be taken. When this is not possible, alternative ways to reduce dependencies should be explored. (b) Assess the relationship to other social and physical systems, technological Step 3 developments, and policy decisions that might be driven by climate change or might Characterization of increase/decrease climate risk. External Risks In most cases, this analysis builds upon information the project has already collected to establish a cost-benefit analysis and non-climate risk assessment. These changes can be co- assessed in the climate risk assessments. Table 2.1 describes typologies of factors that can interact with climate risk, while Box 2.6 provides a relevant example for the water sector. Step 4 Towards Low-Carbon Infrastructure 130 BOX 2.5 THE MULTIPLE PROJECT THREATS OF EXTERNAL RISKS PHASE 2 In the conceptual example of Figure 2.4 below, flood (internal) risk can cause direct damage to the project's assets and/or lead to availability disruptions. Even in cases where robust design helps minimize internal risk, threats can arise from the project's interaction with the broader environment, such as: (i) Associated infrastructure, not part of the project, such as upstream flood risk reduction measures, might fail to prevent unexpected flooding. (ii) Other socioeconomic systems that interact with the project can also increase risk over M2.1 time. For instance, urban densification over the project's lifecycle can increase runoff generation, and by extension, flood risk or transition to green economy can impose legal or Interactions between operational changes related to flooding risks. Climate and PPPs The former risk contribution suggests the project should explore the system-wide resilience of infrastructure. The latter interaction constitutes a slow onset risk which can be dealt with using appropriate spatial planning instruments. Step 1 Climate Hazards Step 2 Characterization of Internal Risks Step 3 Characterization of External Risks Step 4 Towards Low-Carbon Infrastructure FIGURE 2.4 Conceptual example of external risks and their impacts 131 TABLE 2.1 Indicative list of transitions and examples of potential impacts PHASE 2 Transitions that might influence future Potential impact /examples scenarios Land-use changes: land area conversion from Change of land use can affect runoff generation. one use to another, e.g., from natural to build In combination with an expected increase in environment, from forest to agricultural land, extreme precipitation events due to climate etc. change, flooding mayoccur more frequently M2.1 Technological changes: invention and Change of technologies may provide practice of new technologies and opportunities for the project to adopt innovative Interactions between innovative fields that may disrupt (in a techniques and adapt to climate change as for Climate and PPPs positive or negative manner) the regular example, real-time control measures, water- operation of the project saving irrigation measures, etc. Demographic changes: changes in human Different segments of the population make population characteristics and population different use of the project's service, and these segments. These may refer to population uses are associated with different vulnerabilities distribution, age, marital status, occupation, which can increase due to climate change. income, education level, and other statistical Changes in annual income, or population growth, Step 1 measures that may influence the project might increase demand for the infrastructure Climate Hazards (e.g., water consumption) and, by extension, affect the climate resilience of the infrastructure. For example, Cape Town ran out of water due to a lack of adaptation of water infrastructure as the population was growing, combined with a hydrological multi-year drought Step 2 Transport changes: emerging technologies Introduction of electric vehicles in combination Characterization of that will facilitate traveling and at the same with renewable energy production could Internal Risks time increase or decrease GHG emissions mitigate GHG emissions of a transportation network. In this way, a road network should be able to adapt and provide the required facilities (such as electric chargers). On the other hand, autonomous cars might lead to an increase in induced travel and, as a result, increased demand for infrastructure Step 3 Characterization of Policy and regulation changes: evolution of ESG considerations and carbon taxes are likely to External Risks national and worldwide guidelines and affect the demand or viability of certain regulations on sustainability and climate economic activities change Step 4 Towards Low-Carbon Infrastructure 132 PHASE 2 A representative example of the future landscape mapping exercise may be the following. A PPP project aims to develop a new reservoir for water supply and control of downstream floods. The public authority (with the support of an external consultant) should first carry out a climate risk assessment3 to assess potential direct and indirect climate-induced impacts. At this stage, a ‘future landscape mapping’ should be considered that evaluates the effects of external socioeconomic factors. This will ensure that factors contributing to climate risk (through vulnerability and exposure increase) are captured and that the project will remain M2.1 future-ready within its lifecycle. For the proposed example, users could consider: Land use Interactions between Other Possible land use changes that Climate and PPPs (based on table in Box 2.5) will affect water runoff (e.g., from natural to built land, abandonment), irrigation needs (e.g. intensification due to water demanding crop selection) and as a result may affect flood risk. Technology Step 1 Water demand Technological changes that Population growth on the one Climate Hazards hand, and water conservation could be adopted in order to monitor and prevent strategies on the other, will potential floods and their balance water demand. effects on infrastructure and associated socio-economic activities. Population Step 2 Population increase in the Characterization of region will increase exposure and flood risk. It will also Internal Risks increase water demand. FIGURE 2.5 Example of ‘future landscape mapping’ Based on these potential changes and the outcomes of a climate risk assessment, various instances of the future should be conceived and described. These will be the input of the adaptive planning step that aims to ensure the project's resilience and sustainability under Step 3 conditions of uncertainty beyond climate deep uncertainty. Characterization of Future 1: Climate and land management along predictable lines from the past External Risks Future 2: Heavier rainfall and increased use of land Future 3: Lower rainfall and no change in the use of land Future 4: … Step 4 Step Output Towards Low-Carbon Infrastructure A thorough evaluation of external risks arising from the project's interaction with the project's broader, present and future environment, which can be affected by climate change 3 The “broader environment baseline” is used for this climate risk assessment (consistent with a robust deterministic design). 133 PHASE 2 04 TOWARDS LOW-CARBON INFRASTRUCTURE Approximately 70% of global GHG emissions are associated with the construction and operation of infrastructure (Saha, 2018)4. As making significant ex-post changes to an infrastructure project to reduce its emissions is not possible, the ex-ante life cycle assessment (LCA) of greenhouse emissions of an infrastructure project is of critical importance. M2.1 These assessments will inform funding, design, and construction decisions. Box 2.7 describes the typical steps of an LCA methodology used to calculate emissions. While Interactions between Climate and PPPs different tools and databases are commercially available and can be used depending on the infrastructure sector or complexity of analysis, the underlying principles of the indicated steps are the same. Firstly, users performing the assessment should draw a clear scope definition. Upon this, they can establish which are the main activities and components throughout the PPP life cycle that contribute (negatively or positively) to the emissions inventory. The inventory shall analyze all Step 1 environmental inputs and outputs to the processes, services, and products used in the project Climate Hazards with the ultimate aim to quantify net emissions. In some cases, these will be associated with direct emissions (e.g., emissions related to vehicle traffic during construction), while in other instances, emissions will be embodied (e.g., the carbon embodied in cement production). A robust LCA can be performed on the basis of a comprehensive inventory. Expert judgment is used to exclude specific components with a negligible contribution to the net emissions Step 2 Characterization of assessment over the project's life cycle. This can significantly reduce the complexity of the Internal Risks analysis. Expert judgment is required to draw the boundaries of analysis (Box 2.7); this refers to the spatial and temporal boundaries Step 3 and those of associated activities. For instance, a housing Characterization of External Risks project may require the development of supporting infrastructure (e.g., water, transport, energy, schools). Similarly, a transportation project can result in additional travel utilization of other networks. Such considerations are likely included in the project formulation and its CBA. The LCA and CBA should make consistent use of data and assumptions. Step 4 Towards Low-Carbon Infrastructure Upon completion and interpretation of the LCA, users can identify opportunities for reducing emissions. These opportunities might relate to selecting infrastructure options (preliminarily assessed in Phase 1) or to specific material flows and activities during construction and operation. For instance, opportunities can arise by following circular economy principles (e.g., water recycling, circular construction that turns waste into resources) and the adoption of renewable energy technologies where suitable. 4 Saha, 2018: Low-carbon infrastructure: an essential solution to climate change? World Bank Blogs 134 PHASE 2 BOX 2.7 LIFE CYCLE ASSESSMENT FOR INFRASTRUCTURE PROJECTS The shift towards net-zero PPP infrastructure requires the development of an evidence base to inform the respective funding, construction, and operation decisions. To this end, a lifecycle assessment methodology can be used to calculate GHG emissions associated with the project. The methodology consists of the application of the following steps: 1. Goal and Scope Definition, 2. Inventory Analysis, 3. Impact assessment, 4. Interpretation (Figure 2.6). M2.1 Goal and Scope Definition Interactions between Climate and PPPs Inventory Analysis Interpretation Step 1 Climate Hazards Impact Assessment Step 2 Characterization of FIGURE 2.6 Schematization of lifecycle assessment [Source: Life Cycle Assessment Internal Risks Methodology, International Organization for Standardization (ISO) 14040)] The methodology was originally conceived to account for diverse environmental impacts, including carbon emissions. It is recommended that potential adverse effects on other parameters are also explored when applicable, in particular when trade-offs exist between emissions and other environmental impacts. Step 3 Upon the completion of the analysis, the user can explore possible entry points for Characterization of technological and process innovation, including the integration of (i) circular economy models External Risks in the construction and maintenance, (ii) renewable energy sources, and (iii) nature-based solutions, which offer mitigation opportunities to the project. It is recommended that life cycle assessments (LCAs) are carried out in conjunction with life cycle cost (LCC) analysis to obtain a comprehensive picture of the implications of different decisions and options. Where relevant, a comprehensive LCA can form the basis for the accounting and reporting of scope 1 (direct emissions from owned and controlled sources), Step 4 scope 2 (indirect emissions from the generation of purchased energy), and scope 3 (all other Towards Low-Carbon indirect emissions occurring along the PPP's value chain) related activities. Infrastructure 135 An LCA that uses deterministic value inputs and reports single value outputs Gendered Climate Risks PHASE 2 might conceal the impact of multiple The fundamental point that should be taken into drivers of uncertainty on the projected account at this stage is that risks associated with emissions of a project. It is climate change may be gendered, and therefore, recommended that users perform an the climate risk assessment tool needs to allow uncertainty analysis as a QA/QC for gender-sensitive evaluation of the impact of process—within their resource climate stressors. Data collection relating to past experience with natural disasters must include an constraints—to elucidate the adequate sample from underrepresented M2.1 sensitivity of results to these drivers, communities. Social differences including e.g., the definition of functional units, ethnicity, race, Indigenous identity, disability Interactions between system boundaries, geographical status, and age are intertwined and can result in Climate and PPPs context, scale, material lifetime, etc. overlapping forms of disadvantages.Hence, semi- For more information, Saxe et al.5 structured interviews, focus groups and surveys provide a taxonomy of uncertainty in can be important methods in collecting environmental LCA of infrastructure representative data. A methodology of collecting projects. gender-disaggregated data and involving women in infrastructure planning should be put in place at an early stage of the PPP process aiming to Step 1 ensure that gender gaps concerning the impacts Climate Hazards of climate change are suitably addressed. Step 2 Characterization of Internal Risks Step Output Apply fit-for-purpose lifecycle assessment methodologies to assess GHG emissions resulting from the construction, operation, and maintenance of the Step 3 infrastructure, as well as those emissions ing from the use of the provided Characterization of service. This will serve as input to the design of mitigation measures and assess External Risks their technical and commercial feasibility in the subsequent modules. Step 4 Towards Low-Carbon Infrastructure 5 Saxe, S., Guven, G., Pereira, L., Arrigoni, A., Opher, T., Roy, A., Arceo, A., Raesfeld, S.S.V., Duhamel, M., McCabe, B., Panesar, D.K., MacLean, H.L., Posen, I.D., 2020: Taxonomy of uncertainty in environmental lifecycle assessment of infrastructure projects. Environ. Res. Lett. 15, 083003. 136 PHASE 2 KEY TAKEAWAYS • A life cycle assessment (LCA) may be performed to calculate emissions due to M2.1 construction, operation and maintenance of the infrastructure. Upon completion and interpretation of the LCA, users can identify opportunities for reducing emissions, e.g., by using alternative materials, minimizing Interactions between consumption, selecting clean energy sources, benefitting from Climate and PPPs technological advancements, incorporating nature-based solutions, etc. • A detailed climate hazard evaluation and evolution over the future periods may be performed by utilizing Global and Regional Climate Models (GCMs and RCMs, respectively) to identify the potential trends of climatic stressors that may affect the project. Step 1 Climate Hazards • Assessment of internal climate-change induced risks on the project should be performed using advanced modeling techniques on the basis of the expected intensity of hazard, and the project’s exposure and its vulnerability to the specific hazard type. • Climate-change impacts, in the form of chronic and acute climate risks, that Step 2 Characterization of may lead to direct and indirect losses on the infrastructure should be identified Internal Risks and evaluated. • External risks are defined as dependencies with associated infrastructure, other social and physical systems, technological developments, and policy decisions that might be driven by climate change and increase / decrease climate risk. Possible future landscape should be reviewed and risk- Step 3 mitigation options identified. Characterization of External Risks Step 4 Towards Low-Carbon Infrastructure 137 MODULE 2.1 Resources CLIMATE CHANGE KNOWLEDGE PORTAL CCKP provides global data on historical and future climate vulnerabilities and impacts Developed by: World Bank Group CLIMATE ANALYSIS TOOL The Climate Analysis Tool of the CCKP provides a visualization of global downscaled climate models with daily data at a 0.5° scale (approximately 50 km x 50 km) Developed by: World Bank's CCKP, powered by Climate Wizard WCRP CORDEX The Coordinated Regional Climate Downscaling Experiment, a framework aimed at addressing climate information needs at the regional level Developed by: World Climate Research Program VULNERABILITY ASSESSMENT SCORING TOOL (VAST) A spreadsheet-based tool that guides the user through conducting a quantitative, indicator- based vulnerability screening of transportation networks against climate stress Developed by: ICF International, 2015 RCP DATABASE (VERSION 2.0) The RCP database aims at documenting the emissions, concentrations, and land-cover change projections of the Representative Concentration Pathways Developed by: International Institute for Applied Systems Analysis (IIASA) SSP PUBLIC DATABASE (VERSION 2.0) The SSP database provides quantitative projections of the so-called Shared Socioeconomic Pathways (SSPs) and related Integrated Assessment scenarios Developed by: International Institute for Applied Systems Analysis (IIASA) JICA CLIMATE FINANCE IMPACT TOOL: CLIMATE FIT (MITIGATION), JAPAN INTERNATIONAL COOPERATION AGENCY (DRAFT VER. 3.0) Guidelines for methodologies to quantitatively evaluate carbon sequestration and reduction in GHG emissions for different sectors Developed by: Japan International Cooperation Agency, 2019 138 GREENHOUSE GAS PROTOCOL GHG Protocol establishes comprehensive global standardized frameworks to measure and manage GHG emissions from private and public sector operations, value chains, and mitigation actions. GHG Protocol includes multiple calculation tools Developed by: WRI & WBCSD CLIMATE RISKS AND ADAPTATION PATHWAYS FOR COASTAL TRANSPORT INFRASTRUCTURE These guidelines were prepared to provide coastal transport infrastructure authorities and organizations with targeted information about climate risks for both assets and operations.The guidelines also contain practical information pertaining to strategies and measures for building resilience and undertaking adaptation planning Developed by: Fisk, G.W, National Climate Change Adaptation Research Facility, Gold Coast, 2017 CONFRONTING CLIMATE UNCERTAINTY IN WATER RESOURCES PLANNING AND PROJECT DESIGN: THE DECISION TREE FRAMEWORK The Decision Tree Framework described in this book provides resource-limited project planners and program managers with a cost-effective and effort-efficient, scientifically defensible, repeatable, and clear method for demonstrating the robustness of a project to climate change Developed by: World Bank, 2015 ENHANCING THE CLIMATE RESILIENCE OF AFRICA'S TRANSPORT INFRASTRUCTURE The report introduces a three-step approach that allows policymakers to manage the risk imposed by extreme climate change events on roads and bridges in Sub-Saharan Africa Developed by: Cervigni, R. et al., 2016 139 Module 2.1 - Further Reading ASSESSING THE REAL COST OF DISASTERS This report provides reliable, comprehensive, and comparable data on the economic impact of disasters as well as on public spending on disaster management and risk prevention, which are essential for developing effective disaster risk management policies Developed by: OECD, 2018 INDICATORS TO ASSESS THE EFFECTIVENESS OF CLIMATE CHANGE PROJECTS The objective of this document is to discuss SMART (specific, measurable, achievable, realistic and timely) indicators that can be used for assessing the impact of climate change projects, including those that seek to adapt to the expected impacts of climate change and those that promote low carbon emissions growth strategies to mitigate GHGs Developed by: Inter-American Development Bank (IDB), 2012 INTEGRATING GREEN AND GRAY: CREATING NEXT-GENERATION INFRASTRUCTURE This report guides developing country service providers and their partners on integrating nature into mainstream infrastructure systems Developed by: World Bank Group – World Resources Institute, 2019 IMPROVING CLIMATE RESILIENCE IN PUBLIC PRIVATE PARTNERSHIPS IN JAMAICA The tool identifies several instruments and tools already used to address climate change issues in the context of Jamaica’s infrastructure production Developed by: Frisari, G.L., Mills, A., Silva, Z. M. C., Donadi, E., Ham, M.S.C., Pohl, I., Climate Change Division – IADB, 2020 LIFELINES: THE RESILIENT INFRASTRUCTURE OPPORTUNITY. RESILIENT INFRASTRUCTURE FOR THRIVING FIRMS: A REVIEW OF THE EVIDENCE This review examines the literature on the role of infrastructure in determining the productivity and competitiveness of firms Developed by: Braese, Johannes, Rentschler, Jun, Hallegatte, Stephane – World Bank, 2019 OVERVIEW OF ENGINEERING OPTIONS FOR INCREASING INFRASTRUCTURE RESILIENCE: FINAL REPORT (ENGLISH) This report summarizes the findings of investigating the vulnerability of key infrastructure, mitigation/improvement measures, and the costs that are associated with such improvements Developed by: World Bank Group, 2019 OVERVIEW OF ENGINEERING OPTIONS FOR INCREASING INFRASTRUCTURE RESILIENCE (VOL. 2): TECHNICAL ANNEX (ENGLISH) This background document presents a more detailed treatment of the topic (see above) and provides background information and supporting data Developed by: World Bank Group, 2019 140 INVESTMENT DECISION MAKING UNDER DEEP UNCERTAINTY - APPLICATION TO CLIMATE CHANGE This paper summarizes the additional uncertainty created by climate change and reviews the tools available to project climate change (including downscaling techniques) and to assess and quantify the corresponding uncertainty Developed by: Hallegatte, S., Shah, A., Lempert, R., Brown, C., Gill, S. – World Bank, 2012 PPPLRC CLIMATE-SMART PPPS WEBSITE This section of the PPPLRC website provides links to policies, legislation, project documents, and other resources for climate-smart PPP projects relevant to the whole PPP cycle, including the project preparation stage Developed by: PPPLRC, World Bank INTEGRATING GENDER EQUALITY IN CLIMATE-SMART DEVELOPMENT A framework to support the integration of gender into the operationalization of the climate policy Developed by: Netherlands Commission for Environmental Assessment, 2014 WORLD BANK GROUP GENDER STRATEGY (FY16-23): GENDER EQUALITY, POVERTY REDUCTION AND INCLUSIVE GROWTH The World Bank Group's new gender strategy delineates the support that the group provides to client countries and companies to achieve greater gender equality. This strategy builds on past achievements and raises the bar on gender equality by focusing on how the WBG can move beyond mainstreaming to an approach that identifies outcomes and monitors results of WBG-supported interventions in client countries Developed by: World Bank Group, 2016 GENDER EQUALITY, INFRASTRUCTURE AND PPPs The primer consists of four key sections that show PPP practitioners how gender considerations can be incorporated into infrastructure PPPs Developed by: World Bank Group, 2019 GENDER TOOLKIT: TRANSPORT Provides users with a set of tools and case study examples to help design transport projects that aregender- responsive and inclusive Developed by: Asian Development Bank (ADB), 2013 TOOLKIT FOR MAINSTREAMING GENDER IN WATER OPERATIONS The toolkit provides guidance on how to improve gender mainstreaming in project design, implementation, and evaluation Developed by: World Bank Group, 2016 141 Step 1 Step 2 Step 3 Step 4 Climate Hazards Characterization of Characterization of Towards Low-Carbon Internal Risks external risks Infrastructure Revised EIA incorporating climate risks and climate M2.1 mitigation opportunities Climate scenarios, stressors, modelling requirements LCA framework, baseline GHG emissions Mitigation attributes of the project (incl. cost estimates) Step 1 Step 2 Step 3 (Work in Progress) Feasibility of Assess the Feasibility of Manage Uncertainty in Adaptive Plan Small-scale Mitigation Adaptation Strategies Adaptation Plan (final tech. specs+ cost estimates) Technical feasibility M2.2 Carbon Reduction Review of Adaptation Adaptation Strategies Base Plan Assessment Measures based on robustness (final technical specs + cost PHASE 2 estimates) Climate Design through Key multi-scenario analyses Adaptation Strategies Considerations Considerations based on flexibility on Technical Requirements & Simulations Feasibility Considerations for Decision-makers Forward to M2.3 for commercial Finalize Adaptation feasibility check Strategy Step 1 Step 2 Update and refine CBA, Assess Bankability and VfM and Affordability commercial Feasibility Green light to move to M2.3 structuring of the Base or the Adaptive Plan 142 2.2 Climate Considerations on Technical Feasibility The scope of the present module is to identify proper considerations, without the need to and assess climate mitigation and adaptation necessarily deviate from conventional design strategies that could be incorporated into the practices. The design of simple solutions may project to reduce its carbon footprint and be possible in many cases, provided that the protect it from climate risks. The underlying impacts of climate can be correctly recognized principle that should be governing both and that uncertainties can be bypassed by categories of measures is the understanding examining several scenarios. On the other that—despite its complexity and uncertainties hand, more advanced models and —climate change can be hampered through approaches are there and can be employed to feasible climate actions. It is shown that, in offer technically feasible design even under fact, every project can and should contribute complex climate conditions. to a sustainable and resilient future through STRUCTURE OF THE MODULE The proposed process includes the following consecutive steps: Step 1 outlines the process to assess the feasibility of small-scale mitigation measures to be incorporated in projects following a proper GHG emissions analysis. Step 2 provides instructions for the design and technical feasibility analysis of adaptation strategies that will be able to optimize resilience and protection against climate risks that may materialize under several plausible climate evolution scenarios. Step 3 includes considerations for the design of climate actions under conditions of deep uncertainty, including advanced modeling approaches. Step 3 is characterized as a "work in progress" in the sense that it contains methods that have not yet been mainstreamed across infrastructure sectors. 143 PHASE 2 01 FEASIBILITY OF SMALL-SCALE MITIGATION This step intends to provide guidance on incorporating (small-scale) mitigation attributes in projects whose primary scope is not climate mitigation (e.g., renewables). By entering this step, users are supposed to (i) have performed a baseline GHG emissions assessment of the project (i.e., M2.2 prior to the incorporation of the climate-mitigation measures) and (ii) have completed the climate alignment screening (Module 1.1), which highlighted climate mitigation opportunities that can be integrated into the project to enhance its contribution to climate goals. The scope of this step is Climate Considerations on to propose a tangible climate mitigation strategy comprising technically feasible measures to Technical Feasibility reach specific short- and long-term GHG reduction emission targets. The assessments of this step are building on the life cycle assessment (LCA) of greenhouse gas emissions of Module 2.1 and should be therefore performed using the same methodology, tools, boundaries, and timeframe.1 As before, assessments at this stage are expected to be data-driven and computationally demanding. Therefore, it is advisable to undertake the step by a team of Step 1 Feasibility of Small- sustainability experts who possess in-depth sectoral knowledge and a solid understanding of the scale Mitigation project's dependencies on the surrounding natural and built environment. CARBON REDUCTION ASSESSMENT Step 2 A carbon reduction assessment (CRA) should clearly define the reduction target and the means Assess the Feasibility to achieve it (including technical requirements, supporting systems, and operational adjustments). of Adaptation It should also outline any important risks in the process and propose contingencies for mitigating Strategies them. The final outcome should be a lifecycle cost comparison of alternative mitigation strategies including financial figures (i.e., capital, operating, maintenance, and disposal expenses) and socio-environmental costs and benefits (e.g., monetized societal costs due to environmental pollutants) to build a case on the worthiness of the investment. Step 3 Manage Uncertainty At this point, it should be understood that the CRA is sector and project-sensitive. The “best” in Adaptation Plans strategy to reach any carbon reduction metric will differ for each specific project (even within the same sector), owner, and site. It is also expected that the CRA will dynamically progress with evolving technologies and industry understanding. Hence it is beyond the scope of this toolkit to prescribe in detail its various components. Instead, the toolkit is shortlisting below some key considerations that are common for most CRAs, to help the users understand what to expect and look for. Users may also refer to Insight 2.1 to obtain an overview of the variety of mitigation opportunities and their differences among sectors. A detailed description of sector-specific climate-mitigation entry points is provided in the respective sector-specific toolkits. 1 The minimum timeframe of assessing climate hazards shall be the PPP life cycle, however, the public party may want to extend the timeframe for the study given that the life cycle of the infrastructure may be longer than the duration of the PPP contract. 144 KEY COMPONENTS OF A CARBON REDUCTION ASSESSMENT PHASE 2 1 Scope of the Assessment The user should frame the scope of the study by answering the following key questions: • What is the short-term GHG reduction target (in the region/sector), and what is the horizon for accomplishing it (according to current policies)? • Is there a net zero emissions (NZE) decarbonization target, and what is the planning horizon? M2.2 • What are the boundaries of the assessment? Does it cover direct GHG emissions from fossil fuel consumption within the project site? Does it include net indirect emissions from Climate energy imports and exports or embodied emissions in the production of materials? Considerations on • Will the strategy be focusing on the construction, or operation emissions, or both? Technical Feasibility • What are the boundaries of the decarbonization strategy? Does it allow projects to produce or procure clean, renewable energy beyond the boundaries of the project site? 2 Opportunities for Reduction Step 1 Feasibility of Small- Measures and design strategies that are likely to create significant efficiency and energy gains may scale Mitigation be sought within the following four broad categories that are more or less common across sectors. (Although it is possible that some sectors rely more on a particular category than on the others.) Step 2 Reduce energy and material demand through a range of actions including Assess the Feasibility energy efficiency, behavioral, and process changes and the application of circular of Adaptation economy principles. Strategies Direct use of renewable energy (RE)* to provide energy requirements. Depending on the project specifics this may include options for on-site RE Step 3 generation, off-site RE purchase, or off-site RE generation. Manage Uncertainty in Adaptation Plans Direct use of renewable heat and biomass including the use of solar, geothermal, and sustainable biomass for heat, and the production and use of biofuels. This may also include the combination of bioenergy with carbon capture and storage (BECCS). Reduce fossil fuels by replacing equipment with zero-emission alternatives, or by creating incentives/policies that promote low-carbon activities. *The cost for renewable energy generation and storage technologies has fallen considerably, and renewables are increasingly able to compete economically with conventional grid energy, making them an attractive option. 145 3 Climate Mitigation Strategies PHASE 2 Different climate mitigation strategies may be assembled by combining measures from the above categories. In cases where the combination of measures is not enough to reach the GHG reduction target, carbon offsets2 may be used to compensate for the balance of emissions. Such offsets should preferably be able to prove additionality3 and should be used to invest in energy efficiency or carbon-free renewable energy projects, preferably within the same region. The emissions reduction benefits must be claimed through a credible mechanism such as carbon credits or a local carbon credit fund (see Module 3.2). M2.2 4 Future Projections Climate It is recommended that the feasibility assessment of the climate mitigation strategies reflects both Considerations on Technical Feasibility current and projected conditions representing changes in the state of knowledge of enabling technologies, changes in climatic conditions, and changes in the policy framework. For example, developments in battery technologies (i.e., energy storage) may further assist the uptake of renewables, making them a more credible and affordable option. On the other hand, changes in stationary weather patterns may impact the long-term energy usage of the infrastructure and hence the level of the interventions needed to achieve a prescribed performance standard. For Step 1 Feasibility of Small- example, a warmer climate will increase electricity use (associated with cooling, lighting, fans, scale Mitigation pumps, and other electrical loads), thus increasing the requirements for the installed capacity of renewable energy. 5 Requirements and Supporting Systems Step 2 The feasibility study should also clearly describe any requirements/supporting systems essential Assess the Feasibility of Adaptation for implementing the strategy. This may include installation of supporting infrastructure, power Strategies supply requirements, or even changes in the operational workflow of the infrastructure with respect to the established status quo (e.g., charging time requirements of machinery may impact the logistics of a port infrastructure). 6 Risk and Contingencies Step 3 Manage Uncertainty The newness of the technologies and the lack of standardization may also generate risks that in Adaptation Plans should be properly identified and managed during the technical feasibility assessment. Risks may include proprietary technology constraints associated with the choice of a particular technology or a manufacturer (that may not be supported in the future), service reliability risks (e.g., delays, power outages, etc.), supply risks, and others. For these risks, specific contingencies may apply (e.g., a resilience/business continuity plan to guide operations during a power outage). 7 Implementation Plan A well-thought-out timeline of implementation may be as important as the implementation itself. It is generally considered good practice to avoid committing upfront to unnecessary large investments and rather make the necessary arrangements to facilitate the smooth 2Τhe term “carbon offset” refers to using the reduction in GHG emissions in one location/project to compensate for emissions that occur elsewhere. Please refer to Phase 3 of the present toolkit 3 Additionality of an activity refers to net GHG emissions reduction that would not have happened in the absence of this activity (i.e., the offset or the project). 146 implementation of the strategy when the time is ripe. For example, rather than investing today in large capacity high-efficiency cooling equipment, invest in smaller and more economical PHASE 2 equipment, but include provisions in the design to accommodate larger equipment when (and if) needed. EQUITY THROUGH DECARBONIZATION In certain cases, the implementation plan may create M2.2 additional opportunities other than the decarbonization goal. For example, prioritizing zero-emission routes in areas that have both poor air quality, and hence populations with a Climate Considerations on relatively high prevalence of health issues, creates a unique Technical Feasibility opportunity to enhance social equity. 8 Life cycle Cost (LCC) The final step in the feasibility analysis is the comparative analysis of life cycle costs( L C C ) Step 1 of any alternative strategies to select the one that is more cost-efficient while generating Feasibility of Small- scale Mitigation broader co-benefits4 (e.g., reduced pollution, equity enhancement, etc.). The LCC assessment should always be accompanied by sensitivity (stress) tests to properly account for the effect of forecasting costs, inflation, and price fluctuations for volatile commodities over the multi- decade time frame. Expert assessment is required to determine costs (especially those related to new technologies for which limited information is available), set the boundaries of the Step 2 Assess the Feasibility sensitivity analyses, and assist in the interpretation of results. of Adaptation Strategies The cost and benefits of the preferred climate mitigation strategy will be combined with the cost and benefits of the adaptation strategy (described in the follow-up steps) to ultimately inform the economic appraisal of the project and the bankability considerations (performed in Module 2.3). Step 3 Manage Uncertainty Step Output in Adaptation Plans A climate mitigation strategy, a plan for implementation, descriptionof cost, savings, and benefits 4 For example, it is possible to explicitly include the social cost of carbon (SCC) ($/per unit metric ton of carbon dioxide) to implicitly estimate the economic damage that would result from emitting one ton of carbon dioxide into the atmosphere. 147 PHASE 2 02 ASSESS THE FEASIBILITY OF ADAPTATION STRATEGIES The next step towards preparing a climate-smart PPP project is to design cost-efficient adaptation and resilience measures to combat the climate-induced risks (recognized and rigorously assessed M2.2 in Module 2.1). The assessments at this stage are expected to require the engagement of external consultants with experience in risk analysis of engineering systems. Climate The scope is to develop adaptation strategies that are climate-proof (i.e., they perform well or at Considerations on Technical Feasibility least satisfactorily) over a range of climate conditions. "Adaptation strategy" is a term meant to include any combination of individual adaptation and resilience measures that aim to reduce the damage, loss, and potentially disastrous consequences generated by the climate stressing on the infrastructure. Following the definitions of Module 1.2, there are three different classes of adaptation and resilience measures (Figure 2.7): Step 1 • Preparation measures, aiming at increasing robustness (or decreasing the sensitivity) of Feasibility of Small- the infrastructure or a critical component of it scale Mitigation • Prevention measures, aiming at reducing the exposure of the project to the hazard • Preparedness measures aiming at supporting the quick recovery of the infrastructure in the aftermath of extreme climate events. Step 2 Assess the Feasibility In addition to the above definitions, adaptation measures may also be characterized as “soft” or of Adaptation “no-regret” options when they improve performance without substantially changing the Strategies technical design of the infrastructure (e.g., improving water management approaches, installing early warning systems, etc.). Most commonly, however, adaptation measures will require significant modifications of the infrastructure dimensions/technical design to bear the increased climate-induced stressing (e.g., add scouring protection at bridge piers, elevate critical Step 3 infrastructure components, etc.), or may even include construction of additional infrastructure Manage Uncertainty (e.g., flood defenses for the protection of a coastal highway against the risk of sea-level rise). In in Adaptation Plans more extreme cases, adaptation solutions may also include changes in the project's design capacity (e.g., the capacity of a hydropower plant). In all cases, it is important to analyze, understand and build on local knowledge and practices of local communities that, in many cases, may have rich traditional knowledge and practices that they have been using to help their communities adapt to climate shocks. 148 Engineering works to improve performance e.g., design modifications to increase robustness/ expand facility’s capacity Low CAPEX interventions PHASE 2 e.g., development of policies that promote climate adaptation, early warning systems Build protection measures e.g., flood defenses, improved drainage, firebreaks against wildfires Low CAPEX interventions e.g., emergency management systems and M2.2 plans Climate Considerations on Build redundancies e.g., recovery routes, power redundancies, Technical Feasibility insurance coverage Low CAPEX interventions e.g., decision support systems to prioritize retrofitting Step 1 Feasibility of Small- FIGURE 2.7 Categories of climate risk reduction strategies and example adaptation measures scale Mitigation (pertinent to each category) DESIGN OF ADAPTATION AND RESILIENCE MEASURES: THE NEED TO Step 2 CONSIDER SEVERAL SCENARIOS Assess the Feasibility Almost all of today's infrastructure has been designed using climatic design values calculated from of Adaptation Strategies historical climate data, assuming that the average and extreme conditions of the past will represent conditions over the future lifespan of the project. Yet, as the climate changes, the climatic stressors will also change,5 and so will the infrastructure design (i.e., to withstand the increased stressing of the future and avoid failure). For example, it is possible that today's design values (e.g., a flood event that is assumed to occur on average every 100 years) will correspond Step 3 to a more frequent event (e.g., occurring every 20 years) in the years to come. This also implies Manage Uncertainty in Adaptation Plans that the stressing imposed on the infrastructure by the 100-year return period event (in future terms) could be equivalent to the stressing introduced by a considerably more extreme event when converted to current design values (e.g., say that of a 200-year return period event). This peculiarity and the fact that there is no certainty on the precise impact of climate change on the future intensity of the climatic stressors (and their probability of occurrence) complicates the technical design of the infrastructure (and the adaptation measures). As a result, traditional engineering (Figure 2.8)—targeting at a minimum allowable level of performance (i.e., known as “life safety” in the technical terminology) when experiencing an event of low (but known) probability—cannot work when the probability of the event is not known (as is the case with climate change). A generally accepted good practice is to examine climate projections associated with a range of emissions scenarios and simulate the performance of the infrastructure across these scenarios 5 Although the pattern and the magnitude of change is highly uncertain and thus very difficult to predict. 149 (associated with different levels of climate stressing). The output will be in the form of vulnerabilities and losses (direct and indirect) computed over an ensemble of possible PHASE 2 futures.6 This way, decision-makers, rather than relying on a single climate scenario (as was the standard practice so far), are better informed on the level of protection offered by the adaptation strategy across scenarios7 and are thus better prepared to make adaptation decisions that will last. DESIGN FOR CLIMATE CHANGE M2.2 To combat the climate uncertainty, engineers assess the technical performance of protection measures over possible Climate and less possible futures and discard the designs that do not Considerations on provide the required level of protection. Technical Feasibility The selection of an adaptation strategy is then a matter of a technical and economic decision: the incremental protection that is offered by an increase in the capacity of an adaptation measure should be able to justify its incremental cost increase. For example, if the cost differential for using Step 1 Feasibility of Small- the next larger standard size for a drainage pipeline represents only a small increase in total costs scale Mitigation yet would perform better over a range of scenarios, the agency may decide that the extra investment is warranted. The follow-up step (Step 3) further expands on this subject, describing state-of-the-art methodologies and tools that are meant to be used by highly skilled experts to assist agencies in selecting an adaptation strategy that will perform “best”8 over the range of possible future scenarios. These approaches, known by the term decision making under deep Step 2 Assess the Feasibility uncertainty (DMDU), are being frequently used in the design of green infrastructure and flood of Adaptation management systems over the last years, while there are few pilot applications in transportation Strategies projects as well. Step 3 Manage Uncertainty in Adaptation Plans 6 These scenarios are generally described by the Representative Concentration Pathway (RCP) index, discussed already in Insight 1.3 of the previous phase. 7 The level of protection can be high when considering optimistic climate estimates, but may substantially drop if the highest emission scenario takes place. 8 The term “best” is used schematically, as it doesn’t refer to an optimum strategy, but to a strategy that is less likely to fail in the future. 150 PHASE 2 M2.2 Climate Considerations on Technical Feasibility Step 1 Feasibility of Small- scale Mitigation Step 2 Assess the Feasibility of Adaptation Strategies Step 3 Manage Uncertainty FIGURE 2.8 Traditional versus climate-proof design: assumptions, limitations, and resources in Adaptation Plans required TECHNICAL PERFORMANCE OF THE ADAPTATION STRATEGY The assessments performed in this step are highly technical, and hence the involvement of skilled consultants should be considered essential throughout the process.9 It is beyond the scope of the toolkit to go into the details of performing a multi-scenario risk analysis. Besides, this is a sector- and hazard-specific exercise. Instead, the step briefly outlines some key considerations that are important from a design perspective. 9 Sector-specific guidance on the required expertise is provided in the sector-specific toolkits. 151 Computational Model PHASE 2 The model should be comprehensive enough to describe characteristics and processes that may affect the cost-benefit performance of the infrastructure (in due consideration of the overall objective of the investment plan) but simplified enough to be appropriate for multi-scenario analysis. For example, if the objective of investing in a new highway system in a rural area is to improve farmers' access to markets10 and the considered hazard is the flood, the computational model should include a function to describe (at a low-approximation level) the physical loss (e.g., damage of flooded roads), a function for estimating the cost of disruption caused by the closure M2.2 of a traffic link (e.g., performing a simplified network analysis), and a function to describe the benefits of adaptation (that can be as simple as a static correlation between the reduction of transport cost and the expansion of farmers' market). Climate Considerations on Technical Feasibility Development of Scenarios Key in the multi-scenario analysis is, by definition, the selection of representative scenarios. The intention of an experienced modeler is to select scenarios that adequately describe (to the best of today's knowledge) the plausible range of climate changes relevant to the project's economic life. Step 1 The scenarios should combine climatic and non-climatic variables (as described in Module 2.1). Feasibility of Small- scale Mitigation The climatic variables represent different intensities of the examined climate stressor (e.g., river discharge11 during a frequent, moderate, and extreme flood) corresponding to different IPCC storylines (as expressed by the RCP scenarios). Depending on the specifics of the analysis performed, the minimum required number of scenarios Step 2 may vary. For most common engineering assessments, a handful of scenarios would be sufficient Assess the Feasibility to describe the boundaries of the performance (upper-bound and low-bound estimates). On the of Adaptation Strategies other extreme are some very computationally intensive assessments (described in Step 3) for which hundreds or thousands of scenarios are analyzed to describe in detail the full spectrum of variables (climatic and not) that may affect the performance of an adaptation strategy. Step 3 Manage Uncertainty Interpretation of Results in Adaptation Plans The outcome of a multi-scenario assessment is an expanded risk matrix (developed for every adaptation strategy, in case more than one are being examined) that correlates the severity of a climate stressor (associated with a specific climate scenario) with a potential impact (typically expressed in terms of direct and indirect losses). Depending on the level of detail of the analysis, the output of this multi-scenario approach may inform agencies' decisions in several ways: • Engineering design decisions (e.g., need to adjust the design limits based on updated precipitation intensity and frequency projections) • Economic evaluation (that will be performed in Module 2.3) with data on: (i) the capital cost of the adaptation; (ii) projections on the O&M cost and savings (calculated as annual 10Espinet, Rozenberg, Rao, Ogita, 2018: Piloting the Use of Network Analysis and Decision-Making under Uncertainty in Transport Operations Preparation and Appraisal of a Rural Roads Project in Mozambique under Changing Flood Risk and Other Deep Uncertainties, Policy Research Working Paper No 8490, World Bank Group 11 River discharge describes the volume of water that streams past a point in the river’s course every second 152 loss estimates); (iii) benefits of adaption (i.e., as loss reduction/avoidance); (iv) the cost of externalities. For all these estimates, mean and variance values can be provided. PHASE 2 • The direction of climate change (for which greater certainty exists than the exact magnitude and timing of the change). Knowledge of the expected broader direction of change (e.g., increasing or decreasing precipitation) may be sufficient for some decisions. For instance, based on the knowledge that debris and water flows are expected to increase as the climate changes, Norway installed debris deflectors or screens to keep debris out of drainage systems and energy dissipators in channels and culverts to reduce increased water velocities.12 M2.2 • Need for a more flexible adaptation design. When there is significant uncertainty on the climate projection of the future, agencies may choose to proceed with flexible strategies Climate that allow for changing course during the project lifetime. A detailed description of such Considerations on strategies is provided in the next step under the “Adaptive Plan” section. Technical Feasibility • The necessity of O&M and emergency management plan, for which specific requirements will be prepared during contract preparation (Phase 3) and drafting of RFP documents (Phase 4). Step 1 Feasibility of Small- CONSIDERATIONS FOR DECISION MAKING scale Mitigation Upon completion of the assessments, climate strategies will have been evaluated as to their technical performance under a number of possible climatic scenarios (in terms of costs, losses, benefits, technical requirements or any other variable that has been included in the model). In cases where the response is not particularly sensitive to the changing climate, uncertainty should Step 2 not be considered critical. In the opposite case, strategy selection decisions will have to be made Assess the Feasibility depending on the risk appetite of decision-makers and the actual risks of the project. For example, of Adaptation Strategies when risk-aversion is prioritized over cost savings, decisions will likely be driven by the more conservative scenarios. In order to facilitate decisions on adaptation strategy, this section proposes two alternative planning options that build on the idea that instead of designing a plan that will perform well for Step 3 a highly-anticipated future (but it will most probably fail if a more adverse scenario takes place), it Manage Uncertainty may be possible to conceive a plan that is "reliable" (i.e., has relatively low vulnerability) over a in Adaptation Plans wide range of plausible futures. A plan may be characterized as “reliable” if it is either robust (i.e., fail-safe for several possible future scenarios) or flexible (i.e., can be adjusted dynamically as the future unfolds and uncertainty decreases). These competing attributes are associated with two distinctively different planning philosophies for combating climate uncertainty. The first, robust planning, aims to conceive today (with the best available information about the future conditions) a robust static plan – named herein base plan. The second one, termed adaptive plan, consists of an initial plan that will be implemented today (and will perform acceptably for some years, provided that the climate will not change dramatically in the near future) accompanied by adaptive measures that could be activated if climate conditions demand it. (Figure 2.9). 12FHWA, 2017. Transportation Infrastructure Resiliency: A Review of Best Practices in Denmark, the Netherlands and Norway. https://www.fhwa.dot.gov/environment/sustainability/resilience/publications/ gbp_june_2017/index.cfm, 153 PHASE 2 Climate Adaptation Plans Base and Adaptive Base plan Adaptive plan (All CAPEX disbursable upfront) (CAPEX disbursable throughout the project’s M2.2 lifetime based on climate indicators) Seeks robust adaptation Seeks for flexible/expandable plans that perform acceptably adaptation plans that can change Climate under a wide range of climate over time when climate Considerations on scenarios circumstances are different than Technical Feasibility anticipated General applicability Conditional applicability (as it is not always technically possible to design flexible adaptation solutions) Step 1 Feasibility of Small- Implemented once Implemented sequentially (may scale Mitigation require 2-3 interventions during the infrastructure lifetime) Multi-scenario risk assessment & Multi-scenario risk assessment, RCP- Step 2 DMDU dependent dynamic adaptation Assess the Feasibility plans; monitoring methodology of Adaptation Strategies Higher life cycle cost Lower life cycle cost Preferable for risk-avert decision Risk appetite: neutral makers Step 3 Manage Uncertainty in Adaptation Plans FIGURE 2.9 Two different options to implement an adaptation strategy: “Βase Plan” and “Adaptive Plan”  Implementing adaptation via a base plan The base plan is defined as a plan in which all capital expenses associated with adaptation and resilience measures are meant to be disbursed upfront. From a contractual perspective, this is the most straightforward way of procuring new projects; all significant capital expenses are known and fixed at the time of the signature. The challenge for engineers and decision-makers is to commit today to an adaptation plan that will not change in the future and will remain robust (will not fail) for the years to come. 154  Implementing adaptation via an adaptive plan Adaptive planning proposes a conceptually different methodological framework for dealing with PHASE 2 uncertainty in decision-making. Instead of committing today to resource-demanding plans, decision-makers are encouraged to design dynamic plans that can be updated in due time (in light of new climatic conditions). In the context of this toolkit, the adaptive plan is therefore defined as a strategy in which climate-related CAPEX is not disbursed upfront but is rather spread throughout the project's lifespan based on certain climate-dependent indicators. Such an approach, although cost-efficient, introduces two sets of challenges when procuring new projects: M2.2 • First, there is the technical challenge to conceive and design adaptation solutions that can be modular and/or expandable to allow for future interventions. This condition cannot Climate always be met. Considerations on Technical Feasibility • Second, there is the challenge of preparing a contract and financial structure that has the necessary flexibility and provisions to support this type of planning. Discussion on these challenges is included in Phase 3 of the toolkit. Following the definitions presented above, it is easy to understand that the "base" plan could coincide with the current state of practice in cases when the code-compliant design (if available) Step 1 is able to guarantee acceptable levels of robustness. In cases when risk-aversion dominates Feasibility of Small- scale Mitigation decision making, the "base" plan will correspond to a more pessimistic climate-change outlook (i.e., a rather conservative approach). However, in cases where the discrepancies among scenarios are significant or where the existence of too many scenarios does not allow users to compare them directly, advanced methodologies Step 2 to support decision making under deep uncertainty may be employed. An introduction to the Assess the Feasibility technical characteristics and potential applications of such methods is offered in Step 3, duly of Adaptation noting that the methodologies presented are not prescriptive and that the choice on if and which Strategies to apply should be based on technically sound justifications by relevant experts. Step 3 MAINSTREAMING FLEXIBILITY IN THE DESIGN Manage Uncertainty in Adaptation Plans It is important to note that "adaptive" planning may as well, in several cases, consist of simple options without necessitating significant deviations from conventional practice. (Example: the adaptive design of climate control via a geothermal system for a hospital procured via a PPP could include installation of all piping systems upfront while allowing the procurement and installation of additional heat pumps to be performed at a later stage in case temperature rises. This will decrease the upfront capital expenses while allowing – if the temperature rises—for seamless upgrading of the system in the future without affecting the facility's operations.) FINALIZE THE TECHNICAL FEASIBILITY OF ADAPTATION STRATEGY When the adaptation plan is decided, the final task is to perform a detailed technical feasibility assessment following standard PPP procedures in order to: (1) assess in detail the structural 155 competence of the infrastructure (validate dimensions and perform basic structural calculations); (2) verify that the plan can be constructed within the proposed schedule and budget; (3) provide PHASE 2 construction specifications; (4) confirm construction cost estimates; (5) conduct a detailed environmental impact assessment (EIA) for the duration of construction/operation of the project. The process for assessing the technical feasibility of the base and the adaptive plan is outlined in Figures 2.10 and 2.11. M2.2 Climate Considerations on Technical Feasibility Step 1 Feasibility of Small- scale Mitigation Step 2 Assess the Feasibility of Adaptation Strategies Step 3 Manage Uncertainty in Adaptation Plans FIGURE 2.10 Technical feasibility assessment of adaptation works implemented via a base plan. Step 5 is optional. 156 PHASE 2 M2.2 Climate Considerations on Technical Feasibility Step 1 Feasibility of Small- scale Mitigation Step 2 Assess the Feasibility of Adaptation Strategies Step 3 Manage Uncertainty in Adaptation Plans FIGURE 2.11 The six main steps of the technical feasibility assessment for the adaptive plan 157 PHASE 2 03 MANAGE UNCERTAINTY IN ADAPTATION PLANS WORK IN PROGRESS M2.2 The methods presented in this step are innovative and have not—at the time of writing—been mainstreamed across sectors. While some sectors have already incorporated their use in routine operations, some others Climate have only applied them in pilot applications.13 Users are thus encouraged Considerations on Technical Feasibility to review the methodologies in order to obtain an understanding of their capacities, considering the fact that as more models are developed, the use of such methodologies will be gaining popularity among consultants and may be preferable toconventional approaches (due to their advanced modeling capabilities). The selection of the appropriate method and the design suitable for it should be based on relevant expertise and performed Step 1 by experts. Feasibility of Small- scale Mitigation Upon entering this step, users are expected to have pre-qualified a list of candidate adaptation and resilience strategies. Depending on the problem details, the decision on the “best” strategy may not be straightforward. For example, an increase in the capital expenses for adaptation may provide increased protection against losses from a climate hazard, but the hazard itself may be a Step 2 very extreme (i.e., very low probability) event, thereby questioning the justification of Assess the Feasibility the investment. Similarly, an ecosystem-based adaptation option may be able to offer protection of Adaptation up to a level of hazard but unable to protect against more adverse scenarios where a Strategies more conventional approach could work better. In such cases, where decisions are hindered by the uncertainty regarding the realization of one scenario or another, decision making under deep uncertainty (DMDU) methodologies provide a framework to support how decision- makers prioritize their options in an informed way by simultaneously considering multiple Step 3 criteria. Manage Uncertainty in Adaptation Plans Although several types of methods may be found in the literature, the present toolkit focuses on two categories of decision making under deep uncertainty approaches, broadly corresponding to the two types of adaptation plans described previously. It is a matter of experience and preference of the consultant to select the most appropriate approach for the problem under consideration (in view of requirements and resource limitations). 13 For example, the World Bank Group supported in 2018 the Preparation and Appraisal of a Rural Roads Project in Mozambique under Changing Flood Risk and Other Deep Uncertainties. The study included advanced analyses aiming at piloting the use of decision-making under uncertainty in transport operations. 158 STRATEGIES BASED ON ROBUSTNESS PHASE 2 This type of approach shall be more appropriate for the design of "base" plans, with their aim being to identify among several strategies the one that maximizes robustness over a variety of scenarios. A list of popular approaches could indicatively include the following: • Robust Decision Making (RDM) analysis, which measures the performance of alternatives and seeks an alternative that satisfies a predefined performance criterion (i.e., an indicator of success) over the majority of scenarios analyzed M2.2 • Information Gap Decision Theory,14 which uses nested uncertainty increments to evaluate the robustness of a candidate adaptation option Climate Considerations on • Climate Informed Decision Making (CIDA), which identifies alternatives whose good Technical Feasibility performance is insensitive to the most significant uncertainties (Insight 2.2) Despite their technical differences, the basic structure of all methods includes the following steps: (1) Define performance indicators and thresholds Describe the climate-related objectives of the base plan in due consideration of current and Step 1 potential constraints in future conditions. The result will be a definition of success (mathematically Feasibility of Small- scale Mitigation described in the form of performance indicators) that the decision-makers require or aspire to achieve by implementing the specific infrastructure. Depending on the infrastructure sector and the specific investment objectives, success may be described by means of a variety of indicators. A non-exhaustive list would include: • Technical performance indicators (e.g., expected physical damage over life-span less Step 2 Assess the Feasibility than a threshold percentage of the initial investment, loss of network redundancies) of Adaptation • Loss indicators (e.g., expected annual losses below a certain threshold) Strategies • Risk reduction indicators for the infrastructure or the broader ecosystem • Economic indicators (e.g., benefit-cost ratio, total net benefits) or violation of performance thresholds (e.g., levelized cost of regret) Step 3 • Indicators of the overall environmental impact of a plan (e.g., protecting/risking Manage Uncertainty biodiversity, air/water quality, etc. in Adaptation Plans • Social equity indicators (e.g., efficiency in addressing gender gaps) • Multi-objective indicators15 that integrate monetized and non-monetized criteria into one indicator. (2) Perform stress tests Model the system performance in the widest possible range of the future landscape to identify vulnerabilities (i.e., conditions of unacceptable performance) of each plan. 14 Info-Gap Decision Theory - 2nd Edition (elsevier.com) 15Kasprzyk, Nataraj, Reed, Lempert, 2013: Many objective Robust Decision Making for complex environmental systems undergoing change, Environmental Modelling & Software, Volume 42, Pages 55-71, ISSN 1364-8152 159 (3) Test the robustness PHASE 2 Measure the performance of each plan (i.e., using one or more of the indicators described above) under different instances of the future. Apply scenario discovery methods to identify the conditions that lead a strategy to fail to meet its objectives (Bryant and Lempert 2010). The description of these conditions helps to focus decision makers' attention on the riskiest future conditions and to discuss the acceptability of the risks of the various available options. An example of the application of a robust-based DMDU for the design of a hydropower project in M2.2 Sub-Saharan Africa is provided in Box 2.8 (a,b). Climate Considerations on Technical Feasibility BOX 2.8a ROBUST DECISION MAKING FOR THE DESIGN OF A HYDROPOWER PROJECT IN SUB-SAHARAN AFRICA SETTING THE STAGE This is an illustrative example to describe how robust decision-making can be incorporated into the Step 1 design of a new hydropower facility. The introductory questions are meant to describe the dilemma Feasibility of Small- the decision-maker faces before getting into the details of the application of the RDM approach. scale Mitigation 1. What should be the capacity of the hydropower plant considering climate change given that the projected precipitation rates for the future may vary between two extremes (a low and a high)? If the nominal capacity is too low—i.e., complying with the lower-limit of the precipitation Step 2 estimates—there is a risk of procuring a project that may not be able to satisfy the potential Assess the Feasibility increasing demand of the future (e.g., due to increased business activity, or population growth that of Adaptation may be boosted by potential changes in the climatic conditions). On the other hand, if the capacity Strategies is too high—i.e., assuming higher precipitation—there is a risk of under-exploitation in case water supply proves to be low (e.g., due to decrease in rainfalls and increased evaporation). 2. What is an “optimum” design? Evidently, the right design is a matter of balancing between the cost of building and operating the Step 3 power plant over the amount of money that must be charged per unit of energy to break even. If Manage Uncertainty average annual precipitation exceeds a certain threshold, the preferred design would be larger to in Adaptation Plans best utilize the increased available streamflow. If, on the other hand, average annual precipitation is below a threshold, a smaller hydropower design capacity would be the most efficient. 3. What is the metric for an “optimum” design? Depending on the risk appetite of the decision-maker, there are different descriptors to measure this trade-off (and hence optimize investment), resulting in different “optimum” designs: • A conservative decision-maker would feel more comfortable with a design that minimizes the cost of regret, which is the cost difference between a chosen design and the cost of the best alternative for that particular future. Hence when the minimization of regret is the driving motivation for new investments, lower nominal capacity hydropowers will be preferred. • On the other hand, from a riskier decision maker's perspective, an “optimum” design is associated with maximum benefits. Hence, when maximization of net benefits is the goal, a larger nominal capacity will be preferred. 160 BOX 2.8b ROBUST DECISION MAKING FOR THE DESIGN OF A PHASE 2 HYDROPOWER PROJECT IN SUB-SAHARAN AFRICA - NUMERICAL EXAMPLE Hydropower alternatives: 12 alternative design capacities are examined: 29, 31, 33, 35, 37, 39, 41, 43, 45, 47, 49, and 51 m3 /s Future Climate: The mean annual temperature in the region is expected to increase by 1.5o C - 2o C by 2040 (having a median at 22.0o C), and precipitation ranges from 650 to 1,325 mm/year. Computational model: Analyses are performed with the WEAP hydrological model (by M2.2 Stockholm Environment Institute). Results: The performance of the 12 design alternatives when subjected to the different climate Climate scenarios is summarized in Figure 2.12. Following the previous discussion, the comparison is Considerations on performed using two alternative indicators: the levelized cost of regret expressed in $/ GWh Technical Feasibility (left graph) and the forgone profit expressed in $/year (right graph). It is worth noting that designs in the low-middle range (design Nos. 3-4) demonstrate minimum levelized cost of regret and small variance in the predictions over the range of climate scenarios, at the expense, however, of a foregone profit on the order of $4/year. On the other side of the spectrum lies design No. 12, which minimizes the forgone profit if accepting a (non- Step 1 trivial) cost of regret on the order of $400/ GWh. The final decision lies with the decision- Feasibility of Small- maker. scale Mitigation Step 2 Assess the Feasibility of Adaptation Strategies Design alternative Design alternative Step 3 Manage Uncertainty in Adaptation Plans FIGURE 2.12 Mean levelized cost of regret, left, and net benefit of regret (i.e., forgone profit), right, of the 12 alternative solutions over the range of climate scenarios (M$ : million dollars, GWh: Gigawatt hours) Source: World Bank Group, 2015: Confronting Climate Uncertainty in Water Resources Planning and ProjectDesign 161 STRATEGIES BASED ON FLEXIBILITY This type of approach shall be more appropriate for the design of "adaptive" plans and, in PHASE 2 general, aim to handle uncertainty by planning different types of actions that may be activated, if and when necessary, based on trigger points. Alternative instances of the method are summarized in Box 2.9. Their main components of “adaptive planning” are illustratively presented in Figure 2.13 and summarized below: The procedure commences with an in-depth analysis of existing conditions and vulnerabilities. Next, the objectives of the adaptation are determined, and proper indicators of success are M2.2 specified. Based on this, a conceptual design of a base plan is conceived (i.e., a plan that is appropriate to meet the adaptation goals assuming that the climate conditions will not change), Climate supported by “adaptation add-ons” (that offer increased levels of protection against more severe Considerations on climate conditions). By combining the base plan with the different adaptation add-ons, Technical Feasibility alternative strategies are generated and assessed over a large ensemble of climate scenarios to estimate vulnerabilities and losses. It is understood that different strategies may have a different window of effectiveness, beyond which a strategy can no longer meet the desired objectives and new strategies need be followed. Central in the idea of adaptation planning is the implementation of a monitoring system with related contingency actions to keep the adaptation plan on track. An Step 1 example of the implementation of an adaptive planning approach for flood protection is Feasibility of Small- scale Mitigation provided in Box 2.10. FIGURE 2.13 The eight steps of adaptive Step 2 planning Assess the Feasibility of Adaptation Strategies Step 3 Manage Uncertainty in Adaptation Plans 162 BOX 2.9 ADAPTIVE PLANNING METHODOLOGIES PHASE 2 A new paradigm for adaptive planning under conditions of deep uncertainty has emerged in the literature, and several methodologies have been developed in that response. Despite their differences, the methodologies listed below describe a framework for developing dynamic adaptive plans that contain a strategic vision of the future, commit to short-term actions, and establish a procedure to guide future actions. Adaptive Policymaking (Kwakkel et al., 2010) provides a stepwise approach for developing a basic plan and contingency planning to adapt the basic plan to new information over time. Once the M2.2 basic plan has been designed and near-term actions are implemented, a monitoring system is established to signpost the implementation of contingencies (i.e., when a trigger event occurs or a threshold has been reached). Climate Considerations on Adaptation Pathways provide insight into the sequencing of actions over time, potential lock-ins, Technical Feasibility and path dependencies. Central to the methodology are adaption tipping points (Haasnoot et al., 2012; Kwadijk et al., 2010), which are the conditions under which an action no longer meets the clearly specified objectives. The approach uses computational scenario approaches to assess the distribution of the sell-by date of several actions across a large ensemble of transient scenarios. Dynamic Adaptive Policy Pathways (Haasnoot et al., 2013), which is a combination of Adaptive Policymaking and Adaptation Pathways. The methodology explicitly includes decision making over Step 1 Feasibility of Small- time by constructing a dynamic, robust plan as a set of actions or interventions that are decided scale Mitigation dynamically in time whenever a tipping point (i.e., a future time instance at which decisions for actions have to be made) is reached within a monitoring system. After identifying the key objectives, constraints, and uncertainties, a variety of plausible futures is generated. For each future, system performance is examined with respect to the objectives and potential actions, or interventions are identified whenever the system fails to meet the objectives. This assessment is Step 2 performed either through simulation-based techniques or optimization-based techniques. Assess the Feasibility of Adaptation Sources: Strategies Kwakkel, Walker, Marchau, 2010: Adaptive airport strategic planning, European Journal of Transport and Infrastructure Research, https://doi.org/10.18757/ejtir.2010.10.3.2891 Kwadijk, Haasnoot, Mulder, Hoogvliet, Jeuken, Krogt, Oostrom, Schelfhout, Velzen, Waveren, Wit, 2010: Using Adaptation Tipping Points to prepare for climate change and sea-level rise: A case study in the Netherlands, Wiley Interdisciplinary Reviews: Climate Change 1, https://doi.org/10.1002/wcc.64 Step 3 Haasnoot, Middelkoop, Offermans, van Beek, van Deursen, 2012: Exploring pathways for sustainable Manage Uncertainty water management in river deltas in a changing environment, Climatic Change 11, in Adaptation Plans https://doi.org/10.1007/s10584-012-0444-2 Ranger, Reeder, and Lowe, 2013: Addressing 'deep' uncertainty over long-term climate in major infrastructure projects: four innovations of the Thames Estuary 2100 Project, EURO Journal on Decision Process 1, https://doi.org/10.1007/s40070-013-0014-5 Haasnoot, Kwakkel, Walker, ter Maat, 2013: Dynamic adaptive policy pathways: A method for crafting robust decisions for a deeply uncertain world, Global Environmental Change 23, https://doi.org/10.1016/j.gloenvcha.2012.12.006 163 BOX 2.10 AN EXAMPLE OF ADAPTIVE PLANNING Haansoot et al. (2020) PHASE 2 The example refers to a fictitious case based on the Waal River in the Netherlands. The river banks are protected by levees, and the regions in proximity to the river experience flooding when the river flow reaches and exceeds design conditions (approx. 14,000 m3/s). Due to climate change, increased river inflow is anticipated. Four alternative adaptation strategies are considered: (i) raising the dike with 0.5 m (low dike), (ii) raising the dike further by 1 m (high dike), (iii) providing more room for the river by widening the riverbed at a small scale, or (iv) at large scale. M2.2 As illustrated in the figure below, these actions may be combined in various paths and, as such, generate six pathways comprised of four starting points and two possible transfer stations (denoted by circles). Depending on the rate of evolution of the future climate (i.e., fast evolution Climate responsible for a rapid increase in river inflow, or slow representing a later onset of climate Considerations on Technical Feasibility change), the adaptation tipping point is expected to take place between years 40 and 50. Until that point, any of the low-investment solutions (yellow or green) may be implemented. Beyond that point, higher adaptation is required, which may be implemented either by increasing the height of the dike (red line) or by expanding the trenches of the river (blue line), or by combining the low-dike solution with creating some additional room for the river. Among the alternatives, the preferred strategy is the one that maximizes the net present Step 1 value and brings additional co-benefits. Feasibility of Small- scale Mitigation Step 2 Assess the Feasibility of Adaptation Strategies Step 3 Manage Uncertainty in Adaptation Plans Source: Haasnoot, M., van Aalst, M., Rozenberg, J., et al. Investments under non-stationarity: economic evaluation of adaptation pathways. Climatic Change 161, 451–463 (2020). https://doi.org/10.1007/s10584-019-02409-6 164 PHASE 2 KEY TAKEAWAYS • A carbon reduction assessment is necessary to define GHG-reduction targets and M2.2 the means to achieve it (including technical requirements, supporting systems, and operational adjustments). Climate • Based on a life cycle cost assessment, it is possible to compare alternative Considerations on mitigation strategies to select the one that is more cost-efficient while generating Technical Feasibility broader co-benefits1 (e.g., reduced pollution, promotion of equity, etc.). • “Adaptation strategy” is a term meant to include any combination of individual adaptation and resilience measures, that is aiming to reduce the damage, loss, and potential disastrous consequences generated by the climate stressing on the infrastructure. Step 1 Feasibility of Small- • Adaptation and resilience measures should be identified at this stage. These may scale Mitigation be divided in three categories: (i) prevention measures that reduce the likelihood of the consequences of the risk once a hazard is realized, (ii) preparation measures that reduce the severity of consequences once a hazard is realized, and (iii) recovery measures that comprise all measures that can lead to efficient recovery of the infrastructure itself and its closely dependent human and natural Step 2 Assess the Feasibility environment from the impacts of climate hazards. of Adaptation Strategies • It is generally accepted good practice to examine climate projections associated with a range of emissions scenarios and simulate the performance of the infrastructure across these scenarios (associated with different levels of climate stressing). This way, decision-makers are better informed on the level of protection offered by the adaptation strategy across scenarios and are better Step 3 prepared to make adaptation decisions. Manage Uncertainty in Adaptation Plans • In order to allow design of adaptation measures under uncertainty, two potential planning options have been defined: “Base” plan, i.e., a project plan in which all capital expenses associated with adaptation and resilience measures are disbursable upfront and “adaptive” plan, i.e., a project plan in which adaptation and resilience expenses are disbursable throughout the project depending on specific climate-related performance indicators. • In cases where decisions are hindered by the uncertainty regarding the climate scenarios, decision making under deep uncertainty methodologies provide a framework to help decision-makers prioritize their options in an informed way simultaneously considering multiple criteria. 165 ► ► ► ► ► ► INSIGHTS ► INSIGHTS Insight #2.1 Small-scale Mitigation Options Insight #2.2 Climate Informed Decision Analysis 166 SMALL-SCALE MITIGATION OPTIONS Infrastructure projects should aim to Below are examples of climate-change appropriately plan and design construction and mitigation options that can either be introduced operation procedures in such a way that GHG to conventional infrastructure projects whose emissions are explicitly measured and climate primary purpose is not climate mitigation to mitigation methods are incorporated within the reduce GHG emissions and hence align the project solution alternatives. The latter may be project with the international and national / adopted either as core solutions for the project regional agendas on climate change. Adoption or, if not possible, as add-ons to traditional gray of such options may unlock a pool of green infrastructure with the aim to reduce the carbon funding mechanisms that could support the footprint of the project and at least do no implementation of the project and optimize its significant harm to the natural environment bankability. INSIGHT #2.1 biodiversity and regional ecosystem. Road Networks The construction of road networks represents a significant amount of the total GHG emissions produced by the transportation sector. Aiming to reduce the carbon footprint and emissions within the life cycle of the project and consequently contribute to climate change mitigation, the main factors to be taken into consideration while planning and designing a road construction are the smart use of materials, their efficient transportation on-site, as well as the optimization in construction techniques. To this end, the re-use or recycling of existing materials during the construction of a motorway network (e.g., the use of materials from old roadways that can be recycled on-site) and the optimization of earthworks to reduce haul distances may lead to a significant impact on the total carbon emissions of the network. In addition, the contractor may consider the use of climate-smart materials, such as porous asphalt that allows water to flow naturally into the soil beneath (hence preserving the ecosystem without generating significant disruptions), the vegetation of embankments as a carbon-capturing method, and gabion walls as an alternative to concrete walls that can reduce CO2 emissions by 80% compared to traditional reinforced concrete (RC) walls (ref). The infrastructure required for zero direct emissions transport (e.g., electric charging points, electricity grid connection upgrades, hydrogen fueling stations) and infrastructure that is predominantly used for low-carbon transportation (e.g., bicycle and running tracks) may be regarded as indirect measures to assist in climate change mitigation within the life cycle of the network. ©Jason Sheldrake/iStock.com 16 Green Buildings Climate change mitigation strategies for buildings could be mainly focused on the promotion of energy efficiency and energy saving mechanisms, the appropriate selection of materials and resources, the use of renewable energy for their operation needs, proper waste management, the efficient INSIGHT #2.1 use of water, and finally the integration of vegetation that may work as a carbon capture mechanism. Specifically, through careful and appropriate planning, a building may integrate innovative implementations such as passive design for energy conservation (through the use of efficient materials), maximum harvest of daylight to reduce heating requirements, appropriate location and design of the building openings in order to minimize energy losses, and innovative ventilation systems and smart air conditioning that lead to reduction of energy consumption. In addition, production of renewable energy may be incorporated through the introduction of solar panels at the façade and/or roof of the structure that may cover entirely the energy needs of the building itself. Landscaped garden areas and the introduction of green/vegetated façades and roofs may provide a natural, efficient and inexpensive carbon capture mechanism while at the same time enhance the design and esthetics of the building. Efficient water management could minimize the use of water during construction and provide a systematic mechanism to decrease the water footprint of the building (e.g., through the adoption of blue roofs that harvest and store rainwater). Another significant aspect of what is defined as a green, sustainable, and bioclimatic building that mitigates climate change is the incorporation of key elements and technologies that facilitate the use of eco-friendly transport (e.g., the installation of charging stations for electric vehicles and parking spaces for bicycles). Aiming to support sustainability and climate change mitigation within design, construction, and operation of buildings, green certifications/rating systems have been introduced and have gained popularity within the last decades (e.g., LEED, EDGE by IFC). 16 Ports and Maritime Infrastructure Port projects may facilitate reduction of CO2 emissions from shipping, port facilities, and landside operations. The development of ports can also contribute to climate change mitigation by accelerating the energy transition, improving the air quality, and by implementing circular economy principles throughout the port’s life cycle. All these can be achieved by setting a clear green vision that adopts low carbon INSIGHT #2.1 development strategies and other mitigation approaches. A complete supply chain operating on zero emissions can be achieved by setting targets for zero tailpipe emissions from cargo handling equipment and trucks, promoting hydrogen fuel cell electric trucks for freight operations and overall electrification of maritime mobility. Optimization of the port’s own fleet by investing in energy-efficient ships and alternative fuels (hydrogen, bio-fuels, etc.), installation of rapid charging stations, and hydrogen refill tanks may support the port’s emission targets. Development of onshore high voltage power supply for container vessels or cruise ships that can connect at berth and access CO2-neutral electricity from the power grid instead of keeping their engines running and producing emissions of sulfur dioxide, nitric oxide or other air pollutants will not only offer a quieter port environment but also cut substantially such emissions. Carbon capture and storage (CCS) is widely regarded as a key component in the transition of the global energy system. Developing carbon capture infrastructure such as capture plants or transporting pipelines to support CCS projects will not only contribute to climate change combat but also enable new business areas at the port. Improving or compensating for the health of ecosystems, like implementation of large- scale plantation projects (e.g., eelgrass), or maximizing the low carbon energy recovery of wastewater and reducing the overall environmental impact of wastewater treatment can also contribute substantially to climate change mitigation. In addition, the introduction of emission-free stipulations within the procurement system for port development and operation projects is another way to incorporate mitigation in ports. The port authorities could demand from the prospective contractors throughout the life cycle of the port that a certain proportion of the equipment, work process, construction materials, or energy consumption should be emission-free. 169 CLIMATE INFORMED DECISION ANALYSIS Climate informed decision analysis (CIDA) is an innovative methodology as it links the insights provided by bottom-up analyses with the information from climate models and informs decisions and risk assessment. Originally developed for water-management systems, the approach is usually conducted via the following steps: INSIGHT #2.2 After characterizing the key climate The first stage of the analysis identifies the concerns, the next step is to build a model climate conditions that cause risks and/or that simulates system performance as a favor a particular decision to be preferred function of climate inputs. The assessment over another. An additional aim of the initiates with a sensitivity analysis using a discussions is to identify thresholds of large input series that samples a wide performance indicators that, when variety (even remotely plausible) of exceeded, signify the need for adaptive climate conditions. The result is a set of actions. climate stressors and performance indicators. The final step in the process is the A decision map is produced, identifying allocation of probabilities that each decision's performance under characterize the relative likelihood of the different climate possibilities, as well as defined climate groups. Using climate the best decision for a given future models (i.e., global climate models climate. A decision map, including which (GCMs)), stochastic modeling,or expert decision options are optimal under which judgment, a probability is assigned to groups of climate conditions, can be each climate group. The decision is then constructed. based on the application of decision-to- climate performance to relative climate probabilities. Sources: Climate Risk Assessment of Niger Basin Investment Program, 2010, AFTWR Brown, Ghile, Laverty, Li. 2012: Decision Scaling: Linking Bottom-up Vulnerability Analysis with Climate Projections in the Water Sector 170 CLIMATE INFORMED DECISION ANALYSIS ADVANTANGES DISADVANTAGES Identifies vulnerabilities without The quality of the stakeholder relying on uncertain global climate process determines the relevance models and efficacy of the entire decision process. Vulnerability analysis is decoupled from climate projections, thus can CIDA relies on subjective be easily updated when new GCMs judgment to determine become available. important scenarios Applies the GCM late in the Time and computationally process, reducing the impacts of intensive GCM uncertainties on the decision INSIGHT #2.2 171 MODULE 2.2 Resources RESILIENCE BOOSTER TOOL The Resilience Booster is an interactive, step-by-step tool for development practitioners who are designing or working on climate resilient projects. It helps teams to think through, specify, and design project activities that build resilience by integrating relevant attributes Developed by: World Bank, 2021 ADAPTATION KNOWLEDGE PORTAL The portal is an online resource of the UNFCCC Knowledge-to-Action Hub for Climate Adaptation and Resilience (also called the Nairobi work program (NWP)). The portal provides free and open access to relevant knowledge resources Developed by: UNFCCC THE ADAPTATION SUPPORT TOOL: CLIMATE ADAPT A web tool within the European Climate Adaptation Platform Climate-ADAPT that aims to assist the development, implementation, monitoring, and evaluation of climate change strategies and plans Developed by: European Commission - European Environment Agency ECONOMIC APPROACHES FOR ASSESSING CLIMATE CHANGE ADAPTATION OPTIONS UNDER UNCERTAINTY Methodologies for the economic assessment of climate change options considering uncertainty. Prototype Microsoft Excel-based tools for CBA and MCA Developed by: Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) RESILIENCE RATING SYSTEM: A METHODOLOGY FOR BUILDING AND TRACKING RESILIENCE TO CLIMATE CHANGE RRS complements existing methodologies on tracking climate-related finance Developed by: World Bank Group, 2021 172 PILOTING THE USE OF NETWORK ANALYSIS AND DECISION-MAKING UNDER UNCERTAINTY IN TRANSPORT OPERATIONS: PREPARATION AND APPRAISAL OF A RURAL ROADS PROJECT IN MOZAMBIQUE UNDER CHANGING FLOOD RISK AND OTHER DEEP UNCERTAINTIES This paper presents a methodology to identify key priority areas for transport investments. The methodology uses a geospatial data-driven approach and then proposes an innovative economic analysis for project appraisal under uncertainty Developed by: World Bank, 2018 ADAPTATION PRINCIPLES: A GUIDE FOR DESIGNING STRATEGIES FOR CLIMATE CHANGE ADAPTATION AND RESILIENCE The report lays out six universal principles Developed by: World Bank Group, 2020 ASSESSING THE COSTS AND BENEFITS OF ADAPTATION OPTIONS: AN OVERVIEW OF APPROACHES This publication aims to elaborate on the role and purpose of assessing the costs and benefits of risk reduction options; introduce a range of key methodological issues; explain the most commonly used assessment approaches; describe lessons learned and good practices; provide a glossary of the most commonly used terms; provide a bibliography of useful resources and references. A diverse range of case studies is presented throughout this publication to illustrate available assessment methods and options Developed by: UNFCCC - United Nations Framework Convention on Climate Change,2016 ASCE/COS 73. STANDARD REQUIREMENTS FOR SUSTAINABLE INFRASTRUCTURE Standards providing guidance on sustainable infrastructure development through the entire lifecycle process. The standards outline how leadership shall encourage transformative development of the infrastructure solution at the earliest stages; consider and analyze all reasonable alternatives; and consider natural, no- construction, and constructed project solutions Developed by: ASCE, 2020 173 Module 2.2 - Further Reading DYNAMIC ADAPTIVE POLICY PATHWAYS: A METHOD FOR CRAFTING ROBUST DECISIONS FOR A DEEPLY UNCERTAIN WORLD A scientific paper proposing a method for decision-making under uncertain global and regionalchanges Developed by: Haasnoot, M., et al., 2013, Global Environmental Change 23, 2013, 485–498 ADAPTATION PATHWAYS IN PLANNING FOR UNCERTAIN CLIMATE CHANGE: APPLICATIONS IN PORTUGAL, THE CZECH REPUBLIC, AND THE NETHERLANDS The paper compares the application of the methodology in four planning practices Developed by: Zandvoort, M., et al., 2017, Environmental Science & Policy Vol. (78) INVESTMENTS UNDER NON-STATIONARITY: ECONOMIC EVALUATION OF ADAPTATION PATHWAYS A scientific paper proposing an economic evaluation framework of the methodology Developed by: Haasnoot, M., et al., 2020, Climatic Change 161: 451–463 CLIMATIC COST-BENEFIT-ANALYSIS UNDER UNCERTAINTY AND LEARNING ON CLIMATE SENSITIVITY AND DAMAGES A scientific paper presenting a methodology to consider parametric uncertainty on climate sensitivity and damages Developed by: T. Ekholm, 2018, "Ecological Economics," Vol. (154) ADAPTING INFRASTRUCTURE AND CIVIL ENGINEERING PRACTICE TO A CHANGING CLIMATE This report identifies the technical requirements and civil engineering challenges raised by a changing climate Developed by: ASCE, Committee on Adaptation to a Changing Climate; Edited by J. Rolf Olsen, 2015 174 2.3 Climate Considerations on Commercial Feasibility and Bankability When entering the present module, users are quantitative and qualitative benefits), (ii) supposed to have completed the review of render traditional procurement more climate actions to be incorporated in the valuable than PPP, and ( iii) make the project and the assessment of their technical project unaffordable, in which cases feasibility. On the basis that the PPP route has alternative project plans would have to be already been chosen, the impact of such considered and reassessed. technical solutions on the PPP project’s Next, bankability considerations due to commercial feasibility is assessed in the incorporating climate mitigation or following sections in order to ensure it is adaptation measures in the project’s ultimately structured as a commercially viable structure are identified, key questions for the and bankable project. structuring team are presented, and possible At first, given that the project has entered the solutions to enhance bankability are briefly PPP preparation and appraisal phase, it is discussed. essential to perform the underlying The resulting output of this section should be supporting analysis (CBA, VfM, and a project that can incorporate within a PPP affordability). structure technical solutions that address The pre-assessments of Phase 1 are now climate risks; result in negative, zero, or very updated and scrutinized as detailed, low carbon emissions; or at least contribute quantified data are currently available to to the transition towards a decarbonized evaluate whether there are climate scenarios economy. Involvement of appropriate and solutions that (i) tip the balance of costs technical and financial consultants is essential versus benefits (i.e., updated costs exceed throughout the module. 175 Step 1 Step 2 Step 3 Step 4 Climate Hazards Characterization of Characterization of Towards low-carbon Internal risks External Risks infrastructure Revised EIA incorporating climate risks and climate M2.1 mitigation opportunities Technical pre-feasibility & Interactions External risks estimate Environmental Impact between Climate Assessment (EIA) & PPPs Mitigation attributes of the project (incl. cost estimates) Step 1 Step 2 Step 3 (Work in progress) Feasibility of Assess the Feasibility of Manage Uncertainty in Adaptive Plan Small-scale Mitigation Adaptation Strategies Adaptation Plan (final tech. specs+ cost estimates) Technical feasibility M2.2 Base Plan Changes in CAPEX, O&M (final technical specs + cost PHASE 2 Climate costs, loss reduction estimates) Considerations on Technical Feasibility Commercial Step 1 Step 2 feasibility Update and Refine CBA, VfM Assess Bankability and and Affordability Analyses Commercial Feasibility Green light to move to M2.3 structuring of the Base Update CBA Commercial feasibility or the Adaptive Plan checklist Climate Considerations Grantor’s, investor’s, lenders’ on Commercial feasibility Update VfM consideration on commercial and Bankability feasibility Check project’s Climate-related considerations affordability on bankability and preliminary risk-transfer mechanisms 176 PHASE 2 STRUCTURE OF THE MODULE The module includes the following consecutive steps:  Step 1 provides guidance on updating and refining the CBA, VfM, and affordability assessment of the project that has been already checked as to its technical feasibility. M2.3  This is followed by Step 2, which presents the criteria that need to be met so that the project solution is commercially feasible and bankable. Climate Considerations on Commercial 01 UPDATE AND REFINE CBA, VFM, AND Feasibility and AFFORDABILITY ANALYSES Bankability Performing a thorough cost-benefit analysis and properly estimating the value for money and affordability of the project are perhaps the most critical steps towards the decision on the commercial feasibility of the project. The analysis at this stage is expected to be considerably more advanced compared to the early assessments of Phase 1, since users are expected to have acquired Step 1 (as part of the preceding modules) updated and quantified information on: Update and Refine CBA, VFM and Affordability  Climate risk scenarios, which provide an indication of potential exposure of the project to Analyses costs, either due to operational disruption or due to physical damage  the costs and benefits of risk-reduction plans against identified scenarios  the costs and benefits of climate mitigation strategies  the underlying uncertainty and whether such uncertainty can be addressed in part or in full, as well as the impact of such uncertainty in a project’s technical feasibility Step 2 Bankability and The following sections outline how such data can be used to rigorously assess CBA, VfM, and Commercial affordability in order to estimate whether the incorporation of climate actions in the PPP project Feasibility remains justifiable from a commercial perspective. COST-BENEFIT ANALYSIS (CBA) Upon initiation of the process, all categories of costs and benefits related to climate actions (presented previously as part of Module 1.3) will need to be diligently quantified. Thus, in the current step, the preliminary estimates of Phase 1 need to be updated in light of the new data listed above. Table 2.2 illustrates the steps of the traditional CBA process, which will need to be updated to incorporate the costs and benefits of climate actions. 177 TABLE 2.2 Incorporating climate-related considerations in the CBA process (APMG guide) CBA process PHASE 2 CBA sub-steps Incorporating climate toolkit outputs outline Projecting Tax adjustment • Only relevant to the extent there are tax incentives to a project Financial Data when incorporating wider social benefit parameters with Shadow prices • Adjust costs and benefits as would otherwise be done, but with Conversion/ and opportunity including any probabilistic analysis of costs and uncertainties about Adjustment costs adjustment climate hazardrisks and/ or costs of adaptation Construction of • Reflect on the cost estimates and the steps above in the model the model M2.3 Defining term • Residual value requires adjustment as an asset that is unprotected by and residual climate hazards that are worsening in the long term will decline in value, value while an asset that incorporates protection mechanisms (adaptation) Climate will retain higher residual value Considerations on Adding Defining a list of • In the case of costs, externalities may be significant, especially in cases Commercial Externalities externalities of essential infrastructure. These need to be carefully thought of, Feasibility and especially when assessing project alternatives without adaptation (e.g., Bankability in the case of a carbon emission reduction project, a social price of carbon may be applied) • In the case of benefits, externalities should be assessed and reflected (e.g., user safety, the certainty of availability, and of revenue) Adding (Other) Monetizing/ • Reducing and managing the risk of climate disruptions increases private Socio-economic inferring value for investment confidence (business, entrepreneurship, property). Benefits relevant benefits These gains need to be reflected and, to the extent possible, Step 1 quantified Update and Refine CBA, Considering/ • Resilience through the project has to be reflected (e.g., the prevention of VFM and Affordability qualifying other flood or other short or mid-term disruptions to an area that an Analyses unvalued benefits infrastructure asset covers will undoubtedly have significant impacts on the surrounding ecosystem and biodiversity) • Alignment with strategic climate objectives Relative Price Market • Apply as would otherwise have been done Adjustments imperfection and Bias/Risks Other • Consider cases whereby the cost of adaptation leads a project alternative Adjustments opportunity cost to become more expensive than an alternative that was rejected as too adjustments costly but did not suffer from the same climate risks Step 2 • In addition, consider alternative uses of the land and space that climate Bankability and measures cover, if any, and apply such costs Commercial Taxes • Same as above, apply only to the extent that tax advantages are Feasibility applicable when a project exceeds its purpose in social benefits • Consider the tax income gained from steady uninterrupted operations Defining Base Case, Discount rate • Consider adjusting discount rate for valuation depending on levels of Defining and definition and certainty of cash flows (in case a project alternative has adaptation Calculating EIRR calculation of measures) and uncertainty of cash flows (in case a project has no expected net adaptation measures). This needs to be aligned with the probabilistic Present Value – analysis of events occurring to avoid “hurting” a project with uncertainty eNPV and Internal twice (one with a high probability of costs occurring and one with a high Rate of Return - discount rate because of the uncertainty of cash flows) eIRR Incorporating Test the strength • As would otherwise be conducted Uncertainty: of the proposed Sensitivities business plan and present the effect of variations Closing the Analysis Include the • As would otherwise be conducted, however, highlighting in the report and Reporting assumptions and that climate mitigation (if applicable) and resilience has been considered results in the as one of the main criteria screening report 178 CBA Considerations for Base and Adaptive Plans As explained in detail in Module 2.2, adaptation works may either be implemented at the project’s PHASE 2 onset (base plan) or at any other time during the project lifetime (adaptive plan). Depending on the planning horizon of the adaptation strategy, the cost and benefits of the CBA may be impacted differently (Tables 2.3 and 2.4). TABLE 2.3 CBA cost elements for base and adaptive plans CBA Element Adjustments for a Adjustments for an M2.3 Base Plan Adaptive Plan COST ELEMENTS Climate Capital Cost Increase of project’s capital cost Increase of project’s long term Considerations on cost profile Commercial Cost Projections  Reduction of the probabilistic  Reduction of the probabilistic Feasibility and adjusted cost1 adjusted cost Bankability  Mitigation of contingent costs2  Mitigation of contingent costs Contingent Liabilities by the Decrease. Risk transfers to the Decrease. Risk transfers to the state project company project company Contract Mechanism N/A Required (to oversee climate indicators and trigger for adaptive works) Coordination Costs N/A May increase in case inputs from Step 1 an increased number of parties Update and Refine CBA, will be required VFM and Affordability Procurement Cost May increase. Technical advisors’ May increase. Technical advisors’ Analyses scope is widened and scope is widened and environmental (and other) advisors environmental (and other) will have to be engaged advisors will have to be engaged Step 2 Bankability and Commercial Feasibility 1 There are two ways to account for such risks: (i) by adding a cost line adjusted for its probability of occurrence or (ii) by adding a risk premium to the discount rate of the valuation model. 2 Although there is always a probability of an unexpected disruption if a technical solution does not fully protect upfront. 179 TABLE 2.4 CBA benefit elements for base and adaptive plans PHASE 2 CBA Benefit Elements CBA Benefit Elements for Base Plans for Adaptive Plans  Straightforward procurement contract  Continuous innovation by the private as all is dealt with at the EPC contract sector (when adaptive works are level required, better, cheaper solutions  Less frequent interruptions of may have been developed) operations, be they due to adverse  Potential access to liquidity pools that M2.3 climate events or for adaptive works are relevant to climate action  Potential access to liquidity pools that  Higher certainty of operations in case Climate are relevant to climate action of most climate-induced disruptions Considerations on without a high upfront cost  Certainty of flow (supply or offtake) for Commercial Feasibility and interdependent infrastructure  Limited requirement for government Bankability  No requirement for government guarantees (it is expected that for guarantees climate events that do not abide by the expected timing and severity of the underlying risks that the adaptive plan is based on, would still require some form of government protection depending, of course, on the Step 1 availability of relevant insurances) Update and Refine CBA, VFM and Affordability Analyses It is generally good practice to meticulously establish the range of cost impacts for all solutions considered (i.e., adaptation and mitigation measures) in order to assess whether there are cases whereby total costs start exceeding total benefits. For these cases, an assessment by the grantor will have to be made on whether:  the underlying strategic objectives or the qualitative benefits of the project overall “exceed” Step 2 Bankability and the additional costs, and therefore the project should proceed even if such solutions are Commercial costly (assuming it does not breach affordability, of course) Feasibility  Cost-efficient solutions may offer sufficient protection3 against climate risks, and therefore the costlier solutions against severe and less likely events should remain outside the scope of the project; or  Other adaptation measures (i.e., outside the scope of the project under consideration) could be pursued4 3This is a qualitative decision based on the relevant specialist advice and specific circumstances in each case. At a high level and only as an indication, a less costly technical solution that still leaves some contingent liability may have a very low probability of occurrence, therefore minimizing its impact in the CBA, or that probability may be considered to be near zero, and therefore irrelevant, as there are other government mechanisms in place to address severe climate events. It goes without saying, however, that any such exposure would have to be guaranteed by the government under a PPP structure in case it remains an open risk. 4 There may be cases where a project to protect other assets or projects can be pursued independently. 180 INCORPORATING CLIMATE UNCERTAINTY IN CBA PHASE 2 The discussion in the preceding modules has highlighted the fact that climate-related uncertainties impact the project risks and thus the selection of adaptation and resilience plans. This is expected to also be reflected in the costs and benefits of climate actions that could render the traditional CBA approach inadequate. In such cases, uncertainty may be incorporated in the analysis either by conducting CBA under risk or by employing the more demanding approach of CBA under uncertainty, as outlined below. On the other hand, when the effect of different M2.3 scenarios on the technical effectiveness of climate strategies has been proven to be insignificant (on the basis of climate analyses), traditional CBA is appropriate. Climate Although the guidance below attempts to highlight the main advantages and disadvantages of the Considerations on two approaches (which should not be considered as mutually exclusive) and the conditions under Commercial Feasibility and which each one may be applicable, the decision to embark on the analysis should be made on the Bankability basis of project-specific factors including the criticality of climate considerations, availability of data, capacity and priorities of the structuring team, availability of advisors, etc.  CBA under risk The approach may be used to account for the risk of unknown climate-related quantities in the Step 1 same way it would be employed in order to account for any other non-stationary variable (e.g., Update and Refine CBA, uncertainty regarding future traffic volumes in case of a highway PPP). It is performed in cases VFM and Affordability Analyses when it is meaningful to attach distributions to the variables entering the cost-benefit analysis (and net present value equation). Thus, it is appropriate in cases where probabilities may be assigned in the climate scenarios for the region under consideration (and hence reflected in the values of costs and benefits to be fed into the model). The analysis method may be described as a probability-weighted sensitivity analysis using Monte Carlo simulations. The output of this type of analysis shall provide the climate actions’ net present value (NPV) with its corresponding Step 2 standard deviation as well as the probability that the expected NPV is negative. Bankability and Commercial Feasibility  CBA under uncertainty This approach is applicable in cases of significant uncertainty, where it is not possible to accompany scenarios with probabilities, and requires conducting multiple CBA analyses (i.e., one per considered scenario) and deriving the NPV of climate actions in each scenario. A simple metric may be defined as the number of scenarios in which the NPV is positive. The conditions under which the NPV is not positive can also be analyzed to identify the vulnerabilities of the investment. To do so, a scenario discovery method may be applied for identifying conditions that characterize the vulnerabilities of the proposed investment options. The description of these conditions helps focus decision makers’ attention on the most important uncertain future conditions to the problem at stake and discuss the acceptability of the risks involved given the various options available. 181 In essence, CBA under uncertainty follows the same principles as any methodology for decision-making under uncertainty, such as those PHASE 2 discussed in Module 2.2. In fact, in their most advanced instances, DMDU models may incorporate both technical and financial parameters simultaneously (e.g., by using them to select options that optimize the NPV of climate actions). It is worth mentioning that, despite their merit, such “fully coupled” approaches are computationally demanding and require significant expertise. M2.3 Climate Considerations on VALUE FOR MONEY (VFM) ANALYSIS Commercial Feasibility and The next action is the refinement of the VfM analysis, which has been conducted in the early stages Bankability of project selection (as described in Phase 1). The scope of the updated VfM analysis is to assess whether the proposed technical solutions under the various climate scenarios and associated costs maintain the merits of a PPP, both from an overall cost to the government perspective and the potential qualitative benefits and considerations associated with such a procurement option, such as private sector innovation, risk transfer, and performance-based structures. Step 1 At this stage, given the updated specific information from Modules 2.1 and 2.2, the VfM will have Update and Refine CBA, to be revised, primarily in view of the updated cost estimates and other implications of the VFM and Affordability proposed technical solutions. The underlying assumption is that PPP suitability and affordability Analyses are (and should be) maintained with as few implications as possible on the requirements for government or other forms of guarantees and cover. For example, any technical solution that materially and significantly alters the project’s cost and risk profile would likely have to be reassessed for its overall PPP suitability and affordability, to the extent that: 1) The government would need to provide significant guarantees or Step 2 2) Interest from the private sector would be reduced or Bankability and Commercial 3) Any additional costs would require significantly larger debt amounts and capacity Feasibility payments by the government In such cases, it is suggested that the technical solution is rejected or reconsidered to mitigate its impact on PPP suitability and/or affordability. This is likely to be more relevant for projects subjected to medium/high climate risks, having significantly higher associated costs, whether for development of relevant technical works or insurance for any of the remaining risks, or for reinstatement costs.5 5 The level of costs of a technical solution that may derail the VfM analysis by impacting PPP suitability or affordability really is decided on a case-by-case basis. In certain projects it may because the technical solution is rather complicated representing a significant percentage of overall project costs, and therefore requiring higher availability payments by the state or user charges by the public—deeming it unaffordable. Alternatively, the complication of the technical solution may require the involvement of bidders and EPC contractors that are not experts in the sector of the underlying project, therefore reducing the project’s attractiveness given the challenges to form appropriate consortia. In other projects, the technical solution may still require insurances that are too expensive or not available. 182 The VfM should not be looked at in isolation but rather has to follow, or happen in combination with, the updating of the affordability PHASE 2 analysis. Key Considerations for VfM The main parameters to consider when updating the VfM analysis at this stage, both from a M2.3 quantitative and qualitative assessment perspective (Box 2.11), are the following: 1) The range of costs under each climate scenario and technical solution, which will lead to Climate Considerations on a range of values under both procurement options. It is important to note that the cost Commercial implications are seemingly the same for both the traditional procurement and PPP model. Feasibility and Thus they are not impacting the overall conclusion and, in fact, they further support the Bankability case for a PPP as the latter would lead to alleviation of certain such costs (assuming, of course, that a PPP is already preferred to traditional procurement from Phase 1). Yet, there will be cases where such costs may lead to challenging affordability and PPP suitability. Although such cases are likely to occur as a project risk moves from the medium to high probability and from medium to high impact scales, the impact on affordability and PPP suitability should be considered as well if there is a net loss of Step 1 value. Update and Refine CBA, VFM and Affordability 2) The high-level qualitative benefits of a PPP with climate measures have already been Analyses considered in Phase 1. However, they must, at this stage, be further refined (Figure 2.14). For instance, under an adaptive plan scenario, a PPP will allow for innovative solutions to be put forward by the private sector to keep costs low and the underlying competitive tension may push required returns lower. In certain cases, perhaps a PPP will allow for the private sector to suggest and propose technical solutions for climate mitigation or adaptation, rather than the government having to conclude on a solution upfront. Also, Step 2 the technical solution is best managed (developed, proposed, and executed) through a Bankability and performance-based PPP contract whereby the expected innovation and life- Commercial cycle approach by the project will materially enhance the value. Feasibility Private sector innovation with regards to the technical solution Qualitative Private finance benefits eligibility for green financing and sustainability linked loans to be considered Risk transfer Level of risk transferred to the private sector and performance- in VfM based contracts (e.g., solutions that allow the private sector to take analyses the risk and incentivize good performance throughout the project’s life cycle) Other state level objectives (e.g., private investment in the country, infrastructure, and other economic KPIs, precedent setting for investment program, etc.) FIGURE 2.14 Qualitative benefits for procuring climate-smart projects via the PPP route 183 It remains at the discretion of the grantor whether quantitative or qualitative assessment approaches shall be used, either to complement or to be used instead of each other, in order to PHASE 2 complete the VfM exercise depending in each case on the impact level of each risk and its likelihood of occurrence. There may be cases when a qualitative assessment can maintain the preference for a PPP approach, even when the quantitative assessment suggests otherwise. Additionally, in cases where suitability or affordability are questioned, the qualitative assessment may provide the necessary incentives to the grantor to develop deliverable and affordable PPP solutions.6 So while it is considered unlikely that the balance in a VfM analysis will change due to the M2.3 incorporation of more specific and refined climate action plans in a project, both the quantitative and qualitative elements should be refined and updated in this phase, as there may be cases where Climate the technical solution proposed for each climate scenario may be delivered more effectively and Considerations on efficiently under a PPP structure or, in certain cases, compromise the suitability or affordability of Commercial Feasibility and a PPP project and, in such cases, the qualitative assessment may well counter such quantitative Bankability value loss. BOX 2.11 THE IMPORTANCE OF QUALITATIVE ASSESSMENT Step 1 The importance of the qualitative assessment, regardless of the outcome of Update and Refine CBA, the quantitative assessment, is twofold. Firstly, it serves to complete the VFM and Affordability VfM analysis by highlighting all those PPP-related qualitative benefits that Analyses are increasingly important to governments, and secondly, it may well be that, in cases whereby the quantitative analysis is not negative, the qualitative assessment benefits may outweigh the costs and therefore still maintain the preference for a PPP approach. Even in cases whereby the grantor may be in a position to challenge a project’s PPP suitability or affordability (due to large cost increases, or risk remaining uncovered or Step 2 performance cannot be measured), the qualitative benefits can serve to Bankability and improve such a position, especially when considering a PPP project’s whole Commercial Feasibility life cycle and impact on the society. PHASE 2 AFFORDABILITY The analysis is meant to assess whether the incorporation of climate mitigation and resilience provisions compromises the affordability of the PPP project. To this end, the grantor’s total economic exposure to the project company and to the project, either directly because of periodic availability payments and users paying fees or indirectly because of contingent liabilities, has to be determined and assessed against government short- and long-term budgets and the relevant populations’ income levels. Affordability assessments should also verify that the implementation of the adaptation and mitigation actions will not compromise the government’s 6 For example, a substantially higher total cost for the grantor due to climate considerations and measures that would otherwise question the project’s affordability may be countered by the fact that the qualitative assessment part of the VfM indicates that social and other government objectives (e.g., private sector investment, new jobs, local private finance, etc.) do ultimately lead to a net benefit to the grantor, therefore countering affordability. In other words the very fact that a project is procured by a PPP addresses what otherwise would have probably been unaffordable. 184 capability to pay the project company, including for cases when there are unforeseen events or risks that the government has assumed as part of the PPP contract or the financing agreements. PHASE 2 As explained above, the incorporation of climate strategies may impact a project’s affordability in two competing ways 1) increases the additional cost to the project company, which frequently translates into increased availability payments by the grantor or higher user fees7 2) reduces the grantor’s contingent liabilities when the climate change-induced risks are transferred to the project company. M2.3 Therefore, when reviewing affordability in the context of a PPP project with climate mitigation and adaptation provisions, the following considerations would have to be addressed depending on the Climate payment option deployed for the PPP project: Considerations on Commercial Feasibility and Bankability For availability-based concessions  Does the extra cost to the project company for including mitigation options and for incorporating adaptation/resilience plans (including the need for acquiring relevant insurances) lead to an increase in the level of availability payments that is unaffordable over the long term to the government?  Are there any additional guarantees required by the government, given the underlying Step 1 climate hazard, that increase contingent liabilities at an unsustainable level for the state? Update and Refine CBA, VFM and Affordability  What is the level of reduction to the state’s contingent liabilities by transferring this risk to Analyses the private sector? This is expected to mitigate the impact of any cost increases from the two previous questions. For demand-based concessions  What is the resulting increase in the user paying fees over what would otherwise be the case Step 2 Bankability and before incorporating climate mitigation and adaptation plans in the project? Commercial  Can such increase be tolerated by the users in terms of their income levels, and, if not, would Feasibility the state be required to provide a form of subsidy (either directly on the price of the user charge or on the basis of assumed guaranteed usage levels)? Can such a subsidy be afforded?  What is the level of reduction to the state’s contingent liabilities by transferring this risk to the private sector? This is expected to mitigate the impact of any cost increases from the previous question. If the net impact of the above calculations does not harm affordability—and in many cases, perhaps it may even improve it—then no further considerations should be made on this front other than what the respective grantor would routinely do. 7 Such increases are not proportionate to the project cost increase given that most of the time there are innovative structures proposed and executed via a PPP that would mitigate the level of the increase. 185 Step Output PHASE 2  A project (incorporating climate mitigation and adaptation provisions) that is affordable and suitable for PPP procurement.  If the above condition cannot be met, the project should be reconsidered or restructured. M2.3 Climate Considerations on Commercial Feasibility and 02 BANKABILITY AND COMMERCIAL FEASIBILITY Bankability There are two possible scenarios resulting from the updating of the CBA, VfM, and affordability analyses of Step 1:  There are technical solutions (i.e., adaptation and mitigation measures) that can Step 1 Update and Refine CBA, be accommodated within a PPP structure, with required adjustments in many cases VFM and Affordability  PPP suitability or affordability are breached when incorporating such technical solutions and Analyses risks in the project’s structure; therefore, the solutions are rejected. In the latter of these two cases, if the remaining alternative technical solutions do not suffice to manage, share, or be insured against the risks, the project will have to be reassessed, and, perhaps, a different procurement method should be sought if that is available. The next sections address the considerations associated with incorporating climate actions and Step 2 climate risk within a PPP procurement to ensure that commercial feasibility and bankability are Bankability and Commercial achieved and enhanced. The main considerations of the primary stakeholders are outlined for the Feasibility various levels of risk and extent that these can be addressed by the technical solutions, while high- level options are proposed to accommodate the extra cost and risk within the PPP contract. HIGH-LEVEL CONSIDERATIONS ON COMMERCIAL FEASIBILITY AND BANKABILITY The following checklist outlines the initial questions that the grantor should attempt to address in order to safeguard commercial feasibility and bankability (Box 2.12). 186  Does the level of risk and cost associated with a technical solution impact the appetite of the investors8 to bid for a project, and how does this change depending on the type of PPP PHASE 2 structure?  If high risk diminishes interest in the project, what countermeasures can be considered to mitigate such risk (incentives, unlocking financing pools, credit support by multilateral development banks, etc.), other than asking the grantor to assume all risks and provide state support?9  At what level of risk do such measures become relevant? M2.3  Does a high level of risk require upfront addressing early in the concession? Can medium risk be treated with more gradual adjustments? Climate  To what extent do the lenders consider this, and what would they expect in terms of Considerations on commercial structure and protection mechanisms to preserve the project’s bankability (see Commercial Box 2.12)? Feasibility and Bankability  Do mitigation costs deem the project not viable from a returns perspective?  What countermeasures can be put in place in terms of commercial structure in order to reduce the adverse impact of such increased costs?  Can such costs be funded by separate pools of funds (green bonds, climate financing, multilateral cover)? For example, the incorporation of nature-based solutions in the project Step 1 design may unlock additional liquidity pools or even generate additional revenues to the Update and Refine CBA, project (see Figure 2.15). VFM and Affordability Analyses  Can the developers or investors claim other benefits from assuming such cost within the project company (e.g., carbon credits)?  To what extent is the “climate adaptation” attribute of a project officially accepted by international organizations (e.g., to what extent does it officially count towards a participant company’s public climate metrics, and under what authority – similar to “Equator Principles” Box 2.13)? Step 2 Bankability and Commercial ADAPTIVE PLANNING MAY BREACH BANKABILITY Feasibility The whole idea of implementing climate adaptation measures through adaptive planning is to avoid high upfront capital for adaptation works when there is little consensus on their necessity. Such a strategy may provide a good cost-benefit ratio, but may challenge the financial structure and the payment mechanism of the project. A safe practice is to explore the possibility of adaptive planning only as a last resort (i.e., if it is the only economically viable solution). In all cases, decisions on the bankability of adaptive planning and selection of the appropriate financing method will require involvement of expert consultants. Details on the project financing of adaptive plans are provided in Module 3.2. 8 The list of market players, whether investors, developers, or lenders, that are interested in demand-based concessions such as toll roads, airports, and certain utilities, are very different to those that are interested in availability-based concessions such as free roads, utilities with fixed offtake contracts and prices, and social infrastructure. 9 State support of a PPP project can take many forms. It can be in the form of a direct debt guarantee, a guaranteed payment to the project company regardless of asset availability, a debt guarantee only during the construction period, etc. 187 BOX 2.12 GENERAL BANKABILITY CONSIDERATIONS FOR A PPP PHASE 2 PROJECT WITH CLIMATE CONSIDERATIONS There are certain considerations that commercial lenders will particularly be interested in when assessing their participation in a PPP project that incorporates climate risk considerations. While lenders, in general, are by default likely to require approved environmental impact assessments and Equator Principles confirmations in most cases, climate change- induced risks add certain considerations that the lenders would be more comfortable if properly and timely addressed as early as possible in the preparation of PPP contract provisions. M2.3 These include but are not limited to: Climate Considerations on Commercial Feasibility and Bankability Step 1 Update and Refine CBA, VFM and Affordability Analyses Step 2 Bankability and Commercial Feasibility 188 BOX 2.13 EQUATOR PRINCIPLES PHASE 2 The Equator Principles are a risk management framework for environmental and social risks that apply to projects globally across all industry sectors. Their framework includes ten major principles consisting of sets of guidelines to provide a minimum standard for due diligence and monitoring to support decision-makers on socially and environmentally responsible risk management. They are based on the World Bank Group’s International Finance Corporation (IFC) Performance Standards on Environmental and Social Sustainability, that were first introduced in 2003 by ten financial institutions together with the IFC, after growing pressure from the public and various NGOs for M2.3 social and environmental inclusion in project financing and development. Currently, the financial institutions that have adopted the Equator Principles (EPFIs) cover most of the international Climate project finance debt within developed and emerging markets. All EPFIs have committed not to Considerations on support the financing of projects that do not intend, or are not able, to comply with the latest Commercial Feasibility and update of the Equator Principles (EP4). The framework for financial institutions, together with Bankability other respective original frameworks developed by multilateral development financial organizations such as the World Bank Group (Environmental Social Framework) and the Export Credit Agencies of OECD member countries (environmental and social due diligence) or other international organizations such as United Nations (UNEP environmental, social and sustainability framework) are all trying to respond to the overarching need of environmental and social awareness within the projects. Similarly, the inclusion of climate change incorporation in projects Step 1 has also become a prominentneed. Update and Refine CBA, VFM and Affordability Analyses Lack of sufficient revenue Generating new revenue streams to make the project attractive for Tradable carbon to provide additional financial private investors. revenue for NbS projects (e.g., Blue Carbon Resilience Credit). Step 2 Bankability and Lack of track record Accounting standards Commercial Existing revenue components Mandatory natural capital Feasibility (e.g., carbon credits) currently accounting standards, sound lack the track record that would metrics and certification systems make them acceptable for to facilitate the operation of credit investors. markets. Investment incentives Low up-front investment Legally binding targets on the Financiers typically favor large conservation of the environment projects with low due diligence to create strong incentives for and long-term transaction costs. investments in natural capital. Capacity building Lack of a pipeline of Experienced and qualified project teams and bankable projects sufficient budgets for project development. particularly in EMDEs due to the low More technical assistance grants or subsidies, financial capacity during the project to be used for project development. development phase. FIGURE 2.15 The incorporation of nature-based solutions in the design may (under circumstances) enhance the bankability of the project. [Source: Ecoshape (2021), “Paving the way for scaling up investment in nature-based solutions along coasts and rivers”] 189 GRANTOR, INVESTOR, AND LENDER CONSIDERATIONS ON COMMERCIAL FEASIBILITY PHASE 2 The section highlights what the main stakeholders - grantor, investor, lender - would expect to see and achieve in the structure of a PPP project that includes climate actions to help them address the high-level questions (described above). RESPONSIBILITIES  Incorporation of the climate plan in the project’s scope without the need for state guarantees or alternatively with limited government or M2.3 multilateralsupport  Communication of the approach to the market and managing Climate feedback and expectations effectively, in order to develop and Considerations on maintain market interest and competition Commercial  Development of the tender documentation (RfP, project documents GRANTOR Feasibility and and contract, technical specs, etc.) that are clear in terms of Bankability requirements, risk allocation, and qualification criteria  Maintaining competitive tension through a well-timed and disciplined process  Having the capacity to evaluate and monitor the implementation of anadaptive plan (if applicable). Step 1 Update and Refine CBA, VFM and Affordability Analyses RESPONSIBILITIES  To convey to the grantor and government positions and views in relation to climate risk impact on a project and climate adaptation approaches that would be deliverable as part of the project scope REQUIREMENTS  Clarity and robustness of contractual structure in relation to climate-related Step 2 requirements and risk allocation Bankability and  Impact of climate related requirements on investment returns and risk Commercial allocation, such as: Feasibility - the impact on total capital cost - the frequency of capital injections - which party bears the risk of events occurring at different than expected timeframes  The complexity of technical works associated with climate action that may INVESTOR require use of technologies and approaches that cannot be delivered by local contractors  The project’s bankability and the extent that it is affected, positively or negatively, by climate risk and risk reduction plans  Availability of additional sources of liquidity over and above bank debt (e.g., green bonds) and flexibility of project documentation so qualifying conditions can be met  Enforceability of climate risk and climate adaptation clauses in the project documentation. 190 PHASE 2 RESPONSIBILITIES  Consultations whereby high-level views are communicated in relation to the necessary risk allocations and project structures and ways to not compromise bankability. This can be done by the grantor’s financial advisor or, if not yet engaged, by the grantor’s finance team which may administer such consultations, to the extent that relationships exist CONSIDERATIONS AND REQUIREMENTS M2.3  During the project’s construction period, the primary concerns are: - construction delays - construction budgets (to the extent it is not a turnkey lump Climate sum arrangement) Considerations on - the quality of the construction (e.g., poor construction may cause Commercial operational issues in the long term). Feasibility and If climate risks are faced during the construction period, then risk allocation Bankability (i.e., who compensates for the resulting delays and recovery costs) during this time becomes critical for the lenders. If climate risks are relevant for after the construction period, then the only concern for the lenders is whether the construction allows for efficient and cost-effective future climate adaptation works. LENDER  During operations, the main concerns are: - operational disruption and therefore disruption to the steady and Step 1 predictable cashflows of the project company Update and Refine CBA, - the size of the climate adaptation cost and the timeframe within which it VFM and Affordability Analyses will be complete.  The lenders will have different considerations and requirements in case of: - Operational disruption due to a climate event, with no new or minor capital/ repair works required - Operational disruption due to climate event requiring significant repair and reinstatement works - Project company revenue disruption in “user-pays” projects, due to limited or no asset utilization by its intended users. Step 2 Bankability and  Mitigation measures, such as contingency or reserve accounts, for all the Commercial above will be sought for and required in most cases. Feasibility ALIGNED UNDERSTANDING The intention of all the above steps is to ensure a position whereby, before the structuring phase of the PPP contract, the main stakeholders are aligned in their understanding of the climate risk, the required measures, the project structure necessary, and the availability of any bankability or risk “enhancers” that would allow all parties to participate and support. 191 INCORPORATING CLIMATE MITIGATION AND ADAPTATION PLANS IN PPP STRUCTURE: BANKABILITY CONSIDERATIONS PHASE 2 Climate-related risks may impact the project’s bankability, and as such, lenders need to be covered against them. To this end, the current section utilizes results from Modules 2.1 (identification of direct and indirect risks) and 2.2 (climate risk reduction strategies) to evaluate the impacts of including such risks on bankability and to highlight actions and potential instruments that need to be considered. Such impacts and especially the identification, evaluation, and description of the actions and instruments in place to optimize the risk-sharing will be analyzed in detail in the subsequent Phase 3 of the toolkit. M2.3 A high-level guide is presented in the ensuing tabulated format (Tables 2.5 – 2.6) to describe requirements and potential for risk allocation to the private sector without impacting bankability, Climate for varying levels of risk and varying levels of addressability by a technical solution. Considerations on Commercial Understandably risk level will depend on the climate scenario and, as such, cannot be Feasibility and Bankability represented by a unique value for the project. In this sense, it is possible that parties may employ different strategies/actions/instruments to share different portions of risk depending on the intensity and the likelihood of each hazard occurring (e.g., low-impact risks borne directly by the project company with high impact risks covered by insurance). Such allocation, including the categorization of events as force majeure, will be further defined as part of Phase 3. Step 1 Update and Refine CBA, VFM and Affordability Step Output Analyses  High-level consideration of the project’s commercial feasibility and bankability that will be refined during structuring  Green light to move to structuring Step 2 Bankability and Commercial Feasibility 192 TABLE 2.5 Level of risk transfer and impact on bankability based on low climate risk as assessed in Module 2.1 Is the risk Event Level of risk Level of risk transfer to project company Bankability addressable? 10 impact level As long as the risks that the project company takes are Project company will likely accept the risk and cost clearly identified, adaptation works are seen to fully protect Low of adaptation, especially as associated costs can be against them and, assuming a clear adaptation work plan, incorporated in reserve and contingency accounts. then bankability should not be impacted.11 Yes Lenders would require comfort that reinstatement costs will Project company will likely accept the risk up to a not breach DSCR levels. Guarantees above certain levels of certain pre-agreed level of reinstatement costs, costs may be required. Even if there is a risk-sharing scenario High especially if there are benefits in doing so, such as between project company and grantor, the lenders would unlocking liquidity pools (green financing) or want some level of cover or insurance above certain levels of receiving carbon credits. reinstatement costs and timing implications.12 Low Project company is unlikely to accept the risk in full. However, shared risk approaches could be Lenders are unlikely to accept any structure without a considered, especially if there are other benefits in Low sponsor (assuming a strong credit rating) or grantor doing so, such as more sources of finance, cost- guarantees that would keep them whole in any case. sharing in case of adverse events up to a certain degree or pre-agreed level. No Project company is unlikely to accept the risk. High19 Lenders would expect guarantees from the grantor. Incentives could be considered.13 10Addressable risk means that the technical solution can mitigate significantly or protect fully against such risk. Also that the cost of such works is a small percentage of the overall capital costs and that they can be scheduled with a certain degree of certainty during the time of the concession. Another mitigating factor would be other non-project related works undertaken by the government to protect against such risks. 11This will be treated as an extra construction feature of the project—as long as there is enough cash to complete the capital works when these are due (possibly via a reserve account) and maintain Debt Service Coverage Ratios (DSCRs). 12A high-impact incident may be expected to come under force majeure protection clauses. In addition, if there is insurance or credit cover against such events, then it is likely that the project company and lenders can accept the risk. 13 These could include loan guarantee facilities or similar instruments. 193 TABLE 2.6 Level of risk transfer and impact on bankability based on medium climate risk as assessed in Module 2.1 Is the risk Event Level of risk Level of risk transfer to project company Bankability addressable? impact level As long as the risks that the project company takes are Project company will likely accept the risk and cost clearly identified, adaptation works are seen to fully protect Low of adaptation, especially as associated costs can be against them and assuming a clear adaptation work plan, incorporated in reserve and contingency accounts. then bankability should not be impacted.14 Yes Project company will require some level of risk- Lenders would require some form of protection against such sharing above certain levels of disruption, such as events, probably via direct guarantees from the sponsors High that the government covers costs over and above a (assuming strong credit rating), covered by DFI/ ECAs15, pre-agreed reserve account level. or the grantor. A reserve account16 may ease such protections. Medium Project company will likely accept the risk up to a certain pre-agreed level of reinstatement costs, Lenders are unlikely to accept any structure without sponsor Low especially if there are benefits in doing so, such as or grantor guarantees that would keep them whole in any unlocking liquidity pools (green financing) or case. receiving carbon credits. No Lenders would expect guarantees from the grantor for a part High17 Project company is unlikely to accept the risk of the capital. 14 Provided of course that DCSR levels remain healthy in case of such events. If there is a risk that DSCR levels are breached, then lenders may require reserve accounts to be in place. 15 DFIs: Development Finance Institutions, ECAs: Export Credit Agencies 16 The reserve account will be kept at certain levels constantly in the project company to be utilized for such events and to be released as dividend towards the end of the concession. 17 Although currently such cases would be most often classified as force majeure, it is the intention of this toolkit to provide guidance on limiting the portion of risk that would be deemed force majeure, also accounting for the fact that the frequency of severe events is increasing precisely due to climate change. 194 TABLE 2.7 Level of risk transfer and impact on bankability based on high climate risk as assessed in Module 2.1 Is the risk Event Level of risk Level of risk transfer to project company Bankability18 addressable? impact level Project company will likely accept the risk and cost Lenders would require sufficient reserve and contingency Low of adaptation, especially as associated costs can be accounts as well as reduced debt-to-equity levels. incorporated in reserve and contingency accounts. Yes Project company will require some level of risk- Lenders would require sufficient reserve and contingency sharing above certain levels of disruption, such as accounts as well as reduced leverage debt-to-equity levels, that the grantor covers costs over and above a pre- High insurance, or cover by DFIs/ ECAs. Protection by the state in agreed reserve account level. Incentives (e.g., case the project company cannot meet its debt payments financing, credits) will also be important in accepting because of climate disruptions may also be required. any level of risk here. High Other than keeping a reserve account for any such Lenders would require protection by the grantor in case the disruptions, and provided there are other indirect project company cannot meet its debt payments because of Low incentives for doing so (e.g., financing, credits), the climate disruptions. To the extent available, insurance may project company is unlikely to assume the risk for also be required with first claims. such events. No Lenders would expect guarantees from the grantor for part High19 Project company is unlikely to accept the risk. of the capital. 18 In all cases whereby climate risk is high, the lenders are likely to require completion guarantees to the extent that (i) construction schedules may be impacted with delays and additional costs and (ii) that the risk is imminent and not in the medium to long term. 19 As above, although currently such cases would be most often classified as force majeure, it is the intention of this toolkit to provide guidance on limiting the portion of risk that would be deemed force majeure, also accounting for the fact that the frequency of severe events is increasing precisely due to climate change. 195 PHASE 2 KEY TAKEAWAYS • The project’s CBA, VfM, and affordability analyses need to be refined based on the updated data regarding climate risk scenarios as well as the feasible M2.3 technical solutions that have been identified to address them. Climate • When uncertainty about the future evolution of climate influences the Considerations on projected costs and benefits of climate actions, CBA under risk or under Commercial uncertainty may be necessary. Feasibility and Bankability • The VfM needs to be updated given the redefined cost but also other implications of the proposed technical solutions in order to conclude whether the project maintains the merits of a PPP both from an overall cost to the government perspective and the potential qualitative benefits and considerations associated with such a procurement option, such as private sector innovation, risk transfer, and performance-based structures. Step 1 Update and Refine CBA, VFM and Affordability • The incorporation of climate mitigation, adaptation, and resilience provisions Analyses in the project includes two major implications for the affordability of the project: (i) the additional cost to the project company, which frequently translates into increased availability payments by the grantor or higher user fees and (ii) the reduction of the grantor’s contingent liabilities when the climate change-induced risks are transferred to the project company. Step 2 • To ensure that commercial feasibility and bankability are achieved, certain Bankability and high-level considerations related to climate change risks should be outlined Commercial and addressed by the grantor at this stage of the PPP process. Such Feasibility considerations are dependent on the infrastructure sub-sector, but also on the type of PPP project that is envisaged. • Climate-related goals and concerns of the main stakeholders (grantor, investor, lender) need to be understood and respected in order to ensure a common understanding of risks. • Climate-related risks may impact the project’s bankability and as such, lenders need to be covered against them. Parties may employ different strategies/actions/instruments to share different portions of risk. 196 MODULE 2.3 Resources RISK STRESS TEST TOOL (RIST) RiST is an Excel-based tool developed to help conduct the stress testing analysis described in the methodological note Integrating Climate Change and Natural Disasters in the Economic Analysis of Projects: A disaster and climate risk stress methodology. RiST is directly linked to the World Bank’s Resilience Rating System (RRS) and provides an approach to obtain an A rating for the resilience of a project Developed by: World Bank, 2021 INTEGRATING CLIMATE CHANGE AND NATURAL DISASTERS IN THE ECONOMIC ANALYSIS OF PROJECTS: A DISASTER AND CLIMATE RISK STRESS TEST METHODOLOGY This guidance note proposes a simple methodology to ensure that all project appraisaland assessment processes, including economic analyses, properly consider all climate change and disaster risks Developed by: World Bank, 2021 ENABLING PRIVATE INVESTMENT IN CLIMATE ADAPTATION AND RESILIENCE: CURRENT STATUS, BARRIERS TO INVESTMENT AND BLUEPRINT FOR ACTION This report provides an overview of the current state of private sector investment in adaptation and resilience and the known barriers to such investment, then proposes a pragmatic Blueprint for Action for public and private stakeholders. It identifies five key entry points as well as ways to create an enabling environment and illustrates each point with case studies Developed by: World Bank, 2021 THE ECONOMICS OF CLIMATE CHANGE ADAPTATION: INSIGHTS INTO ECONOMIC ASSESSMENT METHODS, ECONADAPT DELIVERABLE 10.2 This guide has been developed as part of the ECONADAPT project, funded by the European Commission under the Seventh Framework Program. The objectives of the project are to build the knowledge base on the economics of adaptation to climate change and to convert this into practical information for decision-makers in order to help support adaptation planning Developed by: Tröltzsch, J., Rouillard, J., Tarpey, J., Lago, M., Watkiss, P., Hunt, A.,2016 197 Module 2.3 - Further Reading 2002–H1 2017 INVESTMENT IN LOW-CARBON INFRASTRUCTURE This report presents records from the Private Participation in Infrastructure Database reflecting the investment commitments for infrastructure projects in low- and middle-income countries globally atthe time of financial closure Developed by: World Bank Group, 2017 BETTER GROWTH, BETTER CLIMATE. THE NEW CLIMATE ECONOMY REPORT. THE GLOBAL REPORT This report examines whether it is possible to achieve lasting economic growth while also tackling the risks of climate change Developed by: Global Commission on the Economy and Climate, 2014 INVESTMENT DECISION MAKING UNDER DEEP UNCERTAINTY: APPLICATION TO CLIMATE CHANGE This paper summarizes the additional uncertainty that is created by climate change and reviews the tools that are available to project climate change (including downscaling techniques) and to assess and quantify the corresponding uncertainty Developed by: World Bank, 2012 PHASE 3 PROJECT SELECTION 1 2 PREPARATION STRUCTURING 3 CONSIDERATIONS Define contract structure & payment mechanism Update previous analyses (where necessary) 4 TENDER PROCESS Finalize risk allocation 21 Phase 3 Incorporation of climate mitigation and adaptation into the structuring phase of a PPP introduces a new set of considerations that should be rigorously understood, assessed, and managed by the procuring authority to ensure and maximize the project’s attractiveness. In this context, the objectives of Phase 3, which evolves during the contract structuring phase ofthe PPP cycle are: (1) to rigorously describe the climate risk profile of the project and prepare a clear risk allocation structure and management plan that specifies and nuances climate risk events (i.e., use of intensity levels/benchmarks and impact ceilings to restrict unreasonable claims), including hedging mechanisms and force majeure exceptions (2) to prescribe climate provisions on the financial structure that would enforce incorporation of climate mitigation and adaptation requirements in the project (3) to explore innovative financing instruments for climate projects beyond the traditional financial support, thus safeguarding their bankability and investability, and to enhance the projects’ eligibility to receive financing from such sources (4) to define a coherent set of requirements (KPIs) for inclusion in the tender documents in order to enhance compliance with climate-related performance objectives during the design, construction, and operation of the project (5) to provide climate-related recommendations for inclusion in the tender documents 200 Phase 3 Position in the PPP Process Cycle At this stage, the project has been successfully appraised, which means that all necessary technical due diligence studies have been completed, and the project’s risk profile (accounting for the varying climate conditions) has been assessed. A preliminary technical design has been undertaken (including climate mitigation and adaptation measures), commercial feasibility and affordability analyses have been carried out (identifying potential public co-financing and other means of support), and a preliminary project structure (basic payment and risk structure) has been outlined. The main objective of Phase 3 is to finalize the structuring of the PPP project contract, which includes the financial structure (i.e., how the private party will be compensated for the works and services); the risk structure (i.e., which portion of risk is borne by each party and to what extent) and the project documentation (that outlines technical requirements and the overall obligations of the project company to which the development and management of the infrastructure will be delegated). Outline Phase 3 comprises three modules: Module 3.1 – Climate Considerations on Risk Allocation provides an overview of the climate risk typologies (from a contractual perspective); outlines how climate change impacts the risk- allocation mechanism; and proposes measures, procedures, and instruments for enhanced climate risk management and climate mitigation. Module 3.2 – Climate Considerations on the Financial Structure discusses the implications of climate change on the payment mechanism of PPPs and proposes measures/instruments to be included in the financial model. It also provides guidance to the procuring authorities on innovative tools (green bonds, carbon credits, grants and loans from MDBs, etc.) that could be considered as options to support the financing of climate mitigation and resilience and outlines general criteria for projects to be considered eligible for this type of financing. Module 3.3 Integration of Climate Requirements into the Project Structure outlines climate- related options to facilitate the preparation of the project documents and describes a set of requirements (climate-related KPIs, design standards) to be embedded in the RFQ and RFP to ensure that the project will deliver its climate objectives. 201 Step 1 Step 2 Step 3 Understand Climate Risk in PPPs Structure & Allocate Insurance Coverage from a Contractual Viewpoint Climate Risk against Climate Risks Formulate an Action Plan M3.1 Climate Finalize Risk Considerations on Allocation Risk Allocation Step 1 Step 2 Climate Provisions into Consider availability of Defining the the Payment Mechanism Concessional Funds Final Decision on Financial Structure Financial Structure and Payment and Payment Profile Mechanism M3.2 (incl. preparation for concessional funding PHASE 3 if appropriate) Climate Considerations on the Financial Structure Step 1 Step 2 Step 3 Include Climate Include Climate Include Climate Structuring Requirements in the Requirements in Technical Requirements in Operational and Drafting Design Specs/Output Indicators Procedures the RFQ/RFP Continue with the M3.3 Tender Process Integration of Climate Requirements into the Procurement Process 202 3.1 Climate Considerations on Risk Allocation The underlying principle of risk allocation in more efficiently. From the private party’s a PPP transaction is that risks should be perspective, risk will be managed primarily allocated to the party that is better placed by reallocating it to the main to carry them (this includes the ability to subcontractors, i.e., the construction prevent the risks from happening and the and the operations and maintenance ability to manage impacts and contractor. The availability of insurance consequences better if they do occur). or hedging will also be a key consideration. Although this principle is widely known and The private partner may be required to accepted, operationalizing it in a place specific insurances by its detailed PPP contract is a complex task.1 lenders, the grantor, and the contracting From a contracting authority perspective, authority. this will require an experienced team of In this risk allocation context, climate advisors combining analytical tools change may be seen as an additional with deep knowledge of everyday exogenous stressor that introduces practice and precedents to carefully some new risks into the PPP assess and quantify possible sources of process and complicates the efficient risks across the different stages of the PPP management of traditional risks. project (planning, design, construction, Therefore, this module attempts to operation, and maintenance). In general provide contracting authorities with an terms, the contracting authority should overview of the different nuances of retain the risks that cannot be climate risks and their interactions with the adequately assessed or efficiently priced by project, provide non-prescriptive guidance the market or those risks that the on the allocation exercise, and highlight contracting authority can manage and price some high-level grantor considerations in the process. 1 Global Infrastructure Hub, PPP Risk AllocationTool 2019 Edition 203 Step 1 Step 2 Step 3 Understand Climate Risk in PPPs Structure & Allocate Insurance Coverage from a Contractual Viewpoint Climate Risk against Climate Risks Formulate an Action Risk Categories Enhancing Long-term Insurance Definitions Plan M3.1 Visibility of Investors & Key Challenges Classification of Risks Climate Risk Allocation Risk Transfer Mechanisms Climate in the Context of the Matrix & Innovative Instruments Project Cycle Finalize Risk Considerations on Allocation Risk Allocation Step 1 Step 2 Climate Provisions into Consider availability of Defining the the Payment Mechanism Concessional Funds Final Decision on Financial Structure Financial Structure and Payment and Payment Profile Mechanism M3.2 (incl. preparation for concessional funding PHASE 3 if appropriate) Climate Considerations on the Financial Structure Step 1 Step 2 Step 3 Structuring Include Climate Include Climate Include Climate Requirements in Requirements in Technical Requirements in and Drafting the Design Specs/Output Indicators Operational Procedures the RFQ/RFP Continue with the M3.3 Tender Process Integration of Climate Requirements into the Procurement Process 204 STRUCTURE OF THE MODULE PHASE 3 The module comprises two steps:  Step 1 describes climate risks from a contractual perspective and provides a high-level overview of the risk appetite and key considerations of the stakeholders involved: the public authority, the private party, the financiers, and the insurers.  Step 2 proposes a climate risk allocation matrix (that is meant to be as general as possible to cover different sectors, projects, and jurisdictions) that the contracting authority may M3.1 use as high-level guidance for allocating climate risks before embarking into negotiations with the private investor counterpart. Climate Considerations on Risk Allocation 01 UNDERSTAND CLIMATE RISK IN PPPS FROM A CONTRACTUAL VIEWPOINT Step 1 Understand Climate Climate risks may affect any stage of the PPP project—planning, land acquisitions, construction, Risk in PPPs from a and O&M. To avoid disputes over additional costs and maximize the VfM of the project, it is Contractual Viewpoint recommended that detailed risk allocation agreements are in place specifying the level (i.e., impact and/or probability) of climate-related events, the range, and types of appropriate compensation and the procedures to react in case of any potential damage. They may also provide guidelines on the use of insurance to cover extreme events. A detailed description of the different types of climate risks has been provided in Phase 2 (Module 2.1), along with a methodology to assess and quantify them. The scope of this stage Step 2 is to revisit the two broad risk categories—internal and external—(defined in Phase 2) from Structure and a contractual standpoint as explained below (Figure 3.1): Allocate Climate- Change Risks Internal Risks (i.e., those directly affecting the project causing physical damage and/ or downtime for inspection or repairs) may either materialize in the form of more frequently occurring or extreme events depending on the intensity of the climatic hazard. Of course, there is a wider spectrum of climate impact and events which will be dependent on whether global Paris Agreement goals of keeping global warming below 1.5 degrees are achieved or not. Here we simply include two main options; in reality it is more complex. Step 3 Insurance coverage against Climate-  More frequently occurring events include the events that may be more readily forecast Change Risks based on the climate modeling described in Phase 2 and for which adaptation and resilience works ideally would be designed and implemented. In these cases, although the imposed stressing on the infrastructure is meant to be within the design capacity of the adaptation measures, loss (or reduced performance) is still possible due to climate- related supply changes that were not captured correctly in the initial design (e.g., lower solar energy potential at the location of a photovoltaic plant), insufficient maintenance, 205 structural defects, human error, or even as part of the technical design itself.2 These risks may either occur during construction (causing delays) or during the operation phase of the PPP. What is more, in case of insufficient adaptation works (e.g., due to PHASE 3 inadequate climate modeling/design or low-quality construction), the infrastructure will experience increased needs for replacements and rehabilitation, prolonged downtime as well as increased maintenance costs that may even trigger an early contract termination.  In this context, these events define the adaptation risk, i.e., the portion of climate risk that would be addressed through the proper design and construction of the appropriate adaptation and resilience works, as explained in Phase 2. Hence, the project company, M3.1 which controls the design and O&M of adaptation measures, usually bears these risks. More details on risk allocation are provided in the risk allocation matrix presented in the Climate ensuing (see also examples in Box 3.1 and Box 3.2). Considerations on Risk Allocation  On the other hand, extreme events refer to significant stresses such as those associated with natural disasters and are supposed to be so rare that they cannot serve as the basis of any technical design for adaptation measures. If they materialize, such events may be responsible for large-scale physical damage or total loss to the infrastructure and the broader environment, having long-term impacts on the operation and availability of the Step 1 project (or even early termination of the contract). Although the scope of adaptation and Understand Climate resilience planning is to avoid severe damage and associated losses, extreme, Risk in PPPs from a unpredictable climate events may drive the respective works beyond their capacity. In this Contractual Viewpoint sense, these events define the excess risk, i.e., the portion of climate risk that exceeds the respective provisions (which the design of adaptation/resilience plans would have adhered to and efficiently addressed). Depending on the level of their potential loss, these excess climate risk events may be classified as “insurable” (when there Step 2 Structure and are available insurance mechanisms to cover them, and Allocate Climate- therefore the private contractor is likely to be required to bear Change Risks the cost of the disaster through insurance) and “uninsurable” events which would commonly be treated as force majeure, explained below. External Climate Risks (i.e., those impacting the project due to failures of the interconnected Step 3 infrastructure or changes in the broader socioeconomic environment interacting with the Insurance coverage against Climate- infrastructure): this category includes risks that may or may not be relevant today but could Change Risks emerge in the future because of climate change, such as:  Transition (and other) risks, defined as the risks accompanying the transition to greener and less carbon-dependent economies that challenge the traditional legislative and investment framework and drive technological innovation in every aspect of life  Risks of climate-induced failure of interconnected infrastructure, which is not part of the project itself but interacts with it (e.g., loss of the grid in a power generation 2 Depending on the intensity of stressing (i.e., the climate event) modern standards may even accept some repairable physical damage in view of a cost-efficient technical design. 206 project or reduction of ridership in a highway project due to gradual desertification of the areas it is serving). PHASE 3 In most cases, external risks stem from events that cannot be controlled or mitigated by the private party but do have the potential to harm the revenues or availability of the project. Therefore, it is essential to recognize them early in the planning process and take the necessary preventive actions to alleviate them. BOX 3.1 COLOMBIA’S 4TH GENERATION ROAD CONCESSION PPP M3.1 The La Niña floods of 2010-2011 led to economic losses estimated at $6 billion, of which 38% arose from damage to infrastructure. Roads under concession suffered damage of $88 Climate Considerations on million, leading to disputes between road concessionaires and the government about Risk Allocation which parties bore responsibility for covering these damages. In response to this, the national infrastructure agency enhanced and clarified insurance requirements with technical support from the World Bank. The contract for the latest tranche of new roads allocates climate risks to the concessionaires since they will be best placed to manage those risks. Concessionaires have to hold sufficient insurance to cover their expected probable maximum loss. The risk of insurance premiums increasing in the future due Step 1 to climate change rests with the private sector. Understand Climate Sources: Risk in PPPs from a CEPAL and BID, 2012: Valoración de daños y pérdidas: Ola invernal en Colombia 2010-2011, Contractual IDB - WBG, 2016: Colombia: 4th Generation Toll Road Program Viewpoint BOX 3.2 PUBLIC AND PRIVATE COLLABORATION IN INSURANCE AGAINST CLIMATE RISKS  In France, the insurance industry’s contribution to extreme weather risk Step 2 management is fairly well integrated, addressing risk transfer, disaster risk Structure and reduction financing, and data sharing for better governance. The public and Allocate Climate- private sectors have long-standing cooperation, put in place by the non-profit Change Risks French Association for Disaster Risk Reduction (AFPCN) in 2001. The AFPCN is supported by government departments and brings together the disaster risk reduction community to promote a coordinated approach. Its activities include stakeholder dialogue, exchange of good practice, and research.  In Denmark, the Storm Council provides flood insurance provisions. This body brings stakeholders together and shapes their interaction within the Step 3 Insurance coverage framework of a single common goal (i.e., the condition of storm surge and against Climate- fluvial flood insurance). In recent years the Storm Council has benefitted from Change Risks the greater involvement of private-sector insurers.  In the United Kingdom, the universal provision of flood insurance is characterized by a series of negotiations between the British government and the insurance industry and therespective roles of the two. Source: European Union, 2018: Using insurance in adaptation to climate change 207 The most extreme cases of either category are commonly defined as force majeure, and may consist of internal and external unforeseen events beyond the control of either party PHASE 3 construed or represented by a law, policy, or contract. While catastrophic climate events have typically been considered force majeure events, incorporating climate change- induced risks and mechanisms to mitigate such risks within a PPP structure may require revisiting the definition of force majeure. Specifically, as more data regarding climatic evolution scenarios become available, it is in the interest of all parties to try and limit the cases to be characterized as force majeure and instead attempt to consider such risks through alternative routes. This will also enhance the comfort of commercial lenders whose M3.1 awareness regarding climate change is growing and, therefore, tend to increasingly require insurance coverage or other forms of reliable guarantees. A good practice example, Climate describing the evolution of risk-sharing and force majeure provisions in PPPs in Japan, is Considerations on provided in Box 3.3. Risk Allocation CLASSIFICATION OF RISKS IN THE CONTEXT OF THE PROJECT CYCLE Internal and external risks, as categorized above, are included in the risk classes that should be considered during the various phases of the project as follows: Step 1 Design and Construction Phase including risk classes relevant to site selection, environmental, Understand Climate Risk in PPPs from a design, work delays, construction standards, and social environment Contractual Operation and Maintenance Phase including risk classes relevant to revenue risk in user-pays Viewpoint PPPs, climate risks in availability-based PPPs, maintenance costs and standards, financing adaptive planning, changes in legal frameworks The climate risk allocation matrix presented in the subsequent step explains each type of internal and external risk attributes while providing a tabulated summary of some high- level risk-sharing principles pertaining to each of them. Step 2 Structure and Allocate Climate- Change Risks Step 3 Insurance coverage against Climate- Change Risks 208 PHASE 3 M3.1 Climate Considerations on Risk Allocation Step 1 Understand Climate Risk in PPPs from a Contractual Viewpoint FIGURE 3.1 Internal vs. External Risks on a PPP project Step 2 Structure and Allocate Climate- Change Risks Step 3 Insurance coverage against Climate- Change Risks 209 BOX 3.3 RISK-SHARING BETWEEN PUBLIC AND PRIVATE SECTORS IN AVAILABILITY-BASED PPPS PHASE 3 Because Japan is prone to natural disasters, the public sector has typically borne the disaster risks, partly contributing to the development of PPP markets in Japan. Under the traditional public procurement in Japan, the costs of force majeure risks were 99 percent borne by the public sector. Japan’s PPP projects of the first generation—mainly build-transfer-operate projects with availability payments (governments pay unitary charges to operators)— adopted the same risk-sharing as in the traditional procurement. However, as both the public and private entities accumulate PPP experience, disaster risks that the private sector can M3.1 reasonably manage have been transferred to the private sector depending on the project type and characteristics. For example, Sendai City PPPs were mostly build-operate-transfer Climate projects that transferred ownership of the assets to the private sector and elaborated upon the Considerations on definition of force majeure to share risks with the private sector if the private sector can bear Risk Allocation these risks. Scope of Force Majeure and Project Type Characteristics Risk Allocation Step 1 Understand Climate • Samples of force majeure Risk in PPPs from a BTO are identified. Contractual (availabilit Viewpoint ypayment) • Force majeure risk will be mainly borne by the • Provides more clarity on definition of force BOT majeurethan the above. (availabilit • Private party owns facilities ypayment) and bears a part of natural disaster risks in some cases. Step 2 Structure and BOT • Force majeure risks will Allocate Climate- (user be borne by the private Change Risks payment party under a project with andhigh high profitability) Note: BOT = build-operate-transfer. BTO = build-transfer-operate. PPP = public-private partnership. “Availability payment” refers to government payment of unitary charges to operators. “User payment” refers to payment to operators from user fees. Step 3 FIGURE 3.2 Transfer of natural disaster risks in PPP projects, by project and payment type Insurance coverage against Climate- Change Risks Step Output A common understanding among stakeholders on the climate-induced risks and their nuances 210 PHASE 3 02 STRUCTURE & ALLOCATE CLIMATE RISK A preliminary risk assessment has already been conducted in Phase 2 – Appraisal Phase identifying the main categories of climate risks relevant to the particular project. A decision has been made on overall risk allocation and the possible impacts on the project’s bankability (Module 2.3). During the present step, the risk structure is refined: climate change risks are M3.1 revisited while risks allocation decisions are further detailed and structured. They specify the form and extent to which each party assumes the identified risks; how compensation and Climate relief events will be treated; relevant support measures for the private/public partner (in Considerations on the form of securities, subsidies, guarantees, etc.). This is materialized by employing a Risk Allocation risk allocation matrix presented in the ensuing. ENHANCING LONG-TERM VISIBILITY OF INVESTORS Long-term visibility of investors is primarily defined by the certainty of cash flows to Step 1 ensure both returns to investors and capacity to service debt. Including upfront climate Understand Climate resilience and mitigation requirements in the financial modeling will be key, including stress Risk in PPPs from a Contractual testing. Designing and constructing the concession with climate mitigation and resilience will Viewpoint also be key together with longer term requirements of additional maintenance or even CAPEX works to ensure ongoing resilience. To this end, life-cycle expenses for climate adaptations and mitigation requirements under extreme climate-related events have to be clearly defined and provisioned for—including in the project and concession agreements. The goal is to attempt to manage risks and their impacts in the contracts to minimize cash-flow disruptions. These provisions may also include innovative financial schemes, such as the climate contingency account described below and other schemes that have been duly Step 2 tested with the market to ensure investment appetite and bankability. Structure and Allocate Climate- What should underlie all cases and scenarios is a common understanding of the climate risk, its Change Risks potential impact, and the sufficiency of the adaptive works to protect against it or the level of protection that such adaptive works provide. How such an assessment evolves over time is also critical; therefore a periodic review would have to be provisioned for in order to assess whether climate indicators have been developing as planned or if adjustments are required. The concession agreements should provide for such review and the resulting Step 3 adjustments that may need to be made and specify who bears the risk for costlier or more Insurance coverage frequent adaptive works. As per the principles of project finance, the risk allocation should against Climate- Change Risks also be clearly defined and determined within the project documents in a manner that addresses any uncertainty. To the extent that uncertainty remains, the grantor would have to offer some form of cover, especially in relation to the debt financing, and subject always to the available insurance coverage and its associated costs. The next sections aim to provide the necessary background for selecting the proper risk transfer mechanisms. 211 NEW INNOVATIVE SCHEMES: THE CLIMATE CONTINGENCY ACCOUNT (CCA) PHASE 3 The idea of a climate con�ngency account (CCA) is one method to be explored as a way to provide for the adap�ve works or to cover climate-related costs (or loss of revenue). However, this concept is new and as of yet not market tested. The concept of a CCA derives from the reserve accounts commonly used in PPP projects, which reserve amounts from the project’s cash flows for future expenditures. Such reserve accounts are mainly used to reserve funds for M3.1 periodic heavy maintenance works (i.e., a maintenance reserve account, known as an MRA) without causing major cash flow fluctua�ons in those years. Similar to Climate these reserve accounts, a CCA may be applied in case of adap�ve planning to Considera�ons on reserve funds from the beginning of the PPP concession up to certain pre-agreed Risk Alloca�on levels in order to pay for periodic adap�ve works that are planned in advance as part of the project structure in line with certain clima�c scenarios and gradual risk exposure increase. (See also the example in Insight 3.1) The cash flow certainty it provides will have to be balanced against the cost to the project company for maintaining such an account or captured in the financial Step 1 modeling and payment schemes. Another way, whether complementary or Understand Climate Risk in PPPs from a supplementary to a CCA, would be to have provisions in place whereby the Contractual grantor steps in to cover the adap�ve costs or to compensate the project Viewpoint company for climate-related disrup�ons. Or in other cases, the project company enjoys certain tax breaks to mi�gate the impact of lower cash flows on equity returns. Step 2 Structure and Allocate Climate- Change Risks Step 3 Insurance coverage against Climate- Change Risks 212 BOX 3.4 EXAMPLE OF ALLOCATING CLIMATE-INDUCED RISK IN USER-PAYS PPPS The project. Toll road PPP: Project company pays annual fees to the state4 in exchange for constructing, 3 operating, maintaining, and financing the asset. Project company's income source is the toll charges, which are regulated and increase only with inflation. Climate risk. Medium risk of flooding due to rising sea level. It is expected that this may cause disruptions after year 10 of the concession. For the purposes of this example, disruptions are assumed to be the equivalent of one to two months’ income from tolls. Adaptation plan. Every five years the sea level is measured and if certain predetermined metrics are exceeded, works should take place to protect the asset from inundation. This plan has been costed upfront and included in the financial model and tariff.  The project company assumes flood risk by being responsible for designing and constructing adaptation PPP Agreement works and periodic maintenance or upgrades  A third party is responsible for monitoring and validating the sufficiency of such works and sea level rise  Grantor and project company should agree on the sufficiency of protection  Insurance should be sought in relation to any flooding occurrence regardless of the adaptive works. In cases whereby such insurance cannot be procured, the state would have to provide some form of assurance, perhaps with the support of MDBs Sponsors would expect some or a combination of the following:  Availability of insurance or state protection for the remaining outstanding risk  A cost-sharing mechanism if adaptive works are required sooner than anticipated and  that any reserve funds (i.e., such as the contingency account concept presented above) can be released if not Investability utilized, even if in certain cases there may be sharing of such gain (e.g., 50:50 sharing of released cash with the grantor)  Risk of traffic volume losses due to issues with interdependent assets to be taken by the grantor or other relevant support institutions, i.e., if flooding in adjacent infrastructure prevents traffic on the toll road. In such cases, the project company would expect some form of compensation by the grantor to avoid default and maintain some level of return  An acceptable clear and transparent monitoring mechanism  Any support that the grantor can provide in relation to certifications that would increase the project’s eligibility for green financing liquidity pools Commercial lenders would expect5 all or a combination of the following:  The asset is designed and constructed in a way to boost climate resilience and properly insured against risks  Enough cash at the project company level to cover the cost of the adaptive works as and when these are due to occur, perhaps through a reserve account  Enough cash balances in a DSRA account that can cover debt repayments during a period of disruption Bankability  Adjustments to the payment mechanism to cover for part of the cost required to develop the adaptive solution as and when required  Sponsor’s ability to access credit facilities to fund adaptive works as and when required, either through an ongoing working capital facility or letters of credit (the project company will prefer the latter) as well as provide additional equity support if needed and as structured in loan documents or financing documents  Protection against any flooding risk that remains regardless of the works (lenders would have first right to any insurance proceeds)  Robust financial models covering different climate scenarios (i.e., stress testing the financial model) 3 Fictional project 4 The winning bidder is the one with the highest NPV of annual payments to the state (assuming a process whereby all proposed technical solutions are acceptable therefore the financial proposal determines the winning bidder). 5 The list is in relation to what lenders would expect in relation to climate considerations. It is assumed that traffic volume and other typical risks are dealt with separately. 213 CLIMATE RISK ALLOCATION MATRIX This section introduces a non-exhaustive list of climate risk classes that generally apply to PHASE 3 climate-smart PPPs and that are commonly identified in different guides and protocols. Risk allocation comprises two elements: (i) public versus private (practically referring to risk structuring), and (ii) debt versus equity (i.e., how the private sector manages risk). In PPPs, it is generally recognized that risk should be allocated to the party capable of managing it from an efficiency perspective. Although the experience has shown that this principle often may be overlooked, it is essential to recognize that inadequate protection from climate-change risks (potentially stemming from the inability of the party bearing the risk to handle it properly) M3.1 could threaten the entire project and negatively impact all parties. The purpose of the climate risk allocation matrix presented herein is to describe risk classes originating from climate Climate change, proposing a rationale for each class’s allocation strategy. Considerations on Risk Allocation As a general rule, it is recommended to try and share climate risk between public and private sectors to ensure every party is involved in the risk-handling process. The private sector will thus be incentivized to manage and innovate around climate risks, while the grantor should be able to put a “cap” on the amount of cost and/or post-completion project impact. Following this principle, it is possible to achieve private sector innovation around the issue while also enhancing bankability that will engage lenders – which will, in turn, provide better terms for Step 1 Understand Climate financing (debt) and will improve the project’s financial feasibility. Risk in PPPs from a The risk allocation table presented below is meant to provide an indicative and “in-principle” Contractual Viewpoint perspective of risk distributions among stakeholders, although there may be cases where such distribution must be reconsidered depending on the project’s nature, size, and location. The type of PPP structure also affects ultimate risk allocation; however, primarily, the project’s characteristics and requirements will indicate the proper PPP structure. Moreover, the provisions outlined herein are not meant to be representative of all possible case studies, as different countries may have various risk-sharing clauses and standards.6 Step 2 Structure and Allocate Climate- Climate risk considerations and their allocation are better determined on a Change Risks project-by-project basis and depending on the project’s needs and risk exposure rather than on the type of PPP structure. Step 3 Insurance coverage against Climate- Change Risks 6 For example, the standard private finance initiative contract in the United Kingdom specifies that a private contractor takes on most natural disaster risks to incentivize private contractors to handle such risks better, while the World Bank’s Guidance on PPP Contractual Provisions 2019 Edition assumes that natural disaster risks (force majeure) are better managed by the public sector. 214 A. Climate Risks Related to the Design and Construction Phase Indicative Risk Allocation Indicative Relevant Risk Items Risk Class Risk Mitigation Measures and Rationale Public Shared Private A1. Site Selection The risk that the land is not suitable is typically shared as the contracting It is recommended that both parties implement authority may be able to secure the availability of the corridor. Still, the detailed geotechnical, geological, and subsoil e.g., the risk associated with suitability of the corridor may be dependent on the private party’s design surveys. The surveys should focus on parameters selecting land suitable for the and construction plan. that may be particularly affected by climate project; risk of hidden change effects such as flooding, erosion, fires, geotechnical risks (that may be The contracting authority usually undertakes detailed geotechnical and ground/soil surveys during the feasibility stage and shares this information sea level risk, soil/water contamination, changes exacerbated by climate events) with the private partner during the tender process and should therefore in settlement patterns due to changes in subsoil that were not adequately identified and assessed during bear the risk of not providing accurate geotechnical data. water, risk of landslide and erosion, etc. Site due diligence studies. Climate- selection through a climate lens will be a critical Suppose it is not possible to perform surveys before the tender. In that change induced risks, e.g., first step to reducing risks. case, the risk for unsurveyed land will be allocated to the contracting inundation of the project area, scarcity of resources required authority (e.g., as a compensation event) or may be shared by the private for the project’s operations partner (e.g., as a relief event). (e.g., inability to guarantee cleaning of solar panels due to In case of projects involving significant underground works (e.g., tunnels), projected water shortage) the private partner should assess geotechnical risks. A2. Environmental Risk Pre-existing pollution is typically the contracting authority’s risk unless it The private partner should develop sound was known to and priced by the private party. environmental and social risk management plans e.g., risks associated with The private party typically bears the risk of obtaining all environmental echoing the most updated international pre-existing conditions; standards provisions such as the WBG’s licenses and environmental authorizations after the contract signature. conditions caused by the Performance Standards and/or the Equator (For exceptions, readers may refer to World Bank’s Guidance on PPP project; compliance with Principles. (A detailed description is provided in environmental laws Contractual Provisions, 2019 Edition.) Module 3.3.) The private party bears the risk of complying with all environmental licenses and environmental laws applicable to the project. Exceptions may apply in the case of “changes in law” (as described in the transition risk category). The private party bears the risk of environmental events caused during the It is advisable that (depending on the project’s project construction. (i.e., unrestricted GHG emissions, contamination, specific characteristics) relevant environmental destruction of biodiversity, noise, etc.) KPIs are introduced in the contract and monitored by the contracting authority. (A detailed description is provided in Module 3.3.) 215 Indicative Risk Allocation Indicative Relevant Risk Items Risk Class Risk Mitigation Measures and Rationale Public Shared Private A3. Design Risk Typically, the private party will be primarily responsible for the technical The contracting authority will define the design’s adequacy and compliance with the standards/output performance standards in the tender documents specifications that the contracting authority has set. (e.g., design and output specifications; provisions The risk that the project design on the technical expertise of the design team; In circumstances where the contracting authority provides the basic design, is not contributing towards guidance on the preferred methodological the private party bidders will be only responsible for non-compliance issues climate mitigation and the procedure7). (A detailed description is provided proposed adaptation measures unless proven that the revised design offers added value to the project compared to the basic design (i.e., increases robustness and resilience at a in Module 3.3.) are not adequately addressing climate change impacts reasonable incremental cost). A4. Work Delays The private party typically assumes the risk of delays to the extent they are Enforcement of construction deadlines subjected (due to climate events) not caused by force majeure or events due to grantor non-compliance or to extensions for specific events/types of works failure (relief and or compensation events). (either in the form of scheduled completion date Exceptions may also include work delays caused by the unavailability of or in the form of expected construction period). input (e.g., interruptions in the supply of utilities) due to adverse climatic If force majeure provisions are applicable, relief impacts on the broader project environment (outside of the private and compensation events may include: partner).  Delivery date extension to suppress late charges  Changes in the payment schedule (i.e., an extension of the payment due date for compensation of services and/or rate revisionsto cover increased costs) A5. Construction Meeting relevant quality standards will be a private party risk. Exceptions  Design standards, sustainability/resilience Standards (mitigation may apply in case of "changes in law/standards" after the project signature ratings, and climate mitigation KPIs should be and adaptation works) (as described in the “transition risk” category). It will however be critical for clearly outlined in the tender documents. The the contracting authority to include and incentivize the use of standards procuring authority bears the responsibility of The risk of non-compliance both in the contract and RFP/RFQ stage (e.g., including a requirement for selecting a competent bidder that has proven with regulatory construction green building certification – EDGE or LEED) experience in relevant projects. standards  Upon completion of construction (including mitigation/adaptation works), there might be provisions for reliability testing8 whereby the 7This may be a particularly important requirement (but at the same time difficult to meet) recognizing the scarcity of specific guidance on climate-adaptation design. 8An agreement between all involved stakeholders (and their technical environmental and legal advisors) on the sufficiency of the planned works, as well as their completion according to the planned requirements and their fitness for purpose. The agreement will mark the point where the project transitions from being “under construction” to “operational.” 216 Indicative Risk Allocation Indicative Relevant Risk Items Risk Class Risk Mitigation Measures and Rationale Public Shared Private lenders and insurers will sign off on the sufficiency of the infrastructure developed.  The contracting authority may seek parent company guarantees directly from the private party and its sub-contractors regarding certain contractual (or tender) obligations (in the form of bid bonds, completion bonds, performance bonds, and guarantees).  New mechanisms not yet tested in the market may include cash reserving mechanisms, which could be maintained during the contract’s lifetime to act as security/guarantee in case of performance failure by the private party. A6. Social Risk  Adopt internationally recognized social and environmental standards and practices for the The risk associated with the project to manage social risk project impact on the affected During the feasibility stage, it is expected that the contracting authority population (including the risk would have assessed the impact of the project on the broader socio-  Introduce specific social KPIs in the tender of widening gender gaps) economic environment and, in particular, the effects of climate change on documents the already vulnerable population and take actions to minimize any  Request a rigorous environmental and negative impact. It is also expected that projects that widen the gender gaps social impact assessment (prepared by the would have been excluded from consideration as inappropriate. private sector) that should include a gender In that respect, the contracting authority will bear this risk except to the impact analysis and a coherent gender action extent the private party is responsible for implementing any social plan management measures.  Investors and lenders may expect to see a plan addressing social impacts, including the execution of necessary contractual arrangements. A7. Changes in Law Regarding climate-change policies, changes in applicable legislation can  As part of the transition to a greener (and overall climate neither be foreseen nor managed by either party. The policy landscape is economy, states may set ambitious climate goals transition risks) currently transitioning, adding uncertainty to any investment across all including—but not limited to—increased economic sectors. To effectively handle such risks without hindering the taxation of GHG emissions. investment appetite, it may be good practice to establish risk-sharing  In order to alleviate the impacts of such The risk of potential loss or mechanisms in the contract to absorb any transitioning impacts towards a changes, parties are encouraged to negotiate potential impacts of the value greener economy. 217 Indicative Risk Allocation Indicative Relevant Risk Items Risk Class Risk Mitigation Measures and Rationale Public Shared Private of investments that may be positive countermeasures such as competitive triggered from changes - or financing of climate mitigation actions. new implementations - in the policy frameworks, the  Transition risk insurance is currently an legislation system, or emerging market of the insurance industry that government strategies, as well may be used to offer coverage (up to a mutually as the transformation of defined cap). traditional operations in primary sectors due to the effects of climate change. A8. Unavailability of The private party typically bears the responsibility for acquiring insurances  As part of the appraisal, the contracting Insurance and the cost of doing so. However, if insurance becomes unavailable (in the authority should consider what insurances are international insurance market from reputable insurers), or the premiums necessary and available at a reasonable are prohibitively high (beyond the control of any party), the private party premium and whether insurance might become will be eligible for pricing in reasonable contingency. For a detailed unavailable (or too expensive) for the project as description of the unavailability of insurance, refer to World Bank’s a result of climate change. Guidance on PPP Contractual Provisions (2019 Edition).  In cases of unavailability, the private party is typically relieved of its obligation to take out the required insurance.  The contracting authority could under circumstances act as the insurer of last resort.  Multilateral agencies could also explore the option of serving as credit enhancers. 218 BOX 3.5 THE CASE OF AICHI ROAD CONCESSION PROJECT: RISK SHARING POLICY BY CIRCUMSTANCE PHASE 3 Force majeure may include events such as a storm, torrential rain, flood, high tide, landslide, fall of ground, a strike of lightning, earthquake, fire, other natural disasters, or uprising, riot, disturbance, an act of war, epidemic, or other human-made disasters—where the cause is not attributable to either the government or the concessionaire (Table 3.1). TABLE 3.1 Examples of force majeure events Disaster type Events for which additional costs are borne by the public sector M3.1 Climate Earthquake Damage based on normal social conventions Considerations on Risk Allocation Maximum rainfall of 80 millimeters or more in 24 hours Even if the rainfall is below the above standard, it is considered heavy rain if the hourly rainfall is significant (20 millimeters or Heavy rain more), provided that the hourly rainfall is observed at the nearest weather observation station (managed by the public corporation) from the damaged place Step 1 Understand Climate Risk in PPPs from a Maximum wind speed of 15 meters per second or more Storm Contractual (average in 10 minutes) Viewpoint High tide, Extraordinary high tide, storm surge, or tsunami caused by a storm surge, storm or its aftermath with relatively non-minor damage tsunami The public sector shall bear the cost if the concessionaire either cannot foresee the risk or should not be expected to establish measures to prevent additional costs. More precisely, additional costs resulting from natural disasters that fall under force majeure would be Step 2 borne by the public sector if (i) the disaster recovery project is in accordance with the Structure and National Government Defrayment Act for Reconstruction of Disaster Stricken Public Allocate Climate- Facilities, and (ii) the public sector agrees that there were no reasonable measures that the Change Risks concessionaire could have taken to prevent the additional costs from being incurred because the event was unforeseeable. Source: World Bank, 2017: Resilient Infrastructure Public-Private Partnerships (PPPs): Contracts and Procurement—The Case of Japan Step 3 Insurance coverage against Climate- Change Risks Step Output 1. Include climate risks within the risk matrix 2. Prepare force majeure clauses for climate-induced events 219 B. Climate Risks during the Operation and Maintenance Phase Indicative Risk Indicative Relevant Risk Class Allocation Risk Items Mitigation Measures Public Shared Private and Rationale B1. Revenue Risk in Case 1. Internal climate risks (excluding cases of extreme  The private partner must obtain and maintain insurance User-pays PPPs events) policies for potential revenue loss due to climate events. These policies should cover the losses up to a minimum amount Given that the project has been adequately designed and prescribed in the contract. The government is indirectly protected appraised against those risks (i.e., the necessary adaptation The risk of reduced revenues by the insurance package,9 as the amount received under the caused by more frequent works have been constructed), the risk of revenue loss insurance policy will be offset from the compensation payable by climate events that obscure should be low and primarily borne by the private party the government in respect of such an event ridership and/or availability Case 2. Internal climate risks caused by extreme but  Purchase of weather derivates by the private party to of service (e.g., reduced aircraft arrival/departure predictable events (exceeding the design limits of compensate for liquidity problems (due to short-term revenue flow rates in airports due to adaptation works) loss) caused by low-impact weather events. (A detailed prolonged periods of fog, This is the case of rare but high-impact climate events (e.g., description is provided in Module 3.3.) decreased energy storm, torrential rain, flood, high tide, lightning strike, a  The establishment of insurance against climate risks provides production due to climate- landslide caused by extreme or prolonged rainfall periods, comfort to the lenders that revenue loss and potential repairs or related supply changes) etc.) that cause significant physical damage and prolonged rebuilding costs will not breach DSCR levels disruptions to the project. The predictability of the event is a crucial differentiator in terms of risk allocation; events for  Contractual mechanisms such as guarantees of minimum which historic experience exists are usually considered traffic/revenue or other similar mechanisms insurable, and hence such risk is assumed by the private party (at the cost of an insurance premium10) Case 3. Internal climate risks caused by extreme and  If commercial insurance is hindered for any reason, an option unpredictable events (overly exceeding the design limits of would be to explore whether multilateral agencies could act as adaptation works) guarantors for financiers, which would also act as a credit It is essential to understand that what classifies as an enhancer unpredictable event—beyond any insurable extremes—isa  State guarantees matter of negotiation between the public and the private  Cat DDOs (see definition and examples in Module 3.3) party based on the experience of past disasters. Unforeseen events are typically treated under the  Other mechanisms/compensation arrangements as described in provisions of force majeure. It is also not uncommon to force majeure provisions. (See, for example, force majeure prescribe a benchmark intensity level above which the definitions in the PFI Act of Japan, Box 3.5) climate event is considered force majeure. Depending on the PPP law of the country of origin, different risk allocation practices may be applicable for force majeure 9 The prescription for a minimum insurance package is common practice in all PPP contracts. 10 If the cost of insurance is significant, it may be covered though (user or availability) payment increases. 220 Indicative Risk Indicative Relevant Risk Class Allocation Risk Items Mitigation Measures Public Shared Private and Rationale Case 4. External climate risks. Depending on the severity of A shadow minimum compensation by the state based on average the event and the level of revenue loss, there might be an usage numbers, similar to a take-or-pay arrangement. This could established threshold/cap above which the take the form of direct compensation, or it may be reflected in contracting authority will bear/share the risk, and the private the payment mechanism partner will be entitled to compensation B2. Climate Risk in Case 1. Internal climate risks (excluding cases of outstanding  In availability-based payment structures, the private partner’s Government-pays climate risk). The private partner bears the risk of meeting payment may be subject to a reduction if availability criteria and PPPs the performance specifications under the contract (i.e., by performance-based standards are not met (e.g., when the ensuring that the works and the operational performance are restoration time to the pre-event performance levels exceeds a of the necessary quality and level) predetermined duration).11 This would have to be weighed on a The risk of events affecting project to project basis pre-determined Case 2. Internal climate risks caused by extreme but  Insurance coverage against extreme weather events. performance and quality  Public guarantees and/or guarantee facilities by MDBs predictable events. As in the respective B1 case above, the standards. (whenever commercial insurance is not available) private party should obtain commercial insurance against such risks. If the cost of insurance is high, it may be covered through availability payment increases Case 3. Internal climate risks caused by extreme and  Mechanisms/ compensation arrangements described in the unpredictable events. As in the respective B1 case, these force majeure provisions cases are typically covered under force majeure provisions, which means that the public sector primarily assumes the risk Case 4. External climate risks. They refer to cases where a  Contractual provisions to specify conditions of non- climate event has disrupted the availability of a significant performance and compensation procedures (see Module 3.3) resource/utility, thus ultimately impacting the availability of the project itself. The private party bears the principal risk and responsibility of ensuring an uninterrupted supply of resources and providing redundancies when necessary. However, depending on the 11 The Spopark Matsumori Accident Response and Investigation Committee, which was established in 2005 after a ceiling collapsed in the Sendai Health Facility Project in Japan, made several proposals to management to minimize the impacts of future accidents. One of the proposed measures includes the restructuring of the payment mechanism that considers reduction in the availability payment when the specifications of the services were not achieved. A point of consideration is whether the scope for reducing the availability payment should only include the payment for the maintenance cost or if it should be applied to the unitary payment as well (to incentivize the private sector to perform to a high standard). Source: World Bank, 2017: Resilient Infrastructure Public-Private Partnerships (PPPs): Contracts and Procurement-The Case of Japan 221 Indicative Risk Indicative Relevant Risk Class Allocation Risk Items Mitigation Measures Public Shared Private and Rationale event’s severity, there may be instances where the risk needs to be shared among parties. B3. Maintenance Cost The private party will bear the principal risk of meeting the  Contractual provisions describing in detail output and Standards appropriate maintenance standards as set out in the specifications, including minimum requirements for day-to-day performance specification. The system remains robust and is routine maintenance as well as life-cycle maintenance and handed back in the expected condition. replacement of particular assets (for a detailed description on The risk of increased The private party should also assume the cost of increased maintenance provisions, refer to Module 3.3) maintenance costs (beyond modeled costs), potentially maintenance (assuming that the impacts of increased exacerbated by climate- maintenance due to climate change should be already change effects; the risk of included in the bidder pricing) non-compliance with the maintenance standards B4. Finance Risk of Although the initial decision for implementing an adaptive  The original design and construction would have included Adaptation Works plan (i.e., periodic climate adaptation works that are planned climate mitigation and resilience measures together with ongoing (applicable to adaptive in advance following specific climatic scenarios) lies with the requisite maintenance or additional CAPEX. Together these would public authority, the public sector has reviewed and have been included in the financial model and payment scheme plans only) validated the rigorousness of the technical design and the for the concession. Other newer schemes which have not yet project structure. From this standpoint, the risk of financing gained wide market approval such as the climate contingency The risk of meeting the additional adaptation beyond those originally planned should reserve account may provide additional solutions. By introducing financing requirements for be shared among parties the CCA in the PPP structure, the grantor manages to pass a the additional adaptation significant portion of the risk to the private sector, protects the work at the time of the project’s bankability by introducing a buffer mechanism for intervention adverse events, and limits the requirements for upfront government guarantees or insurance from other multilateral agencies (see example in Box 3.3) Force majeure is a complex legal issue, as it differs between B5. Force Majeure  Narrowing down the definition of events that may qualify as the civil code countries (where it is a legally defined concept, force majeure specifying intensity levels (e.g., rainfall per hour) (Acts of God) thus limiting the freedom of the parties to derogate from the and/or output thresholds (i.e., level of damage to the asset and legal concept), and those with common law jurisdictions the surrounding environment, duration/ persistence of The risk posed to the project where there is freedom between the parties to agree on the by unprecedented climate consequences, etc.) terms of the contract. Consequently, in civil code countries, a events (such as hurricanes, Such a rationale has been adopted by the PFI Act of Japan, recommended practice is to define a non-exhaustive list of storms, etc.) with potential which defines force majeure conditions using both quantitative extraordinary impacts on the events in addition to a “catch-all definition” that ensures that the term includes all events that fall within the legally defined and qualitative criteria. To this end, numerical intensity asset performance concept. In general law countries, it is common to include an thresholds are specified, coupled with a description of the level exhaustive list of events that will be classified as force of damage to the surrounding environment (see Box 3.4) majeure in the contract 222 Indicative Risk Indicative Relevant Risk Class Allocation Risk Items Mitigation Measures Public Shared Private and Rationale The common ground in all cases, is that force majeure is In other examples, an event may only qualify as force majeure if typically treated as a shared risk where neither party is better it has existed for a particular length of time. In such placed than the other to manage the risk or its circumstances, the risk is allocated to the private partner and/ consequences. The final definition of force majeure should or shared for the first few months and subsequently becomes a not be confirmed until both public and private entities agree. shared risk or a contracting authority risk (with entitlement to As climate change becomes the norm and the severity terminate if the force majeure event continues for more than a of climate events is increasing, it is in the interest of all parties defined time period, e.g., 6 – 12 months)12 to try and limit the cases that can be characterized as force majeure and rather attempt to consider such risks  Objective measurement of the event intensity. The above through alternative routes (e.g., through insurance or other force majeure definition rationale may be facilitated by the financial tools) implementation of local measurements and sensing equipment (managed by the private party under the supervision of the public authority) providing some sort of objective measurements on the intensity of the event (although there are still open regulatory and legal uncertainties regarding the representativeness and accountability of measurements) B6. Disruptive Responsibility for disruptive technology risk depends on the  Precise output specifications that cover both current and Technology Risk project circumstances. From a strict contractual standpoint, projected needs (e.g., locations of electricity charging points) the private partner is responsible for meeting the output  A project-specific cost-sharing mechanism (e.g., for specifications (regardless of whether this is done with state- adjustments of the infrastructure to accommodate or comply with The risk that a new emerging of-the-art or technologically obsolete resources). the new technologies) that provides the necessary flexibility for technology unexpectedly However, given the rapid climate-related technological future improvements displaces an established technology, impacting the advances, it is in the project’s best interest to incorporate  Contractual provisions to incentivize the private party towards business model and/or the contractual provisions for the integration of new technologies integrating disruptive technologies (as soon as they become modeled cost (e.g., new and other foreseeable developments (e.g., projected uptake available) that have a clear environmental and public benefit equipment for maintenance of electric and automated cars). The parties should also agree having a high upfront cost or to a cost-sharing mechanism for such technological upgrades cost of purchasing satellite material for weather forecasts, etc.). 12 Source: Global Infrastructure Hub, PPP Risk Allocation Tool 2019 Edition. 223 PHASE 3 INSURANCE COVERAGE AGAINST CLIMATE- 03 CHANGE RISKS M3.1 As evidenced by the preceding steps, a common pre-requisite for the private sector to assume climate risks, and at the same time satisfy bankability and investor parameters, would Climate be the availability of and access to adequate insurance. Financiers require to know how Considerations on Risk Allocation debt repayments will be made if a disruptive event occurs. Hence, from a commercial lender’s perspective, a party with an appropriate balance sheet would have to step in and make those repayments. That party can be either the state (which is not the preferred route), the sponsors via a corporate guarantee (which is not uncommon in PPPs but breaches the principle of non-recourse financing13), or the insurer whose proceeds will be used to make debt repayments. Step 1 Understand Climate Therefore, this step is devoted to providing guidance on the factors governing climate Risk in PPPs from a risk transfer decisions. In this sense, it intends to illustrate the beneficial role of insurance Contractual Viewpoint options and to highlight (i) the challenges accompanying infrastructure insurance against climate change-induced risks given their inherent uncertainty and (ii) ways to address them by presenting potential hybrid solutions where conventional insurance options may be blended with other financial instruments. The ultimate goal is to ensure that all risks— to the extent possible—are addressable, and hence the project’s bankability and investment appeal are not called into question. Step 2 INSURANCE DEFINITIONS AND KEY CHALLENGES Structure and Insurance is traditionally used to cover risks of catastrophic events such as earthquakes, Allocate Climate- Change Risks extreme floods, hurricanes, and volcano eruptions. Catastrophe risk insurance hence refers to the process of transferring the risk of potential loss due to a catastrophic event from the project company to the insurer for the cost of an annual fee. The latter is termed premium and is estimated by the insurer and mutually agreed with the project company depending on the project’s expected loss in case of a catastrophic event (which depends on its exposure and vulnerability to the considered hazard’s level). The loss limit, i.e., the maximum amount that Step 3 Insurance coverage the insurance could have to pay to the project company, is termed probable maximum loss against Climate- (PML). Change Risks Hence, with an insurance contract in place, in case of a catastrophic event, the insurer shall pay the loss (caused either due to direct damage to the infrastructure or due to downtime) up to the PML limit. Any excess amount is not covered. There is also a portion of the loss (indicatively on the order of 5%-10% of the PML) corresponding to minor events that shall be payable by the project company if such events occur; this is termed the deductible amount. Investments that enhance the climate resilience of the PPP infrastructure would reduce the project’s vulnerability against climate risks (as it would against any type of risk) and would 13 Therefore, this is also not a frequently preferred route although a sponsor may wish to do so. 224 therefore enhance its insurability.14 On the other hand, the uncertainty that climate change introduces is impacting the risk transfer procedure in many aspects: PHASE 3  First and foremost, investors may be reluctant to exert efforts and resources in ensuring long-term resilience against low-probability and highly uncertain climate change-related hazards.  PML amounts are usually relatively high and concentrated on a single location (i.e., that of the asset) which contradicts insurers’ will for portfolio geographic diversification (in other words, insurers themselves wish to reduce their risk exposure by diversifying the risks they are underwriting). This may then reduce the availability of insurance options in M3.1 the market—especially in higher-value projects. Climate  As low-impact events tend to become more frequent due to climate change, the Considerations on deductible amounts may rise to allow insurance companies to reduce their exposure to Risk Allocation high-likelihood events and secure funds to cover their clients against extreme events.  High-impact, low-probability climate events (which by definition encompass a higher degree of uncertainty) cannot be assessed adequately by existing insurance models and are therefore not properly covered in traditional insurance contracts; in these cases, innovative mechanisms (such as those described in the next section) may be required. Step 1 Understand Climate Risk in PPPs from a Contractual RISK TRANSFER MECHANISMS & INNOVATIVE INSTRUMENTS15 Viewpoint Aiming to address the challenges identified in the previous section, which cannot be covered by traditional insurance alone, the present toolkit proposes a combination of options outlined in the next section and schematically presented in Figure 3.3. Step 2 Structure and Although the necessity for transcending the boundaries of traditional risk Allocate Climate- transfer instruments is unquestionable, it is worth mentioning that some of Change Risks the mechanisms presented herein have not yet become mainstream in the market as readily available options. Step 3 Insurance coverage against Climate- Change Risks 14 Any risk mitigation measure included in the technical design apparently reduces risks but cannot mathematically eliminate it. As such, insurance of any project would be essential to cover the amount of potential losses in case of an extreme event possibly surpassing the design level of mitigation measures. 15Exploratory field: innovative risk transfer mechanisms such as those presented herein are currently under development and market testing and have not yet been extensively deployed. 225 PHASE 3 M3.1 Climate Considerations on Risk Allocation Step 1 Understand Climate Risk in PPPs from a Contractual FIGURE 3.3 Innovative risk transfer mechanisms for PPP infrastructure. On the left side of the Viewpoint risk spectrum are the weather derivates to compensate for low impact but high-probability events (e.g., a temperature increase in the coming year above the annual average); on the right side are products to provide finance in the aftermath of extreme catastrophic events (CAT DDOs: Catastrophe Deferred Drawdown Options). Incentives for new insurance instruments Step 2 In order to enhance insurability of climate risks and exceed the limits of traditional insurance, Structure and Allocate Climate- it is recommended that countries attempt to provide market incentives, e.g., by applying Change Risks appropriate policies or modifying legislation for insurance companies to introduce new products which:  Require the use of accurate, region-specific models to correctly assess catastrophe risks and hence are able to price them better  Incentivize investments in resilience as a means to enhance insurability and better pricing Step 3 of insurance plans Insurance coverage against Climate-  Encourage risk-transferring from insurers to investors (especially the ones with high-risk Change Risks appetite) Financial Tools To reduce the effects of climate-change-induced uncertainty in the quantification of both the upper bound of probable loss (due to extreme, acute events) and the frequency of occurrence of lower-magnitude losses (due to low-impact events), traditional insurance could be combined with financing options such as: 226 Index-based products (e.g., weather derivatives) that may be activated as a means to hedge the risk of more frequent weather-related losses: PHASE 3 An index-based weather derivative16 is a financial instrument used by companies or other entities to hedge against the risk of weather-related losses. This financial instrument is typically based on a weather-related index that is designed to reflect losses due to adverse climatic events such as excessive or insufficient rainfall, extreme temperature, tropical storms, hurricanes, cyclones, and typhoons. To this end, an entity that needs to hedge a specific weather risk may purchase a derivative contract by paying a premium upfront. The seller/issuer of the contract accepts this weather risk and works M3.1 similarly to an insurer. In case the weather index crosses a specific pre-determined threshold, the derivative holder receives the agreed payout (see also Box 3.6). Climate Considerations on Risk Allocation Catastrophe Drawdown Options (Cat DDOs) that could be potentially used to provide coverage in case of an extreme event in excess of the maximum insured loss: Cat DDOs act as a source of bridge financing until other post-disaster financing sources (e.g., concessional funding, bilateral aid, reconstruction loans, etc.) become available or while they are being mobilized. Cat DDOs provide a similar Step 1 type of protection to a catastrophe bond (insurance - reinsurance like) with the Understand Climate difference that, once triggered, the contingent financing facility opens a loan or line of credit Risk in PPPs from a to the World Bank that does have to be repaid, albeit at attractive terms. Drawdown may Contractual Viewpoint become available only after specific criteria linked to the catastrophe are met. Typically, the pre-specified drawdown trigger is the country’s declaration of a state of emergency. Cat DDOs (see also Box 3.7) may be tailored to a country’s specific needs and apply to middle-income and low-income countries eligible for the World Bank’s IBRD and IDA concessional funding (IBRD Cat DDO17 and IDA Cat DDO18). State Guarantees Step 2 Structure and An already existing option, state guarantees may be provided not only as part of the regular Allocate Climate- bankability considerations but also as a means to enhance the insurability of the project or the Change Risks investability in the country’s catastrophe risk through the issuance of catastrophe bonds. Step 3 Insurance coverage against Climate- Change Risks 16 World Bank,2015: Index-Based Weather Derivative Product Note 17 World Bank, 2018a: IBRD Catastrophe Deferred Drawdown Option (Cat DDO) Product Note 18 World Bank, 2018b: IDA Catastrophe Deferred Drawdown (Cat DDO) Product Note 227 BOX 3.6 WEATHER DERIVATIVES PHASE 3 Unlike traditional insurance schemes, index-based weather derivatives allow for rapid disbursements as there is no need for an assessment of loss incurred. Once the index threshold value is reached, the buyer receives the payout. As such, weather derivatives will play a significant role in hedging the risk of extreme natural hazards that may increase in frequency and magnitude in the future due to the effects of climate change. M3.1 Climate Considerations on Risk Allocation Step 1 Understand Climate Risk in PPPs from a Contractual Viewpoint The Malawi Example Malawi, a country in Southern Africa, is highly vulnerable to climate change and extreme weather conditions, and especially to drought. The country is heavily based on agriculture, although rainfall is not guaranteed, and precipitation levels are expected to decrease in the future. Given this, the government of Malawi purchased weather derivative contracts that were structured as an option on a rainfall index. The index was related to maize production so that if precipitation within a year falls significantly below a historical average, Step 2 then Malawi would receive a payout of $4.4 million. The World Bank’s intermediation on Structure and Allocate Climate- index-based weather derivatives allowed Malawi to transfer weather-related risk to market Change Risks counterparts. Sources: World Bank,2015a: Index-Based Weather Derivative Product Note DRFIP, 2012: Weather Derivative in Malawi World Bank, 2015b: Case Study - Mitigating the Impact of Drought on Energy Production in Uruguay Step 3 Insurance coverage against Climate- Change Risks 228 BOX 3.7 CAT DDOS PHASE 3 Catastrophic events require immediate liquidity to cover expenses for relief processes, recovery operations, and reconstruction works and may pose significant financial shocks to countries. Timely preparation by securing rapid access to financing sources before a disaster strikes, is critical in preventing budget re-allocations from longer-term social and development programs (e.g., health, education) towards emergencies and achieving efficient and effective response to disasters. The Catastrophe Deferred Drawdown Option (Cat DDO) was introduced in 2008 as part of the World Bank’s broader crisis management spectrum of catastrophe contingent risk financing solutions, aiming to address the urgent financial needs that appear in case of M3.1 catastrophic events (natural disasters and/or health-related events) and to support long-term strategic disaster risk management policy goals and capacity building. Climate The fundamental requirements for a country to gain access to the Cat DDO include: Considerations on • the existence of an adequate macroeconomic policy framework; and Risk Allocation • the existence or preparation of a satisfactory disaster risk management program that the World Bank will monitor on a periodic basis. Numerous countries have already benefited from funds disbursed from a contingent credit line from the World Bank after disastrous events (including the outbreak of COVID-19) triggered their Cat DDOs. One recent example is the $20 million that the World Bank disbursed to support Step 1 Saint Vincent and the Grenadines’ response to the crisis posed by the La Soufrière volcano Understand Climate eruption. Risk in PPPs from a Contractual Viewpoint Step 2 Structure and Allocate Climate- Change Risks Sources: Ijjasz-Vasquez, Escobar, 2017: Cat DDOs: More than emergency lending for disaster relief, World Bank Step 3 Blogs (last visited July 15th, 2021) Insurance coverage Evans, 2020: World Bank CAT DDOs triggered by coronavirus, disburse almost $900M, article against Climate- www.artemis.bm (last visited July 15, 2021) Change Risks Step Output Decision on the insurance requirements for the bidders (for climate events) 229 PHASE 3 KEY TAKEAWAYS • Climate risk categories will need to be redefined from a contractual standpoint as: (i) “internal risks”, i.e., those directly affecting the project M3.1 causing physical damage and/or downtime for inspection or repairs, may be associated with “predictable” and “unpredictable” events and (ii) “external Climate risks”, i.e., those posed on the project due to failures of the interconnected Considerations on infrastructure or changes in the broader socioeconomic environment. Risk Allocation • It is essential to recognize that inadequate protection from climate-change risks (potentially stemming from the inability of the party bearing the risk to handle it properly) could threaten the entire project and negatively impact all parties. Step 1 • As climate change becomes the norm and the severity of climate events is Understand Climate increasing, it is in the interest of all parties to try and properly assess and Risk in PPPs from a allocate such risks. Contractual Viewpoint • Infrastructure insurance against climate change presents key challenges. Hybrid solutions should be sought for where conventional insurance options are not adequate and may be blended with other innovative financial instruments. These could include index-based products (e.g., weather derivatives), Catastrophic Drawdown Options (Cat DDOs), and state guarantees. However, it is duly noted that such options are still at an exploratory phase. Step 2 • Transition risk insurance is currently an emerging market of the insurance Structure and Allocate Climate- industry that may be used to offer coverage (up to a mutually defined cap) Change Risks against potential changes in law as part of the transition to greener economies. • As per the principles of project finance, the risk allocation should be clearly defined and determined within the project documents in a manner that addresses any uncertainty. To the extent that uncertainty remains, the grantor would have to offer some form of cover, especially in relation to the Step 3 Insurance coverage debt financing, and subject to the available insurance cover and its associated against Climate- costs. Change Risks 230 MODULE 3.1 Resources PPP RISK ALLOCATION TOOL 2019 Edition has been designed to assist both the public and private sectors in appropriately allocating risks across a variety of infrastructure projects to improve PPP delivery, leading to more sustainable and better quality infrastructure that provides value for money and addresses the needs of the public Developed by: Global Infrastructure Hub and Allen & Overy, 2019 Module 3.1 - Further Reading GUIDANCE ON PPP CONTRACTUAL PROVISIONS This document contains guidance and examples drafting provisions in relation to a number of core PPP contractual clauses, including force majeure provisions and treatment of climate risk Developed by: World Bank Group, 2019 RESILIENT INFRASTRUCTURE PUBLIC-PRIVATE PARTNERSHIPS (PPPS): CONTRACTS AND PROCUREMENT – THE CASE OF JAPAN A guide harnessing the knowledge and expertise gained from PPP projects in selected countries to help the governments of low- and middle-income countries to prepare and structure disaster-resilient infrastructure PPPs Developed by: World Bank Tokyo Disaster Risk Management Hub, GIF, GFDRR, 2017 RESILIENT INFRASTRUCTURE PUBLIC-PRIVATE PARTNERSHIPS (PPPS): CONTRACT AND PROCUREMENT – THE CASE OF INDIA This country brief gives an overview of the availability of insurance for PPP projects in the context of climate change in India, a country that is a crucial PPP implementer across infrastructure sectors. India’s experience in PPP projects affected by natural hazards offers insights and lessons on how disaster and climate risks can be managed under PPPs in emerging markets and developing economies Developed by: World Bank Tokyo Disaster Risk Management Hub, GIF, GFDRR, 2018 TECHNICAL BRIEF ON RESILIENT INFRASTRUCTURE PUBLIC-PRIVATE PARTNERSHIPS: POLICY, CONTRACTING, AND FINANCE This technical brief highlights key considerations and good practices for structuring resilient infrastructure PPPs through policy and legislation; contracting and disaster risk allocation; procurement, monitoring, and payment; and insurance. The brief was developed based on country case studies on Japan, India, and Kenya, as well as a literature review Developed by: World Bank Group, 2019 231 SOVEREIGN CLIMATE AND DISASTER RISK POOLING The report provides recommendations on managing the financial impact of climate and disaster risks and describes how the sovereign catastrophe risk pools are now operating. It examines potential gaps and identifies possible opportunities for new sovereign pools Developed by: World Bank Group, 2017 A WORKSHOP ON DISASTER RISK REDUCTION AND RISK TRANSFER: TOWARD CONCRETE ACTION IN SOUTH ASIA AND EAST ASIA AND THE PACIFIC This is a summary report of the South Asia Region and the East Asia Pacific regions training workshop from April 28-30, 2008, on the importance of disaster risk reduction and risk transfer, including major concepts, models, and various applications of disaster risk reduction around the globe Developed by: World Bank, 2008 INSURANCE OF WEATHER AND CLIMATE-RELATED DISASTER RISK: INVENTORY AND ANALYSIS OF MECHANISMS TO SUPPORT DAMAGE PREVENTION IN THE EU The study builds on the EU Adaptation Strategy and the accompanying Green Paper. It addresses the objective of encouraging the use of insurance to manage weather and climate-related disaster risk Developed by: European Commission, 2017 MITIGATING THE IMPACT OF DROUGHT ON ENERGY PRODUCTION IN URUGUAY This document refers to a case study brief in Uruguay. The World Bank executed a $450 million weather and oil price insurance transaction for the state-owned electric utility. This milestone transaction creates an important fiscal buffer which is part of the wider risk management strategy Developed by: World Bank, 2015 PRODUCT NOTE - INDEX-BASED WEATHER DERIVATIVES A brief overview of the World Bank’s index-based weather derivatives as part of a broad spectrum of disaster risk financing instruments, designed to assist member countries in planning efficient responses to natural disasters Developed by: World Bank, 2015 WEATHER DERIVATIVE IN MALAWI The index-based weather derivatives allowed Malawi to access the financial markets and transfer weather- related risk to market counterparts. This weather derivative was the first time that the World Bank offered a financial risk management tool to a low-income country Developed by: Disaster Risk Financing and Insurance Program (DRFIP), 2012 PPPLRC CLIMATE-SMART PPPS WEBSITE This section of the PPPLRC website provides links to policies, legislation, project documents, and other relevant resources for developing, procuring, and contracting climate-smart PPP projects and insuring climate-change risks Developed by: PPPLRC, World Bank 232 Step 1 Step 2 Step 3 Understand Climate Risk in PPPs Allocate Insurance Coverage from a Contractual Viewpoint Climate-Change Risks against Climate Risks Formulate an Action Plan M3.1 Climate Finalize Risk Considerations on Allocation Risk Allocation Step 1 Step 2 Climate Provisions into Consider Availability of Defining the the Payment Mechanism Concessional Funds Final Decision on Financial Structure Financial Structure and Payment and Payment Profile Mechanism M3.2 (incl. preparation for concessional funding PHASE 3 Recommendations for Funding preparation process Incentives & Penalties if appropriate) Request technical assistance Climate Climate Action Impact on Tariffs Considerations on the Financial Structure Step 1 Step 2 Step 3 Structuring Include Climate Include Climate Include Climate Requirements in Requirements in Technical Requirements in and Drafting the Design Specs/Output Indicators Operational Procedures the RFQ/RFP Continue with the M3.3 Tender Process Integration of Climate Requirements into the Procurement Process 233 3.2 Climate Considerations on the Financial Structure When it comes to structuring a PPP, a critical attempting to prepare a predictable reaction decision for the procuring authority is to to unpredictable events, in what is uncharted decide upon an appropriate financing mix to territory. Therefore, it is essential to note that leverage the risk and return profile of the several concepts among those presented in project making it a bankable and attractive the next sections are still at a developing stage investment. As described in the previous and have not been fully market-tested and sections, the uncertainty related to climate validated. However, early planning for climate change renders the risks posed on the project resilience is critical for the bankability of the quite unpredictable. Extreme climatic investment. And in fact, provided that such phenomena may occur more often than planning is performed on a timely basis, it may before while moderate events could be provide opportunities for the projects to tap characterized by augmented intensities into additional liquidity pools and new forms thereby impacting the project. Moreover, as of financing. In such circumstances, the insurers and financiers are becoming procuring authority may need to consider and increasingly aware of this climate change prepare financing structures that include landscape, failure to address the climate risks institutional support1 (multilateral or supra- could jeopardize the bankability of the project. national development banks (NDBs) and In this context, it becomes evident that other financial agencies). There are also new neglecting climate in the structuring of such climate finance emerging sources of debt projects is not an option. The long-term and equity financing. This may include green viability of the traditional least cost approach lending and bonds as well as sustainable will need to evolve. Including climate finance-linked debt, among others. This a mitigation and resilience measures into the burgeoning financial market that requires structuring and financial modeling of PPPs is adherence to several global principles and becoming ever more important. taxonomies (compatible with the CBI2 or the GBP3 guidelines/criteria) and is briefly Hence, the aim of this module is to embed explained in Appendix 2. a climate lens into project structures by 1 In the form of non-revolving public grants and concessional loans1 (towards the public authority or the project company). 2 Climate Bond Initiative 3 Green Bond Principles (GBP) 234 PHASE 3 STRUCTURE OF THE MODULE The scope of this module is to provide high-level guidance on these aspects and outline specific considerations and opportunities relevant to the financial structure of the project. The basic financial structure has been defined in Phase 2 during the assessment of the project's commercial feasibility, affordability, and VfM. In the current module, the financial structure will have to be refined further. This includes: (i) finalizing the payment or revenue mechanism and (ii) deciding M3.2 on the level of engagement of public compensation/support instruments (e.g., direct or indirect financial support, credit enhancement mechanisms, etc.). Climate Considerations on While it is not strictly related to the financial structuring performed during the pre-tender stage the Financial (it is the winning bidder/investor's responsibility to obtain the means necessary to finance Structure the project), it is relevant to explore the project's eligibility for innovative sources of climate financing, as it can trigger the need to embed in the overall contract structure some provisions that facilitate the project’s attractiveness to such financing sources. This would enhance the project's eligibility for innovative sources of climate financing. A schematic overview of different Step 1 grants as well as concessional and commercial financing sources (traditional and innovative) that Include Provisions may be relevant for a climate-smart PPP project is provided in Appendices 1 and 2. into the Payment Mechanism Step 2 Consider Availability of Concessional Funds 235 FIGURE 3.4 Schematic summarizing the potential flows of funds between various stakeholders within the complex interaction landscape of potential solutions for funding and financing climate actions in PPP projects. Not all options may be available or applicable in every project (in particular the ones shown with dotted arrows are used in very specific cases only). 236 The module comprises two steps:  Step 1 focuses on the options for integrating climate provisions in the payment mechanism PHASE 3 of PPP projects and discusses the differences between availability-based and user-pays PPPs to meet the CAPEX requirements of climate adaptation.  Step 2 does not constitute a part of the conventional PPP process cycle. It is included in the toolkit as an informative section aiming to introduce users to the benefits of and process to apply concessional funding. For the reader interested in innovative financial instruments (such as sustainable linked and green loans), which are products that may or may not be applicable to a given project, more information is provided in Appendix 2. M3.2 Climate Considerations on the Financial Structure INCLUDE CLIMATE PROVISIONS INTO THE PAYMENT 01 MECHANISM Step 1 It is good practice in PPPs to structure a payment mechanism based on explicit and clear Include Provisions performance standards that incentivize the project company to deliver its obligations or penalize into the Payment it through deductions when underperforming. Depending on the nature of the project, availability- Mechanism based or user-pays, the payment mechanism is adjusted accordingly to include various elements, such as the fixed availability payment, pain-gain sharing, bonuses, penalties, claims, etc. The step focuses on how a payment mechanism may be impacted by incorporating climate considerations in a PPP structure and discusses schemes relevant to base or adaptive Step 2 plans, the two alternative planning approaches introduced in Module 2.2 to design climate Consider Availability adaptation measures under uncertainty. of Concessional Funds It is reminded that both plans constitute a means of responding to climate uncertainty that makes it hard to predict the intensity of climate phenomena for which the adaptation measures will have to be designed. The result of a base plan would be a robust adaptation strategy, i.e., a strategy that would respond satisfactorily under most scenarios. On the other hand, an adaptive plan treats the design of adaptation measures in a staged manner. It thus proposes that adaptation measures are designed and evaluated upfront for different climate scenarios but they are materialized only after specific climate-related indicators exceed certain thresholds. It therefore aims to avoid high upfront capital that could question the financial viability of the project by disbursing capital expenses sequentially based on pre- defined trigger points that are evaluated at specific time intervals. When applied into project finance structures, the latter approach raises investment and bankability challenges. While a critical step is to build a relevant form of adaptation upfront, it may not be sufficient over the life of the project—hence triggering the questions of contract stability and cashflow visibility for the project company. Without built-in adaptation, the project may neither attract investors and lenders nor be insurable. But building flexibility over time in a PPP contract constitutes a challenge: the example of the highway PPP sector is quite illustrative given the gap that can exist between initial traffic projections and the reality of traffic volumes (and sometimes the need to expand the road in advance of initial forecasts). It is only through a case-by-case analysis that this can be dealt with: 237  Would alternatives such as letters of credit or a stand-by financing instrument be viable?  Is the risk insurable? PHASE 3  What about the capacity and need for the grantor to step in, eventually providing a funding account?  Which climate risks can be addressed and committed upon from the beginning and which ones may require a review clause?  In terms of funding, what are the mechanisms that trigger price adjustments, how, and how to ensure those remain acceptable for the user payer? M3.2 When climate mitigation and adaptation plans are in place, the payment mechanism can act as the platform upon which any relevant inflows or outflows will be reflected, especially as Climate monitoring climate risk and the protection against it will be continuous and ongoing throughout Considerations on the Financial the life of the PPP. There are several cases where this can be applicable and relevant as follows: Structure Availability-based PPPs – In this case, the payment entails the total payment required by the project company, incorporating any additional cost associated with climate adaptation and mitigation measures during the construction and concession period. It remains to the bidders' discretion how to integrate these aspects into the design of the project. Climate-related CAPEX Step 1 needs to be built upfront as much as possible. If an adaptive plan is in place for climate risk- Include Provisions reduction works, how eventual future works are funded and financed needs to be agreed into the Payment upfront, to allow the PPP contract to give the necessary cashflow visibility to investors, Mechanism despite of the climate change uncertainty around the infrastructure asset. WORK IN PROGRESS: FINANCING ADAPTIVE PLANNING The concepts presented in this step are innovative and have not—at the Step 2 time of writing—been mainstreamed across sectors. While some sectors Consider Availability have already incorporated adaptive planning in routine operations, of Concessional Funds others have applied them only in pilot applications,4 and the use of such approaches in PPPs is nascent and will require testing, with trial-and-error. Users are thus encouraged to review the financing options discussed while recognizing that the landscape is still evolving and that the concepts presented herein may require further validation prior to being widely applicable. Decisions on the bankability of adaptive planning and selection of the appropriate financing method will require involvement of expert consultants. 4 For example, the World Bank Group supported in 2018 the Preparation and Appraisal of a Rural Roads Project in Mozambique under Changing Flood Risk and Other Deep Uncertainties. The study included advanced analyses aiming at piloting the use of decision-making under uncertainty in transport operations. 238 Let’s assume a fictitious project, including only climate adaptation measures on a base or adaptive structure. The cost of adaptation is assumed to be reflected only in the increase of availability PHASE 3 payment (upfront or after a trigger condition has been reached), neglecting any other sources of funds. In case a base plan is in place, the cost of adaptation will materialize in the form of a constant increase of availability payments (compared to the theoretical “no adaptation” case). In a project finance structure, this approach is strongly preferred and recommended. In case of an adaptive plan, the cost of adaptation will be initially lower and may increase after certain trigger points only in case the climate indicators suggest that additional adaptation measures will need to be taken (and hence paid for). Such an approach triggers bankability questions that need to M3.2 be discussed and agreed upon from the beginning to ensure the feasibility and acceptability of the approach by private sector stakeholders under project finance schemes. Climate For user-pays concessions, cashflows are based on user charges and traffic or usage volumes. As Considerations on the Financial is the case in many projects, there may be some revenue-sharing provisions if usage exceeds Structure certain levels. Therefore, an additional way to account for the extra cost of climate considerations is to net it out of the grantor’s share. An additional way could be to introduce a fixed element in the project company’s revenue, either directly through a periodic fee or a charge per user (or even through tax discounts in each toll fee paid), or by guaranteeing part of the traffic (therefore indirectly improving the credit quality of the project). Social acceptance of tariff Step 1 Include Provisions amounts and adjustments is a critical risk to manage (through effective stakeholder into the Payment engagement, affordability and willingness-to-pay analyses, proactive and strategic Mechanism communication plans, etc.), making it sensitive to transfer climate risk payments to the final user (which puts additional pressure on the fiscal affordability of the project by the public authority). Penalties – Proper maintenance of climate mitigation and adaptation works is critical and should Step 2 be linked with the payment mechanism. To this end, penalties should be in place in case of Consider Availability insufficient maintenance or negligence to enforce the proper application of the relevant of Concessional technical design and maximize the environmental benefit. Special care is recommended Funds when projects involve specific classes of nature-based solutions (e.g., mangroves) whose performance depends significantly on diligent maintenance. CONSENSUS ON RISK REDUCTION PLANS It is noted that risk-reduction plans must be agreed at commercial and financial close by all stakeholders (grantor, project company, and lenders) for them to be sufficient without state guarantees. It is equally important to ensure (by including relevant penalty provisions) proper updating of such risk-reduction plans once additional climate-related data become available or if technological advances allow more efficient treatment of climate-related considerations without impacting the costs. Incentives could be included in the payment mechanism to incentivize the private sector to assume climate risks. For example, incentives could include a shadow toll-based payment for traffic that would have otherwise been lost due to an adverse event if not for the protective measures in place (i.e., via a temporary tax break, netting it out of any revenue sharing in place, or by reducing any annual lease payment due to the public authority). Another class of 239 incentives could be to endow the project with characteristics that enhance its eligibility for concessional financing or its ability to tap additional liquidity pools to finance climate actions. Such PHASE 3 instruments are analyzed in the ensuing sections. CLIMATE ACTION IMPACT ON TARIFFS Assuming tariffs, in this section of the toolkit, refer to the payments made by the grantor to the project company, an increase in tariffs to reflect the additional risk and cost related to climate action would by default occur, either directly or indirectly. On the basis that bankability M3.2 and investor returns have to be viable and maintained over a project’s life-cycle, such an increase in tariffs may be upfront or with step-up mechanisms depending on the timeline Climate Considerations on of delivery of the adaptation works. However, there are ways to mitigate tariff increases or the Financial even minimize the need for such increases altogether (Box 3.8). Such ways are not mutually Structure exclusive and can be thought of in various combinations:  The tariff is split into (i) a base facility charge to cover the capital costs, the operating costs, and the returns to debt and equity, and (ii) a climate charge to cover climate action - related costs. In order to mitigate the increase caused by the climate charge, instead of Step 1 it being charged, the project company can enjoy equivalent tax breaks, or alternatively Include Provisions be able to access certain forms of beneficial green/development/grant financing based into the Payment on that charge. Mechanism  The additional cost, as expressed in this case by the climate charge, will be shared by the government and the project company, with some other form of indirect compensation to the project company or its shareholders, such as tax reliefs, grants, ESG target meeting support, concession benefits (such as extension options), insurance support, etc.  The climate charge element of the total tariff is guaranteed by the grantor under all cases, Step 2 therefore increasing the certainty of the revenues and improving the credit rating of the Consider Availability of Concessional project company. Funds  The project companies are asked to retain in total the additional required cost and therefore bid for the project as a whole without separating climate action elements. There are different ways to share climate-related costs depending on the market, bidder commitment to climate action, and grantor objectives. This requires structuring and thinking from the CBA and VfM stages of a project. 240 BOX 3.8 TARIFF MITIGATION EXAMPLE PHASE 3 In the case of a demand-based concession, i.e., a toll road, there may be an element in the toll charge that is climate action related. For instance, a toll charge totaling $2 per car is the sum of $1.75 for infrastructure development, maintenance and operation, and $0.25 for climate adaptation works. In order to not pass or limit passing the cost to the end-user, the project company is asked to keep the toll charge at $1.75 and apply a shadow charge, which can then be recovered indirectly by mechanisms such as (i) equivalent tax breaks at the project company level (i.e., the equivalent of forfeiting the $0.25 charge), or (ii) access to green M3.2 grants of equivalent amounts. Climate Considerations on the Financial Step Output Structure Climate provisions in the payment mechanism:  Incentives/penalties associated with a good or bad performance during a climate event  Tariff adjustments (and tariff mitigation mechanism) to accommodate for the Step 1 financing of climate actions that take place during the course of the project Include Provisions into the Payment Mechanism 02 CONSIDER AVAILABILITY OF CONCESSIONAL FUNDS Mobilizing concessional funding /financing is not a compulsory part of the PPP cycle; it is Step 2 Consider Availability however included in the toolkit as concessional funds may prove a very useful source of financing of Concessional climate action. According to the World Bank Group:5 “Concessional finance is below market rate Funds finance provided by major financial institutions, such as development banks and multilateral funds, to developing countries to accelerate development objectives. The term concessional finance does not represent a single mechanism or type of financial support but comprises a range of below market rate products used to accelerate a climate or development objective.” Concessional finance constitutes an innovative source of financing climate actions in challenging environments and should not yet be regarded as a mature and readily accessible financing pool. While acknowledging this fact, this step attempts to navigate users through the complex and constantly evolving concessional funding landscape by presenting key instruments, agencies, and interactions. It also provides guidance on how to rapidly screen eligible sources (for the foreseen PPP investment) in order to provide a preliminary source of information for the procuring authority on how to prepare projects to be able to benefit from concessional funds. 5 https://www.worldbank.org/en/news/feature/2021/09/16/what-you-need-to-know-about-concessional- finance-for-climate-action 241 BOX 3.9 HOW A PPP PROJECT CAN BENEFIT FROM CONCESSIONAL PHASE 3 FUNDS From the perspective of a procuring authority seeking to deliver a project as PPP, the use of public/concessional funds can significantly strengthen PPP delivery by providing access to necessary funding that would be unavailable from other traditional sources. Indeed, in case commercial lenders or investors do not have the appetite to provide financing to the project, concessional funds may prove a valuable funding source endowing the project with the following benefits: M3.2  They reduce the national funding resources that the project will require to bridge the viability gap in hardly viable projects Climate  They reduce the level of financing that needs to be raised, thus increasing the Considerations on commercial feasibility of (a viable) project by reducing the risk that the winning bidder the Financial may not be able to raise the required funds Structure  They reduce the level of user charges and improve the overall structure of the PPP by supporting components of the project that may not be attractive for private sector financing  They promote the delivery of a more affordable project for the procuring authority and/or for the users. Step 1 Include Provisions into the Payment Mechanism Securing concessional funding/financing could be a demanding task, which starts from identifying the funding opportunity, continues with the preparation of the financing application, and culminates in the reception of the funding and the implementation of the project. During this process, the procuring authority is faced with some crucial decisions regarding the selection and structuring of the funding and the role and level of engagement of key stakeholders/entities and expert advisors. The process of preparing for concessional financing can be either performed as Step 2 Consider Availability part of Phase 3 (i.e., when the financial structure of the PPP is finalized), or it can run parallel to of Concessional the PPP process cycle and be constantly revisited as information becomes available (Figure 3.5). Funds Preliminary Screening of grants and concessional finance (may have been performed during Phase 1) When concessional funding/financing is intended to be mobilized, at a preliminary stage, the procuring authority is expected to:  Confirm the eligible project expenditure, which includes reviewing the project scope and the intended use of the financial support; pre-screening of funds that support the intended investment activities; checking funding size requirement. Detailed guidance on these aspects is provided in Section 2.  Contact the national entities that are responsible for financially supporting the climate initiatives. (Users may wish to refer to Phase 0 for additional guidance on the domestic administrative structure that oversees climate activities.)  Coordinate with the National Climate Funds (NCFs), if established,6 on the type of activities that are considered national priorities and for which funding from national and multilateral 6 Obviously setting up an NCF may not be a viable option for all countries due to capacity and other constraints. 242 sources is available. For a detailed description of the role of NCFs in supporting green infrastructure projects, users may refer to Insight 3.2. PHASE 3  Seek technical support for the preparation of the financing or grant. Grant Preparation (may have been performed during Phase 2) When grants are mobilized, at preparation stage, the procuring authority is expected to:  Perform the preparatory work that is important for application submission. This will include much of the already conducted financial assessment (i.e., cost-benefit analysis, bankability M3.2 check, and VfM) to support the justification of the financing amount (funding gap, eligible costs). See also general evaluation principles of Climate Funds in Appendix 1. Climate Considerations on  Where specific technical guidance is needed (on any of the aforementioned tasks), the the Financial procuring authority may consider publishing terms of reference to request advisory services Structure for the preparation of financing or grant. High-level guidance on these aspects may be provided by any of the agencies/entities described in the ensuing.  Decide on beneficiary (i.e., whether it will be the public or the private party). This decision will be determined based on the financial structure of the PPP. Should, for example, the Step 1 procuring authority decide that the PPP will involve availability payments, then it may wish Include Provisions to designate itself as the beneficiary to control the payment of the grant proceeds in line with into the Payment Mechanism performance-based payments. In a different context, it is possible for the private partner to assume the role of the beneficiary, provided that this is in line with the procuring authority's desire and that the private partner agrees to undertake the corresponding obligations and responsibilities (e.g., regular reporting, administration of payment, proof of eligible expenditure, etc.).  Decide on the timing of the application (i.e., whether the application will be submitted before Step 2 or after the completion of the PPP procurement process) and allocate the necessary Consider Availability resources to support that decision. The choice will depend, among other criteria, on the of Concessional Funds expected level of the bidder's interest, the thoroughness of the project preparation, the procuring authority's capacity to run parallel processes, and the flexibility of the project's timeline. In general, it is considered good practice to start the application process before financial close to speed up the overall process, reduce the risk of committing to a funding level that may not materialize, and provide bidders with data on the blended finance structure early enough. This will allow them to prepare their bids accordingly and mitigate the risk of losing bidders since the grant availability and conditions will be clear up-front.  Depending on the schedule decided, the procuring authority may wish to seek conditional grant approval. This is generally a good practice to avoid unnecessary delays between commercial and financial close. For example, lenders will require evidence of grant approval to enable financing to be drawn down. Submission of Application and Implementation (typically performed during Phase 3) At this stage, the procuring authority is expected to:  Make the final decisions on the choice of the payment mechanism and timing of disbursement of financing. The nature of the PPP will determine if the financing will be disbursed as a direct contribution towards capital costs (reducing future user charges or 243 availability payments) or used as a contribution towards future availability payments, linking payment to long-term performance. In any case, the decision made should be reflected in the PHASE 3 financial plan submitted to the granting authority for evaluation.  Finalize the application submission, monitor the progress of evaluation, and respond to any further request raised by the granting authority. Often, delays in grant approvals are caused due to such requests rather than by the application and decision process itself.  In case of grant approval, the procuring authority should coordinate with the private partner's legal advisors (and other technical advisors involved in the procedure) to manage the necessary administrative work for initiating the grant reimbursement M3.2 (which includes receiving certification from the granting authority, finalizing the decision on the beneficiary, managing reporting and audit obligations, etc.). Climate Considerations on  In case the public authority is acting as the grant beneficiary, it is the authority's the Financial responsibility to regularly monitor the project's performance and take the appropriate action Structure according to the grant agreement. This may also include handling contract modifications/ disputes, disbursement requests, and meeting reporting and audit obligations. Step 1 Include Provisions into the Payment Mechanism Step 2 Consider Availability of Concessional Funds 244 Preparation for Institutional Support through the PPP process cycle Key Decisions  Granting Entity/ Fund Key Decisions  Need of Technical  Conditional grant approval Key Decisions Key Decisions Support for grant  Final decision on grant preparation  Grant Amount (viability/funding beneficiary gap; eligible costs) Action Plan Action Plan  Timing of grant application  Submit grant  Preliminary decision on grant application Action Plan  Identify the need for institutional support beneficiary (public or private party)  Monitor evaluation  Preparatory administrative  Method of grant disbursement process and provide  Assess eligibility for grant work (upfront or distributed over contract clarifications if (size, fit with project  Manage/schedule duration) necessary scope) reporting/monitoring/audit  Prepare TOR for  Request conditional activities technical support, start Action Plan dialogue with (national)  Justification of grant amount implementing entities  Supporting financial assessments  Start preparation of grant application FIGURE 3.5 Decisions and actions to prepare for concessional support during Phases 1-4 of the PPP cycle for the projects that benefit from concessional support (this being neither systematic nor compulsory) 245 TECHNICAL ASSISTANCE ON CONCESSIONAL FINANCING Last but not least, as previously discussed, depending on the financial model and the specific PHASE 3 characteristics of the PPP project, the process of securing institutional support can be complicated, requiring expert advice in several technical aspects. Public authorities may request technical assistance (or high-level guidance on the preparation/submission of terms of reference) from:  National implementing entities, which can be ministries that supervise and manage fundraising from different funding sources (UNFCCC and non-UNFCCC funds) and the technical committees of national climate funds. (Details on the designated role of NCFs in supporting the development of green infrastructure are provided in Insight 3.2) M3.2  Fund accredited entities or national designated authorities (NDAs) of specific funds Climate (private, public, or non-governmental institutions) carry out a range of activities, Considerations on including developing funding proposals and management/monitoring of projects and the Financial Structure programs. For example, JASPERS (Joint Assistance to Support Projects in European Regions) supports national implementing entities in beneficiary countries in preparing PPP projects for grant applications using ESI (European Structural Investment) funds  Advisory services departments of regional and multilateral implementing entities and DFIs Step 1  Consulting firms with proven experience in the area and knowledge of the country's local Include Provisions context into the Payment Mechanism Step Output (Optional) Action plan for requesting a concessional fund Step 2 Consider Availability of Concessional Funds 246 PHASE 3 KEY TAKEAWAYS  Climate change-related investments need to be embedded upfront and integrated in the initial design as much as possible, to be funded through the revenues or the availability payments of the project.  Prediction of the intensity of climate-related phenomena is hindered due to climate M3.2 change. Hence, investing in adaptation to tackle the most adverse scenario may question Climate the bankability of the project (while under-investment would question its long-term Considerations on viability). One challenge will consist of the need to reconcile eventual adaptive planning the Financial (to avoid veryhigh upfront costs of adaptation works) with the difficulty to finance such an Structure approach. In this context, adaptation actions may be designed and included in the financial model for several scenarios with the actual investments being deferred for later when more data would be available. This is an innovative approach that still needs to be explored and tested, and for which bankability will have to be ensured through tailor- made structuring in each project, mobilizing the appropriate funding measures (such as an Step 1 increase in the amount of availability payments) and financing instruments, to the extent Include Provisions into the Payment possible. Mechanism  The cost of long-term adaptation actions (in case of adaptive planning) can be partially funded via an increase to the availability payment (when it is required) or by introducing a fixed element in the project company’s revenues (i.e., periodic fee, a charge per) or by guaranteeing part of the usage (therefore indirectly improving the credit quality of the project) in user-pays PPPs.  The payment structure of adaptive PPPs should include provisions for continuous Step 2 Consider Availability monitoringof cashflow variations due to climate-induced impacts. of Concessional  Penalties should be in place in case of insufficient maintenance or negligence to enforce Funds the proper application of the relevant technical design and maximize the environmental benefit of the project. Payment incentives (e.g., shadow-toll payments for traffic, temporary tax breaks, etc.) should be included to encourage the private sector to consider climate risk in design, operation, and maintenance.  In some PPP projects, the use of concessional funds is possible and alleviates the financing pressure. When it applies, concessional funding/financing may be mobilized through a competitive selection process. PPP procuring authorities should, therefore, carefully identify funding opportunities and perform the necessary technical analyses for justifying the funding necessity. The preparation for funding may run in parallel with the PPP cycle. This is a quite demanding process and chances for success may be low.  Projects incorporating environmental, climate, and or social benefits may tap into liquidity pools from green, social, sustainability, and sustainability-linked bonds—a fast-growing market sector with nearly $600 billion of bonds issued across these four formats in 2020. 247 INSIGHTS Insight #3.1 Exploring Adaptive Solutions such as Climate ChangeAccount Insight #3.2 INSIGHTS National Climate Funds Insight #3.3 Financing for Climate Resilience and Adaptation Insight #3.4 Exploring Financing Concepts for projects having a strong adaptation component 248 EXPLORING ADAPTIVE SOLUTIONS SUCH AS THE CLIMATE CHANGE ACCOUNT The Problem Assume a project that is affordable, passes the CBA assessment as per the government’s requirements and objectives, and delivers value for money if procured through a PPP structure. The project is exposed to climate change- induced risks that can be mitigated via an adaptive plan that requires structural INSIGHT #3.1 adjustments periodically depending on the levels of certain climate indicators (e.g., if sea level, drought, or frequency and level of floods exceed certain levels). The cost of such structural adjustments depends on the rate of worsening of such indicators, i.e., if indicators do not worsen at the expected rate, less expense will be required for such structural adjustments. Grantor’s and Project Company's Considerations The project grantor wishes to mitigate/eliminate such risks to the project to ensure consistent operational continuity and prefers to include such structural adjustments in the technical requirements of the project and pass on the associated cost to the project company. Among the possible alternatives, the grantor can separately procure protective works outside the PPP project’s scope, which could be conceptually unsatisfactory if one objective is to maximize a PPP project’s capacity to provide climate resilient solutions. 249 278 A possible solu�on – to be tested One possible solu�on – whose cost implica�on would have to be discussed and agreed among partners – could rely on introducing the concept of a climate change account (CCA), to which the project company has to periodically contribute funds up to the level required to cover the costs of some adap�ve works when expected. The level and �ming will have to be pre-agreed based on the due diligence and consulta�ons during the procurement phase. INSIGHT #3.1 250 NATIONAL CLIMATE FUNDS National climate funds (NCFs) are domestic financing mechanisms designed to help countries assess mitigation/adaptation funding from the ever-growing pool of global financing mechanisms into green infrastructure projects that are considered a national priority. In particular, their mission is to:7 • Collect sources of funds and direct them towards climate change activities thatpromote national priorities • Blend finance from public, private, multilateral, and bilateral sources to further catalyze resources supporting climate change action • Coordinate country-wide climate change activities to ensure that climate change priorities are effectively implemented Typically, the NCF structure comprises funding sources, governing bodies, a trustee, and implementers. Funding sources provide funds to the NCF, governing bodies make decisions about the fund's operations, the trustee manages the flow of financing towards and from the NCF's account, and implementers receive funds and ensure activities are undertaken. The financial flows INSIGHT #3.2 (that may come in grants, equity investment, low-cost entrusted loans, financing guarantees) should follow specific fiduciary arrangements and standards.8 FIGURE 3.6 The mechanism of supporting the development of projects through blended financing (national and international funding sources) [Source: UNDP, 2011: Blending Climate Finance Through National Climate Funds] 7 UNDP, 2011: Blending Climate Finance Through National Climate Funds 8 Some funds have set out homogeneous fiduciary standards that every implementer must apply to be eligible for funding. Other NCFs apply different fiduciary standards for different types of implementers and projects (e.g., different standards between multilateral and private sector implementers, and between large-size and smaller-size projects). 251 How can PPP investments benefit from NCFs? NCFs provide access to multiple funding resources Through the NCF mechanism, projects may benefit from a rich financing blend including among other international financing flows from UNFCCC entrusted financial mechanisms (i.e., GEF, GCF, AF, LDCF, SCCF) from non-UNFCCCC financial mechanisms provided by multilateral financial institutions (e.g., WB, Asian Development Bank (ADB); AfDB, etc.) and bilateral development agencies, as well as domestic funds and innovative sources. NCFs support the long-term climate vision Although NCFs are consistent with the Paris Agreement, they have their roots in the national context. NCF objectives and priorities are therefore fully aligned with national climate change strategies and plans (NAPAs, NAPs, etc.) to promote, support, and coordinate investments in country-driven climate change priorities based on national circumstances and reality. NCFs may target specific sectors and/or activities Some NCFs have a broader funding agenda covering both climate mitigation and adaptation projects, while others focus on specific sectors and activities. For example, the Ecuador Yasuni ITT Trust Fund supports activities/programs that specifically address forestry, watershed and river management, energy, social development, research, science, technology, and innovation (as described in the Ecuadorian National Development Plan). The Bangladesh Climate Change Resilience Fund (BCCRF) provides financing for climate adaptation activities that combat the changing agricultural conditions and protect vulnerable populations. NCFs provide flexibility in fundraising An NCF provides the additional mechanism to attract a diverse variety of sources of climate financing, including public, private, multilateral and bilateral funds, as well as innovative financing sources (e.g., carbon taxation, etc.) at a project level. This provides greater flexibility in transactions when compared to traditional UNFCCC supported mechanisms. NCFs have access to innovative financing Innovative financing mechanisms such as levies on coal production, fees from polluting companies, or proceeds from carbon markets may also provide capital for an NCF. Of course, this may only be possible under the assumption that complementary structures are already in place to ensure the efficient collection and delivery of funds. For example, the Brazil National Fund on Climate Change collects funds from revenue from the oil production industry and channels them toward climate change mitigation and adaptation activities. NCFs may have access to direct funding Some NCFs support a “direct access” modality, in which domestic entities can readily attract funding through the Adaptation Fund, the Green Climate Fund, and other funds for implementing their climate change programs and projects. 252 FINANCING FOR CLIMATE RESILIENCE AND ADAPTATION 01. THE CONTEXT As climate adaptation and resilience establish their place high on the global climate agenda reaching levels of attention and focus similar to climate mitigation, considerations regarding the financing of such initiatives and projects are being identified. In particular, grantors and lenders to such projects are contemplating how to increase and optimize the allocation of funds to projects with climate adaptation and resilience mechanisms, especially as these gradually become integral parts of project structures and requirements. Especially in developing markets and economies, where investor and lender appetite are already limited or require significant support in state grants, loans, guarantees, and insurances, adding another layer of cost and risk may further complicate matters. Assuming that the additional cost of climate adaptation and/or resilience against climate- related INSIGHT #3.3 disruptive events is primarily borne by the project company, at least up to a certain level, the sources of funds of the project will need to incorporate such additional costs and accept the risk allocation from a bankability perspective. In certain cases, the level of such costs or the project's exposure to climate-related disruptions will be too high, thereby compromising the project's feasibility, in which case alternate project solutions or project locations will be sought and developed. Yet, for the purposes of this thinking trail, the cost of adaptation and resilience is assumed to be reasonable and the resulting protection against disruptions sufficient (primarily through the project's structural adjustments but also via insurance or a combination to the extent required - the primary objectives are to avoid disruptions to the public service without burdening the project company with losses or the risk of losses, and without having the state to step-in with guarantees in every case). What is essentially defined herein is a PPP project that is required as part of the RFP, apart from its primary role to manage the infrastructure and deliver the public service according to specific criteria and standards, to include mechanisms and structures that protect it against climate-related events and disruptions without compromising the project's bankability and feasibility. From a financing perspective, this implies a requirement for: • additional finance to cover the capital cost of adaptation • insurance availability for such climate-related risks at an acceptable cost to the project company 253 02. CHALLENGE AND OPPORTUNITY As a significant part of the financing for PPP projects in developing economies comes from multilateral (increasingly also national) development banks and agencies, the same institutions are in a premium position to lead the way in structuring solutions for the additional cost of climate adaptation. However, what seems an additional funding requirement may unlock new liquidity pools, ones that are explicitly focused on climate adaptation and which individual projects with climate adaptation mechanisms can tap into. For instance, instead of including climate adaptation within the Green Bond Principles, develop a capital market instrument specifically focused on climate adaptation for projects with such characteristics. By all means, this implies that the climate adaptation elements and costs of a project will have to be identified and quantified and that the fund allocationpolicies at the MDB level will have to be set out in advance. What seems, however, like an additional funding requirement, may actually unlock new liquidity pools, ones that are explicitly focused on climate adaptation and which individual projects INSIGHT #3.3 with climate adaptation mechanisms can tap into. 254 POTENTIAL FINANCING CONCEPTS FOR PPPS HAVING A STRONG ADAPTATION COMPONENT Below are examples of financing mechanisms that either include climate adaptation or can be used to form new independent solutions. These examples constitute innovative ideas that are currently at an exploratory phase and have not yet been verified as being able to become mainstream. The underlying aim is to unlock pools of funding and direct them to projects in developing economies. 1 Climate Adaptation Bond (CAB) by MDBs/NDBs INSIGHT #3.4 Like the green bonds, issuance of CABs by MDBs or NDBs (perhaps even in local currencies) could contribute to either supporting projects that incorporate climate adaptation or funding a project's specific climate adaptation mechanism. The latter case may be an instrument that is insured against backdrops or failures of the adaptation infrastructure to protect against the identified climate risks, either through additional insurance by the respective agency or by cover in the financing documentation (similar to ECA covers) whereby the project company does not default in case of inability to repay loans due to climate-related disruptions. Given the increasing interest by the investor community for green bonds or other environmentally related bonds, the likelihood is that interest for such instruments, initially for ones bythe MDBs and gradually for ones by NDBs, will also be developed alongside the growing importance of and focus on climate adaptation. 2 Project CAB (PCAB) Essentially project-specific bonds that carry a CAB certification. Like CABs above, the PCAB can be raised either as additional financing to the project with adaptation mechanisms alongside the other financing tranches or as a finance pool specifically funding the cost of adaptation. In this case, several considerations will have to be addressed, such as the credit rating of such bonds and their coordination with other lenders and currencies. However, provided there is appropriate support in the form of cover, it could enhance available liquidity. One example of support could be that the MDB would insure the bond against the project company failing to repay the bondholders because of the inability of infrastructure to protect against pre- identified climate risks. This would also improve the project's credit rating, although EMDE countries' credit ratings may limit such improvements. 255 3 Credit Support Let’s assume a public authority aims to raise private bank financing to finance the cost of climate adaptation assets such as a wall against rising sea level, anti-flooding measures, or required materials against extreme temperatures. Such tranches of financing, within an infrastructure project, could benefit from some form of credit support, depending on the country's credit quality and the project, as well as the level of existing private financing activity in the country. Such credit support may include: (i) guarantees in case of inability by the project company to repay the loan, (ii) seniority of such tranches in the cashwaterfall, (iii) security over the project's assets, (iv) restrictive covenants until such loan is repaid, or a combination of the above. Especially if supporting climate mitigation goes alongside receiving some form of certification (a "scout" badge), such financing by commercial lenders will likely be strategically aligned with the growing importance of the climate-related objectives and agenda. INSIGHT #3.4 4 Adaptation Levy Introduce a levy on the businesses that benefit from the project to cover the cost of adaptation. This may have political implications and may be unrealistic to suggest in developing economies. Therefore, only businesses that can sustain such a levy should be considered in any case. Such levies have widely been used in developed economies, generally without political controversy, given that the benefits for the business far outweigh the cost of protection and, most importantly, the cost of business disruption. 256 Perhaps the question is not about new financing instruments but how to optimize and expand existing ideas, make them more focused and targeted, and engage with sovereigns early in the process to support them in delivering such solutions. 5 Tax Incentives Indirectly finance the extra cost of adaptation through specific tax incentives (e.g., tax breaks equivalent to the amount spent on climate adaptation) given to the project company, whether at the company or the holding level or even in capital repatriation. The project company will then be responsible for covering the cost of INSIGHT #3.4 adaptation measures within their existing budget and proposal, assuming that the adaptation measures are sufficient and to the required standards, limiting the likelihood of climate-related disruptions, and consequently the impact on such risk allocation. 6 Climate Adaptation Credits Incorporate climate adaptation in guidelines or policies, whereby a sponsor that develops projects with climate adaptation is eligible for climate adaptation credits—attributed a value—thereby incentivizing the private sector to participate in and complete such projects regardless of location. To the extent that such credits can be quantified and have a commercial value, they can fund part of the project's capital costs. There is no “one model fits all” solution, therefore each of the above will have to be further refined to reflect country- specific considerations and project-specific elements depending on its nature, size, and type of climate risks. The suggestions above serve to form a basis for further discussion and elaboration on the viability, constraints, and applicability of each option. It is expected that, as climate adaptation gains ground in the international socioeconomic and political agenda, so will the requirements and incentives for such characteristics in public infrastructure with financing availability being the main catalyst. 257 MODULE 3.2 Resources CARBON PRICING DASHBOARD Launched in May 2017, the Carbon Pricing Dashboard is an interactive online platform that provides up-to-date information on existing and emerging carbon pricing initiatives worldwide Developed by: World Bank Group CDM REGISTRY An electronic database that ensures the accurate accounting of the issuance, holding, and acquisition of certified emissions reductions (CERs) Developed by: UNFCCC CLIMATE FUNDS UPDATE/THE FUNDS An independent website that provides information and data on the growing number of multilateral climate finance initiatives designed to help developing countries address the challenges of climate change Developed by: Heinrich Böll Foundation/Overseas Development Initiative MULTI-PARTNER TRUST FUND OFFICE/TOOLS The MPTF Office, housed within the UNDP, assists the UN system and national governments in establishing and administering pooled financing mechanisms — multi- donor trust funds and joint programs — to collect and allocate funding from a diversity of financial contributors to a wide range of implementing entities in a coordinated manner. MPTF website provides five tools where users can navigate among various funds and relevant documents Developed by: UNDP 258 Module 3.2 - Further Reading WHAT ARE GREEN BONDS? A green bond toolkit for those interested in better understanding the nature of green bonds. The content aims to distinguish green bonds from other traditional financial instruments and provide insight into the potential of green bonds to mobilize new sources of climate finance Developed by: World Bank Group, 2015 THE WORLD BANK GREEN BOND PROCESS IMPLEMENTATION GUIDELINES High-level guidelines on the implementation of the World Bank's Green Bond Program Developed by: World Bank, 2018 GREEN BOND PROCEEDS MANAGEMENT AND REPORTING The objective of this guide is to clarify the processes issuers in the public sector can follow to meet two of the four elements of the Green Bond Principles (GBP): proceeds management and reporting Developed by: World Bank, 2018 THE WORLD BANK GREEN BOND IMPACT REPORT 2019 The intention of impact reporting is to help investors develop a more detailed understanding of the climate and environmental impacts that can be expected or projected from green bond projects Developed by: World Bank, 2019 THE WORLD BANK IMPACT REPORT 2020 SUSTAINABLE DEVELOPMENT BONDS AND GREEN BONDS The 2020 report is focused on the IBRD-financed projects supported by sustainable development bonds and green bonds. It presents results highlights, issuance, commitment, and allocation figures,followed by examples of the new projects added to the respective project portfolios in FY20 Developed by: World Bank, 2020 CLIMATE BONDS TAXONOMY The Climate Bonds Taxonomy is a guide to climate-aligned assets and projects. It is a tool for issuers, investors, governments, and municipalities to help them understand the critical investments that will deliver a low carbon economy Developed by: CBI, 2021 GREEN BOND PRINCIPLES - VOLUNTARY PROCESS GUIDELINES FOR ISSUING GREEN BONDS The principles outline best practices when issuing bonds serving social and/or environmental purposes through global guidelines and recommendations that promote transparency and disclosure, thereby underpinning the market's integrity. The GBPs seek to support issuers in financing environmentally sound and sustainable projects that foster a net-zero emissions economy and protect the environment Developed by: ICMA, 2021 THE EU TAXONOMY The EU Taxonomy is a tool to help investors, companies, issuers, and project promoters navigate the transition to a low-carbon, resilient and resource-efficient economy Developed by: EU TEG on Sustainable Finance, 2020 259 THE EU GREEN BOND STANDARD The report proposes that the commission create a voluntary EU Green Bond Standard to enhance the green bond market's effectiveness, transparency, comparability, and credibility and encourage the market participants to issue and invest in EU green bonds. The proposal builds on best market practices Developed by: EU TEG on Sustainable Finance, 2019 USABILITY GUIDE FOR THE EU GREEN BOND STANDARD This guide offers market actors guidance on using the proposed standard and the set-up of a market- based registration scheme for external verifiers. The usability guide contains an updated proposal for a green bond standard (annex 1) Developed by: EU TEG on Sustainable Finance, 2020 GREEN BONDS IN PUBLIC-PRIVATE PARTNERSHIPS This paper proposes green project bonds as an alternative way to finance green PPPs by engaging capital markets. For procurers to effectively include green bonds in their current tendering activities, they need to understand both the opportunities and underlying risks stemming from the inclusion of this type of securities as a financing tool Developed by: The International Institute for Sustainable Development, 2015 SUSTAINABILITY LINKED LOAN PRINCIPLES - SUPPORTING ENVIRONMENTALLY AND SOCIALLY SUSTAINABLE ECONOMIC ACTIVITY Sustainability linked loans aim to facilitate and support environmentally and socially sustainable economic activity and growth. The Sustainability Linked Loan Principles (SLLP) have been developed by an experienced working party, consisting of representatives from leading financial institutions active in the global syndicated loan markets Developed by: Loan Market Association, Asia Pacific Loan Market Association, Loan Syndications & Trading Association, 2021 GREEN LOAN PRINCIPLES - SUPPORTING ENVIRONMENTALLY SUSTAINABLE ECONOMIC ACTIVITY The green loan market aims to facilitate and support environmentally sustainable economic activity. The Green Loan Principles (GLP) have been developed by an experienced working party, consisting of representatives from leading financial institutions active in the global syndicated loan markets, to promote the development and integrity of the green loan product Developed by: Loan Market Association, Asia Pacific Loan Market Association, Loan Syndications & Trading Association, 2021 THE CLEAN DEVELOPMENT MECHANISM: A USER'S GUIDE This manual is designed as a tool to help diverse stakeholders put the Clean Development Mechanism into action and to implement projects efficiently and equitably in a variety of national and sectoral contexts Developed by: UNDP, 2003 STATE AND TRENDS OF CARBON PRICING 2020 This report provides an up-to-date overview of existing and emerging carbon pricing instruments worldwide, including international, national, and subnational initiatives. It also investigates trends surrounding the development and implementation of carbon pricing instruments and how they could accelerate the delivery of long-term mitigation goals Developed by: World Bank, 2020 260 STORIES FROM THE FIELD - A LOOK AT WORLD BANK CARBON FINANCE PROJECTS IN AFRICA A list of examples that illustrates the benefits of choosing a low carbon development path and how carbon finance can help finance projects Developed by: World Bank A BLUEPRINT FOR SCALING VOLUNTARY CARBON MARKETS TO MEET THE CLIMATE CHALLENGE The trading of carbon credits can help companies — and the world — meet ambitious goals for reducing greenhouse-gas emissions. This article deals with what it would take to strengthen voluntary carbon markets to support climate action on a large scale Developed by: McKinsey, 2021 HOW THE VOLUNTARY CARBON MARKET CAN HELP ADDRESS CLIMATE CHANGE This article deals with how the voluntary carbon market is gaining momentum and plays an increasingly important role in limiting climate change Developed by: McKinsey, 2020 CARBON PRICING: SETTING AN INTERNAL PRICE ON CARBON This series of articles aims to clarify how carbon is valued, taking into account the different projects and approaches Developed by: Gold Standard THE STATE OF INTERNAL CARBON PRICING This article deals with the pricing thresholds of internal carbon charges implemented by companies Developed by: McKinsey, 2021 NATIONAL CLIMATE FUNDS: LEARNING FROM THE EXPERIENCE OF ASIA-PACIFIC COUNTRIES An analysis document based on the consolidated information from E-discussions, regional clinics, and case studies with contributions from over 250 practitioners across Asia-Pacific Developed by: UNDP, 2012 BLENDING CLIMATE FINANCE THROUGH NATIONAL CLIMATE FUNDS A guidebook for the design and establishment of national funds to achieve climate change priorities Developed by: UNDP, 2011 261 Step 1 Step 2 Step 3 Understand Climate Risk in PPPs Allocate Insurance Coverage from a Contractual Viewpoint Climate-Change Risks against Climate Risks Formulate an Action Plan M3.1 Climate Finalize Risk Considerations on Allocation Risk Allocation Step 1 Step 2 Climate Provisions into Consider availability of Defining the the Payment Mechanism Concessional Funds Final Decision on Financial Structure Financial Structure and Payment and Payment Profile Mechanism M3.2 (incl. preparation for concessional funding PHASE 3 if appropriate) Climate Considerations on the Financial Structure Step 1 Step 2 Step 3 Include Climate Include Climate Include Climate Structuring Requirements in the Requirements in Technical Requirements in Operational and Drafting Design Specs/Output Indicators Procedures the RFQ/RFP Continue with the M3.3 Tender Process Compliance with KPIs for hazard intensity Int. Performance National or Int. standards Integration of Climate Codes/Guidelines KPIs for energy efficiency Emergency Requirements into the Climate certification KPIs for mitigation targets Response Plans Procurement Process KPIs for pollution reduction O&M plans Reporting KPIs 262 3.3 Integration of Climate Requirements into the Procurement Process Once all assessments are finalized and the KPIs to measure the achievement of pre- financial and risk-sharing structure of the determined climate mi�ga�on/adapta�on project is decided (and following review by the goals and levels of service. procuring authority), they should be reflected At this stage, it is also recommended that in the final project documents and the market sounding is performed to ensure the dra�ing of request for qualifica�ons proposed PPP structure will draw both (RFQs) and request for proposals (RFPs). investor appe�te and is bankable. Market The purpose of this module is to sounding has to be managed with facilitate procuring authori�es in transparency and care to allow interested preparing the relevant documenta�on bidders and financial ins�tu�ons to provide of climate-smart PPPs. The la�er should input and set out their concerns on the also include specific climate objec�ves to be project’s scope and proposed structure. met during the design, construc�on, and opera�on of the project and climate-smart STRUCTURE OF THE MODULE The module includes three steps:  Step 1 provides an overview of climate considera�ons included in relevant standards, codes, and guidance documents and discusses available ra�ng systems and frameworks to evaluate the sustainability and resilience of infrastructure projects.  Step 2 outlines opera�onal procedures and standards that are essen�al for comba�ng the effect of climate change during the construc�on and opera�on of the infrastructure.  Step 3 describes how public authori�es can leverage output specifica�ons to incen�vize mi�ga�on and adapta�on innovations during the project's life-cycle. 263 PHASE 3 01 INCLUDE CLIMATE CONSIDERATIONS IN THE DESIGN Designing infrastructure to withstand the unknown climate conditions of the future is neither a simple nor a standardized procedure. As explained in detail in Module 2.2, at the design stage, bidders will be requested to assess the impact of climate risks on their project and design adaptation measures that address climate-induced vulnerabilities across a range of climate M3.3 futures. They may also need to assess whether their projects (and the foreseen Integration of construction/operation procedures) will contribute (and to what extent) to GHG reduction. Climate Aiming to perform these tasks in a coherent, reliable, and high-quality manner, it is Requirements into recommended that all implemented procedures and methodologies will comply with modern the Procurement Process climate standards, guidance documents, and rating systems. This will also provide a common ground of reference that will substantially facilitate the review process of the technical proposals by the procuring authority. Authorities may wish to request in the relevant RFPs that the design will: Step 1 Include Climate Considerations in the  Comply with climate provisions included in national or international codes/guidelines Design (e.g., ISO 14080:20181; International Green Construction Code - IGCC2). More documents are expected to be available over the coming years as national governments and international standardization organizations are stepping up efforts to update and strengthen their technical standards to promote climate resilience. According to UNFCCC, five countries (Australia, Canada, Denmark, Germany, and Korea3) have already incorporated revisions to their standards. Moreover, two major international Step 2 Include Climate standardization organizations, the European Committee for Standardization (CEN, Centre Requirements in Européen de Normalisation) and International Standards Organization (ISO), are reviewing Technical existing standards to address climate risk better.4 The CEN is amending and extending the Specs/Output Indicators scope of Eurocodes5 to account for climate change (with a focus on transport and energy infrastructure, as well as building and construction). The ISO is working through its Adaptation Task Force to develop standards for vulnerability assessment, adaptation planning, and adaptation monitoring and evaluation (ISO 14090:2019 on Adaptation to Climate Change). Step 3  Ensure a minimum climate certification level as prescribed by sustainability rating tools Include Climate and frameworks. Highly rated assets/projects are expected to benefit from increased Requirements in performance, reduced costs, and marketing advantages. Therefore, it is recommended Operational Procedures 1 ISO 14080:2018 2 International Green Construction Code (IGCC) 3 The Korea Expressway Corporation has strengthened the design requirements for drainage capacity, bridge design, and embankment slopes to prevent potential technical failures stemming from the increased frequency and intensity of projected rainfalls. 4 OECD, 2014: Environment Policy Paper No 14 – Climate-resilient Infrastructure 5 Eurocodes: The European Design Codes 264 that RFPs and tender documents include relevant requirements. Indicative examples include: PHASE 3 o LEED certification (Leadership in Energy and Environmental Design) developed by the United States Green Building Council (USGBC)6: a rating system for green buildings (e.g., hospitals, schools, and data centers). More information on the LEED system is offered in Box 3.9 o EDGE (Excellence in Design for Greater Efficiencies) developed by IFC7: a green certification for buildings that demonstrate resource efficiency in energy, water, and embodied energy in materials SuRe (GIB)8 and Envision (ISI, 2015)9: rating systems M3.3 developed to integrate sustainability and resilience metrics throughout the life-cycle of infrastructure projects. More information on the EDGE system is offered in Box Integration of Climate 3.11 Requirements into the Procurement o FAST-Infra Sustainable Infrastructure Label developed by the Climate Policy Process Initiative (CPI) is a globally applicable label for projects demonstrating positive sustainability performance (see Insight 3.5) o The Resilience Rating System (WBG, 2021)10: a methodology for building and tracking resilience of infrastructure projects to climate change o CEEQUAL (BRE)11: evidence-based sustainability assessment, rating, and awards Step 1 scheme for civil engineering, infrastructure, landscaping, and public realm projects Include Climate Considerations in the Design Step 2 Include Climate Requirements in Technical Specs/Output Indicators Step 3 Include Climate Requirements in Operational Procedures 6 U.S. Green Building Council (USGBC): http://leed.usgbc.org/leed 7 International Finance Corporation (IFC), EDGE: https://edgebuildings.com/ 8 Global Infrastructure Basel (GIB): https://sure-standard.org/ 9 ISI, 2015: Envision Rating System for Sustainable Infrastructure 10 WBG, 2021: Resilience Rating System: A methodology for building and tracking resilience to climate change 11 BRE: https://www.ceequal.com/ 265 BOX 3.10 SUSTAINABLE BUILDINGS: THE LEED RATING SYSTEM PHASE 3 Green building rating systems and programs were introduced in the 1990s to support and promote sustainability within buildings' design, construction, and operation. One of the most globally recognized and currently used green certification systems for buildings is the Leadership in Energy and Environmental Design (LEED) rating system. The LEED certification, developed by the U.S. Green Building Council (USGBC) in 1993, is applicable for the performance management of all building types and phases and neighborhoods, cities, and communities. The LEED rating (LEED v4.1) scores the performance of buildings in energy efficiency, water conservation, site selection, material selection, daylighting, and waste reduction and provides an appropriate certification level; M3.3 the Platinum, the Gold, the Silver, and the Certified. Integration of A challenging yet successful application example of a LEED-certified building is the World Bank’s Climate office in Juba in South Sudan which received the Gold LEED certification back in 2013. Lack of Requirements into electricity supply at the site location, minimal access to local materials as well as the scarcity of the the Procurement Process project’s team, and limited local capacity were just some of the aspects composing the challenging environment that the project had to face. Through careful design, detailed planning, and innovative implementations such as passive design for energy conservation, maximum harvest of daylight, solar energy, innovative air conditioning and ventilation systems, extended usage of recycled materials, on-site wastewater treatment and water recycling, enhanced indoor environmental quality and landscaped garden areas and vegetation, the two-story building managed to receive the precious Gold rating and became an inspiring example for sustainable buildings in Central Step 1 Include Climate Africa. Considerations in the Design Step 2 Include Climate Requirements in Technical Specs/Output Indicators Step 3 Include Climate Requirements in Operational Procedures Sources: World Bank, 2013: Feature Story - The World Bank’s Country Office in Juba wins Top Environmental Award for Sustainability Crea, 2014: USGBC article - The little LEED building that could: South Sudan’s first LEED-certified building 266 BOX 3.11 SUSTAINABLE BUILDINGS: THE EDGE CERTIFICATION SYSTEM PHASE 3 EDGE (Excellence in Design for Greater Efficiencies) is an independent, non-competitive in nature, green building certification that was developed in 2014 by IFC. The main aim of EDGE is to mainstream green buildings and contribute to the fight against climate change while simultaneously helping to boost prosperity through increased building efficiency. The EDGE certification applies only to building projects and is available in more than 170 countries included in the EDGE software. The rating system works on a pass/no pass basis where the project must save 20% or more in each of the three resource activities: energy, water, and materials to be classified as “EDGE certified.” In addition to that, the “EDGE Advanced” buildings need to achieve at least M3.3 40% energy savings while the “EDGE zero-net carbon” buildings need to achieve 100% renewables on-site or off-site or purchased carbon offsets to top off at 100%. At the design stage, a preliminary Integration of certificate is provided, while the final EDGE certification is granted after completion of the project Climate by an authorized service provider with independent auditing provided by a licensed EDGE Auditor. Requirements into the Procurement The EDGE software has also been broadened beyond new buildings to support existing buildings Process and buildings undergoing renovation by checking their level of saving against a baseline. The certification providers in each country set the pricing for the certification, which is calculated according to the project’s number of buildings, floor area, and type of building. There are numerous featured EDGE-certified projects that successfully followed the EDGE process. For the Antananarivo International Airport in Madagascar, for example, the predicted project savings reach 33% in energy consumption, 49% in water resources, and 37% in construction Step 1 materials, while the expected CO2 reduction reaches 393.6 tCO2/year. In this project, various Include Climate efficient technical solutions were adopted in the design, such as roof insulation systems, water- Considerations in the efficient toilets, medium-weight hollow concrete blocks, and many more. Another successful Design example is the ALP North logistics park located in north Nairobi, Kenya. By including sustainable roof construction, solar panels and water-efficient facets (among others), the building is predicted to achieve around $16,000 in monthly savings from utility bills. In this project, the predicted savings reach 41% in energy, 52% in water, and 50% in materials, while the expected CO2 reduction is 645 tCO2/year. Solid dense concrete blocks for internal walls, dual flush for water closets, water-efficient landscaping, reduced window to wall ratio reflective paint, and tiles for Step 2 energy efficiency, are just a few of the innovative solutions that were introduced in the project Include Climate design. Requirements in Technical Specs/Output Indicators Step 3 Include Climate Requirements in Operational Procedures Sources: https://edgebuildings.com/ Antananarivo International Airport: https://edgebuildings.com/project-studies/antananarivo-international- airport/ ALP North: https://www.edgebuildings.com/project-studies/alp-north/ 267 PHASE 3 INCLUDE CLIMATE REQUIREMENTS IN TECHNICAL 02 SPECIFICATION AND OUTPUT INDICATORS (KPIs) Output specifications should be defined early in the project lifecycle and should be supported by clear and well-managed reporting standards that regulate the supervision processes (between the grantor and the investee) throughout the project life-cycle. By clearly outlining M3.3 output specifications, the public authorities can take advantage of the expertise and innovation skills of the private sector. A consistent way for the tenderers to monitor and bidders to Integration of Climate demonstrate compliance with sustainability and climate-resilient objectives is by measuring the Requirements into output of key performance indicators (KPIs).12 KPIs are commonly categorized as physical the Procurement or operational. Physical KPIs may include physical quantities referring to the hazard (e.g., flood Process level, temperature, rainfall) or the infrastructure itself (e.g., scouring, drainage blockages, corrosion, IT failures, damage to networks, etc.). Operational KPIs refer to measurable parameters describing the serviceability of the infrastructure (such as traffic, downtime, accessibility, etc.). The exact types and characteristics of KPIs would be infrastructure-specific. However, an indicative high-level list of climate-relevant KPIs for inclusion in the relevant documents should include: Step 1 Include Climate  KPIs correlating hazard intensity (described by specific quantitative standards) with Considerations in the acceptable performance level (i.e., availability reduction, recovery period, construction Design delays). When specific hazard metrics are prescribed (e.g., rainfall above a certain level, etc.), it is also common to define (in consultation with the private party) where measurements will take place and whether the measurements will be managed by the public or the private party or a mutually agreed third party (Figure 3.7). It is also important to take into account the interdependencies of infrastructure assets as part of the climate impact may be indirect Step 2 through interconnection with a grid for example in a power project. The KPIs will need Include Climate to distinguish direct and indirect impacts and expectations around the ability to get an asset Requirements in Technical back into operation. Specs/Output Indicators Step 3 Include Climate Requirements in Operational Procedures 12 Auseful rule when developing output requirements is that they should be SMART— specific, measurable, achievable, realistic, and timely. This is common for both user-pays and availability-based PPPs. 268 PHASE 3 M3.3 Integration of Climate Requirements into the Procurement Process FIGURE 3.7 Example use of KPIs correlating hazard level intensity with the level of service on a fictitious highway system (mm: millimeters, m/s: meters per second)  KPIs for measuring energy efficiency/conservation in projects and their associated Step 1 activities (typically expressed as reductions relevant to some benchmark consumption). This Include Climate Considerations in the can serve as an indirect incentive for the private sector to use renewable energy sources Design and adopt innovative green strategies during construction and operation of otherwise energy-intensive projects (e.g., by the installation of intelligent power distribution systems, new fuel-friendly engines, etc.); see also the example in Insight 3.6.  KPIs measuring emissions (i.e., GHG emissions that are typically expressed as the equivalent of metric tons of CO2 or a percentile reduction thereof13). The latter may be Step 2 produced either by the operations of the infrastructure (and are therefore termed direct) or Include Climate indirectly from the emissions produced by the supply chain (e.g., purchased electricity). Requirements in Technical Depending on the project objectives, additional emission metrics may also be relevant (e.g., Specs/Output emission of dust and particles, metal emissions to air, etc.). Tender documents should Indicators clearly define the scope of the measurement and the calculation methodology. For example, GHG emissions assessment may be requested to follow accounting standards such as the GHG Protocol.14 Step 3 Include Climate Requirements in Operational Procedures is recommended that the measurement protocols comply with Environmental Management Systems (i.e., 13 It ISO14001, EMAS and BS8555) 14 WRI & WBCSD’s Greenhouse Gas Protocol: https://ghgprotocol.org/ 269  KPIs measuring emissions to water/land (e.g., GENDER-SENSITIVE KPIs PHASE 3 nutrients and organic Tenderers should encourage the private sector to consider pollutants/waste pesticides, gender-related issues during construction, operation and etc.). Different KPI targets maintenance of the PPP project. This can be done by are foreseen for the including relevant KPIs within the PPP specifications and construction and the RFQ/RFP documents, describing the ratio of women/men operation period of the employed during construction, the target increases in the PPP. percentage of local women’s employment as a consequence of the project, the benefits of local women/girls from the M3.3  KPIs reporting obligations development of the infrastructure, etc. Gender related KPIs and inspection rights (e.g., will incentivize the private sector to seriously consider Integration of periodic updates of O&M Climate gender equality within the project solution and will help to and emergency response raise awareness about the issue. Requirements into the Procurement plans that address climate Process risks).  KPIs for usage of resources (or enhanced usage of resources) expressed in the form of a targeted reduction, which may include activities performed during both the construction and the operation of the infrastructure. For example, usage of secondary and recycled aggregates (e.g., construction and demolition waste) should be prescribed when possible to further reduce the impact on Step 1 natural resources. Include Climate Considerations in the Design Step 2 Include Climate Requirements in Technical Specs/Output Indicators Step 3 Include Climate Requirements in Operational Procedures 270 PHASE 3 03 INCLUDE CLIMATE REQUIREMENTS IN OPERATIONAL PROCEDURES The benefit of procuring projects as PPPs is that it enables the contracting authority to M3.3 maximize VfM by encouraging private operators to exercise their own ideas and efforts and to implement methods for efficient, effective facility construction and project operation. Integration of The same way of thinking applies to any operational procedure that may be affected by Climate Requirements into the changing climate or may affect (positively or negatively) the environment in general, the Procurement covering a wide spectrum of activities over which the private sector has substantial control— Process from the overall sustainable business strategy to specific business components such as identification of climate risks and impacts; efficient disaster risk management and emergency response to extreme weather effects; a n d establishment of preventive maintenance and monitoring protocols. A procuring authority willing to embed climate considerations in the operational procedures of the Step 1 project may prescribe a minimum set of performance standards while inviting the private sector Include Climate to include climate risk in their O&M plans, and develop innovative emergency response plans to Considerations in the be activated when disasters occur. Such requirements should be included in the RFP and RFQ Design documents and are briefly outlined in the next sections. Prior to issuing these documents, it is advisable to also conduct market soundness testing aiming to investigate the market’s appetite for the project and, if necessary, attempt to modify its terms to increase such appetite. A brief guide to such testing is provided in the last section of this step. Step 2 Include Climate Requirements in Technical Specs/Output Indicators Step 3 Include Climate Requirements in Operational Procedures FIGURE 3.8 Key considerations for the procuring authority when preparing the KPIs for operational procedures 271 BOX 3.12 CONCESSIONAIRE SCREENING USING DRM EVALUATION CRITERIA IN AIRPORT PPP PROJECTS PHASE 3 Examples of how DRM evaluation criteria can be explicitly incorporated in the bidding process of PPPs are provided below. Both examples refer to major airport projects in Japan: the Kansai International Airport and the Sendai Airport. Kansai International Airport For the prequalification of the candidate operators of the Kansai International Airport, positive evaluation points were given to participants that ensured reliable and regular operation of the M3.3 airport by allocating appropriate resources for DRM methods. In addition, points were given to participants that introduced preventive maintenance and monitoring in a systematic manner that Integration of prioritized safe and secure operation of the airport. Points worth up to 10 percent of the total Climate maximum score were added to operators that adopted an appropriate emergency/safety control Requirements into plan and a business continuity plan. the Procurement Process Sendai Airport During the prequalification process of the Sendai Airport, positive evaluation points were given to operators that provided a detailed, proactive management DRM plan that would prevent damage and accidents and would allow the project to obtain insurance. Due to the substantial exposure of the location to earthquakes, DRM was a prerequisite in order to obtain project insurance. The winning bidder also included within the proposal a specialized airport operation Step 1 center that included aviation security, guards, DRM, and facility management that would lead to Include Climate stable operation of the airport and consequently, provided the bid with additional positive Considerations in the evaluation points. Design Source: World Bank, 2017: Resilient Infrastructure Public-Private Partnerships (PPPs): Contracts and Procurement-The Case of Japan Step 2 Include Climate Requirements in INTERNATIONAL PERFORMANCE STANDARDS Technical Specs/Output Indicators Public authorities are encouraged to align (and, if necessary, complement their domestic regulations) with any of the well-established international benchmarks for identifying and managing environmental and social risks, irrespective of the financing scheme of the project. This will guarantee a good level of performance in all relevant aspects of the Step 3 business. Such an example is the IFC Performance Standards Include Climate Requirements in (compulsory for IFC-financed activities), including good sustainability Operational practices to improve life-cycle project performance. The standards Procedures also provide specific guidance and performance indicators for a number of cross-cutting issues, including climate change, gender, human rights, and water— which may not be thoroughly addressed by domestic regulations. 272 Characteristic provisions of the IFC-performance standards (relevant to climate-change effects) are listed below: PHASE 3  Environmental impact assessments should be revisited to include a risk and impact identification process associated with the changing climate and adaptation opportunities. It should also consider the emissions of greenhouse gases in the project area as well as potential transboundary effects (i.e., pollution of air or pollution of international waterways)  In projects posing potentially significant adverse impacts or where technically complex issues are involved, clients may be required to involve external experts to assist in the risks and impacts identification process M3.3  In high-risk circumstances, it may be appropriate to complement the environmental and Integration of social risks and impacts identification process with specific human rights due diligence as Climate relevant to the particular business Requirements into the Procurement  Projects should adopt a mitigation hierarchy to anticipate and avoid, or where avoidance is Process not possible, minimize, and—where residual impacts remain—compensate/offset for risks and impacts to workers, affected communities, and the environment  For projects that are expected to produce more than 25,000 tons of CO2, it is recommended that all emissions (both directly from the facilities owned or controlled within the physical project boundary and indirectly associated with the off-site production of energy used by Step 1 the project) are properly quantified. Quantification will be conducted by the client annually Include Climate in accordance with internationally recognized methodologies and good practice15 Considerations in the Design  The private party is expected to implement technically and financially feasible and cost- effective measures for improving efficiency in its consumption of energy, water, as well as other resources and material inputs—with a focus on areas that are considered core business activities. Where benchmarking data are available, the client will make a comparison to establish the relative level of efficiency  The project shall adopt measures to avoid or reduce water usage (e.g., water conservation Step 2 Include Climate measures, use of alternative water supplies, water consumption offsets, etc.) Requirements in  Include provisions to avoid the generation of hazardous and non-hazardous waste materials, Technical Specs/Output or at least reduce the generation of waste, and recover and reuse waste in a manner that is Indicators safe for human health and the environment EMERGENCY RESPONSE PLANS (ERPS) Efficient and effective handling of climate risks (that can neither be transferred nor mitigated) by Step 3 private operators also improves the project’s VfM. Public authorities wishing to leverage the Include Climate ability, experience, and creativity of the private sector to respond promptly to such Requirements in disastrous events may use the procurement process (RFPs/RFQs) to incentivize the Operational Procedures development of innovative response plans.16 This step describes methods to motivate private partners to submit ERPs, outlines a minimum set of requirements that a successful ERP should contain, and provides examples of good practices. 15 Estimation methodologies are provided by the Intergovernmental Panel on Climate Change, various international organizations, and relevant host country agencies. 16 Efforts can be made to strengthen DRP by private operators through monitoring and payment mechanisms. 273 ERP specifications PHASE 3  The Emergency Response Plan is a key element for incorporating climate considerations (Figure 3.9) while conforming to existing laws and regulations on public works and the country’s disaster risk management standards (federal or local DRM plans). Emergency Response Plan: 5 Principles M3.3 Integration of Climate Requirements into the Procurement Process Step 1 Include Climate Considerations in the Design Step 2 Include Climate Requirements in Technical Specs/Output FIGURE 3.9 Five key principles for the implementation of a robust emergency response plan Indicators  The ERP should consider gender gaps and aim to address gender inequalities that may occur during an emergency  Depending on the in-country procurement procedures and the specific project objectives and Step 3 Include Climate risk profile, different conditions may apply to develop the ERP. For example, the ERP may be: Requirements in (i) the sole responsibility of the government (i.e., in case the government has already a Operational Procedures strong disaster risk management plan, or if it does not wish to complicate the transaction process) (ii) the sole responsibility of the private sector (i.e., when the government believes that the private sector can offer significant creativity) (iii) a shared responsibility between parties 274  Moreover, the submission of the ERP by the private sector may either be requested during the procurement phase (in order to be evaluated17) or after the selection of the preferred PHASE 3 bidder  The level of involvement and responsibilities of the private party should be clearly defined and mutually accepted by both parties in the contract. Before permanent commitments are made, the public authority should adequately communicate the level of risk (for which the private party will be responsible) to ensure that the appropriate measures and investments will be activated  It is equally important that the envisaged level of service is reasonable and based on M3.3 communication between the contracting authority and private entities (i.e., during competitive dialogues and Q&A sessions of the procurement stage). Setting too high Integration of Climate specifications may act as a barrier for the private sector’s participation (because of the Requirements into increased cost implications), leading eventually to the deterioration of the project’s the Procurement attractiveness Process MONITORING PERFORMANCE Step 1 The contracting authority should be responsible for monitoring the Include Climate implementation of the disaster plans. In case the monitoring indicates that Considerations in the Design services are not at the level agreed (as outlined in the proposals submitted by the private operators), penalties may be enforced (e.g., reduction in the availability payment) to encourage better conforming with the agreed service level. (See also the example in Box 3.12.) Step 2 Include Climate Requirements in Technical Specs/Output Indicators Step 3 Include Climate Requirements in Operational Procedures 17 Refer to Module 4.2 for details on the evaluation of the ERPs. 275 BOX 3.13 THE ROLE OF EMERGENCY RESPONSE PLANS IN AVAILABILITY- BASED PPPS PHASE 3 Monitoring and evaluation mechanisms are set up to record and verify that the predetermined and planned actions related to public services during or after a disaster have been performed by the private operator and have met the required quality standards and levels agreed between the public and private party. In cases where services are not adequately provided, the public entity may proceed with an availability payment reduction. Availability payment reductions methods may be applied either directly when obligations are not met or through penalty point systems where the availability payment is reduced after reaching a specific level of points M3.3 and/or a recovery point system based on which the private operator is rewarded when delivering higher quality services. In a PPP contract, not only the minimum obligations and level Integration of Climate of performance should be described, but also the procedures for improvement and further Requirements into development for the cases that the default obligations are ascertained. Such procedures may be the Procurement clearly defined but shall encompass adequate freedom to respect the independence, originality, Process and ingenuity of private entities. An example that demonstrates the applicability of such provisions in practice is the School Meal Supply Center at Sendai, which was restored more than two months faster than other similar facilities that were operated by public authorities. This achievement was made possible due to the independent actions and initiatives of the private operator that had the motivation (availability payment reduction) and the flexibility (following its own supply network) to act and Step 1 Include Climate perform while bypassing time-consuming administrative procedures that the equivalent public Considerations in the operators had to face and along with the other affected infrastructure that they had to manage Design at the same time causing extra delays for the publicly operated facilities. Source: World Bank, 2017: Resilient Infrastructure Public-Private Partnerships (PPPs): Contracts and Procurement- The Case of Japan Step 2 Include Climate OPERATION AND MAINTENANCE (O&M) PLANS Requirements in While the emergency response plans deal with the acute weather events exacerbated by climate Technical change, there is also a need to effectively manage the chronic exposure of infrastructure to Specs/Output Indicators the gradually increasing temperatures and precipitation levels. Although not responsible for disastrous incidents, the latter directly impact the aging process of construction materials (e.g., steel, concrete, asphalt, etc.), resulting in increased O&M expenses. If not promptly addressed, the aging of materials may also trigger high-impact events (e.g., accidents or extensive rehabilitation). Step 3 These changing trends introduce the need for tender documents requesting modernized O&M Include Climate plans that incorporate: (i) preventive or proactive maintenance procedures (Box 3.14); (ii) Requirements in dynamic planning and timing of the maintenance protocols to keep pace with the increased Operational Procedures needs; (iii) wide sensing and monitoring systems to measure the performance of KPIs and update maintenance strategies if needed. Insight 3.7 provides an exciting overview of how climate change is transforming infrastructure maintenance approaches. 276 CHRONIC CLIMATE IMPACTS ON ROADS PHASE 3 Studies demonstrate that U.S. roads may experience accelerated rutting, cracking, and erosion of their pavements (due to changing weather conditions), and this increase in the deterioration pattern is estimated to cost $2.8 billion in adaptation costs in 2050 relative to 2010 expenses. (Chinowsky et al., 2013).18 M3.3 Integration of Climate BOX 3.14 PREVENTIVE MAINTENANCE EXAMPLES IN PPP CONTRACTS Requirements into the Procurement Example 1 Process Japanese Railways (JR), Japan: Extreme heat can cause railroad tracks to buckle, as heat causes steel to expand, putting stress on ties, ballasts, and rail anchors that keep the tracks fixed to the ground. To achieve zero accidents due to track buckling, JR has raised the standard for estimated maximum performance temperature of its railroads from 60°C to 65°C to guide future investments. JR has also developed maintenance vehicles that detect potential joint openings. Example 2 Step 1 Attica Tollway (Attiki Odos), Greece: Located in the greater Athens area, Attiki Odos is one of Include Climate Considerations in the the most modern roadways in Greece and has been constructed by incorporating resilience and Design adaptation measures to climate-related hazards. The managing company adopts effective climate change adaptation measures against the potential asphalt melting, thermal expansion of bridge joints, landslides, and structural damage that are projected due to climate alterations within the area of the motorway. Preventive maintenance currently includes pavement maintenance, installation, and operation of environmental (e.g., meteorological) monitoring stations and proactive management. Meteorological stations are installed along the motorway Step 2 network and provide real-time data on weather conditions, environmental conditions, and keep Include Climate Requirements in a record of extreme events. Therefore, the condition and current state of the roadway is Technical evaluated regularly, especially after an extreme event (e.g., flood, earthquake, etc.). The Specs/Output overarching goal is to develop a climate-change resilient road through preventive maintenance Indicators and retrofitting of structural components and equipment at an early stage that will minimize the plausible detrimental effects of the projected climate change futures. Sources: OECD, 2014: Environment Policy Paper No 14 – Climate-resilient Infrastructure European Commission, 2018: Climate change adaptation of major infrastructure projects Step 3 Include Climate Requirements in Operational Procedures 18Chinowsky et al., 2013: Assessment of Climate Change Adaptation costs for the U.S. road network, Global Environmental Change 277 MARKET SOUNDING PHASE 3 Climate-smart PPPs constitute a relatively new type of investment that naturally comes with both risks and opportunities. It is strongly recommended to clearly communicate this to potential investors and financial institutions prior to the tendering phase when more data is available (making sure that there is still some flexibility in the procurement process to allow updating some of the terms of the project based on the feedback received). Climate considerations in the market sounding would not alter the regular format of the process. Hence, it is expected that the exercise could include meetings with companies, contractors, M3.3 investors, banks, etc., either in person or in writing. The scope of these meetings would be to present the project structure, potentially even draft RFQs and RFPs, capture the market Integration of Climate reactions, test investment appetite, and ensure bankability of the project. Requirements into It is necessary to ensure that the climate-risk landscape is communicated while at the same time the Procurement Process stressing the fact that innovation in adaptation and resilience is not only sought for but would also be incentivized using all means that would have been identified as applicable. Similarly, it is essential to focus on the importance of climate mitigation through positive messaging. References to innovative financing mechanisms would enable tapping into additional financing options. Throughout this exercise, it is important to understand and efficiently communicate to the stakeholders the changing global landscape that favors green investments—moving away Step 1 from traditional GHG-emitting infrastructure. Include Climate If successfully executed, this exercise will have the dual impact of raising the market’s awareness Considerations in the Design and appetite for the project while at the same time informing the procuring authority about potential blind spots in the intended tender process that need to be revisited. Step 2 Include Climate Requirements in Technical Specs/Output Indicators Step 3 Include Climate Requirements in Operational Procedures 278 PHASE 3 KEY TAKEAWAYS • Aiming to include climate requirements in the design of a PPP, authorities may request in the RFP that the design complies with climate provisions included in M3.3 national or international codes/guidelines (e.g., ISO 14080:2018; International Green Construction Code - IGCC). Additional international standards and Integration of documents that will help in mainstreaming climate adaptation and mitigation Climate within the design process are expected to become publicly available soon. Requirements into the Procurement Process • It is proposed that the project technical characteristics comply with sustainability rating tools and frameworks (e.g., LEED, EDGE, SuRe, etc.), that will add value to the project due to marketing advantages and provide benefits from increased performance and cost minimization. • Climate relevant key performance indicators (KPIs) need to be included in the technical specifications of the project, providing a clear output of the project’s Step 1 Include Climate performance during its life-cycle. Considerations in the Design • The procuring authority may require the embedding of climate requirements in the operational procedures of the project by including them within the RFP and RFQ documents. As such, it is proposed that bidders include climate risk in their O&M plans as well as emergency response plans. Step 2 Include Climate Requirements in Technical Specs/Output Indicators Step 3 Include Climate Requirements in Operational Procedures 279 INSIGHTS Insight #3.5 Sustainable Infrastructure Frameworks INSIGHTS Insight #3.6 Energy-Efficiency and Sustainability Practices in Modern Port Facilities Insight #3.7 How Climate Change is Transforming Infrastructure Maintenance Approaches 280 SUSTAINABLE INFRASTRUCTURE FRAMEWORKS AND TAXONOMIES FAST-Infra: a tool to label sustainable infrastructure assets and enhance their bankability BACKGROUND FAST-Infra, the “Finance to Accelerate the Sustainable Transition-Infrastructure” initiative, aims to close the trillion-dollar sustainable infrastructure investment gap, with urgency, by transforming sustainable infrastructure into a mainstream, liquid asset class. The platform proposes practical and inclusive solutions while embedding sustainability across the life-cycle of projects and expanding the pipeline of bankable projects. FAST-Infra is also working on four market mechanisms with the potential to mobilize private capital. SOLUTION INSIGHT #3.5 FAST-Infra proposes to establish a consistent, globally applicable labeling system for sustainable infrastructure assets. Such a system will allow the market to easily signal the sustainability of the asset. Investors can trust that their money is going to projects that meet environmental, social, resiliency, and governance needs and contribute to the SDGs. A sustainable infrastructure label will also ensure that governments and project developers embed high environmental, social, governance, and resiliency standards into new infrastructure at the design and pre-construction phases, on the grounds that only assets incorporating such standards will obtain the label. The label will also attract private finance at the construction stage and new institutional investors at the post-construction phase. Alongside the labeling work, FAST-Infra is developing financial mechanisms to mobilize private investment at scale for the financing of labeled projects. Sources: World Bank|PPLRC|FAST-Infra website (last visited 30.07.2021) Climate Policy Initiative|FAST-Infra website (last visited 30.07.2021) 281 SuRe: a global infrastructure standard for sustainability and resilience The Standard for Sustainable and Resilient Infrastructure (SuRe) – developed by the Global Infrastructure Basel Foundation (GIB), introduced at COP21 in 2015 and officially launched as certifiable at COP23 in 2017 – is a voluntary global standard applicable to new (greenfield) or existing (brownfield) infrastructure projects that wish to be certified for their performance in sustainability and resilience through 61 environmental, social, and governance (ESG) criteria, clustered in 14 themes. The SuRe standard has been developed with the purpose to contribute to the objectives of international frameworks (SDGs, UNFCCC, Sendai framework, UN Universal Declaration on Human Rights, and many others) and to complement the Equator Principles (see Box 2.13) by serving as a guide for the development of infrastructure that is environmentally sound, socially inclusive, economically viable, and able to withstand impacts and recover quickly from shocks and stresses. Public offices, project developers, as well as infrastructure investors and financiers may follow the SuRe standard and benefit from the acquisition of the certification for their infrastructure INSIGHT #3.5 projects through a 7-step process. The certification assessment is possible at any project phase (i.e., planning and design, construction, commissioning, operation, upgrade) and is verified through audits by third-party, independent, accredited bodies. Annual surveillance audits are carried out after the initial certification. The duration of the validity of the certification is five years, while recertification may be applied in the fourth year. The SuRe standard describes certain minimum requirements for gaining the prestigious certification and distinguishes three performance levels based on specific thresholds of the overall points: Bronze (>60%), Silver (>75%), Gold (>90%). The current publicly available latest version of the SuRe standard is ST01 Version 1.1. However, Version 2.0 is expected to be released soon. A simplified version of the SuRe goes by the name of Smartscan, built as a self-assessment tool suitable for projects that are planning to be certified in the future and wish to be evaluated in advance. Source: https://sure-standard.org/ 282 EXAMPLE: ENERGY-EFFICIENCY AND SUSTAINABILITY PRACTICES IN MODERN PORT FACILITIES A new era for ports Ports are undoubtedly a major gear of the global economy as they mobilize numerous business lines and workforces in various fields (transportation, cargo distribution, logistics, tourism, etc.) and create significant economic and social value. The evolution of ports throughout history has led to the transformation of modern ports into international and local hubs of multiple business activities with complex interactions and interlinks. Due to this concentrated activity, ports have always been responsible for a significant amount of greenhouse gas emissions that accelerate climate change. At the same time, though, and dueto their location, ports are directly experiencing the effects of extreme INSIGHT #3.6 weather events or longer-term climate impacts caused by climate change. Modern port facilities need to contribute not only to making the port industry cleaner in order to combat climate change but also to protect all business activities and infrastructure from all acute and chronic risks linked to climate change. Following the international trends in responsible development, there is significant progress in technological port advancements and port facilities and operations developments towards energy efficiency, sustainability, resilience, and environmental soundness. In support of this vision, the World Ports Sustainability Program (WPSP), launched in 2018 by the International Association of Ports and Harbors (IAPH), is mandated to enhance and coordinate the sustainability efforts of the global port stage. The program is directly linked to the UN’s 17 SDGs by covering potential topics within five major themes (resilient infrastructure, climate and energy, community outreach and port city dialogue, safety and security, governance and ethics). WPSP provides active sharing of knowledge via a global online library of best practices, a portal for sustainable port-related projects and initiatives, and a think-tank platform that aims to connect and inspire international and national port community actors. WPSP also reports on the global sustainability progress within the port and maritime sector (World Ports Sustainability Report 2020). Sources: Imam, 2019: Climate Change Impact for Bridges Subjected to Scour and Corrosion, Climate Adaptation Engineering, Elsevier Nasr, Kjellström, Björnsson, Honfi, Ivanov, Johansson, 2020: Bridges in a changing climate: a study of the potential impacts of climate change on bridges and their possible adaptations, Structure and Infrastructure Engineering United Nations, 2018: The World’s Cities in 2018 283 The Port of Rotterdam, Netherlands The Port of Rotterdam, Europe’s largest seaport, is an example of sustainable port development and clean transition realization. The port has already implemented and is continuously planning and researching many innovative applications for its infrastructure assets and operational activities. Numerous projects, such as the Heat Alliance that distributes residual port heat to greenhouses, local industries and households or the four blockchain prototytpes of Blocklab for heat supply administration, wind energy pricing, energy data exchange, and smart electricity meters, INSIGHT #3.6 contribute towards building a sustainable port and set the path towards the ambitious target of building a 100% green port cluster. Sustainable Practices in Port Facilities  Smart flood risk management strategies  Air quality improvements  Emissions monitoring and management (e.g., through carbon capture and storage in empty gas fields)  Application of circular economy principles  Incentives for clean shipping (e.g., discounts for clean ships or bans of ships not complying with international environmental standards)  Protection/ recovery of biodiversity at the port and the surrounding nature  Wind and solar power production at the port area  Wide usage of LED lighting and eco-friendly land transportation (electric or hydropower cars, public buses, and industrial trucks) Sources: Woetzel et al., 2020: Will infrastructure bend or break under climate stress? Shtayat, Moridpour, Best, Shroff, Raol, 2020: A review of monitoring systems of pavement condition in paved and unpaved roads. Journal of Traffic and Transportation Engineering https://doi.org/10.1016/j.jtte.2020.03.004 284 HOW CLIMATE CHANGE IS TRANSFORMING INFRASTRUCTURE MAINTENANCE APPROACHES The challenge Climate change is a substantial factor of infrastructure material deterioration, while long- term changes in climatic conditions might lead to an increased rate of corrosion of materials, including concrete, steel, and asphalt. Regions currently experiencing freeze-thaw cycles may experience fewer cycles in the future, and regions currently experiencing deep seasonal or even permafrost conditions may experience thawing. Variation of the average temperature, a rise of precipitation and relative humidity, as well as air pollution and higher carbon concentrations in the atmosphere are already predicted by the scientific community and their potential impact on material deterioration INSIGHT #3.7 has been evaluated by various researchers (Imam, 2019; Nasr et al., 2020; Yoon et al., 2007). At the same time, the rapid expansion of urbanized regions is unavoidably followed by the need to enlarge the capacity and resilience of existing infrastructure (the population of people in urbanized regions will rise from 55% now to nearly 68% in 2050, United Nations, 2018) at a time when the world strives to secure infrastructure maintenance funding. The future of our infrastructure appears to be uncertain, and societies must act immediately to avoid unforeseen financial oreven human loss. The opportunity To this end, climate-resilience and adaptation have the potential to increase asset life and reliability of services and consequently protect asset returns. Apart from undertaking structural retrofitting measures that directly increase the capacity of the infrastructure system, climate resilience may involve preventive maintenance and monitoring techniques that could potentially reduce the vulnerability of structural components and enhance their defenses against plausible pessimistic climate-change scenarios. These measures may comprise a package of simple management (non- structural) decisions, such as modification of maintenance schedules to adjust to changing circumstances over the asset’s life-cycle and inclusion of adaptive management that considers climate change uncertainty. Another methodology is the introduction of structural health monitoring and detection technologies that aim to identify potential faults in infrastructure and, as such, prevent deterioration at an early stage. Those technologies include systems that can detect cracks along with infrastructure networks (highway pavements, railway networks) and sensors to identify whether a structural system (e.g., a bridge) has developed increased vulnerabilities. The Role of Technology 28 As technology becomes more accessible and advanced analytics are introduced in decision making processes, sensors that measure key climate change metrics may be introduced at the location of the infrastructure. By collecting such data f o rm several locations of the infrastructure (e.g., measurements of humidity, temperature variation, precipitation etc.) deterioration prediction algorithms may be used that will provide an estimation of structural health decay within the time domain, considering the effects of climate change. Preparing for climate change at this stage can avoid the need for costly rehabilitation and reduce the risk of infrastructure components becoming prematurely obsolete. Preventive Maintenance Methods for Climate Change INSIGHT #3.7 Wide Sensing Install sensors to measure key environmental/climatic data (e.g., humidity, temperature variation, precipitation levels, carbon dioxide concentration, chloride concentration, etc.) that may be used for structural deterioration predictions Infrastructure Health Monitoring (IHM) Measure structural response and deterioration rate to enable effective asset management and prioritize maintenance strategies. Measuring methodologies include crack detection sensors, steel corrosion measurements, accelerometers, wireless sensors, thermal sensors, optical fiber sensors, strain gauge sensors, etc. UAV technologies Complement in-person maintenance and traditional datacollection with frequent, low-cost, high-performance UAVinspections supported by digital image processing (DIP) applications Increased frequency of traditional inspections Early detection of signs of structural deterioration to avoid increased replacement rehabilitation in the long run 286 MODULE 3.3 Resources SUSTAINABLE INFRASTRUCTURE TOOL NAVIGATOR Navigation to 90+ rating systems, high-level principles, and guidelines. By developing this tool, GIZ’s Emerging Markets Sustainability Dialogues (EMSD) aim to bring clarity to the infrastructure sustainability arena and thereby increase uptake of innovative infrastructure solutions that meet sustainability principles Developed by: GIZ EDGE GREEN-BUILDING CERTIFICATION SYSTEM – THE EDGE APPLICATION A free online tool to assist in designing resource-efficient and zero-carbon buildings. EDGE includes a cloud-based platform to calculate the cost of going green and utility savings. The state-of-the-art engine has a sophisticated set of city-based climate and cost data, consumption patterns, and algorithms for predicting the most accurate performance results. (More details on EDGE certification system: https://edgebuildings.com/) Developed by: IFC, 2015 GREENHOUSE GAS PROTOCOL GHG Protocol establishes comprehensive global standardized frameworks to measure and manage greenhouse gas (GHG) emissions from private and public sector operations, value chains, and mitigation actions. GHG Protocol includes multiple calculation tools Developed by: WRI & WBCSD Module 3.3 - Further Reading REFERENCE GUIDE ON OUTPUT SPECIFICATIONS FOR QUALITY INFRASTRUCTURE Practical guidance with a focus on PPPs and other long-term contracts Developed by: Global Infrastructure Hub, 2019 PPP KNOWLEDGE LAB | PERFORMANCE REQUIREMENTS The PPP Knowledge Lab brings together the most relevant and authoritative resources on PPP in one location to empower governments and their advisors to design and deliver best-in-class infrastructure projects. The Performance Requirements section provides information on what is expected from the private party in terms of the quality and quantity of the assets and services to be provided. Developed by: World Bank Group 287 RESILIENT INFRASTRUCTURE PUBLIC-PRIVATE PARTNERSHIPS (PPPS): CONTRACTS AND PROCUREMENT – THE CASE OF JAPAN A guide harnessing the knowledge and expertise gained from PPP projects in selected countries to help the governments of low- and middle-income countries to prepare and structure disaster-resilient infrastructure PPPs. Developed by: World Bank Tokyo Disaster Risk Management Hub, GIF, GFDRR, 2017 RESILIENT INFRASTRUCTURE PUBLIC-PRIVATE PARTNERSHIPS (PPPS): CONTRACT AND PROCUREMENT– THE CASE OF INDIA This country brief gives an overview of the availability of insurance for PPP projects in the context of climate change in India, a country that is a key PPP implementer across infrastructure sectors. India’s experience in PPP projects affected by natural hazards offers insights and lessons on how disaster and climate risks can be managed under PPPs in emerging markets and developing economies. Developed by: World Bank Tokyo Disaster Risk Management Hub, GIF, GFDRR, 2018 TECHNICAL BRIEF ON RESILIENT INFRASTRUCTURE PUBLIC-PRIVATE PARTNERSHIPS: POLICY, CONTRACTING, AND FINANCE This technical brief highlights key considerations and good practices for structuring resilient infrastructure PPPs through Policy and Legislation; Contracting and Disaster Risk Allocation; Procurement, Monitoring, and Payment; and Insurance. The brief was developed based on country case studies on Japan, India, and Kenya, as well as a literature review. Developed by: World Bank, 2019 PPPLRC CLIMATE-SMART PPPS WEBSITE This section of the PPPLRC website provides links to policies, legislation, project documents, and other resources that are relevant for developing, structuring, and implementing climate-smart PPP projects. Developed by: PPPLRC, World Bank PHASE 4 1 PROJECT SELECTION 2 PREPARATION 3 STRUCTURING 4 CONSIDERATIONS TENDER PROCESS Structure and draft RFQ/ RFP Launch the tender Evaluate bidders Award the contract 31 Phase 4 This phase covers the period from the completion of project structuring (where the fundamental design/performance specifications and the financial and risk structure of the project have been decided) to the official launch of the tender. This essentially includes: (i) designing/drafting the RFP and RFQ. That is, specifying a set of climate-related qualification/evaluation criteria for the bidders that are consistent with the characteristics of the project. It also includes the structuring and designing of a clear and transparent RFP package that outlines proposal requirements and informs bidders on the climate aspects of the tender/selection process and timing. (ii) drafting of the contract, detailing in a clear and enforceable manner the role of the public and private parties and key climate-related provisions (output of Phase 3). The scope of Phase 4 is to support users include elements and procedures applicable to climate-smart PPPs in the drafting of the tender documents. 290 Drafting RFQ/RFQ Documentation Step 1 Step 2 PHASE 4 Define Climate-smart Include Climate-smart Criteria Considerations in the PPP Agreement Green light for launching the M4.1 tender The framework of Key Contractual Climate Climate-smart criteria Considerations Drafting of Climate-smart Criteria: Examples Climate-smart Climate-smart Evaluation Tender Documentation 291 4.1 Drafting of Climate- smart Tender Documentation STRUCTURE OF THE MODULE Phase 4 comprises a single Module 4.1 'Drafting of Climate-smart Tender Documentation', which is broken down into the following steps:  Step 1 aims to integrate 'climate-smart' criteria and processes into the preparation of the RFQ and RFP documentation.  Step 2 summarizes some key climate considerations/ components (described in detail in the previous Phases of this toolkit) to be included in the contract draft. 292 PHASE 4 01 DEFINE CLIMATE-SMART CRITERIA FOR THE RFQ/RFP M4.1 Regardless of the precise outline of the tender process, and whether the RFQ will be a separate phase or integrated within the RFP, the definition of clear qualification/evaluation criteria is Drafting of Climate- essential for the selection of high-quality bidders. Due to the diversity of partnerships, it is Smart Tender challenging to identify criteria that can be universally applied across the range of climate-smart Documentation PPPs. Instead, the focus of this step is to describe a generic framework that will assist procuring authorities in defining their own sets of criteria that pertain to the complexity and nature of each project. This step also provides climate-smart examples and discusses different evaluation processes. Step 1 Define Climate- Smart Criteria for the THE FRAMEWORK OF CLIMATE-SMART CRITERIA RFQ/RFP Climate-smart criteria shall be used to evaluate the technical capability of the private party to deliver high-quality infrastructure that is designed, built, and operated in a way that anticipates, prepares for, and adapts to changing climate conditions while promoting the transition to a decarbonization pathway. As with traditional qualification/evaluation criteria, climate-smart criteria are also project-specific and should be decided when the project structure is finalized, and the project scope and associated risks are well understood. The Step 2 climate-smart criteria should reflect and be compatible with: Include Climate-Smart Considerations in the  the design standards of the project (described in Module 3.3 - Step 1). The proposed PPP Agreement design must be consistent with relevant standards, and bidders should be able to provide evidence of technical competence in assessing the impact of climate risks and designing adaptation measures while implementing the standards and methodologies described in the project agreement. Depending on the format of the PPP (i.e., whether a preliminary technical design is requested in the bidding process), the design's quality and innovation may also be evaluated. In such cases, it is recommended that the evaluation considers how the design improves the project's climate resilience and the methodology's environmental footprint (i.e., LCA of the use of natural resources, raw materials extraction, etc.)  the operational standards of the project (described in Module 3.3 - Step 3). Bidders will be requested to propose an adequate design and provide evidence of previous or ongoing experience in operating/maintaining similar infrastructure (in terms of size, technical features, complexity, and volume/number of users). In line with the operational specifications described in Module 3.3, bidders should demonstrate: i) experience in managing climate, environmental and social risks following international standards (including GHG emissions calculations, implementation of 293 'mitigation hierarchy' protocols in construction and operational processes; energy- efficiency practices; conservation of natural resources and reduced generation of PHASE 4 waste) – see examples in Box 4.1 ii) previous or ongoing experience in implementing modern operation and maintenance procedures (incl. state-of-the-art preventive maintenance protocols). Submission of (preliminary) O&M plans may also be requested to assist the evaluation of bidders. M4.1 BOX 4.1 EXAMPLE OF INCLUDING LOW-CARBON INCENTIVES IN THE PROCUREMENT PROCESS Drafting of Climate- Smart Tender Documentation Port Facility in Timor Leste The Tibar Bay port is one of the most significant private investments in Timor Leste and the country's first PPP project. The project was designed as a world-class container terminal port encompassing several sustainable and energy-efficiency strategies such as: developing the Port to avoid/minimize the loss of blue carbon sinks (mangroves, Step 1 seagrasses, and salt flats); incorporating best-practice energy efficiency solutions for Define Climate- lighting, buildings, and facilities; using renewable energy to supply at least part of the Smart Criteria for the Port's electricity needs (e.g., solar photovoltaic panels and solar water heaters mounted RFQ/RFP on Port buildings); and requiring all ships using the Port to comply with MARPOL (International Convention for the Prevention of Pollution from Ships) Annex VI. Source: Republica Democratica de Timor-Leste, 2013: Tibar Bay Port Summary of Environment and Social Scoping Study Step 2 Include Climate-Smart Considerations in the PPP Agreement 294  technical/construction standards (described in Module 3.3 - Step 1). Bidders may be requested to provide evidence of past or ongoing experience in constructing projects PHASE 4 of a similar scale (in terms of size and complexity), having similar climate-resilient and/or green characteristics. For example, this could include demonstrating experience in sustainable building practices or expertise on green building rating systems (e.g., LEED, EDGE).  the overall project risk profile. Bidders will be requested to demonstrate a specific strategy, including tools, processes, and policies, to manage and address the most prominent climate risks identified in the structure of the project (outlined in Module M4.1 3.1 - Step 2). These may include: (i) Construction experience in dealing with problematic site conditions that are Drafting of Climate- particular to the project under consideration (e.g., specialized excavation Smart Tender Documentation techniques; ground-stabilization techniques) (ii) Procedures for dealing with environmental risks (e.g., projects with pre- existing pollution conditions or in proximity to environmentally protected areas requiring sensitive and skilled management, etc.) Step 1 (iii) Experience in designing and implementing emergency response plans for the Define Climate- Smart Criteria for the efficient management of extreme-climate events supported by a good track RFQ/RFP record in relevant circumstances (i.e., similar in scale projects impacted by the same kind and intensity of weather events) – see example in Box 4.2. (iv) Methods for designing projects in a gender-responsive manner that may create positive changes in women's lives. In the case of projects delivered in regions with identified gender inequalities that the impacts of climate change may further exacerbate, it is good to request a draft gender action plan (to be Step 2 evaluated during bidding). Include Climate-Smart Considerations in the (v) Access to insurance mechanisms or other financial instruments to provide PPP Agreement coverage in case of extreme events that may disrupt operations and impact in any way the availability of the asset. Although it is not necessary to sort out insurance until contract signature, it is considered good practice to request evidence of the policies/insurance being available.  the output specifications of the project (as described in Module 3.1 - Step 2). Bidders will be requested to propose methods and practices to achieve a particular performance level of the infrastructure when facing a climate event of pre-determined intensity. The procuring authority should then assess whether the means and methods proposed by bidders are realistic and sufficient to meet the expectations. Any relevant innovation that may improve performance further may be positively evaluated and encouraged through incentives. There will of course need to be a balance between innovation and bankability that will have to be explored. 295 RIGHT BALANCE OF CLIMATE CRITERIA PHASE 4 Procuring authorities need to be mindful of the fact that introducing too many specifications may function as a disincentive for more bidders (perhaps including local firms) to participate in the tender. It is therefore recommended that such requirements are optimized so as not to threaten the competitive process. One approach would be to differentiate between essential needs and desired ones (that would add value to the bidder but would not remove marks if absent). M4.1 Drafting of Climate- Smart Tender Documentation BOX 4.2 PRIVATE OPERATOR EVALUATION CRITERIA ON DRM FROM JAPANESE PPP PROJECTS In the Sendai School Meal Supply Center Project, the bidding documents emphasized and explicitly evaluated (1) the capacity of the bidder to ensure the structural and non-structural competence of the facility; (2) the comprehensiveness of the maintenance system and Step 1 recovery plans. Define Climate- In the Aichi Toll Road Project, the emphasis was placed on the Crisis Management Plan and Smart Criteria for the RFQ/RFP particularly on the feasibility of the communication systems and the capacity of the plan to effectively address climate incidents (e.g., snowfall, torrential rain, etc.) © Blue flash / Pixta In the Kansai International Airport, private operators that allocated sufficient funding for DRM and presented business continuity plans were positively Step 2 evaluated. Additional points Include Climate-Smart were given to bidders that Considerations in the proposed maintenance and PPP Agreement renovation investment in a preventive and systematic manner. Kansai International Airport Source: The World Bank (2017): Resilient Infrastructure Public-Private Partnerships (PPPs): Contracts and Procurement, The case of Japan CLIMATE-SMART CRITERIA: EXAMPLES In line with the definition and the purpose of climate-smart infrastructure, the criteria provided below would be able to nuance the technical capacity of the private party to deliver structures and services sustainably, to promote climate-resilience of and through the project, and to integrate climate-related technological innovations in a meaningful and forward-thinking way. Evaluation should also consider the bidding team's qualifications and the engagement of external experts in performing complex due-diligence studies requested by the RFP. A schematic view of the five principles of climate-smart evaluation is depicted in Figure 4.1. 296 The traditional evaluation1 process divides the criteria into three broad categories: construction, operation and maintenance, and environmental and social aspects. An indicative PHASE 4 list of climate-smart qualification/evaluation criteria pertinent to the above categories is providedin Tables 4.1 - 4.3. M4.1 Drafting of Climate- Smart Tender Documentation Step 1 Define Climate- Smart Criteria for the RFQ/RFP Step 2 Include Climate-Smart Considerations in the PPP Agreement FIGURE 4.1 Criteria to be considered by the procuring authority when evaluating proposals (ESMP: Environmental and Social Management Plan) 1 Although there is no universal approach for the organization of the criteria, it is customary to bundle criteria into several broader categories and assign a specific weighting factor to reflecting their relative importance in the total score. 297 TABLE 4.1 Indicative climate-smart criteria and sub-criteria for evaluating the quality of the design and the construction procedures. The list is meant to be indicative and provide a basis for PHASE 4 developing project-specific detailed RFQ and RFP provisions. RFQ: INDICATIVE CRITERIA (AND SUB-CRITERIA)  Demonstrate technical capacity to develop low carbon solutions  Experience in the construction of "green" structures as DESIGN & demonstrated by relevant certifications CONSTRUCTION  Experience in the use of innovative low-carbon materials M4.1 (e.g., low carbon concrete)  Demonstrate prior experience in NbS and Eco-system Drafting of Climate- BasedAdaptation design Smart Tender Documentation  Experience in GHG inventory preparation (field measurements,standardized reporting, Quality assurance and control protocols)  Qualifications of climate experts (i.e., downscaling, climate modeling incl. climate stress tests and probabilistic/stochasticsimulations, etc.) Step 1 Define Climate-  Experience in relevant projects should be evaluated Smart Criteria for the RFQ/RFP  Technical and financial advisors with experience in DMDU procedures (if requested by the project agreement) RFP: INDICATIVE CRITERIA (AND SUB-CRITERIA)  Demonstrate the flexibility of the project to adapt to climatechange impacts  Explore the option of including a base or an adaptive plan Step 2 (seedefinitions in Module 2.2) Include Climate-Smart  Demonstrate the strategy to enhance the project's climate Considerations in the PPP Agreement resilience. How does this strategy account for the quick recoveryof the asset(s) and the affected community in general? 298 TABLE 4.2 Indica�ve climate-smart criteria for evalua�ng the thoroughness of the maintenance procedures and the rapidness of the opera�ons when confron�ng extreme climate events. Thelist PHASE 4 is meant to be indica�ve and provide a basis for developing project-specific detailed RFQ and RFP provisions. RFQ: INDICATIVE CRITERIA (AND SUB-CRITERIA)  Demonstrate sufficient financial and technical capacity to OPERATION respond to acute weather-events M4.1 & MAINTENACE  State-of-the-art preven�ve maintenance strategies; integra�on of monitoring in O&M plans. Dra�ing of Climate- Smart Tender RFP: INDICATIVE CRITERIA (AND SUB-CRITERIA) Documenta�on  Demonstrate how climate change hazards (e.g., hurricanes) are treated by the opera�ons and maintenance plan?  Include a descrip�on of cease of opera�ons. Is an effec�ve Business Con�nuity Plan (BCP) foreseen to secure the con�nua�on of opera�ons of facili�es when incident occurs? Step 1 Define Climate-  Propose an ac�on plan for quick emergency response and Smart Criteria for the recovery in the a�ermath of a disastrous climate-event RFQ/RFP  Submission of a dra� disaster preven�on and risk response plan could be posi�vely evaluated  Early-warning systems (for extreme weather events) for effec�ve emergency response (may include decision support pla�orms to assist rapid screening of assets and ac�va�on of evacua�on routes). Step 2  Provide sufficient insurance coverage against climate-related Include Climate-Smart risks. Considera�ons in the PPP Agreement 299 TABLE 4.3 Indica�ve climate-smart criteria for evalua�ng the social and environmental footprint of the bidder. The list is meant to be indica�ve and provide a basis for developing project-specific PHASE 4 detailed RFQ and RFP provisions. RFQ: INDICATIVE CRITERIA (AND SUB-CRITERIA)  Ensure that the service provider has commi�ed to a sustainable policy for doing business. SOCIAL &  What is the CO2 performance cer�fica�on of the firm? What are ENVIRONMENTAL the measures to be taken to limit CO2 emissions within the rou�ne M4.1 firm opera�ons?  Demonstrate experience in implemen�ng measures for improved Dra�ing of Climate- efficiency in the consump�on of energy, water, as well as other Smart Tender Documenta�on resources and material inputs  The use of innova�ve construc�on methods will be posi�vely evaluated (e.g., automated construction; low-emissions machinery; methodologies to reuse construction materials)  Examples of efficient resource management in previous projects Step 1 Define Climate-  Demonstrated experience in implemen�ng mi�ga�on hierarchy Smart Criteria for the protocols RFQ/RFP  Qualifica�ons of social experts RFP: INDICATIVE CRITERIA (AND SUB-CRITERIA)  Provide details (including targets and achievements) of the organiza�on's sustainability management policy.  Perform an LCA of the environmental impact of the design (using Step 2 methodologies/ criteria recommended by the procuring authority). Include Climate-Smart Considera�ons in the PPP Agreement  Submit environmental and social management plans that take into account the climate-change impacts  Include measures/ac�ons to enhance co-existence with local communi�es 300 CLIMATE-SMART EVALUATION Introducing state-of-the-art climate resilience and climate-mitigation approaches in the project PHASE 4 implementation will often entail additional upfront capital or operational expenditures with the potential for long term savings over the life of the asset beyond the concession period. Hence, providers of resilient infrastructure may find themselves in an unfavorable position (compared to less expensive bidders) if the benefits of resilience are not appropriately accounted for in the evaluation process. An option for procuring authorities to consider is to include in the evaluation criteria other than price to capture the value that the private party will bring to the delivery of the infrastructure project (including quantities expressed in non- M4.1 monetary terms as described in Module 2.1). On the other hand, the contract award is often more defensible if based on the lowest price bid rather than less quantifiable factors. Drafting of Climate- Aiming to balance between these two options while safeguarding the project's VfM, the public Smart Tender Documentation authority is responsible for structuring an evaluation procedure that smoothly integrates climate-smart criteria with traditional (price and quality) criteria rigorously and transparently. There are many different approaches to conduct such an evaluation, and it is beyond the scope of the toolkit to promote one versus another. Indicative examples are provided below. Step 1 Define Climate- Smart Criteria for the It is a customary and sound practice that, next to each criterion, the RFP RFQ/RFP describes a definition or explanation for transparency purposes — and even a description of the main factors that will be considered when assessing it. Qualitative criteria should be objective to the maximum extent possible and clearly defined or explained. Step 2 Include Climate-Smart Considerations in the PPP Agreement 1. Enhanced Least Cost Evaluation The conventional "least cost" selection method should be carefully considered, as what may seem a lower cost option upfront may ultimately lead to higher costs for the grantor if climate considerations and suitable provisions are not put in place or planned for in advance, including the potential for partial or total asset loss due to climate events. For example, the compensation that will have to be paid by the grantor to a road project company for events for which protection has not been appropriately developed or provisioned for may far exceed the surplus on the availability payments (resulting from a more expensive solution). The least-cost selection would always have to be balanced against the quality and requirements of the infrastructure as well as against the capabilities of the consortia bidding for the concession. Assuming that quality, performance, and bidder capability are not compromised then the most economically beneficial solution for the grantor (e.g., the lower NPV of payments to the project company for availability-based concessions or the highest NPV of upfront and lease payments to the grantor for demand-based concessions), in other words the least-cost approach, is opted for. 301 2. Price and Quality Evaluation The contracting authority may score the financial and technical competence of the proposal PHASE 4 individually and endorse with additional points those bidders that can provide added value in climate mitigation and adaptation measures. At the same time, it is necessary that the authority evaluates the balance between value and price (i.e., the cost of an option will need to be justifiable in terms of the value it is adding to the project). The classification of the criteria (in categories and sub-categories) and the weighting of each category should be done on a project basis. For example, innovative projects may be eligible for assigning higher weights to the technical design category (and the implemented M4.1 innovations) than other conventional projects. Also, the level of thoroughness of the evaluation of any single criterion may differ. For example: Drafting of Climate- Smart Tender  In some cases, the demonstration of a draft emergency response plan may be Documentation considered enough, while in other cases, the bidders may be requested to specifically demonstrate the alignment and interaction of the proposed plan to the local disaster risk management plans, or to submit different plans for the construction and operation phases. Step 1  Similarly, authorities may either decide to evaluate whether the proposal meets a Define Climate- minimum required level or incentivize bidders to submit a proposal that exceeds the Smart Criteria for the RFQ/RFP minimum expectations2. When price or other quantitative criteria represent less than 50 percent, or when the RFP includes highly technical elements, it is also recommended to assemble an expert committee to oversee the evaluation process, and Step 2 provide input where needed. Include Climate-Smart Considerations in the PPP Agreement 3. Bid Evaluation Model The bid evaluation assesses the technical, economical, environmental, and climate (and other) benefits of the submitted proposals and selects the bid that brings the higher Value for Money to the project (that can be defined differently by different procuring entities). The bid evaluation process intends to provide a fair, transparent, and accountable method for evaluating providers' bids based on balancing sustainability and other non-financial factors with cost. The process is best applied and demonstrated using a properly constructed bid evaluation model. More elaborate approaches may incorporate the life-cycle evaluation of the proposed design. For example, green public procurement in the Netherlands has customized the Most 2e.g., the tender document of the concession work for the civil airport in Sofia (Bulgaria) stated that “the bidders are required to submit an environmental and social program which shall inter alia include the bidder’s approach to the increase of the airport’s use and production of renewable energy and can earn extra points during evaluation in this regard” 302 Economically Advantageous Tender (MEAT) approach3 to integrate specific sustainability metrics (Box 4.3). PHASE 4 BOX 4.3 EVALUATION OF BIDDERS IN THE NETHERLANDS Rijkswaterstaat (RWS), the Department of Public Works of the Ministry of Infrastructure and the Environment, uses the Most Economically Advantageous Tender (MEAT) methodology, including specific sustainability criteria for infrastructure projects and services. When assessing sustainability, RWS focuses on two criteria: CO2 emissions and environmental M4.1 impact. Two instruments have therefore been developed: the CO2 performance ladder and "DuboCalc", respectively. The CO2 performance ladder is a certification system with which a tenderer can show the measures to be taken to limit CO2 emissions within the company Drafting of Climate- and in projects, as well as elsewhere in the supply chain. DuboCalc is a Life-Cycle Analysis Smart Tender (LCA) based tool that calculates the sustainability value of a specific design based on the Documentation materials to be used. Bidders use DuboCalc to compare different design options for their submissions. The DuboCalc score of the preferred design is submitted with the tender price. Source: OECD, 2016: Country case: Green public procurement in the Netherlands Step 1 Define Climate- Smart Criteria for the RFQ/RFP Step Output RFQ / RFP documents that include climate-smart criteria and climate-related technical requirements Step 2 Include Climate-Smart Considerations in the PPP Agreement 3 TheMost Economically Advantageous Tender (MEAT) is a method of assessment that can be used as the selection procedure, allowing the contracting party to award the contract based on aspects of the tender submission other than just price (Most Economically Advantageous Tender (MEAT) - Designing Buildings Wiki) 303 PHASE 4 02 INCLUDE CLIMATE-SMART CONSIDERATIONS IN THE PPP AGREEMENT The PPP agreement governs the obligations and rights of the parties. Although the structure and contents of the contract may vary significantly from country to country, a snapshot of the key provisions of a customary PPP agreement is summarized in Figure 4.2. The primary requirement M4.1 would be a clear definition of the scope of the contract and the responsibilities of the private partner over the entire contract cycle (i.e., design and construction requirements and output targets) or KPIs, followed by provisions on the financial structure and the private party's economic Drafting of Climate- rights (i.e., disbursements of payments, etc.). PPP contracts should also outline the public party's Smart Tender Documentation rights of oversight and control and tools/means to supervise performance (i.e., conditions of penalties, deductions from service payments, and breaches) as well as the obligations on the private party to report. Finally, the PPP agreement should describe how risks are allocated among parties, including cases of exemption from contractual obligations (i.e., definition and condition of compensation and relief events, force majeure provisions) and procedures/mechanisms to Step 1 resolve disputes. Define Climate- Smart Criteria for the In the previous modules, the effect of climate change on the financial and risk structure of the RFQ/RFP project has been extensively discussed, highlighting the possible implications of climate change on the contractual elements defined above. This step will navigate the users through the key contents of the PPP agreement and summarize specifications/ considerations/ provisions that are pertinent to climate-smart projects cross-referencing the relevant sections of the previous modules. CLIMATE CONSIDERATIONS ON THE PPP AGREEMENT Step 2 Include Climate-Smart Considerations in the PPP Agreement FIGURE 4.2 A schematic summary of some key climate considerations to be included in the components of a climate-smart PPP contract 304 KEY CONTRACTUAL CLIMATE CONSIDERATIONS  Technical requirements should comply with modern climate standards (where available). PHASE 4 They may also include a reference green certified design4 (following an internationally recognized rating system or certification). For additional guidance, users may refer to Module 3.3 - Step 1.  Performance requirements may include climate-smart KPIs correlating the level of asset service with the intensity of the weather event (as those described in Module 3.3 - Step 2). The contract may also include KPIs measuring the compliance of the service provided with specified climate mitigation targets (e.g., reduced GHG emissions, pollution, energy M4.1 conservation, conservation of natural resources, etc.) and penalties to remedy the following: non-compliance in the delivery of climate adaptation works, outdated risk- Drafting of Climate- reduction plans, and insufficient maintenance works. Abatement conditions are also Smart Tender described in Module 3.1 - Step 1. Documentation  Other financially related provisions may include insurance requirements (to be obtained by the private party) and state guarantees to cover potential losses from extreme climate events, as well as reserve funds for additional climate CAPEX needs. An overview of the available insurance mechanisms and critical considerations concerning climate change are Step 1 included in Module 3.1 - Step 3. In Module 2.3, the concept of the climate contingency Define Climate- account is introduced as an option to finance adaptation works implemented during the Smart Criteria for the RFQ/RFP operational phase of the PPP. However this is untested and may impact bankability if the funding sources are allocated to the private sector.  Climate risk-related provisions are described in detail in Module 3.1 - Steps 1 and 2. Climate risk events are defined and nuanced, distinguishing between "high probability low impact" events and "extreme" events that can be classified as natural disasters. This is followed by an indicative risk allocation matrix (Module 3.1 - Step 2) that can provide high-level guidance on risk structuring matters to be incorporated in the PPP agreement. Step 2 Include Climate-Smart  Compensation, relief, and force majeure events (introduced by extreme climate events) Considerations in the are specified in Module 3.1 - Step 2, highlighting conditions that may qualify for PPP Agreement compensation. The use of numerical intensity thresholds is introduced to reduce ambiguities and misinterpretations in the definition of climate events. For a comprehensive list of sector-specific KPIs, users may refer to the relevant sector-specific toolkits.  Financial structure. An overview of the financial structure of climate-smart PPPs is presented in Module 3.2 - Steps 2 and 3, emphasizing the available funding and financing sources. Climate considerations on the payment mechanism are outlined in Module 3.2 - Step 1. Step Output Green light for tender 4 on the basis of which bidders will prepare their technical proposals for construction 305 PHASE 4 KEY TAKEAWAYS • Definition of qualification/evaluation climate-smart criteria is essential for the M4.1 selection of high-quality bidders. Climate smart criteria may be used to assess the capability of the bidder to include climate considerations within the design of the project and implementation of the contract. These criteria should reflect Drafting of Climate- Smart Tender and be compatible with the design standards of the project, the operational Documentation standards/specifications, the sustainability construction standards, and the overall risk profile of the project. • Sustainability criteria (e.g., low-carbon solutions), climate resilience criteria (e.g., capability of the project to adapt to climate hazards), innovation criteria Step 1 (e.g., smart preventive maintenance strategies), excellence criteria (e.g., Define Climate- Smart Criteria for the demonstrated ability to calculate GHG emissions and provide mitigation RFQ/RFP solutions), and inclusivity criteria (e.g., appropriate gender action plans) should be considered by the project authority when evaluating the bidders. • It is recommended that the contracting authority provides an objective methodology with measurable criteria for assessing the value of sustainability and climate-smart factors included as part of the bidders’ offers. For example, the contracting authority may evaluate separately the financial and technical Step 2 Include Climate-Smart competence of the proposal and provide additional marks to the bidders that Considerations in the provided additional climate-mitigation and adaptation measures. PPP Agreement • The responsibilities of the private party over the entire contract cycle should be clearly defined. Key contractual climate considerations may include technical requirements (e.g., green certifications, alignment with modern climate standards) and climate-smart KPIs correlating the level of asset service with the intensity of climatic stressors. 306 MODULE 4.1 Resources CHECKLIST FOR SUPPORTING THE IMPLEMENTATION OF OECD RECOMMENDATION OF THE COUNCIL ON PUBLIC PROCUREMENT: TRANSPARENCY The purpose of the checklist is to guide and support public procurement practitioners in reviewing, developing, and updating their procurement framework, according to the 12 principles of the Recommendation of the Council on Public Procurement. Developed by: OECD, 2016 Module 4.1 - Further Reading GUIDE FOR ASSESSMENT OF PROCUREMENT SYSTEMS BASED ON OECD/DAC – WORLD BANK INDICATORS A PROPOSED RATING METHODOLOGY The objective of this guidance note is to provide a complete methodology, including scoring criteria, for the assessment of procurement systems using a set of indicators initially developed by the OECD/DAC – World Bank Working Group on Strengthening Procurement Capacities in Developing Countries. Developed by: OECD, 2006 A FRAMEWORK FOR DISCLOSURE IN PUBLIC PRIVATE PARTNERSHIPS The World Bank Group recommends a systematic structure for proactively disclosing information through this Framework for Disclosure in Public-Private Partnership Projects. The Framework is embedded in the findings of a global review of public-private partnership (PPP) disclosure frameworks and practices in transacted PPP contracts in identified jurisdictions. It suggests a holistic approach to disclosure through predefined standards, tools, and mechanisms, allowing for increased disclosure efficiency. Developed by: World Bank Group, 2017 GUIDANCE ON PPP CONTRACTUAL PROVISIONS This document contains guidance and examples of drafting provisions in relation to a number of core PPP contractual clauses. Developed by: World Bank Group, 2019 307 GUIDEBOOK ON ANTI-CORRUPTION IN PUBLIC PROCUREMENT AND THE MANAGEMENT OF PUBLIC FINANCES: GOOD PRACTICES IN ENSURING COMPLIANCE WITH ARTICLE 9 OF THE UNITED NATIONS CONVENTION AGAINST CORRUPTION This Guidebook serves as reference material for governments, international organizations, the private sector, academia, and civil society, by providing an overview of good practices in ensuring compliance with article 9 of UNCAC, which requires establishing appropriate systems of public procurement, as well as appropriate strategies in the management of public finances. Developed by: UN, 2013 THE EPEC GUIDE TO GUIDANCE HOW TO PREPARE, PROCURE AND DELIVER PPP PROJECTS This Guide to Guidance seeks to identify the "best of breed" guidance from PPP guidelines worldwide and selected professional publications. By providing a sourcebook of good PPP practice, it is designed to assist public officials responsible for launching and implementing PPP projects and to facilitate their understanding of the key issues and procedures involved in the procurement of PPP arrangements. Developed by: European Investment Bank, 2011 NATIONAL PUBLIC PRIVATE PARTNERSHIP GUIDELINES VOLUME 2: PRACTITIONERS' GUIDE Chapter 13: Bid Evaluation includes a detailed description of the criteria to apply at the bids evaluation stage. Developed by: Australian Government | Department of Infrastructure and Regional Development, 2015 BIDDING FOR PRIVATE CONCESSIONS: THE USE OF WORLD BANK GUARANTEES This discussion paper provides guidance on issues that need consideration before and during the bidding process. The report identifies the critical issues involved in the tendering and evaluation stages of bidding for private concessions. It draws on a survey of bidding experience in eight water and toll road projects in seven countries (China, Hungary, Mexico, Peru, Thailand, Turkey, and the United Kingdom). Developed by: World Bank, 2010 SUSTAINABLE PROCUREMENT: AN INTRODUCTION FOR PRACTITIONERS TO SUSTAINABLE PROCUREMENT IN WORLD BANK IPF PROJECTS This guidance is written for World Bank staff and Borrowers responsible for implementing Bank Investment Project Financing (IPF). It provides an introduction to public sector sustainable procurement. It gives practical how-to advice and supports good sustainable procurement practices. It informs practitioners how to include sustainable factors into procurement processes and provides incentives for vendors to offer more sustainable products and services. The content of this guidance is non-mandatory and is supplied as illustrating good practice only. Developed by: World Bank, 2019 308 ENVIRONMENTALLY RESPONSIBLE PROCUREMENT: A REFERENCE GUIDE FOR BETTER PRACTICES This document provides guidance to ADB staff, consultants, and executing agencies in designing and implementing environmentally sound projects. Developed by: ADV, 2007 GOING GREEN: BEST PRACTICES FOR SUSTAINABLE PROCUREMENT A collection of best practices has been prepared by the OECD, providing good practices for green public procurement at national and sub-national levels. Developed by: OECD, 2015 309 Epilogue THE IMPORTANCE OF CONTRACT MANAGEMENT IN CLIMATE-SMART PROJECTS The scope of this toolkit has been to provide guidance to PPP units and their advisors on including climate mitigation and adaptation options in the up and midstream stages of structuring PPP infrastructure projects. Following their financial closure, climate-smart PPP projects will enter their final and longest stage: contract management. According to a recent publication by the Global Infrastructure Hub, PPP contract management is one of the most important aspects of PPP delivery. If done effectively, it will support the long-term success of the project in line with the agreed contract terms. But, if managed poorly, it can seriously undermine years of project preparation and procurement and can ultimately lead to major cost implications for taxpayers and service disruptions for end users1. In the face of growing investment needs and constrained budgets, many governments are increasingly looking to the private sector to bring expertise and financing to infrastructure delivery, often through the use of PPPs. However, despite the growing trend among governments to consider PPPs as a procurement and financing model for infrastructure projects, the contract management of these projects through their construction and operations phases is one of the more overlooked areas of infrastructure delivery. Indeed, as PPPs are typically long-duration contracts often referring to large-scale infrastructure projects, poor contract management could have a very detrimental impact on the quality of service. 1https://managingppp.gihub.org/report/overview/ 310 This may further be exacerbated by the effects of • The need to transparently report and abide by climate change and the uncertainty associated with standards (and consequently monitor them), them. As such, efficient contract management should adopting frameworks such as TCFD’s. be regarded as a necessity - especially in the case of climate-smart PPP projects as those considered in • The need for efficient handling of renegotiations this toolkit. Thus, the intent of this epilogue section is and disputes that could be increased due to not to provide guidance on the supervision of climate change. Force majeure clauses and climate-smart PPP contracts (which would require a eventual compensations related to resilience and separate, dedicated guidance document) but rather climate change will certainly also become an even to emphasize on its necessity while pointing out more delicate field of contract management specific climate-related elements that such (together with how insurance covers evolve over supervision should consider, including: time). In fact, although it is generally valued as a good practice to avoid frequent renegotiations, • The need for a properly-trained contract the uncertainty regarding the evolution of climatic management team including members experienced indicators (and hence of climate-related in monitoring climate indicators and qualitatively phenomena impacting the availability of the assessing climate risks and new options able to infrastructure) during the lifetime of the project, offer GHG emissions reduction while being able to could challenge this principle. This may be more interact efficiently with external resources (such as likely in cases when innovative instruments or consultants) when necessary. structures (e.g., green financing tools, nature- based solutions, adaptive plans) are incorporated • The need for a well-structured plan for monitoring in the contracts. Given that such options may in climate-related construction and operations some cases play an instrumental role for the including adaptation measures and GHG-reduction viability of the projects, it is recommended that strategies. Assessment of the appropriateness and the contract management teams are prepared to ability to monitor the climate-related KPIs is negotiate issues such as impacts on tariffs and essential at an early stage so that any weak points maintain contractual visibility over time – even are identified and corrected as soon as possible. A though there could be uncertainty around the good practice may be to set up specific milestones asset itself. At the same time, any renegotiation in cooperation with the project company so that will need to ensure that it will not risk the benefits timeliness and objectivity is added on the for the climate and the public. monitoring process while ensuring that the public and private parties are efficiently partnering in combating the effects of climatechange. Understandably, the listing above is neither thorough nor complete. While it is beyond the scope of the present document to get into the details of the contract management phase, it is necessary to remember that delivery of climate-smart PPP infrastructure is not only about adequate planning and execution. Given the challenges that climate change uncertainty is bringing to infrastructure assets, PPP contract management will become an even harder and more important task. Learning from it will certainly constitute an effective way to loop back and continue improving PPP contracts’ quality and bankability in the years ahead. And despite all the challenges, this is the only path forward for the sake of our future. © Patrick Jericho Santos/iStock.com 1 APPENDIX APPENDIX APPENDIX 1 Concessional Financing Sources APPENDIX 2 Innovative Financing Options 312 Appendix 1 Concessional Financing Sources 01 THE LANDSCAPE OF CLIMATE FUNDS An overview of the global climate funding architecture with emphasis on the multilateral and bilateral funding mechanisms is provided in Figure A1. As illustrated, funds flow through multilateral channels and bilateral mechanisms to regional/national climate change financial institutions and organizations, forming another pool of funding from which low-emission and climate-resilient development can benefit. Although a plethora of funds are available, eligibility and selection criteria may be quite hard to fulfill, while the competition to access them may be overwhelming. Additionally, the process of receiving funds through such mechanisms is quite often associated with significant managerial and reporting requirements, which in turn increase the administrative costs of handling them. Therefore, governments are advised to ensure the suitability of funds with the PPP project and the country under consideration (not all countries are eligible for all funds) before embarking on the relevant transaction process. Hence, it is recommended that a skilled team with proven experience in similar transactions is in place before initiating the process to maximize the chances of achieving an agreement with donors. It is underlined that due to the multitude of funds and their case-specific characteristics, it is beyond the scope of this toolkit to provide an exhaustive and detailed description of all available funding sources. Instead, the intention is to provide an overview of the most significant climate funds that are currently active and summarize key features/considerations that appear to have general applicability. Tables A.1 and A.2 provide a non- exhaustive selection of available multi- and bilateral funding mechanisms covering various sectors and regions, thus allowing a first-level screening of potential options. It is recommended that the following criteria are considered when evaluating the suitability of funds with a country and PPP project:  Sectors, countries, and types of usually funded projects.  Application time, cost, and administrative requirements, including reporting requirements in case of a successful application.  Focus on the fund's priorities/requirements and the country's specific goals. 313 FIGURE A.1 The global climate finance architecture: indicative (non-exhaustive) list of funds and Institutions that could be considered when exploring potential sources for concessional funding sources. [Source: Climate Funds Update, 2021: The Global Climate Finance Architecture, copyright ODI and HBS]. 314 FUNDING SELECTION CRITERIA Once the preliminary decision to proceed has been made, it is necessary to ensure that the PPP projectmeets specific eligibility conditions that are fund-specific. Table A.1 provides vital information and hyperlinks to relevant web pages to assist toolkit users in accessing eligibility criteria specific to each fund. The figure below illustrates key selection criteria common among donors when evaluating proposals and should thus be carefully considered by the procuring authorities when preparing project applications (Figure A.2).  Impact Potential The purpose of this criterion is to provide the donor with the fundamental justification for the proposed project and why it is worth funding. The criterion may vary between climate mitigation and climate adaptation projects: the former should describe the emissions reductions they expect to achieve, while climate adaptation project proposals should demonstrate a reduction in loss of lives, the value of physical assets, livelihoods, and environmental or social losses.  Urgency and Necessity Project proposals should describe the country's financial, economic, social, and institutional needs and the barriers to accessing domestic (public), private and other international sources of climate-related finance. This is important, as most bilateral and multilateral adaptation funds will only support proposals that respond to the highest priority needs in the targeted region/country and sector.  Efficiency and Effectiveness Although cost-effectiveness (e.g., CO2 emission reduction per unit amount invested) is a common selection criterion for most bilateral and multilateral donors, performing quantitative measurements/comparisons in adaptation projects is not that straightforward. For the latter case, funds may ask for a justification reasoning (i.e., different financial, social and environmental costs) for choosing an adaptation solution over an alternative.  Long-term Sustainability and Broader Impact The proposal should demonstrate how the benefits achieved through the investments will be sustained beyond the project's lifetime. It is, therefore, possible that donors will request commitments from the national government to maintain the infrastructure and build local capacities that will enable future developments in the specific sector (e.g., upscale pilot projects and capacity-building activities). In addition to the project's impact (that is separately scored), proposals may be requested to demonstrate co-benefits in the broader economy (e.g., creation of jobs, poverty alleviation, and enhancement of income and financial inclusion, especially among women); social prosperity (e.g., better access to education, cultural preservation, social inclusion, improved sanitation facilities); environment (e.g., enhanced air, water, soil quality, and biodiversity); gender empowerment (e.g., outlining how the project will address gender gaps).  Alignment with National Climate Goals Project proposals should clearly describe how the proposed activities align with the country's NDC and other relevant national plans.  Organization Capacity and Experience Another criterion, typical for most multilateral and bilateral funds, is the institutional context in which the proposed project will be implemented. Project developers should be ready to describe the organization's mandate or past work experience. Donors may also be interested to see how the project will be coordinated and how the planned investments will support the existing development activities of the targeted sector. 315 FIGURE A.2 Selection criteria for concessional funding 316 TABLE A.1 Multilateral Funds and Initiatives Multilateral Priority Areas Sources of Funding Trustee Website Funds / Initiatives Adaptation Fund Gender Agriculture Coastal Zone Multi-donor trust fund World Bank (on AF (AF) Management Disaster Risk Reduction (top contributors: an interimbasis) FoodSecurity Forests Rural Germany, Sweden, Italy, Development Urban Development Water Spain, Belgium), 2% share Management of proceeds of the CER1 Africa Climate The third Call for Proposals (CFP3) for the Multi-donor trust fund African ACCF Change Fund Africa Climate Change Fund (ACCF or Fund) (Germany, Italy, Flanders, Development (ACCF) focuses on Gender Equality and Climate Belgium, Global Affairs Bank Resilience (GECR). Canada, Quebec) Climate Clean Technology Fund (CTF) Forest 14 donor countries, World Bank CIF Investment Funds Investment Program Pilot Program Climate including the US, UK, (CIF) Resilience (PPCR) Gender Japan, Norway, Canada,  Scaling Up Renewable Energy Program etc. (SREP) EU Global Climate Mainstreaming climate change into poverty Development Cooperation European GCCA+ Change Alliance reduction and development efforts Instrument (DCI), Union Plus Initiative  Increasing resilience to climate-related European Development stresses and shock Adaptation and Fund (EDF), EU members (GCCA+) mitigation strategies, plans, and actions. Green Climate Agriculture Forestry and Other Land Use GCF-1 (first World Bank GCF Fund (GCF)  Buildings, Cities, industries and appliances replenishment): 31  Ecosystems and ecosystem services contributors  Energy Health, food and water security  Infrastructure Livelihoods of vulnerable communities Transport Global Biodiversity Climate Change International 40 GEF donor countries World Bank GEF Environment Waters Land Degradation Chemicals & Facility (GEF) Waste Trust Fund Least Developed Implementation of NAPAs and NAP process. Multiple countries such as GEF, World LDCF Countries Fund Priority funding areas: agriculture and food Germany, United Kingdom, Bank (LDCF) security Natural resource management Sweden, Belgium, etc. Water resources Disaster risk management and prevention Coastal zone management Climate information services  Infrastructure  Climate-change- induced health risks NBS Special Climate Mandated to serve the Paris Agreement  Multiple countries such as GEF, World SCCF Change Fund Acts complementary to the GEF Trust Fund Germany, United States, Bank (SCCF) Climate-resilient technologies and Belgium, Norway, etc. infrastructure, climate risks, engagement of private sector for adaptationsolutions, access to finance from public sources and to markets UN-REDD Supports nationally led REDD+ processes Norway, European Union, UNDP Multi- UN- Programme Denmark, Switzerland, Partner Trust REDD Spain, Japan, Luxemburg Fund Office Programme 1 CER: Certified Emissions Reduction 317 TABLE A.2 Bilateral Funds. [Note that this account is not meant to be fully exhaustive; the list of all available NCFs is expected to be significantly broader] Bilateral Funds Priority Areas Funding Countries Website Global Climate Partnership Renewable energy Εnergy efficiency and Germany, United Kingdom, GCPF Fund (GCPF) low-carbon projects in developing economies Denmark International ClimateFinance Strengthening global peace  Security and United Kingdom ICF (ICF) governance Strengthening resilience and response to crises Promoting global prosperity Tackling extreme poverty, and helping the world's most vulnerable Internationale Greenhouse gas emissions mitigation Germany (funded partly IKI Klimaschutzinitiative (IKI)  Adapting to the impacts of climate change through the saleof national Conserving natural carbon sinkswith a focus tradable emission certificates) on reducing emissions from deforestation and forest degradation (REDD+) Conserving biological diversity Nationally Appropriate Implementation of NDCs UK, Germany, Denmark, and NAMA Mitigation Action facility the European Commission Facility (NAMA Facility) 318 Appendix 2 Innovative Financing Options This appendix outlines existing innovative financing instruments to incentivize investments in green infrastructure and enhance the bankability of climate mitigation options. The list of instruments outlined in the ensuing is neither exhaustive nor binding; its scope is to raise awareness on the sort of available mechanisms and common eligibility criteria so that governments can consider them when structuring PPP projects1. Green, social, and sustainability-linked bonds and loans are financial instruments that were built with the very purpose to raise finance for projects with environmental, climate, and or social benefits. This is a fast-growing market sector, with nearly $600 billion of bonds issued across these four formats in 2020, representing a year- over-year increase of around 80 percent (CBI, 2021). During the first three quarters of 2021 the combined labeled issuance of such bonds had already reached $767 billion (Figure A.3). 01 BONDS TO FINANCE CLIMATE MITIGATION/ADAPTATION PROJECTS Conventionally, bonds2 are used by private or public companies, supranational companies (such as multilateral development banks), commercial banks, municipalities, states, and sovereign funds to finance projects and operations. PPP projects may use bonds as an alternative debt-raising mechanism. Bond proceeds can be used to finance the full project, pre-construction financing instrument, or post-construction financing. For example, it is also possible to plan for two bond issues: one for the pre-construction phase with a short maturity, followed by another bond issuance starting with the commencement of operations and maturing at the end of the project. Post-construction bonds are better received by risk-averse investors unwilling to assume the construction risk of new development (including cost overruns, construction delays, non-compliance with construction standards). Moreover, bonds can be used either to develop a single project, a collection of projects (allowing for additional diversification of the financial risk), or to support investments in a broader sector. Boxes A.1 and A.2 illustrate examples of bonds that have been used for the financing of particular projects. Table A.3 includes examples of bonds that have financed broader green developments. 1 As awareness on climate aspects is increasing, new financing schemes may surface in the market (see for example the financing solutions described in Insights 3.3 and 3.4) 2 A debt-capital market instrument that represents a cash flow payable during a specified time period 319 Although issuing a green debt (or any other type of bond) is a complex process, the primary considerations can be described by the list below3 , which is intended to provide guidance on the general eligibility criteria for green debt financing (see, also, Figure A.4). The green bond market is governed by voluntary guidelines4 designed to regulate all aspects of bond issuance and increase transparency. ICMA4 defines the four main Green Bond Principles as follows: 1. Use of Proceeds: The issuers need to define a range of green projects they wish to support with the green bonds. The projects need to be able to demonstrate clear environmental benefits. It is strongly recommended that eligibility criteria be reviewed and rated by an external expert party. This will provide comfort to investors that the projects will meet their climate-related targets. To identify such projects, voluntary guidelines may be followed. 2. Process for Project Evaluation and Selection: Projects to be supported must undergo a robust review methodology. For example, all World Bank projects seeking green bond support need to undergo early screening of their processes and environmental impact. 3. Management of Proceeds: Allocation of funds is subsequently provided to the selected projects. Disbursements are often made over a period of a few years, depending on when project milestones are reached. 4. Reporting: The issuer of the bond supervises the implementation of the green bond projects. Client countries implement the development projects as per the project loan agreement. The supervision process comprises regular reports by the implementing government agency on project activities, ensuring transparency in communicating the expected/achieved impact of proceeds. 3The list is based on WBG’s IBRD green bond issuing process. 4The main representatives are the Green Bond Principles (GBP,2014) by ICMA (International Capital Market Association) and guidelines developed by the Climate Bonds Initiative (CBI). CBI guidelines align with the CBP but also include a standard for what would qualify as a climate bond. 320 FIGURE A.3 Evolution of green, social, and sustainability linked bonds in the last years ICMA Bond Principles Core Components: Core Components: Use of Proceeds: all proceeds from the bond issue Selection of Key Performance Indicators (KPIs): selection should be utilized for green projects providing clear and of credible sustainability KPIs is significant to measure the quantifiable environmental benefits issuer’s performance Process for Project Evaluation and Selection: the Calibration of Sustainability Performance Targets (SPTs): process of green projects selection and eligibility criteria involves calibration of one or more performance targets should be clearly communicated to investors per KPI to be used as milestones during the project Management of Proceeds: financial management should Bond characteristics: financial and structural bond be treated with high level of transparency (e.g., a third- characteristics should be clearly defined party audit is recommended) Reporting: Up to date information on the use of proceeds Reporting: Up to date information on the use of should be readily available by the issuers and reported at proceeds should be available by the issuers and reported least annually at least annually Verification: Issuers should seek independent and external verification FIGURE A.4 Key components of green, social, and sustainability linked bonds according to ICMA 321 BOX A.1 EXAMPLES OF PPPS FINANCED BY GREEN BONDS Eglinton Crosstown Light Rail Transit (LRT) Ontario was the first government in Canada to issue green municipal bonds to finance green infrastructure projects. The green bond program was launched in 2014 with a bond issue size of $500 million and a maturity period of four years. Multiple green investors from Canada, the U.S., Europe, and Asia showed strong demand, with orders approaching $2.4 billion. Since then, the evaluation, selection, and reporting process of eligible projects were refined by incorporating stricter environmental criteria, specific category scores of LEED-rated buildings, and prioritizing particular Sustainable Development Goals (SDGs). The new Eglinton Crosstown LRT, a 30-year concession under a PPP model of $5.3 billion investment, was one of the 16 green projects selected in 2014 to receive funding from Ontario's inaugural green bond issue. The project was financed by the three subsequent green bonds issued by the province. The Eglinton Crosstown LRT is currently under construction, with scheduled completion in 2022. Sources: Ontario Financing Authority, 2018: Green Bond2018 Newsletter Queen's Printer for Ontario, 2014: Strong Demandfor Ontario's First Green Bond Aecon: Eglinton Crosstown LRT Elazig Integrated Health Campus In 2016 the first "green and social" project bond in Turkey was verified by a major environmental, social, and governance rating company, Vigeo Eiris. The 20-year bond, with a total bond size of 288 million euros, was the first project bond financing a hospital under a public-private partnership in Turkey. The proceeds financed the construction of the 1,000-bed Elazig Integrated Health Campus in Elazig city in eastern Turkey, including five healthcare facilities equipped with climate-friendly technologies and modern applications. IFC invested 80 million euros in the project bond supporting the next-generation healthcare facilities. At the same time, the EBRD and WB's MIGA supported the commercial tranche by an innovative joint credit enhancement scheme. Construction was completed on time, and the 28-year availability payment concession entered its operational stage in 2018. Sources: IFC, 2016: IFC Supports Mobilization of Long- Term Financing for Next-Generation Healthcare Facilities in Turkey Meridiam, 2016: Closing of Elazig project GIH, 2021: Elazig Hospital PPP 322 TABLE A.3 Examples of Green Project Bonds and Loans Size in # Bond Issuer millions Country Sector Description (USD) Regional Transportation District (Colorado) ("RTD") is issuing Green Bonds – Climate Bond Denver Certified to refund outstanding debt used to Regional expand and improve Denver, Colorado's regional 1 834.1 USA Transport public transportation system. RTD's efforts Transportation District expedite a transition to a zero-emission transportation sector and advance regional greenhouse gas emission reduction goals. The issuance aims to finance and re-finance a mortgage asset pool with added environmental value, focusing on energy performance. The bond will re-finance an existing mortgage loans Low Carbon portfolio with residential buildings in Norway. 2 SpareBank 1,102 Norway Both new and existing Norwegian residential Buildings buildings are eligible for green bonds as they have significantly better energy standards and account for less than 15% of the residential building stock. PET Refine Technology is issuing a green bond to Pet Refine Waste finance investment in chemical recycling facility 3 16.7 Japan Technology Management of consumed PET bottles. IFC loan will fund the company's expansion into the solar power generation segment, including financing five solar power generation plants, 4 IEnova Corp. 100 Mexico Solar thereby diversifying the country's energy supply. This is IFC's first financing in Mexico certified under the Green Loan Principles. CONSIDERATIONS FOR ISSUING PROJECT BONDS The way that grantors structure the project can incentivize certain types of financiers to participate in the project. While green project bonds present several merits, they are also associated with considerations that should be correctly assessed when this financing route is in place (IISD 2015). The main considerations may include: The project risk (reflecting the project's overall risk profile). This risk may be exceptionally high for green projects (incorporating green innovations and not mature-enough technologies) or for projects requiring extended climate adaptation measures. On the other hand, this risk is compensated by the ability of green projects to accommodate future climate legislation. Therefore, the procuring authority must possess the necessary expertise to adequately evaluate the overall project and how this may affect the project bonds’ proposals. Depending on the size, experience, and banking relationships, bonds' placement is not always guaranteed. Contracting authorities should specify the weight and importance of bond financing in their initial tender conditions to ensure just the right amount of competitive tension without risking losing otherwise competent bids that may not support bond financing. 323 The pricing volatility risk. This integrates changes in the bond pricing from the time of the financial closure to the bond issuance. Timeline of bond issuance. Issuing a bond usually requires more time than any conventional bank lending, eventually impacting the project's starting date. Contracting authorities should therefore evaluate the suitability of bonds concerning the specific project timeline. BOX A.2 EXAMPLE OF A PPP (RE)FINANCED BY GREEN LOAN In 2020, ANZ and the Commonwealth Bank (CBA) supported the first certified green loan executed by a transport Public-Private Partnership in the Australian market. The loan was certified as green by the Climate Bond Initiative (CBI) under its low carbon transport criteria. With the $280 million green loan, the Canberra Metro re-financed its debt facility through which it delivered in 2019 the first stage of the Canberra Light Rail project that connects Gungahlin in the north with the Central Business District (CBD) via a 12 km track. The project will keep operating for 20 years under the design, build, operate and maintain agreement of the PPP. Over the contract term, the Australian Capital Territory (ACT government) will pay Canberra Metro for the construction costs and components of the operational costs. The Canberra Light Rail project is the largest single infrastructure project ever undertaken by the Australian Capital Territory. Image source: Canberra Metro website Sources: Commonwealth Bank, 2020: CBA supports Australian-first PPP Green Loan Canberra Metro: The Canberra Light Rail project is being delivered through a Public-Private Partnership (PPP) 324 02 SUSTAINABILITY-LINKED FINANCING According to IFC5, sustainability-linked financing aims to leverage the role of debt markets in financing and promoting sustainability. The borrower's performance is related to ESG performance targets defined by the agreement between the lender and the borrowing entity. In this context, sustainability performance targets (SPTs) are identified, which need to be ambitious, provide incentives for more action, and be linked with measurable key performance indicators, preferably benchmarked against specific metrics. A significant characteristic of sustainability-linked loans is that economic outcome is related to whether the selected predefined SPT(s) are met, which, in turn, incentivizes action on sustainability. The Loan Market Association has developed the Sustainability Linked Loan Principles (SLLP).6 The goal of the SLLP is to provide guidelines that identify and promote the key technical characteristics of these types of loans and, in this way, preserve the integrity of the sustainability loan financial product. Sustainability-linked financing is a forward-looking, performance-based instrument explicitly aiming to future improvements in sustainability outcomes within a predefined timeline. it may be materialized by means of any type of instrument such as bonds, derivatives, credit facilities, etc. A significant difference between sustainability-linked financingand climate-financing instruments (e.g., green loans) is that the former would typically not impose any constraints on the use of proceeds. 03 CARBON CREDITS AND CARBON OFFSETING A carbon credit is a coupon that allows its holder to emit a certain amount of carbon dioxide or an equivalent of another GHG. One credit permits the emission of a mass equal to one ton of carbon dioxide. The main goal for creating carbon credits is to reduce carbon dioxide emissions and other GHGs from industrial activities. One way to use credits issued under carbon credit mechanisms can be as "offsets". This means that emission reductions achieved by one entity can be used to compensate for (i.e., offset) emissionsfrom another entity.7 In this context, investments in climate mitigation as part of a PPP project may endorse the latter with the ability to issue carbon credits up to the equivalent of GHG emission reduction corresponding to such mitigation actions. These credits may then be sold to a GHG-emitting entity as "offsets" (following the definition of mitigation hierarchy levels), thereby generating profit for the PPP project while contributing to the NDC targets of the receiving entity's country. WBG sets the target that projects that generate carbon credits beyond the emissions mitigation benefit could also generate additional co-benefits. Carbon crediting mechanisms could be designed explicitly to support or 5 Sustainability Linked Financings: Guidance Note for MAS IOs 1.0, IFC, 2021 6 LMA-APLMA-LSTA, 2021a: Sustainability Linked Loan Principles 7 World Bank, 2020: State and Trends of Carbon Pricing 2020 325 enhance specific co-benefits like health outcomes (e.g., from reduced indoor air pollution through the installation of improved cookstoves), biodiversity, resilience, water retention, and habitat protection. Carbon credits are traded in two market categories: 1. Voluntary Carbon Markets are marketplaces allowing carbon emitters to offset emissions by exchanging them with carbon credits produced by projects which remove or reduce GHG emissions. This process is termed voluntary emissions reduction (VER) and is not the product of a process of compliance with legal obligations (such as obligations imposed by the Kyoto Protocol) 2. Compliance Markets are marketplaces intended to be used by regulated entities thereby achieving certified emissions reduction (CER). In this case, offsetting of a project’s emissions is materialized by means of emission units (or credits) created through a regulatory framework (e.g., the UN’s Clean Development Mechanism or CDM) (see also Insight 0.1 and Insight 1.5) MECHANISMS TO BENEFIT FROM CARBON-CREDITS PPP projects can use the carbon markets to supplement their revenue streams thereby possibly making projects more attractive. The first option to use them is to take advantage of the Clean Development Mechanism (CDM) that the Kyoto Protocol defined. CDM aims to assist developing countries not included in Annex I8 and least developed countries in achieving sustainable development and at the same time to assist parties included in Annex I25 in complying with their GHG emission limitations. To this end, industrialized countries are willing to buy certified emission reductions (CERs) and invest in emission reduction where it is cheapest globally. This leads to investments of developed countries and businesses in climate-mitigation options and low-carbon projects taking place in EMDE countries and producing CERs. For a PPP project to be eligible for such financing, it will be necessary to demonstrate that carbon emissions are either reduced (energy efficiency measures), removed (carbon capture projects such as planting of forests), or avoided (for example, using low-carbon technologies and nature-based solutions). The process of issuing CERs may be grouped into five steps for a PPP project, as illustrated in Figure A.6. A consulting committee is formed to conduct GHG emissions measurements for the project according to the CDM's protocol. Actions that reduce the overall project emissions are then identified and implemented to reach the desired GHG reduction target. The issue of the CERs is subsequently approved by the CDM Executive Board (CDM EB) under the guidance of the Conference of the Parties (COP/MOP) of the United Nations Framework Convention on Climate Change (UNFCCC). Detailed advice and up-to-date information on the CDM issuing process are provided on the UNFCCC CDM website9. Another option is the consideration of VER carbon offsets. Similar to CERs, these carbon credits are issued to assign a value to an offset of greenhouse gas emissions. However, in this case, carbon credits do not need to be approved by the CDM regulations but are verified by independent standards such as Gold Standard and Verified Carbon Standard (VCS). If a project meets the specified criteria – summarized in Figure A.5 – credits can be issued. The investor may then sell the credits in the voluntary market for credits in order to finance the project. The proceeds from the sale of voluntary carbon credits enable the development of carbon-reduction projects across a wide array of project types. These include renewable energy, or avoiding emissions from fossil-fuel-based alternatives; natural climate solutions (nature-based infrastructure), such as reforestation, 8 Annex I parties include the industrialized countries that were members of the OECD in 1992, plus countries with economies in transition (the EIT parties), including the Russian Federation, the Baltic states, and several Central and Eastern European states. 9 UNFCCC CDM website: https://cdm.unfccc.int/ 326 avoided deforestation, or agroforestry; energy efficiency; and resource recovery, such as preventing methane emissions from landfills or wastewater facilities; among others. FIGURE A.5 General criteria for carbon credits 327 FIGURE A.6 General procedure to issue carbon credits 328 GLOSSARY A Acute climate risks Risks which are imposed from the noticeable increase (or decrease) in the frequency and/or intensity of extreme weather phenomena. In a similar way to chronic risks, acute risks encompass high uncertainty as the frequency and intensity of extreme weather events cannot be determined given their dependency on a climate that is currently evolving in an unpredictable way Adaptation The process of adjustment to actual or expected climate and its effects. In human systems, adaptation seeks to moderate or avoid harm or exploit beneficial opportunities. In some natural systems, human intervention may facilitate adjustment to expected climate and its effects Adaptive plan A project plan in which adaptation and resilience expenses are disbursable throughout the project depending on specific climate-related performance indicators. In general, an adaptive plan seeks flexible/expandable adaptation options that can change over time when climate circumstances are different than anticipated Affordability1 The ability of a project to be realistically accommodated within the inter-temporal budget constraints of the government All-risks insurance3 Covers losses due to physical damages to tangible property. It will respond to all perils except those specifically excluded in the insurance policy, such as war, radioactive/nuclear contamination, willful acts, defective design, etc. Availability payment1 Payments made over the lifetime of a contract in return for the private party making the infrastructure available. This is defined in the contract, and it is a common form of payment in government-pays PPPs Availability-pays PPP/Availability-based projects4 Projects that entitle a private partner to receive regular payments from a public sector client to the extent that the project asset is available for use in accordance with contractually agreed service levels. An availability-pays PPP is a form of government-pays PPP B Bankability1 The ability of a project to be accepted by lenders as an investment under a project finance scheme, or the ability of the project to raise a significant amount of funding by means of long-term loans under project finance, due to the creditworthiness of the project in terms of sufficiency and reliability of future cash-flows 329 Base plan A project plan in which all capital expenses associated with adaptation and resilience measures are disbursable upfront. A base plan aims to conceive today (with the best available information about the future conditions) a robust static plan Bid bond1 A written guarantee provided by the private party to the procuring authority. The bid bond is intended to ensure that if selected, the bidder will proceed with the contract. It is also known as a “bid submission guarantee”. The bid bond is generally returned to the successful bidder on effectiveness of the relevant contract or on financial close Biodiversity2 The biological variety on earth, essentially the variety of plant and animal life in the world or in a habitat or ecosystem Blue-Green Infrastructure (BGI)5 A subset of nature-based solutions that intentionally and strategically preserves, enhances, or restores elements of a natural system, such as forests, agricultural land, floodplains, riparian areas, coastal forests (such as mangroves), among others, to help produce higher-quality, more resilient, and lower-cost infrastructure services. Infrastructure service providers can integrate green infrastructure into built systems. The “blue” part refers to water elements while the “green” part refers to land elements Business interruption insurance3 Insures the project company for loss of net profit and standing charges until such time as normal production or commercial operation is resumed C Capital expenditure (CAPEX) 1 The initial construction costs of the infrastructure plus any expenditure on the constructed PPP asset that is not an operating expense (OPEX) Carbon credits (or Carbon offsets) A kind of permit that allows its holder to emit a certain amount of carbon dioxide or an equivalent of another greenhouse gases. One credit permits the emission of a mass equal to one ton of carbon dioxide. The main goal for the creation of carbon credits is the reduction of emissions of carbon dioxide and other greenhouse gases from industrial activities to reduce the effects of global warming. A carbon credit is a tradable certificate that can be sold to the carbon credit market Catastrophe Deferred Drawdown Option (Cat-DDO)3 A contingency credit instrument developed in 2008 as a World Bank Development Policy Loan with a Catastrophe Deferred Drawdown Option. The Cat-DDO allows funds to be drawn upon declaration of a state of emergency or equivalent in the borrower’s territory, as a result of a natural or health-related disaster. The Cat- DDO provides critical liquidity to enable a rapid response without compromising the availability of resources for longer-term development programs. Cat-DDOs also incentivize proactive steps to reduce risk: in order to be eligible, governments must demonstrate capacity to manage the risks by strengthening the policy and financing framework for disaster risk management Changes in law Potential losses or potential changes in the value of investments that may be triggered from changes - or new implementations - in the policy frameworks, the legislation system, or government strategies as well as the transformation of traditional operations in primary sectors due to the effects of climate change (see also transition risks) 330 Chronic climate risks Refer to potential incremental future climatic impacts, and their subsequent potential consequences. The time of occurrence, the severity and the pace of these possible impacts is unknown and cannot be predicted (not even probabilistically), thus, chronic risks inherently entail uncertainty Civil code Civil code is a codification of law. In civil code there is a comprehensive compilation of legal rules and statutes. In civil code countries force majeure is a legally defined concept, thus limiting the freedom of the parties to derogate from the legal concept Climate adaptation measures Measures that facilitate adjusting to actual or expected climate and its impacts, in order to moderate harm or exploit beneficial opportunities Climate Contingency Account (CCA) The concept of a CCA derives from the commonly used in PPP projects reserve accounts, which reserve amounts from the project’s cash flows for future expenditures. Similar to these reserve accounts, a CCA may be applied in case of adaptive planning to reserve funds from the beginning of the PPP concession up to certain pre-agreed levels Climate hazard2 The potential occurrence (or likelihood) of a climate-induced physical event or trend or physical impact that poses risk on the project Climate mitigation measures Low carbon or other measures that reduce GHG emissions and contribute to climate change mitigation Climate model2 A numerical representation of the climate system based on the physical, chemical and biological properties of its components, their interactions and feedback processes and accounting for some of its known properties. The climate system can be represented by models of varying complexity; that is, for any one component or combination of components a spectrum or hierarchy of models can be identified, differing in such aspects as the number of spatial dimensions, the extent to which physical, chemical or biological processes are explicitly represented, or the level at which empirical parametrizations are involved. Coupled atmosphere-ocean general circulation models (AOGCMs) provide a representation of the climate system that is near or at the most comprehensive end of the spectrum currently available. Climate models are typically applied as a research tool to study and simulate the climate and for operational purposes, including monthly, seasonal and interannual climate predictions Climate resilience measures Measures that increase the ability of a system and its component parts to anticipate, absorb, accommodate, or recover from the effects of a hazardous event in a timely and efficient manner. This also includes the preservation, restoration, or improvement of the system’s essential basic structures and functions Climate risk2 The potential for consequences from climate variability and change where the project is at stake and where the outcome is uncertain. Risk is often represented as probability of occurrence of hazardous events or trends multiplied by the impacts if these events or trends occur. In this toolkit, however climate risk is defined directly from the interaction of vulnerability, exposure, and hazard - as probability cannot be explicitly computed for climate change Climate-proof design A design that explicitly incorporates and addresses risks that are caused by climate change 331 Co-benefits2 The positive effects that a policy or measure aimed at one objective might have on other objectives, irrespective of the net effect on overall social welfare. Co-benefits are often subject to uncertainty and depend on local circumstances and implementation practices, among other factors. Also referred to as ancillary benefits Commercial feasibility1 Analysis conducted to check whether the project will effectively attract quality bidders, investors, and lenders, as well as highlight the main conditions that must be met to do so. Also includes “financial feasibility” Common law1 Common law is generally uncodified. This means that there is no comprehensive compilation of legal rules and statutes. Although common law does rely on some scattered statutes, which are legislative decisions, it is largely based on precedent, meaning the judicial decisions that have already been made in similar cases. In common law countries there is a clear freedom between the parties to agree on the terms of the contract Compensation events1 Risk events for which the private partner is entitled to receive financial compensation if the event materializes and to the extent the partner is impacted financially. This may occur in order to restore the financial equation of the project contract (the expected equity internal rate of return (IRR) and bankability) or to compensate the loss only partially (typically when an event has been nominated as a shared risk or a partial compensation event). Compensation events may be classified as full compensation events, partial compensation events, or shared-risk events Completion bond6 Security provided by the construction subcontractor for performance under and completion of the construction subcontract Concession The agreement between the grantor and the project company for a finite period of time, typically between 25 and 40 years (with extension options for an additional 5-15 years), based on which the project company must construct, operate, and offer the required service to the public; maintain; and ultimately transfer back to the grantor the asset Contracting authority The unit/body/department within a government that is contracting the project (see also procuring authority) Cost-Benefit Analysis (CBA) 1 A type of analysis used to compare two or more options for a project or a decision based on economic flows duly adjusted, following some patterns. The CBA is primarily used to assess the socio-economic feasibility or value of the selected project or project under assessment (regardless of the method of procurement) Credit enhancement1 Instruments that are structured mainly to provide a higher protection to lenders, thus increasing the credit rating of the debt. When provided by the public sector, credit enhancements are a form of public finance (in revolving mode) that may not necessarily provide soft terms, and they decrease the average cost of capital of the project directly; instead, they enable the lenders to charge lower rates of interest due to the increased credit rating. Credit enhancements can also be provided by multilateral development banks, export credit agencies, and private sector monoline institutions D Decarbonization Refers to the process by which governments or other entities (or individuals) aim to achieve a low-carbon economy and reduce their consumption of carbon 332 Developer A party willing to undertake / develop a project and responsible for the delivery of the project. A sponsor. Often, in some sectors, the engineering procurement and construction (EPC) contractor is also a developer Disruptive technology risk The risk that a new emerging technology unexpectedly displaces an established technology impacting the business model and/or the modeled cost (e.g., new equipment for maintenance having a significant upfront cost or cost of purchasing satellite material for weather forecasts, etc.) Due diligence1 Review and evaluation of the project, the project contracts, and their related risks. It is carried out by project investors and lenders before deciding to participate in/lend to the project. The term may be also applied to the project preparation activities or some aspects of the preparatory works to be handled by the procuring authority before the tender launch E Excess risks The portion of climate risk that exceeds the respective code provisions. The design of adaptation/resilience plans should have adhered to and be able to efficiently address the excess risks Exposure2 The presence of one or more project assets in places that could be adversely affected by a hazard External climate risks Climate-change risks that originate from hazards affecting the broader socioeconomic system (i.e., green economy transition risks) and surrounding or associated infrastructure with which the project is interlinked. This category is exclusively associated with potential indirect impacts (e.g., revenue loss due to reduced demand or loss of access to the infrastructure due to failure of the interconnected network) F Force majeure 1 External unpredictable events beyond the control of either party that are construed or defined by a law, policy or the contract. The precise scope of this term varies by jurisdiction, but it typically includes “acts of God” (natural disasters). It also often includes certain man-made events, such as war and terrorist activities G Government-pays PPP6 The government is the sole source of revenue for the private party. Government payments can depend on the asset or service being available at a contractually-defined quality (availability payments)—for example, a free highway on which the government makes periodic availability payments. They can also be volume-based payments for services delivered to users—for example, payment from hospital care effectively delivered 333 Grantor or Procurer or Procuring Authority1 The party that is responsible for evaluating and ultimately procuring a project. For example, the grantor may be a state entity (such as a ministry or a PPP secretariat) or local government (such as a municipality) Gray infrastructure5 Built structures and mechanical equipment, such as reservoirs, embankments, pipes, pumps, water treatment plants, and canals. These engineered solutions are embedded within watersheds or coastal ecosystems whose hydrological and environmental attributes profoundly affect the performance of the gray infrastructure Green bonds7 A subset of bond instrument where the proceeds are exclusively applied to finance or re-finance in part or in full new and/or existing eligible green projects and support climate-related or environmental projects Green taxonomy7 A classification system for identifying activities or investments that will move a country toward meeting specific targets related to priority environmental objectives H Hazard frequency A hazard attribute that describes the rate at which a hazardous event occurs (or is expected to occur) over a period of time Hazard intensity A hazard attribute that describes the magnitude of the hazard. The intensity might refer to the power, duration, area of coverage, or other measurable characteristics of the hazardous event Hedging mechanisms4 Mechanisms or instruments that are used to limit exposure to a price or unit of value that fluctuates. These typically cover interest rate, foreign currency exchange rates or commodity prices, and/or inflation I Insurable events (or risks) When there are available insurance mechanisms or instruments to cover the risks associated with these events Insurance premium The amount of money an individual or business pays for an insurance policy Insurers Entities that provide insurance to the project: mainly insurance companies Internal climate risks Climate-change risks that originate from hazards that are posed directly on the project and could damage the infrastructure itself or/and affect its availability (e.g., extreme flooding destroying dikes and suspending the service of infrastructure). Internal risks may have two components of impact: direct impacts defined as the loss due to damage on the physical infrastructure and indirect impacts defined as the loss of revenue due to the unavailability of the infrastructure (applicable both to government-pays and user-pays PPPs) 334 Investability Potential or capacity for investment; the quality of being attractive or profitable to invest in Investors The shareholders of the project company. They can be EPC companies, facility management companies, financial investors, institutional investors (pension and insurance funds), state entities or the government itself K Key Performance Indicators (KPIs)1 The financial or non-financial indicators used to measure the progress or success of the private party during the operating term on critical factors relevant to the project, and which will normally vary depending on the contracted services and other attributes of the project. KPIs are often included in the contractual arrangement because they may serve as the basis for certain payments to the private party L Lenders The financial institutions that provide loans to the project company in the form of senior debt, mezzanine debt or debt cover, to fund the project company on a non-recourse or limited recourse basis. Lenders can be commercial banks, multilateral institutions, development banks, export credit agencies, and infrastructure debt funds. Some types of creditors to the project company can also be bondholders, through the use of project bonds M Mitigation2 The ability of a human activity to reduce the sources or enhance the sinks of greenhouse gases. Human interventions may reduce indirectly GHG emissions by decreasing the sources of other substances that contribute indirectly to climate change N Natural disasters Very low-probability extreme climate events Nature-based solution (NbS)5 An umbrella term referring to actions that protect, manage, and restore natural capital in ways that address societal challenges effectively and adaptively. These include structural and nonstructural actions, ranging from ecosystem restoration to integrated resource management, green infrastructure, and more 335 O Offtaker or offtake purchaser The purchaser of the product produced by a project. The term is often used in connection with take-or-pay contracts Operating expenditure (OPEX)1 Costs for operating the infrastructure asset after construction delivery P Parent company guarantee1 Guarantee from a contractor’s parent company for the fulfillment of all contractual obligations. The parent company will assume responsibility for the obligations and/or provide financial compensation to the special purpose vehicle (SPV) to cover the cost of failure Payment abatements or payment deductions/adjustments1 Deductions from the payments in a government-pays PPP. These are the immediate route for penalizing financially under-performance in government-pays PPPs Performance bond/ Performance guarantee1 A written guarantee issued by a third-party (usually a bank or an insurance company). This is then submitted to the procuring authority and/or the special purpose vehicle (SPV). It is intended to ensure that the private partner and/or the contractor will perform all of the obligations as stated in their contracts Physical risks Potential damages on infrastructure or any tangible assets and service disruptions. The sources of the physical risks are climate- or weather-related events that may impact the project within its own environment. Physical risks are linked to damages and may pose financial losses for a project due to assets impairments or service interruptions PPP contract1 A long-term contract between a public party and a private party for the development and/or management of a public asset or service, in which the private agent bears significant risk and management responsibility throughout the life of the contract. Remuneration is significantly linked to performance, and/or the demand or use of the asset or service PPP pipeline1 A list of projects the government is considering for implementation as PPPs for a specific time frame (yearly, over 5 years, 10 years, and so on) PPP process or PPP cycle1 The steps that PPP projects proceed through in order for the project to be delivered. Steps include identifying the project, appraising the PPP, structuring the PPP and designing the contract, managing the tender and award processes, and managing the contract Private finance initiative (PFI)1 An alternative name introduced by the United Kingdom (UK) to refer to government-pays PPPs Private partner1 The counter party of the procuring authority in the PPP contract. A private entity that has been granted the contract to construct and operate a government asset, and which is usually created under the form of a special 336 purpose vehicle (SPV) or project company. It may also refer to the shareholder members of the SPV/project company, however these are more accurately defined as equity investors or shareholders Private party1 An alternative common name to mean private partner. Private party or parties may also refer to the private agents that participate in the project (including sponsors, contractors, lenders, and investors) Project A plan or solution that addresses a public need and/or national goal that needs to be fulfilled or achieved. The project might be in the form of a concept or a more detailed set of operations. It might consist of an individual project or a set of multiple sub-projects. The project can be introduced with a single or multiple alternative approaches and each alternative might consist of different variants (i.e., technical solutions) Project agreements All the main documents that define and guide a PPP project structure, such as the offtake agreement, the engineering procurement and construction (EPC) contract and the operation and maintenance (O&M) contract Project Company or special purpose vehicle (SPV) An entity created to undertake a single task or project in order to protect the shareholders with limited liability, often used for limited or non-recourse financing Project asset A human, social, natural, physical, or financial resource or capital of the project R Re-financing risk of adaptation works (applicable to adaptive plans only) The risk of meeting the financing requirements for the additional adaptation work at the time of the intervention Reliability testing Lenders and insurers sign off on the sufficiency of the developed PPP infrastructure Relief events1 Risk events for which, if the risk occurs, the private partner will be excused for under-performance or even breach of obligations (that resulted from the event, but no financial compensation is granted). For example, time delays in the case of unforeseen archaeological findings Representative concentration pathways (RCPs) 2 Scenarios that include time series of emissions and concentrations of the full suite of greenhouse gases and aerosols and chemically active gases, as well as land use/land cover. Representative signifies that each RCP provides only one of many possible scenarios that would lead to the specific radiative forcing characteristics. Pathway emphasizes that not only the long-term concentration levels are of interest, but also the trajectory taken over time to reach that outcome Rescheduling (or Restructuring)8 In relation to debt obligations, the renegotiation and agreement of revised terms of a loan facility (usually involving the spreading of interest and capital repayments over a longer period) as a result of the borrower being unable to comply with the original terms Resilience2 The capacity of social, economic and environmental systems to cope with a hazardous event or trend or disturbance, responding or reorganizing in ways that maintain their essential function, identity, and structure - while also maintaining the capacity for adaptation, learning and transformation 337 Resilience of the project9 Reflected in the question: “Are project assets/outputs resilient to risks from climate change and natural hazards?” Specifically, resilience of the project refers to the capacity of the project itself to achieve resilience against climate change Resilience through the project9 Reflected in the question: “Is the project outcome aimed at building resilience to climate change and natural hazard risks?” Specifically, resilience through the project refers to the ability of the project outcomes to contribute to community/regional resilience Risks of climate-induced failure of interconnected infrastructure A type of external risk related to the associated infrastructure that is not part of the project itself but interacts with it (e.g., failure of the grid in case of a power-generation project or reduction of ridership of a highway project due to gradual desertification of the areas it is serving) S Security6 A legal right of access to value through mortgages, contracts, cash accounts, guarantees, insurances, pledges or cash flow - including licenses, concessions and other assets. Lenders can act on security rights in the event of default by the borrower. A negotiable certificate evidencing a debt or equity obligation/shareholding Social risk The risk associated with the project impact on affected population (including the risk of widening gender gaps) State guarantees10 Agreements under which a sovereign or assimilated entity (“Government”) agrees to bear some or all of the downside risks of a PPP project. A state guarantee is a secondary obligation. It legally binds the government to take on an obligation if a specified event occurs. A state guarantee constitutes a contingent liability, for which there is uncertainty as to whether the government may be required to make payments, and if so, how much and when it will be required to pay. In practice, state guarantees are used when debt providers (e.g., commercial banks, national and international financial institutions, capital markets, hedging counterparties) are unwilling to lend to a PPP company as a result of concerns over credit risk and potential loan losses. State guarantees can also be used to benefit the equity investors in a PPP company when they require protection against the investment risks they bear Subcontract1 A contract between the private party and a third party, providing for performance of part of the private party’s obligations under the PPP contract Sustainability-linked loans Key financial instruments that aim to support sustainable economic growth and investments towards a low- carbon and climate-change resilient future. They comprise any loan instrument and contingent facilities that incentivize green initiatives and actions that support sustainable economic growth T Tender process1 The process by which bids are invited from interested parties to carry out the project. A tender process uses competitive pressure among bidders to obtain the best price and terms 338 Third-party liability insurance Covers third-party claims that may result from a physical injury or damage to someone else’s property Traditional design A design that follows established norms and standards and does not account for climate uncertainty Transition risks A type of external risk that is not directly caused by a climate-event but is associated with the green economy transition that challenges the traditional legislative and investment framework and drives technological innovation in every aspect of life. They include the potential losses or potential changes in the value of investments that may be triggered from changes - or new implementations - in the policy frameworks, the legislation system or government strategies as well as the transformation of traditional operations in primary sectors due to the effects of climate change U Uninsurable events (or risks) Events for which there are no available insurance mechanisms or instruments to cover the associated risks. They are commonly treated as force majeure User-pays PPP6 The private party provides a service to users and generates revenue by charging users for the service. These fees (or tariffs, or tolls) can be supplemented by government payments, for instance, complementary payments for services provided to low-income users when the tariff is capped; or subsidies to investment at the completion of construction or specific construction milestones. The payments may be conditional on the availability or volume of the service at a defined quality level V Value for Money (VfM) in the PPP context1 The benefits relative to the costs of procuring a project using a PPP compared to other procurement options. Commonly referred by its abbreviation VfM. In a PPP context, value for money can be tested at two different points in the project cycle: (i) during appraisal and structuring, a VfM test can determine whether the PPP alternative is a supportable procurement mechanism that is likely to provide best value to the public authority or better than the traditional procurement mechanism. (ii) during the evaluation of bids, a VfM test can determine whether bids offer value for money against the cost of conventional procurement. A positive VfM result or the VfM expected from the PPP option is the result of the combination of private sector efficiency and innovation, risk transfer, whole life cost, and service provided by the facility Vulnerability2 The propensity or predisposition of the project to be adversely affected. Vulnerability encompasses two main concepts: (i) sensitivity or susceptibility to harm and (ii) lack of capacity to cope and adapt 339 W Weather derivatives Financial instruments used by companies or other entities to hedge against the risk of weather-related losses. This financial instrument is normally based on a weather-related index that is designed to reflect losses due to adverse climatic events such as excessive or insufficient rainfall, temperature extremes, and tropical storms, hurricanes, cyclones, and typhoons. The seller/issuer of the derivative accepts this weather risk and works in a similar way to an insurer; in case the weather index crosses a specific pre-determined threshold, the derivative holder receives the agreed payout. Definitions based on: 1. ADB, EBRD, IDB, IsDB, and WBG, 2016: The APMG Public-Private Partnership (PPP) Certification Guide – Glossary 2. WBG CCKP, 2018: Glossary of Terms and Definitions 3. IFC, 2017: Insurance Layperson’s Guide 2017 4. GIH, 2019: PPP Risk Allocation Tool 2019 Edition 5. WBG - WRI, 2019: Integrating Green and Gray: Creating Next Generation Infrastructure 6. PPP Knowledge Lab, 2021: Glossary 7. International Capital Market Association (ICMA) 8. Jeffrey Delmon, Private Sector Investment in Infrastructure, Kluwer Law International, Third Edition 9. WBG, 2021: Disaster Risk Financing (DRF) - Emerging Lessons in Financing Adaptive Social Protection 10. EPEC, 2011: State Guarantees in PPPs A Guide to Better Evaluation, Design, Implementation and Management 11. WBG, 2021: Resilience Rating System: A Methodology for Building and Tracking Resilience to Climate Change