From: Robert Siddall
To: Jonathan Wilkinson, Minister of Environment and Climate Change, and Bill Morneau, Minister of Finance
Date: February 10, 2020
Re: Assessing Climate Change Impacts on P3s
Public-private partnerships succeed when both parties can adequately identify and quantify risks and then effectively allocate them to the party best suited to manage these risks.
Climate change will affect P3s in three major ways:
- Likelihood of Risks – As climate variability becomes the norm, extreme and rare weather events now occur regularly. The evolution of new regulatory and building code regimes will be harder to predict as governments try to address climate change. Predictability becomes even harder for P3 contracts with 20- to 30-year lengths.
- Quantification of Costs – Putting any number on various cost scenarios facing P3s will become much more difficult. In some cases, the inclusion of climate change contingencies in cost estimates will affect the risk transfer process.
- Transfer of Risks – The unwillingness, or in some cases, the inability of P3 proponents to accept climate risks will lead to more risks being retained by governments.
The impact of climate change will also vary by the type of activities included in any P3, as shown below.
In addition, governments may also need to renegotiate some existing P3 contracts as it becomes evident that climate change costs were never identified or quantified but are now regularly incurring costs that can no longer be borne by the private partner. With no renegotiation, governments could find the P3 proponent walking away.
P3s will continue to exist. But better identification, quantification and allocation of climate risks will be crucial. Governments, however, can still expect greater retained risks for any future P3 projects affected by climate change, as well as higher costs when risks are transferred to the private partner. Over time, governments should also expect to see less private sector enthusiasm for long-term contracts and to enter into Design-Build-Finance-Operate/Maintain agreements that leave them with significant exposure to inadequately assessed climate change risks.
Better understanding and shared acceptance of climate change estimates would help reduce some of these risks and costs for government.
Creation of a Canadian Centre for Climate Information and Analytics, as recently recommended by a government advisory panel, would provide an authoritative source of climate-related information and analysis.
Access to reliable and consistent climate data is at present quite weak, and is essential for better business decision-making, said the Expert Panel on Sustainable Finance in its report late last year.
Following through with this type of recommendation will go a long way to better quantifying climate-related risks, making it easier for P3 projects assess risk, and continue to play a role in public projects.
Robert Siddall, FCPA, FCA is former chief financial officer of Metrolinx.
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The views expressed here are those of the author. The C.D. Howe Institute does not take corporate positions on policy matters.