Financing for Disaster- and
Climate-Resilient Infrastructure

4.1 Introduction

The bulk of new infrastructure investment over the next 30 years needs to take place in LMICs

Financing infrastructure resilience requires mobilizing investment from geographies and sectors with surplus capital to those where major new funding is required.

Mobilizing new investment at large scale can only be facilitated by significant changes in the financial system and by building on the capacities of existing institutions (G20, 2018). Underinvestment in infrastructure is fundamentally one of the fault lines of the world economy and a key risk driver of stagnation in global economic growth (Blanchard, 2019; Krugman, 2014; Rachel and Summers, 2019).

As announcements of major new infrastructure investments by the USA and EU have shown, high-income countries have sufficient capacity for public investment to scale up their infrastructure investments (Chapter 1). They are also attractive markets for private capital. High income countries are upgrading and replacing obsolete infrastructure that has outlived its design life and making major investments in renewable energy to accelerate the transition to net zero emission. However, even these countries struggle with the increasing cost of capital, governance issues, and inadequate return on investments in infrastructure assets.

The bulk of new infrastructure investment over the next 30 years needs to take place in LMICs. As previously argued, given the design lifecycles of new infrastructure, planning and investment decisions made today will determine whether countries follow one of the two alternative future trajectories: sustainable social and economic development or constrained development and increasing contingent liabilities and higher systemic risk (IIHS, 2023). It is not just new investment that is required; it is investment in infrastructure resilience.

Mobilizing the finance required to strengthen infrastructure resilience in LMICs is a huge challenge. Weak infrastructure governance is consistent with a low rate of return on investment, project delays, complex approval mechanisms, and political uncertainty, all of which discourage private investment. At the same time, domestic financial markets generally lack capacities to channel capital towards infrastructure resilience. Therefore, identifying incentives and mobilizing finance for a new ‘resilient infrastructure asset class’ becomes imperative (IIHS, 2023).
Low- and Middle-income
(LMICs)

Most infrastructure in LMICs is currently financed through public investment, with significant participation from MDBs. However, the infrastructure resilience deficit cannot be addressed without a drastic increase in private investment. Unfortunately, governments and private investors are yet to fully recognize the significance of investing in resilience.
Multilateral Development Bank
(MDBs)

In the public sector, only a weak political and economic imperative exists for investing in resilience. As discussed earlier, resilience benefits typically accrue over long periods, while electoral cycles demand short-term and visible results. Private investors are yet to be convinced of the relevance or commercial benefits of investing in resilience. As highlighted in Chapter 3, traditional cost-benefit analysis rarely captures the broader benefits of resilience, such as avoided loss, damage, and service disruption, or the environmental, societal, or economic co-benefits over the entire lifecycle of infrastructure assets. Furthermore, even if the resilience dividend is identified and measured, it is unclear how it can benefit investors. Identifying a compelling political and economic imperative for investment in resilience is, therefore, critical, along with mechanisms and incentives developed to integrate that imperative into investment decisions.

4.1.1. The Infrastructure Resilience Finance Gap

The infrastructure resilience finance gap can be defined as the difference between the sum of the investment needed to strengthen the resilience of existing infrastructure and build future resilient infrastructure and existing and projected public and private finance, including climate finance.

Estimates of the size of this gap vary widely and depend on the type of transformation envisaged, For example: to achieve the SDG or to transit to net-zero economies. the assumptions made, and the way income geographies are classified. The definition of developing countries by the United Nations is different from that of LMICs by the World Bank or low-income developing countries and emerging economies by the IMF. However, there is a significant overlap between all three classifications.. Most estimates include the requirements to achieve the SDGs or net-zero economies or both, but do not explicitly contemplate strengthening resilience. The World Bank estimated that developing countries need to invest around 4.5 percent of GDP to achieve infrastructure-related SDGs (Rozenberg and Fay, 2019). Other studies showed an annual shortfall of $2.5 to $3 trillion between required and available resources (OECD, UNEP et al., 2018).
Gross Domestic Product
(GDP)

The assumptions that underpinned these earlier estimates now need to be reappraised. Recent assessments have found that investment in physical assets, energy, and land use amounting to $9.2 trillion per year would be required between 2021 and 2050 to achieve net zero; this is an increase of $3.5 trillion or the equivalent to onequarter of global total tax revenue in 2020 (McKinsey Sustainability, 2022).

LMICs, particularly those with low GDP per capita and a high dependency on fossil fuels, require more investments relative to GDP to undertake this transition (Averstad et al., 2023).

They are also more vulnerable to the downsides, such as stranded infrastructure assets and employment shocks. LMICs will thus have to spend approximately 30 percent of the global investment in infrastructure assets and land use to achieve net zero, which amounts to $2.76 trillion annually (South Pole Carbon, 2022). If it were assumed that the cost of strengthening infrastructure resilience represents an additional 3-5 percent, the total annual requirement would be in the range of $2.84-$2.90 trillion.

The infrastructure investment of LMICs is far behind of what is actually required (African Development Bank et al., 2021). Private investment in LMICs was approximately $40 billion in 2021, with additional climate financing of around $50.7 billion channelled through MDBs (GIH, 2022). Estimates of public investment vary, but it seems likely that the sum of public and private investment and climate finance may be around one order of magnitude lower than the requirements in these countries.

Furthermore, even this estimate is probably overstated as much of the new investment is, in reality, used for repairing and rehabilitating damaged infrastructure. As highlighted in Chapter 2, the proportion of GFCF at risk of disaster, climate loss, and damage in LMICs ranges from 4.7 percent in upper-middle income countries to 9.1 percent in low-income countries (GIRI, 2023). In 2021, total GFCF in low-income countries was $124 billion. This implies that around $11.3 billion would have to be set aside annually to cover the costs of repair and rehabilitation. Owing to accumulated disaster and climate risk, less investment is available for new infrastructure in LMICs.
Gross Fixed Capital Formation
(GFCF)

4.2. Climate Financing

Debt remains the dominant instrument for climate finance

Dedicated multilateral funds, such as the Green Climate Fund (GCF), are also key sources of adaptation finance to LMICs, particularly in least-developed countries and SIDS. GCF has made an overall commitment of $11.3 billion since its inception in 2010, with $8.8 billion currently under implementation. The crucial feature of GCF is that it can tap into and catalyze both public and private finance flows, offering a range of financing instruments, from loans, equity, guarantees, and grants to specifically adapted solutions in investment-scarce environments. Its ability to partner with the private sector means it can help countries to de-risk large infrastructure investments and raise additional funding for climate action.
Small Island Developing States
(SIDS)

Over the past decade, only 16 percent of climate finance was concessional finance while 5 percent was grants (Figure 4.1). Concessions and grants are crucial in de-risking investment in the new technologies required to achieve net zero and in markets such as LMICs (Buchner et al., 2021). Instead, debt remains the dominant instrument for climate finance, increasing the risk for countries already struggling with high debt levels. As discussed, climate finance may not be appropriate for all resilience requirements. A significant proportion of infrastructure risk is associated with high-severity, long-return period events such as major earthquakes and tsunamis and is already internalized in existing infrastructure. Climate adaptation funding is not appropriate for addressing these risks.

In large emerging economies, such as India and South Africa, domestic budgets are an important source of adaptation finance, far exceeding international finance. In line with Article 2.1(c) of the Paris Agreement, there is a growing recognition that domestic budgeting should fully account for revenues and expenditures that enhance resilience in order to make finance flows consistent with low-carbon and climateresilient development pathways.

Figure 4.1 Climate Finance by Instrument, 2011-20 (in bn US$) Source: Buchner et al. (2021)

4.3. Investing in Resilience

There is an estimated $106 trillion of untapped private institutional capital worldwide.

Some estimates claim that including resilience measures in infrastructure projects produces an average dividend of $4 for every $1 spent (Hallegatte et al., 2019). However, in reality, the costs and benefits vary enormously, asset by asset and sector by sector.

For example, the global power sector would require annual capital spending of around $2 trillion to decarbonize; it could create employment benefits of up to 43 million additional jobs by 2050. Meanwhile, the mobility sector would require annual spending of $3.5 trillion for road transportation transformation alone, but with net losses in employment of up to 3 million jobs lost by 2050 due to productivity gains in low-emission vehicle manufacturing (McKinsey Sustainability, 2022). The Ministry of Economy and Finance in Peru was a pioneer in introducing resilience considerations into public investment planning and evaluation. Table 4.1 shows how the resilience dividend varies widely across public investment projects in Peru for hazard events of different return periods, considering only the value of avoided loss and damage. Achieving high levels of structural resilience of infrastructure may not always be economically viable, and normally some of the risks must be retained (ICSI, 2022). Strengthening resilience always involves trade-offs that must be identified and negotiated politically in each sector or territory. However, as the case studies summarized in Section 2.8 show, a resilience dividend exists even when considering only avoided loss and damage.

Table 4.1 Cost-benefit Relationship in Public Investment Projects in Peru Source: UNISDR (2009)

Note: Shaded cells indicate that value of avoided losses exceeds additional costs of disaster risk reduction investment

4.4. Challenges to Mobilizing Finance for
Resilient Infrastructure

There is an estimated $106 trillion of untapped private institutional capital worldwide, which would be more than sufficient to close the current infrastructure resilience investment gap (World Bank Group, 2016). However, only 1.6 percent of it is currently invested in infrastructure, mainly in high-income countries and renewables. Another assessment by the IMF estimates that low-income countries and small state countries would require additional investment to the tune of 1 to 2% of their GDP annually in resilient infrastructure and ecosystems, the majority of which are targeted towards coastal protection. How to attract this capital to geographies with the greatest need, therefore, is the crux of the financing challenge.

The ability of countries to mobilize private capital for infrastructure resilience is highly dependent on their capacity to develop and implement projects in the context of their overall quality of infrastructure governance (South Pole Carbon, 2022)

Challenges and barriers to accessing private capital include misperceptions of the costs and benefits of investing in resilience, governance issues, weak institutional capacities, and the limited buoyancy of public domestic capital markets (Table 4.2).

Table 4.2 Challenges and Barriers to Investing in Resilience Source: South Pole Carbon (2022)

4.5. Pathways to Upscaling Financing for
Infrastructure Resilience

4.5.1. Strengthening Infrastructure Governance: National Resilience Policies, Strategies and Plans

An essential first step in most countries is to ensure the development and maintenance of a national audit of all infrastructure asset classes and service nodes, including spatial information, data on the authorities involved in building, the quality of O&M and services, and asset loss and service interruption. Such audits can identify per capita access to local and strategic infrastructure and ascertain the basic infrastructure deficit. The service delivery levels and updates can give greater insight into the level of resilience and the establishment of priorities for investment.
Operations and Maintenance
(O&M)

The application of financial risk metrics, such as those produced by the GIRI, can then allow risk and resilience to be layered in each sector and territory. The layering of risk is critical as some assets may be resilient to high frequency, low-severity events such as floods or storms but not to lowfrequency, high-severity events such as high-magnitude earthquakes or tsunamis. By layering risk, national resilience strategies can then identify the most cost-effective approach to ensuring resilience, including prospective risk management (higher infrastructure standards, environmental protection, etc.), corrective risk management (retrofitting, reinforcing, and remedial measures), compensatory risk management (risk financing and transfer), and reactive risk management (early warning systems and effective response and recovery).
Global Infrastructure Risk Model and Resilience Index
(GIRI)

National resilience policies are essential for determining countryspecific resilience objectives and the different levers of change that can be used in the policy mix; for example, to ensure that procurement policies adhere to internationally agreed resilience standards and encourage the development of Model Concession Agreements (MCAs) for PPPs aligned with resilience targets (IIHS, 2023). Japan, for example, introduced the PPP model on a large scale by enacting and promoting the Private Finance Initiative (PFI) Act. The Cabinet Office has established a PPP/PFI Promotion Office, which plays an advisory role to the Prime Minister and other relevant public agencies and has developed several guidelines that help local governments understand the process of PPP projects and contracting. The same office coordinates PPP promotion with the public and across central government agencies (Chavarot, 2023).
Public-Private Partnership
(PPP)

As Figure 4.2 shows, the GIRS confirmed the importance of national policies: ‘In most nations, having stronger policies are seen as the most important infrastructure management development to ensure long term resilience’.
Global Infrastructure Resilience Survey
(GIRS)

Figure 4.2 The Importance of Policy Frameworks for Infrastructure Resilience (GIRS) Source: Chow and Hall (2023)

4.5.2. Financial Risk Metrics and the Economic Case for Resilience

Unfortunately, in most LMICs, robust, comparable, and credible disaster and climate risk metrics are not available in a form that can be easily used to measure the financial risk in projects. Consequently, the resilience dividend cannot be properly quantified. This remains a key hurdle in attracting private capital as it adds additional uncertainty to projects and implies hidden contingent liabilities for potential investors.

The lack of accessible risk data is now recognized as a critical barrier by financial institutions (Willis Towers Watson, 2021). In many LMICs, the required input data on hazard, exposure or vulnerability, disaster loss and damage, or ecosystem services may not exist or be heavily constrained due to institutional silos and national security issues. However, the growing availability of high-resolution, publicly accessible global data enables the development of global risk models such as GIRI that begin to close the gap, even in countries where official data is difficult to access. As explained in Section 2.8, downscaling these models to the national or sub-national level can make a clear economic case for investing in resilience and estimating the resilience dividend, including through NbIS.
Nature-based Infrastructure Solutions
(NbIS)

Figure 4.3 How Environmental Risks Translate to Financial Risks Source: WWF India (2023)

Financial risk metrics are also used to price risks and underpin insurance markets. Risk transfer mechanisms such as insurance (Miyamoto International, 2022) Risk transfer is defined as the formal or informal transfer of the financial consequences of specific risks from one party to another (a household, community, organization, or state authority), obtaining resources from a different party after a disaster happens in return for ongoing or compensatory social or economic benefits given to that other party. can and should form an integral part of a national infrastructure resilience policy, strategy, and infrastructure financing. With a major loss of infrastructure assets in a large disaster, governments without an adequate level of savings and reserves cannot access contingency loans. They will have difficulties paying for the rehabilitation and reconstruction of uninsured assets (Mechler et al., 2016). Due to interrupted economic activity, fiscal shocks further reduce the capacity to finance recovery. If infrastructure assets are insured, recovery and reconstruction can be accelerated, avoiding fiscal downsides.

Unfortunately, in most LMICs, public infrastructure is protected neither by asset insurance nor by other instruments such as risk pools or insurance-linked securities (IIHS, 2022). The sovereign catastrophe risk pools that do exist in the Caribbean, Pacific, and Africa have required many years of sustained technical assistance from partner organizations For example, the World Bank Group has assisted the development of the Caribbean Catastrophe Risk Insurance Facility (CCRIF), Pacific Catastrophe Risk Assessment Finance Initiative (PCRAFI), Southeast Asia Disaster Risk Insurance Facility (SEADRIF), and the World Food Programme has assisted African Risk Capacity (ARC). to facilitate the political and policy dialogue and coordination between participating governments (Miyamoto International, 2022).

While it is desirable that all infrastructure assets are insured, the pricing of premiums is generally insensitive to investments in resilience. Insurance premiums are usually calibrated with respect to the AAL of large pools of assets with differing levels of resilience (OECD, 2015). Thus, the cost of risk financing is rarely an effective incentive to encourage investments in resilience.
Average Annual Loss
(AAL)

4.5.3 Identifying the Resilience Dividend

Similarly, there is little incentive to optimize lifecycle costs, given the time, value of money and the way discount rates tend to skew asset valuations towards the short and medium terms, with little consideration for an asset’s residual value. There is still insufficient awareness that investment in resilience can lead to value creation through a combination of reduced future loss and damage, optimized lifecycle costs, and improved certainty of operating cash-flows, combined with positive development outcomes, such as increased well-being and economic growth (Figure 4.4).

Figure 4.4 Framework for Infrastructure Resilience: Dimensions, Enabling Conditions, and Outcome Monitoring

As already highlighted in Section 3.3.7, if investment in resilience is to become more attractive, the social rate of return on investment, including avoided loss and damage and service disruption; broader social, economic, and environmental co-benefits; and reduced systemic risk, needs to be considered (GCF, 2022; IIHS, 2023). Identifying and estimating the resilience dividend clearly is essential to change the perception of investments in resilience from a cost to an opportunity.

To be resilient, infrastructure assets need to be robust and well-maintained, with adequate O&M standards and targets (European Commission, 2019). As mentioned earlier, the capital cost of an infrastructure asset often only accounts for 15–30 percent of the overall expenditure over the design lifecycle, while 70–85 percent represent O&M expenses (UN, 2021). This requires a steady flow of resources, and hence, well-planned and soundly estimated investments. For example, in countries such as Austria, Denmark, Italy, Moldova, New Zealand, and Slovenia, over 50 percent of the total budget for road transport is spent on maintenance (OECD International Transport Forum, 2022).

If appropriate resilience standards are integrated at the project planning and design stage, then both capital expenditure (CAPEX) and operating expenditure (OPEX) can be optimized to convert resilience from a cost to a vehicle to generate additional, stable revenue over the asset lifecycle. Integrating financial risk metrics into asset design enables more predictable cash flows, improved credit quality simulations, and a more efficient allocation of costs across the whole asset lifecycle (Figure 4.5).

Figure 4.5 Changes in Cashflow under Business-as-usual and Resilience Scenarios Source: Chavarot et al. (2021)

A critical challenge is determining who bears the contingent liability. For example, if a flood damages a major transportation hub, there is often no procedure for distributing losses amongst different stakeholders. The actual fiscal liability for investors, operators and users, as well as the public sector, is unclear. Furthermore, in most low-income countries, most of these losses are currently uninsured. Consequently, the burden of risk may lie entirely with the public sector (Jain, 2015), though this challenge can be addressed by explicitly defining shares in contingent liability.

If resilience is to be fully factored into the planning, design, financing, operations, and maintenance costs of infrastructure projects, the benefits and costs of resilience need to be correctly priced.

As discussed in Section 3.3.9, conventional cost-benefit analysis for infrastructure projects often fails to identify the total resilience dividend that can accrue over the lifecycle of a project. To identify the resilience dividend, this approach should be broadened to include avoided asset loss and damage and service disruption; the value of protected ecosystem services; co-benefits for households, communities, and businesses; and avoided systemic risk, including climate change and loss in biodiversity.

These broader benefits should be identified early in a project’s development. Some are more easily quantifiable and measurable, such as the creation of new jobs. While others, such as loss avoidance associated with low-return period hazards, can be quantified but may seem less tangible to owners and users of the infrastructure. As Box 4.2 shows, investing in the planning of infrastructure development, for example, through pre-development technical assistance, plays a crucial role in allowing quantification of such benefits.

Identifying the resilience dividend can increase the economic and financial value of projects, thus demonstrating that the risk-adjusted returns of resilient investments can be attractive. There are a number of tools that facilitate the identification of the resilience dividend. For example, the CCRI Physical Climate Risks Assessment Methodology (PCRAM) determines the baseline climate resilience level of an asset and undertakes a cost-benefit analysis of potential resilience options (Chavarot et al., 2021). The Economics of Climate Adaptation studies present another useful framework and a modelling platform, CLIMADA, to assess not just the risks related to climate change but also the costs and benefits of different adaptation options (Figure 4.6).

The integration of resilience features in project design and operations should address bankability issues, improve the ability to raise project debt, and lower the cost of capital. Therefore, methodologies and frameworks, such as PCRAM or CLIMADA, should form part of standard lender due diligence processes. Discount rates can then be adjusted to reflect the Net Present Value of an asset once resilience features are factored into cash-flow projections. For example, in a renewable energy power plant in Asia, resilience was embedded into the design of the project from the outset. Implementing this resilience option increased the initial CAPEX by approximately 2 percent and decreased the internal rate of return by 0.1 percent. However, accounting for avoided future potential losses increased the internal rate of return by 2 percent, which highlighted an important resilience dividend (Chavarot et al., 2021).
Physical Climate Risk Assessment Methodology
(PCRAM)

Figure 4.6 The CLIMADA Platform for Assessing Climate Change Impacts and Cost-benefit Ratios of
Adaptation Options Source: Adapted from ETH Zürich (2023)

4.5.4. Public Investment Planning and Evaluation

The capacity of local government varies across the globe: in Europe, municipalities account for around 45 percent of all public investment in infrastructure, but in LMIC, it is often just a fraction of this (EIB, 2021). The contingent liabilities of local governments in lower-income countries are often associated with extensive risk (frequent low-severity events). A retrospective analysis of disaster loss and damage data Despite several decades of efforts to strengthen data collection and reporting, disaster loss and damage data continues to be inconsistently documented in many countries. can often be an important first step in identifying and estimating risks to local infrastructure. Probabilistic risk estimation rarely accounts adequately for the extensive risk layer of highly idiosyncratic, localized, frequent events, in which case a retrospective approach, using disaster loss and damage data, may be the most appropriate. However, as Box 4.3 highlights, data availability is still a challenge.

4.5.5. Pipelines of Bankable Resilience Projects

National resilience plans can include developing project pipelines consisting of a series of projects developed in connection with each other.

Project pipelines can enable government, industry, and communities to plan better and finance investment in resilience (GIH, 2022). For governments, pipeline development is an essential step in planning infrastructure. The industry needs pipelines to plan and prepare its resources both on a micro level (in pursuit of specific programmes and projects) and on a macro level (by using pipelines to identify market trends). Pipelines are an important signal for attracting new entrants to infrastructure markets and for industry and academia to prioritize workforce education and upskilling programs. Moreover, pipelines can be an effective tool to demonstrate transparency so that communities can see what is being built and when.

Project pipelines also allow the bundling and aggregation of smaller projects in a way that optimizes the allocation of funding sources across projects. Small projects do not have the scale to attract private investment and increase risk for investors. But if they are aggregated and bundled together in a project pipeline, they become more attractive to investors as the risk is distributed across the range of projects.

Project and portfolio risk valuation needs to cover a range of risks, from construction to market risks and O&M to regulatory and political risks (GCF, 2022). By accounting for the full range of risks, project pipelines can help to derisk private infrastructure investment. This allows governments to then select the most appropriate mix of financial instruments for the pipeline rather than bundling projects to match specific financing mechanisms, which can increase the portfolio risk (Figure 4.7).

Figure 4.7 Steps towards Developing Integrated Projects Pipelines to Mitigate Risk Source: GCF (2022)

A well-bundled project pipeline presented in an investment road map for climate-resilient investment can attract private-sector institutional investors alongside public-sector funding (Box 4.4) (GCF, 2022).

4.5.6. Towards a Resilient Infrastructure Asset Class

Standards and certifications provide a common language to understand and compare different infrastructure projects, which could aid in scaling projects and prioritizing project benefits.

In particular, standards and certifications can help lower perceived risks for private investors by providing additional clarity, therefore unlocking additional financing and funding streams (ICSI, 2022). Environmental, social and governance (ESG) performance indicators can also potentially inform infrastructure investors. Figure 4.8 provides an example of how to map the most relevant ESG criteria for the selected asset, outlining which ESG criteria should be measured and reported, and quantifying and assigning monetary value to ESG metrics (WWF India, 2023).
Environmental, Social and Governance
(ESG)

However, no single comprehensive set of criteria for ESG in infrastructure is universally recognized, limiting the usefulness of current multiple ESG frameworks for infrastructure resilience. At the same time, there is insufficient evidence that confirms how positive ESG scores increase investment in resilience. ESG scores for LMICs companies tend to be systematically lower than those in high-income countries, meaning ESG-focused funds allocate only limited resources to LMICs (Ehlers et al., 2022).

Figure 4.8 Principles, Standards, Frameworks and Tools in the Context of Infrastructure Investments
Source: WWF India (2023)

Initiatives that promote a common approach to identifying sustainable, quality, and/or green infrastructure projects include several ‘meta standards’, such as FAST-Infra (Finance to Accelerate the Sustainable Transition-Infrastructure) label, the SuRe (Standard for Sustainable and Resilient Infrastructure) standard, and the Blue Dot Network (BDN). FAST-Infra (presented in Box 4.5), led primarily by finance-sector institutions, launched the Sustainable Infrastructure Label to identify sustainable infrastructure projects. SuRe is a third-party verified global voluntary standard developed by Global Infrastructure Basel (GIB). It provides certificates in line with insurance standards (Global Infrastructure Basel Foundation, n.d.). The American, Australian and Japanese governments introduced the Blue Dot Network framework to certify quality infrastructure projects (US Department of State, 2019).

Going forward, it is essential that these meta-standards are fully aligned and address the user needs across all infrastructure sub-sectors, especially in emerging geographies where the majority of new infrastructure is expected to be built (WWF India, 2023). A combination of resilience standards and credible third-party certification processes can pave the way for creating an infrastructure resilience asset class, providing investors with a transparent identification of opportunities for investment in resilience.

Figure 4.9 FAST Mechanism Source: Losos and Fetter (2022)

4.5.7. Allocating the Resilience Dividend

One of the major barriers to increasing private investment in resilient infrastructure is that the resilience dividend over the design lifecycle usually benefits a broad set of stakeholders. Allocating the costs and benefits of risk and resilience amongst these stakeholders is the key to providing incentives for the proper integration of resilience in infrastructure systems.

Once the resilience dividend and stakeholders have been clearly identified, it is necessary to develop policies that monetize the socioeconomic benefits of investing in resilience and enable investors to capture a part. The value of the resilience dividend needs to be estimated first, combining project and economic evaluation (e.g., through the Resilience Dividend Valuation Model). Developed by the Rand Corporation with support from the Rockefeller Foundation (Bond et al., 2017). In this approach, the resilience dividend is calculated as the sum of benefits, over time, from a project investment integrating resilience, compared to one that does not.

In other words, the additional value generated by investing in resilience in comparison to ‘business as usual’ (Bridgett-Jones, 2017).

Monetizing the resilience dividend can be seen through the dual lenses of tangible vs. intangible benefits and internal vs. external benefits. Tangible benefits relate to potential streams of cash flows that can be quantified relatively easily, such as reduced maintenance costs, avoided asset losses, improved infrastructure services and other benefits including biodiversity preservation that can be quantified (and monetized) through a voluntary carbon market mechanism. Intangible benefits are more diffuse and benefit broader society. Quantification is less obvious, meaning they are more difficult to monetize. They may only be measurable nationally (e.g., health, environmental, or other societal benefits).

Internal benefits are those that accrue at the asset level to the users, managers, or owners of the asset. Their allocation is generally governed by the regulations and legal framework under which the asset operates. For example, a public highway with no toll fees is an infrastructure asset where the internal tangible benefits are allocated entirely to its users. In contrast, if the same highway is operated by a concessionaire with the right to charge tolls, the benefits are normally allocated between the concessionaire, the users, and the authority that granted the concession. External benefits are typically not attributes of the infrastructure asset per se. While the asset owner may benefit directly or indirectly, these benefits are normally not quantified (e.g., economic growth from new or improved infrastructure or the increased resilience of a national economy to economic-, financial-, and hazard related shocks).

Tangible, internal benefits are the easiest to monetize (for example, through the identification and quantification of costs and benefits of different resilience strategies). In contrast, intangible and external benefits are the most difficult to monetize, as demonstrated through decades of negotiations on the costs of climate change. Benefits that are tangible and external can be monetized by mechanisms such as fiscal incentives provided that the beneficiaries, and their propensity to be taxed, can be clearly identified, with proceeds redistributed to asset owners.

On the other hand, internal and intangible benefits can be monetized through existing mechanisms, such as payment for ecosystem services and other conservation ‘banking’ tools developed to support NbIS, distinguishing between benefits that communities and local businesses should pay and the benefits that governments should pay. Box 4.6 highlights a case where investors can monetize part of the resilience benefits accrued from an NbIS programme.

Figure 4.10 Yuba Project Completed Treatments (2019) Source: Tahoe National Forest & Blue Forest Conservation (2018)

For the monetization of the resilience dividend to become a quotidian practice, ‘Voluntary Resilience Benefit Certificates’, modelled along the lines of the Voluntary Carbon Market, could be introduced (Chavarot, 2023). The certificates could identify and monetize the resilience dividend based on predefined standards. Finance ministries could then issue the certificates and implement or regulate a trading scheme. They could also be potentially structured as a pre-payment of future resilience dividends and used for finance investments in resilience through national resilience funds. MDBs could be asked to co-fund such pre-payments through investment in national resilience funds.
Multilateral Development Bank
(MDBs)

It could also be possible to develop and structure a parametric insurance product that links pay-outs with a reduction in losses as a result of embedded resilience features in an asset. This could then be replicated at a portfolio or even national level with insurance-linked resilience securities issued in capital markets.

4.5.8. Innovative Financing Instruments for Infrastructure Resilience

First, there is a need for financial structures that adequately blend public and private sources of capital through de-risking mechanisms (Box 4.7). With the help of such mechanisms, public funds can provide the basis for and stimulate private investment in resilient infrastructure while simultaneously accelerating development goals.

The creation of national resilience funds, to fund project pipelines, could provide a vehicle that blends public capital, private investment, and, where appropriate, climate finance in a way that de-risks projects for investors, maximizes rateof-return, and appropriately distributes the resulting resilience dividend amongst the range of stakeholders. They can also potentially provide a vehicle for integrating insurance and other risk financing mechanisms, such as catastrophe bonds, as an integral part of infrastructure financing.

Second, new financial instruments can allow the mobilization of untapped financial resources. As Box 4.8 illustrates, the issue of green bonds has helped strengthen resilience in the Philippines.

Third, as Box 4.9 shows, green financial instruments can also promote the integration of NbIS (ICSI, 2022).Debt relief programmes or new debt swap mechanisms are another mechanism that can significantly increase the fiscal space of heavily indebted LMICs, generating new resources for resilience building and energy transition (Box 4.10) (Elston, 2021).

Figure 4.11 Interventions to Reduce Stormwater Runoff Source: Adapted from USFS (2023)

Figure 4.12 summarizes some of the sources and innovative instruments that LMICs may use to mobilize resilience financing (South Pole Carbon, 2022). Sources of financing range from local to international and public to private and include instruments that can be used for resilient infrastructure development and those linked to post-disaster risk financing.

Figure 4.12 Innovative Sources to Finance/ Fund Resilient Infrastructure Source: South Pole Carbon (2022)