Resilient Infrastructure 
Durable by design

Our Resilient Infrastructure series examines how legal, regulatory and financial frameworks must evolve to deliver assets that are fit for purpose. In this article, we identify the forces that shape outcomes for project participants – and the populations they support. 

Resilience isn’t something that can be added late in the process: it's determined at the start through pricing, structuring, approvals and risk decisions that shape a project’s entire lifecycle. 

The lessons are hard earned. Every warped rail line, collapsed bridge and heat-stressed power plant offers insight about how future assets can better withstand climate shocks and rapid change in demand. Yet the challenge of resilience extends beyond engineering. Financial, political and social pressures can also undermine even the best-designed projects.

For governments in developing nations and investors wary of risk, resilience means more than weathering storms or withstanding earthquakes. It’s about ensuring assets stand the test of time – economically, socially and politically. This means realistic pricing to encourage use by locals and project structures that invite participation.

Economic resilience and the price of ambition

The fastest way for a project to lose resilience is through mispriced ambition. In many emerging markets, government subsidies for infrastructure are simply not an option. Consumers often cannot afford to pay the full cost of use, and the state lacks the fiscal capacity to fill the gap. The result can be projects that overreach or overpromise. 

The Nairobi Expressway shows how this plays out: a 27-kilometre toll road has transformed access to the Kenyan capital’s airport but remains underused. “It’s a terrific piece of infrastructure, but it’s almost empty because of the toll,” says Herbert Smith Freehills Kramer (HSF Kramer) partner Martin Kavanagh. “Because of that, it may not meet the resilience challenge.”

By contrast, the Gautrain in Johannesburg, South Africa demonstrates what happens when pricing models align with local demand. Airport travellers pay at a premium and suburban commuters pay far less. “This is a good example of how you price dynamically so that you can maximise revenue, but also make the infrastructure important and useful locally,” Kavanagh adds. “If you can do that, you’re much more likely to have a resilient piece of infrastructure that has a long-term future.”

Risk and realism in fast-growing economies

Economic optimism often drives investment in infrastructure, but that optimism can be misplaced. In Indonesia, a decade of significant infrastructure spending under former President Joko Widodo – including a new capital city, toll roads, ports and one of the world’s fastest trains, linking Jakarta and Bandung – has left a complex legacy for his successor.

“Most of these projects are fundamentally based on a view as to where Indonesia’s economy will be in a certain period of time,” notes HSF Kramer partner Matthew Goerke. “Everyone loves the high-speed train, they are so happy it’s there; and yet it is not financially resilient.” 

The challenge, he adds, is that Indonesia’s middle class has unexpectedly shrunk by about 10 million over the past three years. When economic assumptions change this dramatically, formerly promising assets can quickly become unsustainable. Developers must anticipate these in-country risks when modelling project viability.

For sponsors and lenders operating in fast‑growth markets, these pressures typically show up as:

• Volatile middle‑class purchasing power.
• Shifting government objectives and policy resets.
• IMF/World Bank influence on project repricing.
• Political cycles that outlast concession agreements

A more pragmatic approach is needed, according to Goerke: “It may be a case of saying, “don’t let perfect get in the way of good. Let’s deliver a good project, build national capability, then make the next one better.'”

Structuring for long-term success

The long-term success of an infrastructure asset can be influenced by how the project is structured. The overall structure needs to be sufficiently attractive to engage the supply chain, without jeopardising project appraisals, whilst striking the right balance between risk, reward and value for money.

As with any business agreement, downside risks and potential upside matter. Alliancing models – where contractors, suppliers and clients share risks and rewards – can work well on certain types of projects but remain complex to deliver. 

“If contractors have equity, it means they have a longer-term interest in making sure projects are delivered in an efficient way for whole-life resilience,” notes HSF Kramer partner Tim Healey. Yet because contractors depend on steady cash flow, equity-based incentives remain rare. Other financial incentives can also be outweighed by the need to protect the bottom line.

Progress depends on strengthening governance – the rule of law, risk management procedures, fair allocation of risk and reward, precision of contract terms, appropriate enforcement and regulatory stability – rather than pushing more risk onto under-resourced governments or a supply chain that may be unwilling or unable to carry it. “You can’t eliminate risk,” Healey says. "But you can structure it in a way that keeps both investors and societies engaged for the long term.”

As a result:

• Developers must invest more in supply chain engagement to produce efficient and resilient design and delivery solutions.
• Governments must underwrite more uncertainty.
• Lenders demand clearer risk pathways to financial close.

Governments should be wary if they are pitched as generating unusually high returns. "Such promises are seldom kept," warns Kavanagh. On the other hand, early investors who deliver the first project in a country takes a large amount of risk, and they may have earned a premium. The key is what happens next: if a project succeeds, a government might agree to lower returns on subsequent projects, maintaining investor interest while building certainty and local capability.

Rethinking risk allocation

Building resilience into an asset invariably increases cost and the question of who carries that cost is becoming a defining challenge in infrastructure delivery. Contractors rarely have the capacity to absorb it and that risk eventually lands with developers or the public sector. Developers and governments will have to be more creative as to how they structure solutions that raise investment.

Governments are also experimenting with ways to stimulate investment through policy innovation. Healey points to the UK’s carbon capture sector, where government-backed revenue models have encouraged development. He also notes growing efforts to support circular-economy models – such as recycling markets for construction materials like steel – as a way to reduce costs and encourage sustainability.

The push for green infrastructure brings its own complications. While sustainable design is essential, truly sustainable development often proves too costly to achieve.

In the UK water sector, there has been much discussion about improving resilience to changing weather patterns but translating that sentiment into real projects is difficult. High upfront costs, pressure to keep bills affordable and constant changes in regulation mean many schemes are never finished. Even when a project is agreed and supported, shifting rules and priorities can halt progress. 

“You get to a point where, when it comes to delivering it, the goal posts have already moved,” laments HSF Kramer Of Counsel Joanne Holbrook.

Resilience in new infrastructure increasingly hinges on designing funding models capable of dealing with high upfront capital costs and risks the private sector cannot absorb, says HSF Kramer partner Tom Marshall. With government budgets constrained, many projects now rely on consumer-pays structures but there is still a need for the state to underwrite certain risks (for example, insufficient demand for the new infrastructure) to make investments viable. “Funding models are having to adapt in ways that take certain risks away from investors,” he notes, pointing to sectors such as new nuclear and carbon capture as examples. 

The cost of good intentions

It is often the case that projects in developing markets will face stricter environmental and social standards than their developed-world equivalents. While the intentions are sound, the effect can be counterproductive. Kavanagh recalls a hydro power project delayed because teams wanted to source green steel for construction. “Meanwhile, people will burn diesel or coal for an extra four or five years,” he points out.

Similar tensions arise when infrastructure consumes scarce local resources. Data centres, for example, require enormous amounts of power and water but create few jobs. “Should you provide that power to run a data centre or supply it to people’s houses, so they don’t have to have a diesel generator outside their bedroom window?” Kavanagh asks. “It’s hard to argue that’s a resilient piece of infrastructure if it prevents power being provided to a school or a hospital.”

Social licence and the politics of impact

Social licence is equally important in the developed world. In Australia, where renewable energy projects are proposed in regional areas far from the state capitals, governments and investors are coming up against resistance because the social impacts aren’t handled early or well enough. 

“The people who bear the visual, environmental or land-use impacts are often not the people who benefit from the profits,” says HSF Kramer partner Kathryn Pacey. “Once community trust is lost, it’s a long road to get it back.”