James Heath: Incentivising the delivery of resilient infrastructure

Remarks by the Commission's chief executive on the challenges of ensuring the UK's infrastructure is sufficiently resilient to future shocks and threats

Published: 1 Dec 2022

By: Rob Mallows

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James Heath, Chief Executive of the National Infrastructure Commission, spoke at a roundtable event on Wednesday (30 November 2022) organised by Resilience First and PA Consulting, in collaboration with the Cabinet Office, on building a ‘whole society’ approach to national resilience.

In his remarks, James reflected on how to incentivise behaviours that support building resilience. Using the example of the UK’s infrastructure, he briefly explored some of the challenges associated with building resilience and the levers and mechanisms open to government and operators to ensure the country’s infrastructure can continue to operate effectively in the face of the impacts from climate change and other long term challenges.

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“Resilience has been a key theme in the work of the Commission – we’ve played both an advocacy role to push resilience up the agenda in areas like water resource planning and we’ve made recommendations to government on how to better integrate resilience into infrastructure planning overall. And yesterday we published a report on what needs to done to improve our long-term resilience to the growing risk of surface water flooding.

The first question we should ask is: what do you need infrastructure to be resilient to? In almost all cases, infrastructure operators will need to consider multiple threats and pressures in the round, including climate change, population growth and supply chain disruption.

Effective resilience must be aligned with wider policy goals on net zero and climate adaptation. There is an urgent need to adapt our economic infrastructure sectors – energy, water, digital and transport – to the potentially rapid effects of climate change. This concerns not just how we build new infrastructure, but also how we adapt and retrofit the installed base of infrastructure that will be here for decades to come.

A case in point is the resilience of our electricity system, which will become increasingly important as we electrify heat and transport to meet net zero. There are both physical risks to electricity grids from extreme weather – like what happened last winter when nearly one million UK homes were left without power due to storm damage. But there are also questions about how electricity generation based on a high level of renewable energy can balance supply and demand in prolonged periods of very low wind or no sunshine.

The second question we should ask is: how can infrastructure systems be made more resilient? This takes us into pressing discussions about how infrastructure assets are managed and renewed to ensure reliability, how we build spare capacity or redundancies into systems to deal with single points of failure, how we mitigate the risk of cascading failures in interconnected systems, and how we prepare infrastructure to anticipate demand through adaptive planning. In each of these areas, action is not keeping pace with the scale of the challenges.

What is holding us back? One issue is that making infrastructure more resilient often adds extra upfront costs – even though the investment is likely to earn a positive return over time by avoiding future costs.

Despite this, we know that resilience to lower probability events is the sort of thing that markets and indeed governments tend to under-invest in. Resilience is susceptible to the ‘can kicking’ problem due to misaligned incentives and behavioural biases.

How do we overcome this? We urgently need to put in place a policy framework that creates better incentives – incentives that ensure resilience is properly valued and invested in by both government and the private sector.

At the Commission, we’ve developed a framework for taking a proactive approach to infrastructure resilience – based on what needs to be done by government, regulators and operators to better anticipate risks, improve the capacity to resist and absorb shocks, and recover from them.

We’ve made three specific recommendations to government:

First, it should develop and publish a set of outcome-based resilience standards for infrastructure sectors, providing clarity on what households and businesses can expect. We should be prepared to have an open conversation about how much resilience do we want and what are we willing to pay to get it. Some of these standards are already in place – but we need to fill in the gaps and ensure existing standards are up to date.

Our second recommendation was that regulators should be given explicit statutory duties to promote resilience, including ensuring that their price review decisions are consistent with standards being met by operators.

Our third recommendation is that infrastructure operators should develop long-term resilience strategies and carry out regular stress tests to identify vulnerabilities and improve preparedness. This exercise should be overseen by the regulators in a similar way to the model adopted by the financial sector after the 2008 crisis. While governments will always tend to get involved when there are serious failures, it’s also important that commercial operators – who are, and should be, responsible for ensuring their services are resilient – are exposed to the costs of failures.

In its response to our report, government recognised the importance of effective resilience standards and stress testing by operators. We hope government’s forthcoming resilience framework will now take forward these measures as part of a plan of action to improve resilience.”

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