03 Sep 2009

New climate risks present fresh challenges for infrastructure industry

Sydney, 3 September 2009: The new risks climate change presents for the infrastructure industry will reshape its future and lead to an evolution in industry practice and contractual risk allocation, according to Clayton Utz Construction and Major Projects partner Owen Hayford.

Speaking today at the first in a series of seminars on climate change and infrastructure, a joint initiative of Clayton Utz and engineering firm Parsons Brinckerhoff, Mr Hayford said participants in infrastructure developments would need to carefully consider and start to address the various risks climate change presents – physical, regulatory and market-related.

"We're already seeing industry engagement in government policy development in addressing regulatory risks such as the Federal Government's Carbon Pollution Reduction Scheme for example, but we will also seegreater focus onallocating or sharingthese risks contractually as well as attempts to pass on the costs associated with climate change regulations," Mr Hayford said.

In addressing market-related risks such as higher insurance costs andincreased prices forcertain goods and services, Mr Hayford said he expected the industryto respond by undertaking more detailed risk assessments on the impact climate change might have on a project's revenues and costs.

"For example, if you are looking at investing in a port facility, you will want to consider the impact which climate change might have on demand for the goods which are expected to pass through the port," he said. "We will also see attempts to allocate or share market-relatedclimate change risks up front in the project contracts, as well as a greater emphasis on physical risk reduction and loss minimisation strategies, if only to reduce insurance premiums associated with property damage and business interruption insurance."

The potential climate change impacts on projects would also lead to changesin risk allocation in contractsin relation todesign risk, emissions risk, change in law risk,and price risk, among others.

"Iexpect we will see the introduction of a ratings scheme for infrastructure similar to the Green Star scheme which applies in relation to building projects, which will see similar issues in relation to the contractual allocation of responsibility for achieving a particular rating as we presently see within the commercial building industry," Mr Hayford said.

Mr Hayford said he also expected to see a greater focus on weather-related events in force majeure, extension of time and relief event clauses in contracts, applicable during the construction of infrastructure projects and during their operation and maintenance.

"I expect we will see greater regard to weather-related risks in operation, maintenance and repair plans for infrastructure projects, and increased demand for more comprehensive property damage and business interruption insurance to protect owners and operators of infrastructure against losses incurred as a result of floods, hail damage, lightning, wind gusts and other extreme climate events as the incidence of these events increases," Mr Hayford said.

"The standard of care expected of designers of infrastructure facilities will also increase as designers will be expected to design facilities to cope with foreseeable impacts of climate change. The foreseeability of climate change risks will also influence the content of fitness for purpose obligations going forward."

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