How COVID-19 will impact the PPP project lifecycle
COVID-19 creates challenges and opportunities in the PPP infrastructure project lifecycle. CPCS experts Joël Castonguay and Elan Cusiac-Barr explore how this virus is changing the project lifecycle as we know it.
The impact of COVID-19 has been wide-reaching. Since the beginning of the pandemic, CPCS has been monitoring the effects of COVID-19 on the infrastructure project lifecycle, particularly from a public-private partnerships (PPP) standpoint.
Given our close cooperation with developers, governments and international financial institutions, we’ve speculated on some of the most important effects of COVID-19 on each step of the project lifecycle.
Having a shared understanding of the situation is crucial for stakeholders from both the public and private sectors to continue to work together. Only then can government and its private partners maintain a project’s service levels to users while at the same time ensure financial viability to keep investors and lenders whole.
The project lifecycle generally consists of five phases:
- Contract Management
Below, we discuss the expected effects COVID-19 will have on each of these five phases. However, keep in mind that the global landscape has been in a state of constant flux and will remain so in the foreseeable future. Today’s forecasts may very well change in the blink of an eye.
Origination: New prioritization of PPP projects
- Infrastructure projects have started to focus on building capacity and resilience to better deal with pandemics. The health care sector, for instance, has been quick to adopt logistics solutions to increase hospital capacity.
- Countries suffering from an overloaded broadband network may accentuate efforts on strengthening their telecommunication infrastructure.
- Travel restrictions may reduce the ability of private developers to mount credible bids on infrastructure deals.
- Due to social distancing measures and travel restrictions, government consultations with public and private stakeholders may stall.
- Government budgets are being redirected towards COVID-19 relief, which may decrease available funding for the development and operation of PPP projects.
Economic stimulus measures have begun to take root. For example, the Government of Alberta has announced that it will double its annual budget for infrastructure maintenance and renewal to $1.9 billion to counter job losses caused by COVID-19 and the collapse in oil prices.
Preparation: Slowdown of project feasibility abilities
- Field missions to conduct technical, financial or legal due diligence are either put on pause or delayed due to travel and crowd restrictions.
- The pandemic may compel developers and governments to deploy measures to work remotely as much as possible.
- Pandemics will likely become a new project risk to be analyzed and mitigated. Future financial models may add sensitivity scenarios to mimic COVID-19 disruptions.
- Sources of funding for private developers and investors may dry up due to the volatility of financial markets.
Some forward-looking governments are already preparing for post-COVID economy recovery. New South Wales in Australia, for example, is fast-tracking assessment processes for planning approvals to provide industry support to boost jobs.
Procurement: Delayed or cancelled tenders disrupt deal flow
- Sudden disruptions in global financial markets mean that commercial terms may differ from those that were commonplace a month ago.
- Procurement processes will eventually stall as public authorities can no longer convene to review and grant approvals.
Indeed, public authorities have come under pressure to postpone or cancel tenders. Brazil, for instance, has recently cancelled the auction of a passenger maritime terminal. The procurement process was originally expected for 27 March 2020, but the auction was postponed indefinitely. The contract was expected to be signed in the second half of 2020.
Construction: Physical distancing and supply chain issues cause construction delays
- Risks of delayed construction due to work stoppages and slow operations may trigger clauses in the PPP contract. Force majeure clauses would lead to significant – if uncertain – costs to the public sector.
- Even without work stoppages, physical distancing measures could slow the construction schedule and result in missed deadlines and trigger penalty clauses.
- Material and equipment procurement may stall as the supply chain prioritizes essential products (e.g. medical supplies and agricultural products) and demand for other products falls.
In the United States, the federal government hasn’t issued any specific mandates to the construction industry. States and cities have begun enacting their own policies. As the pandemic continues, there is bound to be more change to the construction industry, including more shutdowns.
However, some regional governments have granted exceptions to essential workers, including those in housing construction. In Quebec, for example, the government has allowed some residential construction to resume as an essential service.
Contract management: Greater variability in demand and revenue leads to lower project performance
- There may be significant revenue gaps for certain user-pay projects (e.g. decreased traffic on toll roads), whereas availability-payment based projects (e.g. hospitals) will be less impacted. In the event that the private operator of a hospital is asked to temporarily increase capacity (and it is operationally feasible to do so), the private operator will be compensated in accordance with ‘’project variations’’ usually provided for in the PPP contract.
- Projects that fall short on revenue targets may need a moratorium on financing. Seeking a lower debt service over the disruption period could allow the project to survive financial difficulties.
- Public entities set to inherit PPP projects at the end of the contract term via asset transfer may prefer to temporarily extend the current operating contract with the private operator. The logic is to avoid any disruptions in operations arising from a change in ownership.
Contracts and financing structures matter. Take the aviation industry: the International Civil Aviation Organisation estimates an overall reduction of 41 – 51% of seats offered by airlines during the first half of 2020.This is in line with the Airports Council International’s prediction of the severe economic impact of COVID-19 on the global airport industry.
Fragile structures that are over-leveraged or tight on cash, usually better equipped to deal with gradual, drawn-out economic crises, will be slammed by this swift downturn.Few financiers will want to venture into the market – unless an acquisition is closing, or an upcoming maturity is imminent and must be refinanced.
To learn how CPCS can help you make better sense of these changes to the project lifecycle, contact: