How will coronavirus affect public-private partnerships?

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Coronavirus infrastructure investment PPPs response
Graphs representing the stock market crash caused by the Coronavirus | Photo credit: OSORIOartist, Shutterstuck


This morning I received the following message on my Bloomberg newsfeed:
 

Welcome to the first edition of Bloomberg's new daily coronavirus newsletter for the latest on the Covid-19 outbreak and its impact around the world. 
 

The announcement of this dedicated newsfeed is sobering, as it indicates the seriousness of the impacts of coronavirus on global economic activity. In fact, it’s almost impossible to keep up with the specific impacts as they change by the hour. What we do know for certain is that we must prepare for short-, medium- and long-term impacts to economies—and PPPs.

An article in the Economist (Flattening the Curve – How the world can deal with a pandemic) discusses potential scenario impacts, referencing past pandemic and epidemic events such as the Spanish flu and the Middle East Respiratory Syndrome (MERS). Impacts included reduced investment in risky markets, cities with large service sectors becoming vulnerable, and costs of millions of dollars to prevent infections spreading. If we were to reach the impact magnitude of the Spanish flu pandemic, the Economist predicts we could see a drop in GDP of 5% and a loss of a quarter of the global GDP forecast for 2020.

On Monday, CNN reported that, as supply chains contract, economic activities decrease and companies draw down their financial resources to survive. Banks are under increasing pressure to extend credit and debt is increasing. If the crashing oil market of Monday and the temporary cessation of stock trading in New York is an indicator of the coronavirus’ ancillary economic impacts, global public and private sectors leaders need to embrace mitigation strategies immediately.

The virus’ economic impacts on PPPs will place a tremendous burden on project stakeholders, users, the private corporate sector, and the public sector for weeks, months, or years.  Perhaps the hardest part is not knowing.

With reduced economic activity, PPP projects (especially in the transportation sector) will experience considerable revenue generation challenges. In most instances, the vulnerability scope and extent to this force majeure risk was not foreseen in PPPs that rely on revenues generated by user fees. Just think of the impacts to maritime ports (loss of shipping and service fees), airports (loss of gate fees, refueling fees, airport commercial concessions), tolls roads (no users due to city-wide quarantines), and hospitals (new patients with uncertainty of how they will pay their medical bills).

Even PPPs that receive revenue through availability payments might suffer in the long term as governments face contracting economies that result in declining tax revenues and less treasury and budget resources to honor their availability commitment payments.

Additionally, the day-to-day operations and management of PPP projects will be affected, with special purpose vehicle (PPP project companies) employees being incapacitated, especially when it comes to project operations and maintenance project knowledge.

Furthermore, it’s important to monitor what the impact of the coronavirus will have on risk insurance for PPPs. If pandemic insurance becomes expensive and unaffordable the question of impacts on project bankability will need to be addressed. Time will tell what appetite World Bank Group’s Multilateral Investment Guarantee Agency (MIGA) will have regarding coverage of escalating political risks caused by economic disruptions that will cumulatively impact the viability of existing PPPs.

If the finance sector becomes less liquid, the question needs to be addressed whether it will have the financial resources in the short and medium term to participate in PPPs with governments in future projects.


The need for strategic focus on mitigation and recovery

Governments need to proactively engage with their private sector partners to mitigate PPP project impacts as soon as they surface.  Failure of PPP projects should not be an option. It’s critical the private sector be assured that, as soon as problems arise, they can approach their public sector partners and share project impacts without fear of punitive actions that could unilaterally blame them for impacts.

It’s also important that recovery plans are harmonized with national strategic priorities. Strategic recovery plans must focus on a win-win recovery tactic that is inclusive of the needs of both the public and private sectors.


Immediate action needed

The clock is ticking. Focused actions to identify vulnerabilities, ascertain the scope of project impacts, monitor risks, adopt active risk management, and identify voluntary and mandatory recovery measures must be embraced immediately. This includes engagement with all stakeholders to optimize recovery actions.

Recovery planning will only be effective if short-, medium-, and long-term strategies are embraced that address necessary mitigations today, the next few weeks, and the coming months.

Allow me to add a positive note: the coronavirus will most certainly offer new resilience opportunities for innovators as the PPP market recalibrates. 

In the meantime, truly sustainable and resilient PPPs should be promoted to help mitigate the coronavirus’ impacts to vulnerable communities and those that are already grappling with them. Failure by stakeholders, both in the public and private sectors, to rally around the recovery of PPPs impacted by the coronavirus is not an option, as many users rely on these facilities and services to carry out economically sustainable lives.
 

David Baxter is associated with the United Nations Economic Commission for Europe (UNECE)-affiliated International Sustainable Resilience Center (ICRC) and the World Association of PPP Practitioners (WAPPP), which are focused on providing practical solutions to PPP resilience issues.

 

Disclaimer: The content of this blog does not necessarily reflect the views of the World Bank Group, its Board of Executive Directors, staff or the governments it represents. The World Bank Group does not guarantee the accuracy of the data, findings, or analysis in this post.
 

 

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This blog is managed by the Infrastructure Finance, PPPs & Guarantees Group of the World Bank. Learn more about our work here.

Join the Conversation

Laurence
June 05, 2020

Thanks for raising these issues. 3 comments:
- Rigid risks matrix show their limits. This unpredictible situation by its scale, uncertain duration, geographic coverage (compare to the "traditional" force majeure) calls for a principles based approach (equilibrium of the contract, continuity of the service...)
- this is a perfect stress test for PPPs : solutions to be found should also play a role in case of future climatic catastrophic events.
- Active collaboration, including renegociation, will be the only solution. Otherwise, most of the projects will shutdown.

Manzoor ur Rehman
June 05, 2020

For PPPs to flourish- Innovation and diversification is going to be the winner.