Last month, the World Bank kicked off a marathon of brainstorming sessions with national PPP units and government representatives across the globe to get a sense of how COVID-19 (the coronavirus) is affecting their PPP programs. We wanted to encourage frank exchange among peers that will inform conversations for a virtual PPP Community Forum for governments that we’ll launch this month.
Our intention is to proactively support countries as they put in place crisis management and recovery strategies to prevent, mitigate, and backstop distressed PPP projects. While we’re surging to address COVID-19, this is part of our integrated approach to help mobilize private sector financing and expertise for infrastructure development in general—to get more resources to countries for this purpose affordably, in a way that provides value for money.
We know that healthy cooperation with the private sector will be more important than ever as countries exit this crisis even more fiscally constrained. We also know from past crises that many governments will use infrastructure spending as an economic stimulus measure. Our role is very clear: we’re here to help countries optimize private sector infrastructure solutions that are sustainable and resilient as well as informed by best practices, good governance, transparency, and fiscal sustainability. We also want to help them ensure that their infrastructure investment—by both public and private means—supports low-carbon pathways and strengthens resilience to climate change and other kinds of shocks, like the COVID-19 pandemic.
Allow me to give a sense of how we’re looking at this in the short through long term.
Right now, temporary disruptions of demand and operations are leading to revenue losses for PPPs. This is no surprise, and we’re tracking the situation closely. The same is true for delays in construction schedules due to supply-side issues like labor, equipment, and raw material disruptions for projects under construction.
In the medium term, we anticipate a lasting downward trend in revenues from operating projects, adverse impacts on access to financing for those yet to reach financial close, and disruption of construction schedules of projects already underway.
How much should we worry? This is the billion-dollar question. Short-term losses may be recouped with private operators relying on revenue reserves and the fixed component of their payments from long-term service and offtake contracts—and by slowing down non-essential investments. In fact, where project schedules have built in lags for risk events, schedules may recover without lasting impact on project fundamentals. Force majeure, compensation, and change-in-law clauses might apply depending on each case’s circumstances.
These impacts can be mitigated with modest success through force majeure and compensation clauses, using bridge financing, capital injections, renegotiation of key project parameters, and introduction of regulatory flexibility on performance indicators, among other measures. If the pandemic’s impacts are limited to the short or medium term, project credit risk and access to financing may not change substantially.
Further along, adjustments in existing PPP contracts will simply not be possible without proactive steps by government, sponsors, and lenders—given contracts’ limited flexibility to adjust to drastic changes. Terminations and buy-backs initiated by either party could become reality with the government choosing or being forced to operate and maintain distressed projects. This seems less likely; however, policymakers should be cautious and assess sectoral and project-level risks as the situation evolves.
In this vein, I have two words of advice to governments: stay vigilant. We recommend that they review their PPP and state-owned enterprise (SOE) infrastructure portfolios to identify where financial risks are largest and what’s at stake in terms of service delivery if projects underperform or enter financial distress. From there, policy responses vary: from use of available contractual flexibility, financial restructuring, provision of short- to medium-term liquidity, appropriate credit risk enhancement instruments, asset recycling, or monetization of existing assets.
Trust-funded initiatives we house also are ready to assist:
The Public-Private Infrastructure Advisory Facility (PPIAF) has launched a program whereby governments can request support for taking stock of COVID-19’s impact to PPP portfolios; stress-tests of PPP structures; high-level contractual review; relief and provisions for disruptions; and provision of international best practice examples to mitigate impacts, prevent project failure, and fast-track PPP development.
The Global Infrastructure Facility, working through its multilateral development bank partners, is responding with dedicated resources to help with additional studies, repricing, rebalancing, and market sounding with private sector representatives for pre-bid stage projects affected by COVID-19. The facility can also advise SOEs to address liquidity issues and help governments design and prepare investment programs as part of green stimulus packages that are affordable, sustainable, and fit-for-purpose.
What about the long term?
The reality is that we need more resilient PPP and contractual frameworks going forward. PPPs, as a means to deliver infrastructure, are in constant evolution, as is governments’ capacity to effectively procure and implement them. Continued focus on the development of infrastructure as an asset class will help move this along.
But to borrow from biology, we also know that there are moments of rapid evolution. We’re now experiencing the creation of a new normal in many parts of our lives: some of it will be difficult, some hopefully better.
In the work that occupies the readers of this blog, let’s not shy away from the challenge to make even more progress towards achieving more sustainable and resilient infrastructure PPPs. Especially in moments like this, we know that quality infrastructure development helps protect lives, livelihoods, and the very future of countries.
The time is ripe also because each passing day the world finds ways to harness infrastructure technology (InfraTech) through the integration of material, machine, and digital innovations across the infrastructure lifecycle—and indeed future PPPs.
Yes, we absolutely can create a new type of PPP and an enhanced framework that strongly supports it that are informed by what we all will have been through once the COVID-19 crisis is over. And I look forward to seeing this unfold.
Related Posts
COVID-19 and infrastructure: A very tricky opportunity
COVID-19 & infrastructure: Why governments must act to protect projects
How will coronavirus affect public-private partnerships?
A common goal: More consistency and risk analysis for infrastructure PPPs
Future-Proofing Resilient PPPs
We need to act now for sustainable infrastructure investments
This blog is managed by the Infrastructure Finance, PPPs & Guarantees Group of the World Bank. Learn more about our work here.
What should be our participation.
COVID -19 pandemic took the entire globe by shock and surprise. The physical work place has been affected drastically . The narratives have changed with an emerging New normal and a new paradigm. Given these changes, there is urgent need for stakeholders to proactively react to these crucial New order. There is an urgent for a new mindset and dedicated drive to keep to requirements of the new normal. Employment and utilization of ICT is a prerequisite for a sustained world. There is therefore, a great need for the training and development of an intelligent workforce to drive this new age. The time to act is now.
Indonesia is planning to build a New Capital City in Kalimantan, of which, 56% will be developed through PPP schemes...how will the New Normal influence the development of infrastructure there, from design to implementation?
The ideas and program, the support is highly needed here. Akimwale from Nigeria
All concepts of PPP project cycle included in the blog. Time is of essence and it is imperative to speed up the process to fast track the project implementation / revival. But, without compromising on the basics of PPP process
Aftermath of COVID-19 will change the attitude of government of Bangladesh towards public health system. they will invest in hospital buildings, modern machinery and appoint doctors, nurses and lab technicians. But they may not develop hospital services as per global standards like JCI, they may build buildings but may not consider medical waste management, patients and nurses comfort having natural touch and energy efficient passive building design like USGBC LEED credits and reduce CO2 emission from the hospital activities. These global standards should be a pre-requisite for any future investment in either new hospitals or renovation of existing hospitals either by the government or by private enterprises. Regards, Engr. M Omar Faruq, CEO & Chief Consultant Engineer, Faruq M&E Consultants, House 23/A, Road 2, Aprt 4/C, Banani Dohs, Dhaka-1206, Bangladesh, Cell: +880 1712070925, website: www.fmecbd.com, E-mail: [email protected]
I individually appretiate you strugle to overcome poverty but some times you fevoured those are already able to bake their cakes
I agree that the COVID epidemic has adversely affected the global economy. Demand for some PPP services are up substantially in some sectors such as health while the demand is down in transport projects such as toll roads. Fiscal risks are affected as well because government budgets are stretched to their limits. But I disagree that we need to invent something new to save PPP projects. Most of the contracts can be renegotiated by extending the terms or increasing government subsidies as needed. Lenders can restructure their loans and readjust their repayment schedules to accommodate the needs of the project companies and avoid a costly early terminations. If these projects are delivering value for money, then steps must be taken by all key stakeholders to make them work in the face of the COVID crisis. But at the end of the day, COVID should not require a complete revamping of the traditional risk allocation and project structures.
Thank you soo much from world bank group
Your research are very helpfull in all cases
The subject matter has two distinct issues viz. handling of distressed PPP projects (Post Covid) and developing a new framework with inbuilt flexibility so as to survive in adverse circumstances like post covid situation. My views, in brief, are as follows:
For handling distressed operational projects, a representative list of measures may include (i) waiver of penalties, (ii) extension of the expiry date of all permits/ approvals, (iii) extension in the period of various statutory compliances/ submission of returns, etc., (iv) deferment of all payments of taxes/ duties, etc., (v) postponement of all payments to Public Sector Partner such as revenue share/ lease rentals to Concessioning Authority, (vi) deferment of repayment obligation to lenders and (vii) extension of the concession period. The aim shall be to save the maximum number of projects and to ensure optimum level of operation of the saved projects which may not necessarily mean a return on investment on the project as envisaged while taking up the project. In order to ensure optimum utilization of public funds and in the interest of transparency, triggers for fund-based support of the Government need to be defined.
Developing a new framework will involve revisiting the project structuring framework and risk allocation as per present concession agreements. Needless to say, that Public Sector entity must appreciate that besides being a partner in the execution & operation of the project, it is the owner of the project and has to play the role of Monitoring Agency and Regulatory Authority as well. The job of developing adequate quality infrastructure in the country is also the responsibility of the Public Sector entity. Accordingly, it has to be prepared to suitably insulate the private partner from the excessive/unforeseen project risks. In respect of major risks associated with the project, a suitable window shall have to be provided, instead of complete allocation to either party, with a provision of review in the event of variation being beyond the prescribed window. Briefly stated, it has to act like the big brother in a family and avoid skewed allocation of risks to avoid accountability.