How can governments look at COVID-19's impact on infrastructure PPPs?
What to expect
In the short run, we expect to see temporary demand and operational disruptions leading to revenue losses for PPPs. We can also expect delays in construction schedules due to supply-side issues such as labor, equipment, and raw material disruptions for PPPs under construction. In at least the medium term, governments should expect a lasting downward trend in revenues of operating PPP projects, adverse impacts on access to financing for projects yet to reach financial close, and disruption of construction schedules of projects already underway.
How to mitigate
Short-term losses may eventually be recouped over months with private operators relying on their revenue reserves and the fixed component of their payments from long-term service and offtake contracts -- and by slowing down non-essential investments. 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 upon the circumstances of each case.
Medium-term impacts can be mitigated with modest success through invoking force majeure and compensation clauses, using instruments such as bridge financing, capital injections, renegotiation of key project parameters -- including contract duration -- and introducing regulatory flexibility on milestones and performance indicators, among others.
In the case of longer-term changes, adjustments in existing PPP contracts will not be possible without proactive steps by government and lenders given the limited flexibility in PPP contracts to adjust to drastic changes. Terminations and buy-backs initiated by either party could become a reality, with the government choosing to or being forced to operate and maintain distressed projects. This seems less likely; however, policymakers need to be cautious and continue to assess sectoral and project-level risks as the situation continues to evolve. There may, however, also be positive temporary or permanent impacts for some sectors such as digital connectivity and logistics.
How should governments respond?
In the near term, IPG recommends that governments review infrastructure PPP projects in the sectors most affected by the crisis -- airports, ports, roads, transport, and energy -- to understand demand- and supply-side impacts. Governments should do this in discussion with their private partners and other relevant stakeholders such as financiers and regulators and, if required, come up with a plan of action with a view to ensuring continuity of service for their citizens and mitigating the impacts on projects.
Issues we're looking at include helping governments examine performance vis-¨¤-vis contractual clauses, consider restructuring and bridge financing, renegotiate contracts, and manage distressed assets. Longer term, we'll look at issues that include monetizing existing infrastructure stock and SOE corporate governance.
In all cases, IPG is urging special attention to human development issues. National PPP Units must be cognizant of the health and safety of labor working on PPP projects. If -- on examining their contracts -- governments find weaknesses in labor health and safety aspects, they may take advantage of the situation to incorporate new contract terms.
World Bank support
Resources on many issues that governments will need to address as they respond to COVID-19's impact on infrastructure PPPs are below. In addition, we encourage you to contact us with any questions via e-mail at IPGquestions@worldbankgroup.org.
Resources
Last Updated: Apr 09, 2020