A Future-Forward Recovery Approach
This article was written by David Baxter, sustainable international development practitioner and public private partnership (PPP) procurement navigator and his republished with his kind permission.
As transportation infrastructure is shut down by governments to combat the spread of COVID-19, the sustainability of existing PPPs will be under increasing pressure over the next six to 12 months. This Black Swan event will compel governments globally to adopt socio-economic recovery mitigation strategies to shore up their economies in the short-term. Government led recovery strategies must include the collaborative participation and input of private sector stakeholders, especially developers and investors who are already committed to PPP projects. Currently, we have a laser focus on mitigating the current challenges - which is absolutely necessary. However, I can only wonder when efforts will be made to broaden the focus to ensure the sustainability and resilience of Public-Private Partnerships (PPPs) long-term - in a post-Covid-19 world. This means that we will need to refocus from short-term myopic recovery strategies as soon as possible to include medium- and long-term strategies as that are future-forward looking.
Avoid penalising underperformance in the short-term
PPPs - as everyone knows – are long-term agreements where risks are shared and appropriately allocated between the partners to deliver infrastructure and services through innovative approaches that incentivise performance and penalize under performance. Performance exceptions for unexpected force majeure events, such as a pandemic, are typically covered in the force majeure language of PPP contracts – regrettably often in a minor paragraph of a contract. Additionally, strategies pertaining to impact recovery and responsibility allocation of risk mitigations under force majeure contract terms can be very vague at times. This is often due to the often-laissez-faire approach to project pandemic risks which in most situations are “never” going to happen. This is especially true with events such as the COVID-19 outbreak and its incomprehensible scope and magnitude.
So, what can we do. I believe that ultimate emphasis of everyone’s recovery efforts should be to ensure that unreasonably punitive contract clauses that punish operators and concession holders - instead of supporting them in times of crises - need to be revisited. It is not the time to enforce contract terms that distract from attempts to mitigate pandemic impacts on the sustainable operations and maintenance of PPP projects. PPP partners (both the public and private sector) need to ask what can be proactively done to ensure the survival of PPP projects, especially those that rely on revenue generated by users.
Any collaborative approach must address the concerns of all project stakeholders, including investors and the holders of debt. It is also a time for selflessness where all stakeholders should think of the “common good,” and win-win strategies wherever possible. Decision that entertain failure of PPPs should not be an option under any circumstances. If multiple PPP projects fail, we will be looking at years of contract negotiations that could lead to the bankruptcy of project companies (SPVs) and serious ongoing disruptions of critical infrastructure and services. Governments will have little practical recourse to go after bankrupt entities under this scenario and could be saddled with multiple failed projects that in turn will cripple their ability to stimulate economic recovery and meet their socioeconomic commitments to their citizens. This scenario could have serious impacts on treasury PPP project guarantees and devastate national PPP markets if the wrong decisions are made.
I believe it is in everyone’s interest to avoid a post-COVID-19 scenario where we see airports, ports, metro systems, healthcare systems, etc. which are no longer operating, because we could not find ways to innovatively support PPP concessionaires to economically survive this global crises and economic downturn.
The need for short-, medium-, and long-term recovery and resilience strategies
COVID-19 will impact the full spectrum of PPP project lifecycles in the short-, medium-, and long-term. This includes their planning/design; build/construction; financing; and operations and maintenance. This creates the need for a matrixed strategic approach to recovery and resilience that is cohesive and which protects all stakeholder parties from future events as well. Although we might not have been able to plan for the current pandemic, we can certainly undertake measure for an effective recovery in the immediate future and plan for greater resilience in the future.
Concerning the planning/design of future PPPs
The following recommendations are proposed:
Governments should revisit their PPP sector priorities once the scale of impacts on existing PPPs is ascertained. This might require a total revision of program visions, plans, and strategies in terms of national development goals (medium- and long-term action and goal)
Planning should explore innovatively how PPPs can become mechanisms of Post-COVID-19 recovery (medium action and long-term goal)
Lessons learned from the current pandemic should be applied to future pandemic mitigation planning and contract terms, especially in terms of force majeure contract clauses and their potential punitive impacts on project sustainability and resilience (continuing action and long-term goal)
National PPP project pipelines need to be revisited so that the private sector can reposition itself during an economic recovery period to be efficient partners in future PPPs (long-term strategy)
A paradigm shift to “People First PPPs (PFPPPs) should also be considered, so that PPPs are more resilient to societal needs when the next pandemic appears. This means that we need to future proof PPP projects (long-term goal)
A comprehensive and inclusive consultation with all stakeholders is needed to ensure that future pandemic planning continues to address the needs of all project users and partners (medium- and long-term action and goal)
It would also be prudent to review and adjust project selection criteria in regards to pandemic effects on value for money, bankability, and viability assessments (one going and long-term action)
Concerning the construction (build) of PPP projects underway
The following recommendations are proposed:
SPVs should immediately explore the impacts of- and possible mitigations for labor shortages and supply chain breakdowns on contractors who are currently building projects (immediate action)
Construction timelines should be revisited to determine impacts to project delivery and the subsequent servicing of debt (immediate and long-term action)
SPVs should explore ways to mitigate impacts to their sub-contractors - in consultation with the public sector. A special focus should be given to small contractors) who do not have liquidity to survive the pandemic shutdown (immediate and medium-term action)
Determine the greater societal ripple impacts of delayed construction on PPP projects and mitigate them (immediate and medium-term goal)
Explore the recovery steps that need to be undertaken to relaunch construction and protect project sites during the downtime caused by the pandemic (short- and medium-term)
Explore project health and safety concerns associated with stalled project sites and their impacts on neighboring communities (short term - immediate action)
Concerning the financing of PPP projects
The following recommendations are proposed:
Debt relief and financing costs need to be addressed innovatively (i.e. debt holidays, government subsidies, etc.) and immediately (short-, medium- and long-term action)
Extended credit lines to enhance the liquidity of the SPVs need to be explored and implemented (short-, medium, and possibly long-term action in extreme cases)
Project refinancing should be considered if feasible (medium-term and long-term action)
Preventing panicking investors and debtors exercising their step-in-rights if it is not proven to be in the common interest of all PPP stakeholders and project recovery (immediate action)
Revisiting what steps can be taken to ensure that future projects can be made bankable under similar pandemic scenarios (medium- and long-term action)
Governments honoring availability payments on current projects and possibly offering availability payments to projects that do not have revenue to bridge the impacts of the economic slowdown (short- and medium-term actions until recovery is completed)
Ascertaining what adjusted insurance costs will have on project’s bankability in the future (medium- and long-term action)
Exploring the role of organizations such as MIGA when it comes to insuring risk on future projects (medium- and long-term action)
Concerning operations and maintenance of current PPP projects:
I believe that O&M is the area of greatest concern for PPPs. Globally, the impact has been the greatest on transportation, healthcare, and education PPPs. For example, operators of airport concessions (and their sub-concessionaires) and public transport facilities (i.e. metro operators, toll roads, busses, etc.) that rely heavily on user fees have been shut down. Port concession operators (maritime and inland) are facing drastic declines in trade driven traffic as well. The resulting evaporation of revenue from user fees for these facilities is having - and will continue for the foreseeable - a major impact on operator’s ability to service their debt obligation, keep their employees gainfully engaged, and even provide limited services.
The following recommendations are proposed:
Determining the immediate impact scope, scale, and duration caused by mandated cessations of activities on project's commercial and financial viability so that sound decisions can be taken (short-term immediate action)
Prioritizing operational expenses and cut costs while keeping essential employees engaged (short-term and medium-term action)
Quantify the financial impact on the project vis-à-vis the gap between projected revenue and operation costs – including debt servicing
Using project activity cessation as an opportunity to elevate maintenance on projects while lulls in service continue – this is also an opportunity to keep the project workforce engaged (short- and medium term for now, without ignoring long term maintenance commitments)
Ensuring that sensitive infrastructure that is shut down is not degraded (ongoing action)
Consider management succession planning for employees who might not return at the end of the pandemic (medium- and long-term)
Prepare a project reactivation plan that is launch ready in the recovery phase (medium-term action)
Consult with public sector partners and stakeholders on how to collaboratively ride out this event (medium- and long-term action)
Keep public sector partners briefed on all impacts and expected consequences continuously (ongoing action)
Develop strong recovery plans and strategies (short- and medium term)
It is impossible to develop an exhaustive list of actions that should be undertaken. However, it is paramount that common sense prevails as well as empathy for all impacted parties. Everything should be done to create a trust driven recovery environment that is partner and stakeholder friendly. It is essential that:
Governments should proactively engage with their private sector partners to mitigate impacts to PPP projects as soon as they become apparent.
It is also important that the private sector be given the assurances that as soon as problems arise they can approach their public sector partners openly and honestly to share what is happening with their projects.
Recovery plans are harmonized with national strategic priorities.
Strengthening trusting and collaborative partnerships that are focused on a win-win solution for all parties must be a priority
No party should wait to see what the overall impacts are going to be before you seek the remedies for immediate needs. If you are not in emergency overdrive at the moment you might be missing opportunities to fix things.
Vulnerabilities are collaboratively identified, and risks monitored continually until the crises has passed
Voluntary and mandatory measures for recovery should be explored with the private sector
All stakeholders should be engaged in recovery strategies so that all parties understand the severity of the situation, and that their participation in recovery can be voluntarily be mobilized
Avoid making decisions in a vacuum, this will only make the situation worse in perceptual and practical terms
It is critical that all parties understand that long-term recovery will most certainly depend on the actions that are take now (short-term) and over the next few months (medium term).
On a positive note, this pandemic will most certainly offer new opportunities for innovators as the PPP Market recalibrates. In a Post-Covid-19 world, public and private sector institutions that leverage innovative strategies that are sustainable and resilient will succeed.
I firmly believe that PPPs are going to become more important as a recovery tool as we innovate our way into the Post-Covid-19 world.
Some useful future proofing readings on sustainability, resilience and regeneration of PPPs are listed below:
Regenerative PPPs (R+PPP): Designing PPPs that keep delivering. https://blogs.worldbank.org/ppps/regenerative-ppps-rppp-designing-ppps-keep-delivering
2018: Are we ready to commit to building resilient infrastructure? https://blogs.worldbank.org/ppps/2018-are-we-ready-commit-building-resilient-infrastructure
Future-Proofing Resilient PPPs https://blogs.worldbank.org/ppps/future-proofing-resilient-ppps