The Corona virus pandemic & the impact on Public Private Partnerships - act now
Catastrophic risk is a broad topic that must be viewed holistically, as it can impact many facets of society - human, political, cultural, and economic (Erik Banks: 2005)
Corona virus - A global reality
Over the last two weeks I have travelled extensively both domestically and internationally. From the first trip to the last trip I have observed firsthand the increasing impacts of the Corona virus on countries, especially to their travel, transportation, commercial, and tourism and hospitality sectors.
Supply disruption realities
My first memorable experience was on a domestic flight where I found myself sitting next to an executive of a company who was deeply agitated and upset about his disrupted supply chains from China. Short of yelling, he was instructing his home office, by mobile, to overwrite all management protocols and to be proactive in addressing ways to "immediately" secure shipment of commercial good on order that would address the needs of his clients who were desperately waiting for their timely delivery. What peaked my interest, was his insistence that his team reach out to "any shippers" of goods from China to deliver his commercial goods to the USA, no matter the cost. He was obviously under tremendous client pressure (and I am sure corporate pressure as well). This perception was strengthened when he reminded his colleague, who he was speaking to, that the company's first quarter had been wiped out, their second quarter was going to be wiped out, and that there was no way that they could recover lost revenue in the third and fourth quarters. What was sinking in, was the reality that the paralysing impact of the Corona virus on supply chains from China was about to potentially put him out of business.
Impacts on the travel economy
My second memorable experience was my trip to Dubai to attend the Second MENA PPP Forum. On my flight there, things seemed normal. Upon arrival in Dubai there did not seem to be much screening of passengers taking place. However, the next day the press was filled with proactive and responsible measures that were being taken by the Government of the UAE to immediately mitigate the impacts of the growing global crises. Measures included Etihad and Emirates cancelling all flights to Iran and other highly impacted countries; asking staff to take 30 days (unpaid) leave as the airlines curtailed their services; and never ending announcements of cancellations of international conferences in Dubai. These precautionary announcements were not specific to Dubai, but also were being repeated globally, with even suggestions that the Tokyo Olympic Games be postponed or cancelled. What was more shocking was that the Corona virus impact, just on the airline industry, could be as high as $113 billion in 2020. My flight back to the USA was very subdued and somber. I was more acutely aware of the changing mood of international travellers on the flight from Paris (that was only approximately 60% full) than ever before. There were vacant seats in business class, premier economy, and ordinary economy. I have never seen so many vacant seats in my many years of travel.
What is the economic impact of the corona virus?
This morning I received the following message on my Bloomberg News feed -
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.
Good morning, everyone. Here's the latest top news on the virus:
Cases top 109,000 worldwide; deaths exceed 3,800.
Stocks worldwide plunge as oil fell 30%.
U.S. yields hit new lows.
France called for Europe-wide fiscal stimulus.
The U.S. is preparing measures to support the economy.
This news focus was very sobering, but what was more sobering was that Bloomberg has now created a news feed that is focused in updating the business sector on the impacts of the Corona virus. The impact of the Corona virus on economic activity is going to be difficult to determine in the the short-, medium-, and long-term. There are indicators, but they seem to be outdated as soon as they are published. The Economist had the following to say -
Riskier markets could experience reduced investment
Impacts on certain countries will be considerable. For example, when South Korea had its outbreak of 186 cases of the Middle East Respiratory Syndrome in 2015, the hit to the economy was $8.2 billion, or about $44 million per infection
Cities with large service sectors are most likely to be vulnerable to the impacts of the Corona virus
If the Corona Virus pandemic reaches levels of the Spanish Flu pandemic (1918 - 1919) we could see a drop in GDP of 5%
If this happened to today, it would cause a slump similar in size to that of 2009. In a mild scenario similar to 2009 - 30% of people infected, losing on average of 10 days of work each, and a fatality rate of 0.25% - the cost could be 0.8% of global GDP which translates into losing a quarter of the global GDP forecast for 2020. This is in a mild scenario.
At present, we do not know what the immediate impacts or the long-term impacts are, as we only entered the pandemic phase of the Corona virus outbreak today. However, what is undeniable is the ripple effect across the global economy, which will likely impact poor countries which would be the biggest losers on a Corona virus pandemic. The news reports are not good. On CNN this morning there were reports that as supply chains contract, economic activity decreases, and companies begin to draw down their financial resources to survive, banks are under increasing pressure to extend credit, and debt is increasing. We have to ask ourselves was measures can be taken to mitigate risks and the impacts of the Corona virus, not only on people but also on economic activity. If the crashing oil market of today and the cession of stock trading in New York is an indicator of the ancillary economic impacts of the Corona virus, leaders (both political and corporate) are going to have to take note immediately, think out of the box, and be more proactive than ever (in an unchartered environment). They will also have to seriously embrace sustainable and resilience practices more than they ever have.
So what about the impact of the corona virus on PPPs - many questions
In Erik Banks' book the following statement is made -
From a financial perspective, a disaster can place a tremendous burden on its citizens, the private corporate sector, and the public sector; creating financial distress and slowing economic progress for weeks, months, or years.
This is the sober message that needs to be heeded when it comes to infrastructure and service Public Private Partnerships (PPPs) that have long-term horizons.
With decreased trade, economic activity, and travel; transportation sector PPP projects are going to experience considerable revenue threats in the coming weeks, months, and (possibly) years.
PPPs are vulnerable to catastrophic (force majeure) risks that are unpredictable such as the Corona virus. This is certainly the case with PPPs that rely on revenues generated by user fees (versus those that rely on availability payments). Just think of the impacts to maritime ports (loss of shipping and service fees), airports (loss of gate fees, refuelling 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). The list is extensive and the scope and magnitude of impacts are large unknown at present. Even PPPs - where revenue is assured by public sector availability payments - might suffer as governments face contracting economic activity that will result in declining tax revenues and less treasury and budget resources to honour their commitment to availability payments.
Additionally, the day-to-day operations and management of PPP projects will most certainly be impacted if SPV (PPP project companies) employees are quarantined and become incapacitated. Furthermore, project management knowledge could be compromised if critical staff are incapacitated. This will impact short-, medium- and long-term operations and management of PPP projects in ways that may be impossible to mitigate.
It is important to monitor what the impact on the insurance industry will be regarding risk insurance and mitigation. One thing is certain, Pandemic insurance will become expensive and in many countries unaffordable. One also has to ask whether organisations such as MIGA (World Bank) will cover the costs of escalating political risks caused by economic disruptions that will cumulatively impact the viability of existing PPPs. It is also important what impact this will have on MIGA's appetite for future PPPs in the intermediate term? Will new projects even be bankable in the near future if insurance cannot be obtained?
One of the attractions of PPPs is that they provide the opportunity for the public sector to obtain alternative forms of financing to bridge funding gaps. However, if the finance sector becomes less liquid, will it have the financial resources in the short and medium term to participate in PPPs with governments on future projects? Another question is whether governments will have the reserves to prop up current PPP ventures if they fail?
The Need for a Strategic Focus on Mitigation and Recovery
It is critically important that governments proactively engage with their private sector partners to mitigate impacts to PPP projects as soon as they become apparent. Failure of PPP projects should not be an option. Recovery must be the only option strategy. 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. We will need to move away from a contractually punitive environment where unfair blame is placed on any party.
This means that recovery plans need to be established, that are harmonised with national strategic priorities, and which have specific recovery strategies that are focused and which are technically sound.
It is critically important that governments immediately develop short-, medium-, and long-term strategy driven plans that focus on collaborative recovery which is inclusive of the interests of both the public and private sectors.
This means no more heads in the sand when it comes to recover. This means strengthening trusting and collaborative partnerships that are focused on a win-win solution for all parties. If one partner fails, the PPP partnership will dissolve, and the PPP will cease to exist. This is not an option that should be taken lightly.
Yesterday was the Time to React
Do not wait to see what the impacts are going to be before you seek the remedies. If you are not in emergency overdrive at the moment you might be missing opportunities to fix things. Do not say or think you are too late to react – this is not an option. Now is the time to identify vulnerabilities, ascertain the scope of project (or sector) impacts, monitor risks continually until the crises has passed, adopt active risk management, and identify voluntary and mandatory measures for recovery. Engage with all stakeholders so that all parties understand the severity of the situation, and optimise the role of all parties. Do not make decisions in a vacuum, this will only make the situation worse in perceptual and practical terms.
In ending, it is important to think about the short-, medium-, long-term recovery strategies that you need to implement, Medium-term recovery planning is only effective if an effective and immediate short-term strategy is identified. Long-term recovery will most certainly depend on the actions you take now (short-term) and over the next few months (medium term).
On a positive note, the Corona virus will most certainly offer new opportunities for innovators as the PPP Market recalibrate.
If you are facing challenges, feel free to reach out. As a senior advisor to the International Sustainable Resilience Center, we can help you develop recovery strategies to ensure the long-term resilience of your PPP projects. WAPPP can also help find experts through its wide network of PPP practitioners to support your recovery efforts.
This book has helped me to gain insights into catastrophic risk management.
Erik Banks (2006) - Catastrophic Risk - Analysis and Management - Wiley Finance.
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.