How do you fix the roof in a storm?
It seems that it was not too long ago when 2020 was shaping up to be a game changer for global infrastructure investment thanks to the scaling up of the response to climate change.
Plans were being put in place; trillions of dollars, euros and pounds into funding projects; and shovels (or boring machines) hitting the ground at last.
Infrastructure had become the best show in town for investors and policymakers.
However just as the public and private sector had begun to batten down the hatches as the effects of climate change surged (literally in some cases), along came the COVID-19 tsunami.
Policymakers globally are scrambling to mitigate the impact of the pandemic with daily announcements of capital spending pledges on health and economic infrastructure.
In his Budget Speech UK Chancellor Rishi Sunak announced “a multi-billion-pound commitment” to get the nation through the crisis including “whatever extra resources our NHS needs to cope with coronavirus”.
In response Acting Liberal Democrat leader Ed Davey asked Prime Minister Boris Johnson should the Conservative government “have fixed the roof when the sun was shining”, paraphrasing President John F. Kennedy.
Despite the brief respite of House of Commons hijinks, by the end of the day Kennedy’s successor, President Donald Trump had confirmed to the US (and the world) that the sun is certainly not shining now and placed an amber light on an already slowly moving global transportation system.
Kroll Bond Rating Agency (KBRA) described COVID-19 as ‘a different scale of risk’ commenting “disruptions and pandemics are not new to the global order, but what is perhaps new is the potential impact”. It said it expects a ‘cascade’ of travel and event cancellations at least until there is some measure of virus containment and renewed traveler optimism.
KBRA also reported extended disruption due to virus contagion concerns could also impact volume risk infrastructure assets such as toll roads (if people decide to work from home or postpone business and personal travel), ports (if there is a continued and substantial disruption of world trade), and social infrastructure (if schools postpone classes for student housing).
Following a preliminary review of P3 assets in the US and Canada, S&P Global ‘bucketed’ projects based on risk exposure. S&P reported infrastructure projects dependent on discretionary spending could face negative cash flows amid COVID-19 outbreak with airports, stadiums/arenas, parking facilities and convention centre hotels considered high-risk. Many of the volume-based roads that S&P rate are commuter roads and thus that agency suggested using them is not a discretionary decision consumers make, assuming people continue to go to work.
“However, if more employers suggest or request their employees work from home, this could tilt the risk adversely”.
KPMG’s Global Services’ infrastructure leader John Kjorstad told P3 Bulletin while we are in uncharted territory and it is too soon to know what the long-term impact will be on infrastructure and the economy said “one thing the current situation is doing is forcing people to work more remotely and digitally. They’ve had the tools to do this for 20 years, but adoption has been slow. If the virus causes a prolonged shutdown of business as usual, these new ways of working might finally stick with the masses who can still be productive through them. This will lower the demand for transport (which impacts transport investment decisions) and might possibly affect retail and real estate value driven by exposure to people in mobility.”
In the North America report S&P noted university housing as medium risk, while last month it noted student accommodation projects in the UK could feel temporary effects from COVID-19. In recent years UK universities have significantly invested in recruiting from non-EU countries, China in particular, to compensate the current slowdown in domestic student demand, and to overcome the cap on domestic tuition fees.
Also, in this week’s report, S&P noted the exposure of operational availability PPP projects, including hospitals, will not be materially affected under the current COVID-19 scenario. A side effect that may alter many policy maker’s assessment of the value of the availability-payment based model.
In January, the agency reported UK hospital PFI projects were expected to be resilient against spread of coronavirus. It noted if a project's capacity to accommodate patients in isolation proves to be insufficient to accommodate the outbreak, some buildings may require changes.
NHS trusts may ask the projects to help them increasing such capacity—provisions for this are included in the projects' long-term contracts with the NHS. Mitigants in such an event could include the NHS trust bearing the associated costs directly, or compensating the projects over time, leaving them financially indifferent.
The optimum handover of these operational facilities will also come into view in the weeks ahead, particularly when the UK’s National Audit Office releases its report on the handover of existing PFI contracts. The UK government announced in the Budget it will now focus on making sure they are well-managed and represent value for money and will allocate GBP2m in 2020-21 to carry out targeted contract reviews.
This maybe be particularly of interest to the healthcare sector, if they were not at the frontline of the COVID-19 crisis. It is both noticeable and welcome news that healthcare procurements across markets are proceeding apace, with Saudi Arabia the latest country to commence procurement for a hospital PPP. Chile was an early advocate of ramping up construction of hospitals with P3 following the outbreak.
Procurements expected to be a P3 model that are set to be rolled may now be expected to be expediated. In fact, in the medium term it is plausible that health authorities across the world will look at P3 to expediate capital plans which could result in a robust pipeline in the sector. There will also likely be a focus on making sure healthcare projects under construction are not delayed.
Given the current situation however, it is difficult to see in the short term how any healthcare staff or official will get a moment to look up and consider if they need a better facility, and what model might be best value for money, etc. But the support of doctors and nurses will be required to get facilities built and maintained, one way or another and sooner rather than later.
However, the prospect of the construction workforce having to down tools will compound this situation with inevitable delays across sectors.
Both KBRA and S&P Global noted that under-construction projects are an area of concern as that might be delayed due to supply-chain disruptions. The ratings agency is assessing the implications of how force majeure, if declared, might be viewed by stakeholders.
Law firms across jurisdictions are also closely watching this threat.
Irish firm Mason, Hayes & Curran said: ‘International construction projects naturally have a greater inherent risk from global issues because the supply chain for the required goods and materials often involves a number of jurisdictions. An unexpected and unpredictable event such as COVID-19 may result in workers falling ill, international or domestic travel restrictions, or government quarantine measures with knock-on effects to the supply chain and the progress of construction projects. So the question arises whether contractors impacted by these events would be entitled to contractual relief and, in particular, would COVID-19 be considered a force majeure event within the meaning of a contract?’
KBRA have also noted projects that are reliant on replacement parts that come from China, South Korea, Japan and other affected countries could also be impacted over the short term.
An advisor on a much-anticipated project in the justice sector in the US confirmed to P3 Bulletin this week that a key decision on the delivery model for the project had been postponed after county officials cleared their agendas following a case of COVID-19 discovered at a school.
This type of scenario is unfortunately being replicated across the global market and highlights acutely how the roll-out the procurement timeline of the entire global P3 pipeline is now under review.
This may lead to discussion about the role of independent bodies making decisions on infrastructure projects when elected officials have crises, such as pandemics and climate change, to deal with it.
However, as US-expat Kjorstad pointed out; “the business disruption of COVID-19 goes well beyond infrastructure, and taking politicians out of the decision making process is not feasible. Stakeholder and public engagement are more important than ever. Public money won’t be ring fenced for a specialist unit to with as it sees fit without due public authority and accountability.”
On Friday contractor Skanska announced it will hold its Annual General Meeting in Stockholm as planned on March 26, but will make certain adjustments to arrangements to reduce the risk of spreading the infection including asking shareholders that have been in close contact with a person infected with the new coronavirus to refrain from attending.
A testament to the extent to which this crisis will affect the industry from the building site to the boardroom.
An updated edition of this article will appear in the next issue of Partnerships Bulletin magazine.