Update: 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 coronavirus tsunami.
Policymakers globally are scrambling to mitigate the impact of the pandemic with daily announcements of capital spending pledges on health and infrastructure.
As the European Commission told Partnerships Bulletin: “COVID-19 is a severe public health emergency for our citizens, societies and economies with infections in all Member States. The situation is evolving on a daily and hourly basis. At this stage we cannot speculate on potential implications in individual policy areas. The Commission will continue to maintain its functioning.
While our immediate focus is on combating COVID-19, our work on delivering the European Green Deal continues”.
A Different Scale of Risk
In his Budget 2020 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”.
KBRA also reported eextended 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 PPP 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 the coronavirus 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 Partnerships 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.”
Availability of facilities
Also, in that report, S&P noted the exposure of operational availability PPP projects, including hospitals, will not be materially affected under that COVID-19 scenario.
This may alter many policymaker’s assessment of the value of the availability-payment based PPP model in the months ahead.
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.
Backing the frontline
This maybe be particularly of interest to the healthcare sector, if they were not at the frontline of the coronavirus 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 PPP following the outbreak.
Procurements expected to be a PPP model that are set to be rolled, such as Wales’ Velindre Cancer Centre and Ireland’s Community Nursing Units, may now be expected to be expedited. In fact, in the medium term it is plausible that health authorities across the world will look again at PPP to expedite capital plans which could result in a robust pipeline in the sector.
However, it is difficult to see in the short term when 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 to deliver it. But the support of doctors and nurses will be required to get facilities developed and maintained, sooner rather than later.
There will also likely be a focus on making sure healthcare projects under construction are not delayed.
However, the prospect of the construction workforce having to down tools will compound this situation with inevitable delays across sectors.
Like many law firms, contractors such as Bouygues have reached out to their entire supply chain to minimise the risk to their workforce, supply chain and clients to ensure business activity continues in the most coordinated way.
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.
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 to the market.
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.
Decisions on hold
A European advisor on a much-anticipated project in the justice sector in the US confirmed to Partnerships Bulletin that a key decision on the delivery model for the project had been postponed after county officials cleared their agendas following a case of coronavirus discovered at a school. This type of scenario is being replicated at an increasing scale across the global market and highlights acutely how the roll-out the procurement timeline of the entire global PPP pipeline is now under review.
In Europe procurements in Italy were the first to show up on the Official Journal of the EU (OJEU) as being delayed. However, the official extent to which the project pipeline has been pushed back will be difficult to assess following following the closure of many European Union institution offices to non-critical staff, including the European Commission and the European Investment Bank.
On 17 March EIB President Werner Hoyer announced the EIB had a plan to mobilize up to EUR40bn of financing to fight the crisis. Hoyer said “Covid-19 is exacting a tragic toll in human suffering across Europe and the world. The Bank, and I personally, are close to the people hit by the contagion. The pandemic is also having a devastating economic impact which is already showing. We need a strong European response and we need it now. Europe needs another ‘whatever it takes’ moment.”
There will be a discussion about the role of independent or arms length bodies making decisions on infrastructure projects when elected officials have crises to deal with it, such as pandemics and climate change. But that like so many discussions, will have to wait.
As Kjorstad demonstrates; “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.”
In a crisis that is felt most acutely by the most vulnerable of society, how the pandemic will affect emerging markets could become the most devasting legacy of coronavirus.
On 17 March, Moody's Investors Service said increased investor focus on debt issuers' exposure to environmental, social and governance (ESG) issues and broader sustainability credentials will underpin strong growth in green, social and sustainability bonds across global emerging markets in the coming years.
However, the ratings agency reported fallout from the coronavirus outbreak has dampened the near-term growth prospects for sustainable bonds following last year's record issuance of USD56bn, as prolonged market disruption could deter issuers from coming to market.
The funding gap needed to meet the UN Sustainable Development Goals in developing economies will be around USD2.5trn to USD3.0trn each year up to 2030.
"Sustainable finance in emerging markets is coming of age," said Rahul Ghosh, a Moody's Senior Vice President and the report's author. "Emerging market issuers in exposed sectors and regions will encounter growing pressure to adapt their business models and undertake investments to reduce or mitigate underlying ESG exposures. Those that outline clear financing plans to reduce their ESG and climate risk exposures stand to benefit from robust investor demand."
Fitch and Norton Rose Fulbright were among the many firms that announced a series of free webinars on the impact of the crisis. While IPFA have postponed or cancelled all events due to take place through to the end of April and is monitoring the situation. Where possible, events will be live-streamed or a webinar will be coordinated on the same topic. Partnerships Bulletin also announced that the Partnerships Awards in London and the UK conference in Glasgow have been postponed until the autumn.
As society collectively turns to critical infrastructure assets and technology like never before to mitigate adversity, the value of infrastructure investment may finally be universally realised. All it took was a global catastrophe.