Covid-19 – the new Carillion for operational PPPs
It’s probably fair to say that there are very few individuals, organisations and industries that have been unaffected by the global catastrophe that is Covid-19.
The word ‘unprecedented’ has been bandied about across all media platforms but never has it been more fitting for a health crisis that nearly every country has been plunged into.
And the PPP industry is no exception, with all stages of projects being affected by the deadly virus and governments’ response to try to stem and treat infections.
Responding to what one FM contractor described as “extraordinary pressure” the UK’s Infrastructure and Projects Authority (IPA) and the Scottish Futures Trust (SFT) have issued guidance notes specifically referring to operational PPPs and supplier relief for those maintaining the facilities.
Following on from the Cabinet Office’s Procurement Policy Note (PPN) published on 20 March that set out guidance for paying suppliers, the IPA’s note urges authorities to work closely with PFI contractors to use all available options to maintain public services including maintaining unitary charge payments, revising contract requirements and moderating payment and performance mechanism regimes.
The SFT followed suit with similar guidance urging all parties (including funders) to “recognise that normal contractual processes may not be able to be followed in these circumstances”.
Although the guidance is not sector specific, unsurprisingly hospital projects are experiencing the most pressure.
Victoria Miller, partner at Pinsent Masons, describes dealing with the fallout from Covid-19 as “the new Carillion” referring to when a number of projects had to attempt to maintain usual service provision after the contractor went into liquidation.
“Much like then, we are having to stay one step ahead and react on a daily basis,” she said.
Miller welcomes the IPA’s guidance note. As well as killing off the “force majeure argument and letting us move on from that” she says not adhering to the Model Interim Payment Terms was “more than welcome as it has to be recognised by all parties (including funders) that it is not feasible to strictly comply with the existing contractual provisions at this time and all parties have to find a way to work round this”.
However, Bevan Brittan partner Nadeem Arshad says that while the guidance is helpful for SPVs, there are a number of legal interpretation issues which make its application tricky for both the private sector and public bodies. “For example, under the IPA guidance it is unclear what is meant by ‘best efforts’,” he explains.
One SPV manager admitted that there is more of a “hope rather than a guarantee” that the guidance will be followed.
Despite this, S&P has recently affirmed its underlying ratings on the senior debt of PFI hospitals as a result of “unprecedented support from the government” in the form of its guidance to Trusts.
The ratings agency expects the spread of Covid-19 to “largely leave the PFI projects financially unscathed, owing to their solid contractual structure and guidance from the central government.”
Max Curzon-Hope helped negotiate the first PFI to be handed back to the public sector while in his previous role at the Department for Work and Pensions. Now with newly formed commercial consultancy Curshaw, he expects the biggest challenge to be around staffing levels.
“Contracting authorities and providers will both be affected by lower staffing levels – possibly the chief risk,” he said. Curzon-Hope predicts this could have “a detrimental effect on the battle rhythm of operations and therefore the performance of vital infrastructure like hospitals, schools and prisons”.
He welcomes the IPA guidance as a “pragmatic and timely acknowledgment of these pressures” and hopes the guidance increases the likelihood that the workforce and supply chain are protected.
Curzon-Hope continues: “In the case of hospitals the risk, for obvious reasons, is particularly severe. Those contractors with maintenance and construction obligations may be facing severe disruption from their suppliers who are unable to obtain parts that are required to keep building assets operational. Those responsible for soft FM are also likely to face the added pressure from contracting authorities to do even more than usual such as more extensive cleaning. Having to do more with less staffing and a scarcity of consumables like sanitiser and personal protective equipment will be very difficult.”
For those projects in construction, the main challenge also appears to be around a potentially reduced workforce. Sick or quarantined staff will affect most organizations alongside managing revised health and safety guidelines. In Scotland and Ireland, all construction work has been halted entirely.
Large scale projects like Silvertown Tunnel are not at the “shovels in the ground” stage and one of the contractors told Partnerships Bulletin that at the moment they foresee no immediate threats to timings. However, for projects closer to completion with less contingency to recover lost time, the main area of concern seems to hinge on the likelihood of meeting the first senior debt requirements.
One lender with uncompleted projects in their portfolio expects the costs associated with any delay event will be either payable by the building contractor (through payment of liquidated damages) or by the public authority (compensation event). “In the latter case, the SPV is also afforded an extension of time by the public authority, thereby relieving it from the risk of termination,” the lender says.
However, they add that the main expectation from lenders will be transparent and regular information updates. “Most public authorities value the close engagement of senior lenders in resolving issues,” they explain.
“Transparency is key. Lenders will only be able to provide flexibility if they can see an agreement will be reached within a short timeframe.”
Presently there is a lack of overarching guidance on projects close to construction and the parties have been urged to deal with individual schemes on a case-by-case basis.
Peter Reekie, chief executive of the SFT, says: “Given the low number of projects, and that some are very close to completion, SFT is not planning to issue generic guidance [but] is working closely with our colleagues in procuring authorities and industry to develop individual solutions in light of the unprecedented situation we all find ourselves in.”
Outside the UK, most countries appear to be relying on communication between individual project teams rather than overriding guidance.
Melbourne-based Richard Foster, director at advisers Foster Infrastructure, says that in Australia there tends to be direct and regular contact between the public sector project team and the relevant central PPP unit. “As a result, coordination across government in respect to an issue such as Covid-19 impacts mostly occurs through internal communication, rather than public guidance as has occurred in the UK.
“Typically, the central PPP unit would consult with project teams and contract managers on the impacts and potential solutions, and then provide direct guidance, working with the project teams and contract managers to negotiate … and implement the solutions."
One Australian-based developer adds that state governments “are being collaborative where they can” and said that he was seeing instances of governments paying early where cash flow is under pressure, and seeking to provide relief where possible. But while he said that the overriding view across the PPP industry was “optimism that arrangements can be made” he warned that there is concern private sector owners either will not or cannot afford to provide relief.
This case-by-case approach is echoed in the similarly mature market of Canada. A spokesperson from Infrastructure Ontario (IO) said: “The government and IO are committed to working with industry partners to continue this essential work in these unprecedented times. We have been in constant contact with our partners as we respond to this unprecedented challenge and will continue to communicate with industry as this evolves.”
There is no doubt that responding to the demands of the facilities during the Covid-10 fallout will be challenging but if the majority of contracts are able to demonstrate partnership working, this could show the strength of PPP contracts rather than the weakness.
Curzon-Hope says that strong existing partnerships will stand PPP projects in good stead to deal with the constantly unfolding changes to service provision.
“The length of contracts relative to other government services contracts is favourable to well-established, mature governance and trusting relationships that are critical to a flexible, agile, commercial and operational response that the crisis demands,” he explains.
“If contractors and contracting authorities work in partnership then PFI/PF2 should rise to the challenge and supportticle ongoing service of critical infrastructure through the Covid-19 emergency and may even be stronger and better for it.”
Indeed, in its recent report, S&P expect that the “all hands on deck approach” will positively impact the working relationships between PFI projects and the Trusts.
“Fighting Covid-19 may reset the dial of the interaction between the PFI projects, their subcontractors, and the NHS Trusts, perhaps even in a credit-positive way,” it says.
Article by: Amanda Nicholls