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April 30, 2020

What is the COVID-19 Crisis Impact on Public-Private Partnerships

Covid
Posted by Rui Monteiro and Ozlem Aydin Sakrak[1]

The coronavirus health crisis poses new challenges and uncertainties for public-private partnership (PPP) projects. Governments should be well prepared to take pro-active measures to defend health and jobs while protecting the public purse.

How can COVID-19 affect ongoing PPP projects?

The current health crisis will most likely affect PPPs in three ways:

  • creating additional costs for all PPP projects, particularly those that are operational, mostly due to disinfection of equipment and facilities, and workforce shortages;
  • affecting significantly the revenue of user-funded PPP projects, particularly transportation and energy projects, due to the much-reduced demand;
  • posing specific challenges to projects that are in the construction phase, such as construction delays and supply chain disruption.

The impact of the COVID-19 will depend on the length of disruption and will be felt differently by each PPP project depending on its specific conditions (country, sector, phase of the project cycle, design of the contract, etc.). For instance, PPP projects in transportation and energy will face significant losses of revenues. Healthcare projects will be particularly affected (through reduced revenue and increased costs) if they include medical services. Some sectors such as water are likely to be less impacted by COVID-19 challenges, while for school projects, which usually cover only school facilities, the impact is still uncertain.

Key considerations for Governments

Contractual provisions. Well-structured PPPs include mechanisms for dealing with unexpected situations like health emergencies. Some of the COVID-19 challenges can be addressed by interpretation of existing contractual provisions and provisions in the existing law. Changes in circumstances are usually covered by several PPP contractual provisions, including force majeure which usually implies the suspension of penalties for non-performance and compensation for higher costs and losses. It should be noted that the PPP company remains committed to deploy all possible efforts to keep the service operational. Some PPP contracts benefit from minimum revenue guarantees that will compensate the PPP company for loss of revenue. PPPs under availability payments should not be affected by lower demand.

Government economic response to COVID-19. PPP project companies can benefit from available government support (loans, guarantees, tax relief, subsidies, etc.) as any other private firm to address liquidity or solvency needs during the pandemic.

Emergency measures. To ensure continued operation of the PPP assets, governments may need to define emergency measures and discuss with PPP companies how to soften their financial burden. For instance, contract managers in line ministries may allow PPP operators to reduce services and change performance standards, temporarily relieving the company from performance penalties. If services cannot be delivered due to the crisis or emergency measures, despite the best efforts of the PPP company, there can be also a temporary suspension of performance-related penalties and an extension of deadlines until services are reestablished.

The impact of service reductions on staffing should be addressed, protecting jobs temporarily and defining compensation rules, if not already covered by COVID-19 general support measures. Additional service/standard requirements (e.g. safety, disinfection) may impact the service provider's ability to operate, and additional costs may have to be compensated by the contracting authority. It is therefore important that the ministry of finance is involved in major decisions, assessing the fiscal impact of these changes, identifying the solutions that best serve the public interest, and blocking the ones that don’t.

Protection may still be needed. PPPs, as partnerships with government entities, are generally better protected from COVID-19 impacts than other private businesses. They are either government-funded projects or, if user-funded, they usually benefit from the above-mentioned contractual provisions or other tools that require governments to share or cover costs created by the crisis. Nonetheless, they may still need swift action by governments to safeguard public health, protect users and staff, and manage fiscal costs. For contracts where force majeure is not well addressed, governments may need to quickly announce the protection they will guarantee to PPP companies. PPP projects with a heavy debt burden may need immediate support which involves public funds, or simply government guarantees. The finance ministry should work with the contracting authorities to assess the current and future fiscal cost of those measures.

Preparing for post-crisis conditions. The fiscal cost of the current emergency will necessarily tighten post-crisis fiscal space, and changes to private sector risk-appetite are expected. So, because infrastructure will still be critical for growth and quality of life, governments should prepare to reassess and reprioritize their pipelines of investment, including projects that are currently being developed or in procurement, and most probably will be suspended.

This article is part of a series related to the Coronavirus Crisis. All of our articles covering the topic can be found on our PFM Blog Coronavirus Articles page.

 

[1] Fiscal Affairs Department, IMF.                          

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.                            

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