PPPs can help by bringing in private sector capital and technical expertise as governments continue to look for value for money in infrastructure provision.
COVID-19 is directly impacting infrastructure services around the world. Demand for existing infrastructure has fallen sharply. Construction of new infrastructure has slowed, if not stalled, everywhere.
The COVID-19 crisis is also unique in the suddenness and the severity of its impact on the economy and infrastructure usage. While some infrastructure sectors like health and ICT are experiencing unprecedented demand, others like airports have seen demand dry up. In a period of two months, daily commercial flights have fallen from more than 110,000 to less than 30,000. In April, national highway traffic in Java, Indonesia, plunged by almost 70%. But uniformly, across all sectors the costs of service delivery are going up as governments rush to make service delivery pandemic-proof.
In seeking value for money, public-private partnerships (PPPs) are becoming an important modality for governments to attract private capital and expertise into infrastructure in Asia. PPP projects can be structured so the demand risk, the risk of infrastructure usage, is retained by the investor (usually in transport) or by the government. More than 80% of the PPPs that reached financial closure in Asia in the last two decades are in transport sector, and these are usually structured so demand risk is retained by the project company through user fees.
Pair the impact of declining revenue and increasing costs with the uncertainty of a timeline to complete recovery or an as-yet-unknown new-normal, and you can start to see the formidable challenges facing governments and investors in navigating the long term contractual nature of operational PPPs.
First, a focus on the infrastructure PPP challenges of the immediate.
In Asia, the immediate stress is being felt primarily by the partner carrying the demand-risk. Significantly less revenue and significantly higher operating costs will force investors to dig into their reserves to keep critical infrastructure functioning.
Even projects where the investor depends on an availability payment from the government will feel stressed because, at a time when issues of health and economic well-being have stretched governments, little revenue will come in to offset the government’s payments.
Even though these infrastructure PPPs are stressed, infrastructure may not form part of the upfront stimulus measures given COVID-related pressing requirements. Yet, where there are payment obligations, governments must continue to honor those obligations.
From a policy/portfolio perspective, in the near-term, countries should take lessons from the global financial crisis and the Asian financial crisis. Governments in Asia will need to quickly assess the potential short-term impact of reduced demand and increased costs across their PPP portfolio, differentiating by project-type, project-status, and assessing government exposure.
While it may be difficult to predict the impact, stress-tests should be developed to assess a range of the exposure of the government.
In coming blogs, we will discuss infrastructure PPP challenges and opportunities in the medium-term while we wait for clarity on the new-normal. With credit and liquidity in short supply, stimulus measures may be needed for the infrastructure sector, as continued payment risks will increasingly impair investors. In light of the pandemic, a significant portion of this stimulus may also be targeted for healthcare, education, social housing, digital connectivity and agribusiness sectors.
Even though the number of PPPs has been increasing rapidly in Asia, most Asian countries’ PPP programs are still considered developing or emerging by international lenders. Only 13% of the countries in Asia and the Pacific have procedures that align PPPs with public investment priorities, and even fewer may have good contingent liability management processes.
Further, as in the periods following the Asian Crisis (1997-2001) and the global financial crisis (2008-2012) that were followed by a dip in the number of PPPs worldwide, this pandemic will drastically change the risk profile of infrastructure PPPs.
Regardless of the shape of the recovery, V-, U-, or swoosh shaped, governments should revisit their PPP frameworks and risk sharing to prepare for the longer-term, making government support an integral element for seeking value-for-money through PPPs.
With declining GDPs and decreasing fiscal headroom, this is not going to be easy, and new sources of revenue – such as bonds, land value capture, and asset recycling - may have to be mobilized. COVID-19 is an opportunity for leadership to strengthen local governments so that cities, many of which are struggling to meet the social and economic challenges of the pandemic, can become frontliners in the recovery process.
Multilateral financial institutions will also have a big role to play in supporting governments in this transitionary period, with capacity building, technical, and financial assistance through this period.
In the long-run, there is a lot of uncertainty about what the new-normal will bring, but a few things can be safely assumed. One, a significant infrastructure gap to attain UN’s Sustainable Development Goals will remain, and the private sector will have an even bigger role to play in closing that gap and ensuring we build back better.
Two, the unit cost of infrastructure-service provision will increase as we make current projects pandemic-proof, and newer, efficient and disruptive ways of delivering services will have to be found. Think 5G for all.
Finally, in whatever way the new-normal shows up, governments in Asia will take a bigger step towards resilient and quality infrastructure, and here PPPs can help by bringing in private sector capital and technical expertise as governments continue to look for value for money in infrastructure provision.
This blog is part of a series from the PPP, Governance, and Legal groups of ADB to help governments in Asia and the Pacific think through the legal, financial, and commercial aspects of PPP projects and the fiscal aspects of their portfolios in light of COVID-19. A thorough guidance note is being prepared on these issues.