Does This Change Everything?
How does the coronavirus impact public-private partnerships? What will happen to the many projects for hospitals, schools, roads, airports hit by the lockdown? Find out from one of our experts.
Our lives have changed with the coronavirus crisis. But have they changed forever? In Does This Change Everything? European Investment Bank experts examine the implications of the COVID-19 crisis for sectors from education and digitalisation to urban mobility and medicine—and for your everyday life.
To find out what the coronavirus means for public infrastructure run by public-private partnerships that has been hit by the lockdown, we spoke to Julia Kennedy at the European PPP Expertise Centre in the European Investment Bank.
A public-private partnership is a way of offering a public service, but instead of doing everything itself, the public sector uses the private sector’s skills and expertise. Is that right?
Correct. A public-private partnership, or PPP for short, is usually a long-term arrangement, say for 10 to 30 years, where you have a private-sector partner that takes on responsibility for building, financing and servicing a piece of public infrastructure. We find PPPs in schools, hospitals, roads, railways, airports, waste-treatment facilities. The private partner usually makes the upfront investment in the infrastructure and then gets paid over time, either by the public sector clients in the case of a school or a hospital or directly by the people who use the infrastructure—for example rail passengers or drivers on a toll road.
What does coronavirus mean for public-private partnerships and all these public services? Does this change everything?
The short answer to this is, yes, the coronavirus is right now having a significant impact. In many cases, things have changed in some way or another, at least in the short term. If you think about PPPs that are under construction, construction activity across Europe has been diving or stopped completely and that’s going to cause many delays in the short term.
The issues to be worked out will be: Who takes responsibility for those delays and the costs? The private sector will want to know if it’s going to be penalized for being late and if the public sector is going to help shoulder the financial burden. Ultimately, these delays carry a social cost of not seeing the infrastructure and the service improvements come through as early as planned.
On projects that are built and up and running, on one end of the spectrum you have hospitals, where there’s a sharp increase in use. In some cases, they might need to reconfigure their layouts as a matter of urgency and change the way the spaces are used: for example, turning regular wards into intensive care units. The increased intensity of use will also put pressure on their private partners who need to keep up with routine tasks like maintenance and cleaning in a context where they might be faced with staff shortages and supply shortages.
On the other end of the spectrum, you have schools, where there’s been a complete shutdown or almost complete shutdown for several weeks now and so there’s been no need or demand for the buildings or for the services to keep them open. In both these cases, the questions will be around the flexibility of the PPP arrangements to adapt to changing circumstances and particularly from the perspective of the private partner and its lenders. Will it keep being paid, where the coronavirus situation is preventing it from delivering the services, either because it can’t get staff or supplies, or because the services are not required?
There are also other examples in the transport sector, where you have roads, ports, railways, airports often operated by the private sector, which makes their money from passengers. Many of them have seen their revenues plummet over the past few weeks. How are they going to manage their way through this and what is government’s role?
We’re also seeing problems for PPPs that are still in a competitive tendering phase. The practicalities of putting together a tender and negotiating the terms of the contracts are complex at the very best of times, but even more so in the current environment. We’re hearing examples of projects that are valiantly going ahead with multiparty negotiation meetings as best they can over video conferencing or in some cases even resorting to written negotiations. The majority of projects and procurement are likely to face some kind of delay or change. It’s certainly true that the topic of COVID-19 and pandemics are now being put firmly on the table for discussion before anyone would be prepared to sign the deal. There is some nervousness and some uncertainty about the ability to close deals in the near future.
This sounds scary for public projects. Do you have any tips for the public and private partners in these situations?
This crisis will certainly be putting the partnership element of public-private partnerships to the test. I think communication between the parties is the most critical thing. The private partner needs to understand the demands and pressures that its public partner is under to ensure the continuity of public service delivery. At the same time, the public partner needs to understand the challenges that the private partner faces in delivering on its side.
At some point, hopefully sooner rather than later, all of these projects are going to need to work on returning to normal, and it’s going to be in everyone’s interests for the parties to emerge as unscathed as possible from all of this. We have a role to play here in getting together our network of public sector stakeholders, giving them opportunities to connect and share ideas and solutions for how to work constructively with our private-sector partners.
So what does this mean for the future of public-private partnerships? Will it be more difficult to do these types of deals?
Starting with individual projects, I think that both the public and the private partners are going to be much more conscious and cautious about building flexibility into contract arrangements. The coronavirus has highlighted in an unprecedented way the need to be agile and flexible in delivering public services. Where the private sector’s involved, it’s going to continue to have a key role to play in supporting that.
At the same time, they are going to be much more conscious and cautious about ensuring that the contracts are clear as to how the high risks and responsibilities of pandemics or other emergency situations like this are dealt with. What is reasonable and fair for the parties to expect from one another, practically and financially, in response to something like this? And then, if you think of the bigger picture, it will be interesting to see the attitudes that governments take to PPPs as a result of this crisis and the economic fallout. Here, we’re probably going to see a divergence, much as we saw in the financial crisis back in 2008. In some cases, there will be a reining back on public spending, and investment in new projects will slow down significantly.
It’s important to remember, governments have significant infrastructure spending needs, not least in climate action and commitments to zero carbon. So we also expect to see governments prioritizing infrastructure spending in some cases in order to boost economic recovery. And here the question will be whether they choose to go for private financing through PPPs or if they go for traditional government borrowing. PPPs can offer significant value for money and additional investment for government, but they are complex and they can take a long time to procure, and they also require a buoyant private sector market to ensure good competition.
Some countries have a lot of experience and a good track record in delivering PPPs, but others much less so, and so they face the additional challenge of building skills and capacity to support good PPP projects. And here there is a role for EPEC and the EIB.
There’s also the willingness of the private sector to continue participating in these arrangements, with the risks and challenges and uncertainty that they carry. And the appetite and ability of banks and other lenders to continue providing long-term financing. Another interesting player will be the insurance market and whether or not it responds to put forward solutions for the risk of future pandemics.
Taking an even bigger step back, the other thing to mention is the impact of the crisis on infrastructure planning and preparation more generally. The systems of working, traveling and connecting — for society, government and business — have been turned upside down in the last few months and some of this might never return to what it was like before. So that means governments will need to take a fresh look at their forecasts and assumptions around demand and use of public infrastructure as they plan for the future.
The bank is organizing a big package of assistance to respond to the new coronavirus. Where do you see your team playing a role in this package?
Things are certainly not slowing down for us. Our mission in EPEC is to help the public sector deliver good public-private partnerships, and we do this by sharing information, best practices and lessons learned across our European network. We advise governments on policy issues and project promoters in preparing their projects. The coronavirus crisis will not change that mission or the services that we offer. We’ll continue to do all of these things, but indeed the need for EPEC is likely to increase as we see the market navigating its way through this and into these partnerships in the future.
By Chris Knight