Every day we are hearing news from all around the world about coronavirus and countries are in lockdown situation with no economic activity. Magazine Economist predicts we could see a drop in GDP of 5% and a loss of a quarter of the global GDP forecast for 2020.
If we put into concern the crashing oil market and the temporary cessation of stock trading as an indicator of the coronavirus’ ancillary economic impacts, global public and private sectors leaders need to embrace mitigation strategies immediately.
The virus’ economic impacts on PPPs will place a tremendous burden on project stakeholders, users, the private corporate sector, and the public sector for months and years to come.
With reduced economic activity, PPP projects (especially in the transportation sector) will experience considerable revenue generation challenges. In most instances, the vulnerability scope and extent to this force majeure risk was not foreseen in PPPs that rely on revenues generated by user fees: maritime ports (loss of shipping and service fees), airports (loss of gate fees, refueling fees, airport commercial concessions), tolls roads (no users due to city-wide quarantines), and hospitals (new patients with uncertainty of how they will pay their medical bills).
PPPs that receive revenue through availability payments might suffer in the long term as governments face contracting economies that result in declining tax revenues and less treasury and budget resources to honor their availability commitment payments.
Additionally, the day-to-day operations and management of PPP projects will be affected, with special purpose vehicle (PPP project companies) employees being incapacitated, especially when it comes to project operations and maintenance project knowledge.
It’s important to monitor what the impact of the coronavirus will have on risk insurance for PPPs. If pandemic insurance becomes expensive and unaffordable the question of impacts on project bankability will need to be addressed.
If the finance sector becomes less liquid, the question needs to be addressed whether it will have the financial resources in the short and medium term to participate in PPPs with governments in future projects.
It’s critical the private sector be assured that, as soon as problems arise, they can approach their public sector partners and share project impacts without fear of punitive actions that could unilaterally blame them for impacts.
It’s also important that recovery plans are harmonized with national strategic priorities. Strategic recovery plans must focus on a win-win recovery tactic that is inclusive of the needs of both the public and private sectors.
The Public Private Partnership Market Recovery Plan in Serbia should focus equally on the interests of both parties in the partnership.
Existing contracts that will certainly suffer from the occurrence of force majeure risks should be maintained with active mediation by all parties and a fairer division of the resulting difficulties in order to avoid termination of contracts and court epilogue.
To revive the public-private partnership market in the aftermath of this crisis, any potential public partner can use the time of crisis to prepare potential public-interest projects that can be implemented in the form of a public-private partnership.
It is about developing a so-called Public Private Partnership Calendar, a development document that presents all projects of public importance that can be implemented in some form of PPP, as well as the proposed model, risk matrix and financing model. PPP Calendar is a kind of public sector marketing and an instrument for attracting private equity.
On the other hand, in accordance with the PPPs and Concessions Law, any potential private partner can use the time of this crisis and come up with a PPP Self-Initiative Proposal that will be sent to the potential public partner when the crisis passes.
The PPP proposal should include a Feasibility Study with the economic and financial analysis of the possible future project, the calculation of the value for money of the project, calculation of the public sector comparator, the suggested risk matrix and the PPP contract proposal.
If the corona crisis and economic downturns are utilized in this way, PPP market in the World and Serbia will feel much less of present growing vacuum which will certainly affect the real, financial and fiscal sectors.
By Vladimir Vasiljev, Special Counsellor, Stojkovic Attorneys