PPPs and Covid-19: Your Questions Answered

We received several questions from delegates during the 'PPPs and Covid-19 Webinar.' The panel has provided the following written responses.

The full recording of the webinar is now available on YouTube.

 

Answers by Natalia Korchakova-Heeb, Managing Director SDG.17 Consulting GmbH, leader PPPHealth4All

Q. What are the business opportunities in post-Covid world?

A. The business opportunities in post-Covid world are connected to: 

1) Digitalization. Successful businesses will have a combination of resilience and agility and will have to digitalize their services wherever is possible and this is also applicable to the public partners. Digitalization of processes and creation of digital services will be more and more in demand and I personally see a lot of business opportunities especially for PPPs in the healthcare sector. Digitalization of processes in PPPs in the healthcare sector improves availability and 24/7 monitoring, so reducing unavailability risk.

2) Use of new technologies for PPPs. New technologies (e.g. artificial intelligence, blockchain, big data, drones, BIM/ digital twins for PPP infrastructure projects) enhance the resilience and create new business opportunities. The benefits include improved performance and cost reductions. 

3) Innovative PPPs. As far as the health sector is concerned, the investments in digitalization of healthcare projects are often undertaken with PPPs. PPPs are applied for m-health, e-health, telemedicine and health information technologies.

I have also mentioned  today in my presentation that more multi-stakeholder approaches are necessary during and after COVID-19 pandemic to mobilize stakeholder ecosystems in the case of emergency or a need to provide a quick response. "Platform-approach" and “platform" as a service is a new business trend.

 

Answers by David Baxter, International Development Consultant, PPP Navigator

Q. Will risk assessment reverse cost of PPPs?

A. It will be increasingly important to revisit risk allocation and make sure that it is allocated to the relevant party - the one part that can mitigate this. If allocated to the wrong party there is a great risk of failure and then an increase in project cost. It will be important to revisit what is meant by force-majeure as well and who is responsible for a catastrophic force-majeure event impacts.  In the current situation where both the public and private sectors are impacted it might not be wise to allocate it to one party, especially in Black-Swan events. It will be important to clearly define what a pandemic is so that it can be addressed in all existing contracts. The onus cannot be placed on the private sector on its own as they are reeling from impacts.  PPP projects cannot fail because of bad force-majeure risk decisions on risk.  There will be a cost to evaluate projects, but it will fix future problems. We need to revisit risk assessments and consider retro-reallocating them.

 

Q. What are mechanism for gov to support new projects?

A. We have two scenarios - short term - we need innovative procurements to address critical issues and needs now.  In long term projects - there will be a need for revising projects and deciding which projects are a priority - we will need projects that offer value for money and consider People First PPPs. New feasibility studies that address Sustainability and resilience will be critical considerations for new PPP projects or they should not be considered.

 

Q. Do we have scenarios with Covid-19 situations? What are the implications?

A. We have short, medium, and long-term scenarios.  

Short-term are the rescuing actions. This includes avoiding unnecessary disputes, setting up project round tables that are focused on solving problems and include solutions that are forward looking.

In the medium term we need to look at applying lessons learned, and revisiting enabling environments - are they conducive to mitigating future events, 

In the long term we will need to revisit projects for commercial and economic viability.  This means that future projects will have to have a people focus and must have elements of sustainability and resilience.  In the long term governments will need to revisit their PPP projects and chose ones that carry merit in the post-covid-19 world.  This will require the cumulative reallocation of the public and private sector resources towards meritorious projects.  

 

Q. How can businesses help those suffering from the impacts of Covid-19?

A. There are a variety of PPPs that range from philanthropy to structured contractual agreements,  Philanthropic partnerships can offer arrangements where companies (which have corporate social responsibility programs) can reach out to the public to help with recovery from the pandemic impacts.  Formal PPPs have a great area for making impacts in healthcare and food security initiatives. It will be important to find innovative applications of technology through APPS that can improve food-supply chains, tracking of needs and delivery of essential services in partnerships between the public and private sectors. Innovation will also help create PPPs in countries like the USA where the healthcare system is privatized and not accessible for all.  What would be important would be for the public and private sectors to come together to bridge investment and resources gaps by sharing resources and leveraging their expertise.

 

Q. What sectors would benefit the most from using PPPs in a post-covid-19 world?

A. It needs to be determined by country specific needs. They will need to be tied to countries specific SDGS. Education will be a big focus- especially in the area of delivering education remotely while students cannot attend classes. This will require the sharing of ideas and innovations of the private sector tech providers in partnership with public education systems. This will require collaborative PPPs where the resources of both parties are leveraged. In order to expedite such agreements during the pandemic, governments should explore ways to expedite procurement of projects to support critical PPP projects, in the heathcare, education, and WASH sectors. This could include developing prequalified pools of providers who have proven that they can be good PPP partners. Agricultural outreach programs that improve food security should be considered (i.e. strategic food storage warehouses). Supporting WASH projects and prioritizing them should be considered as bad sanitation will lead to the spreading of pandemic diseases.  Until economies recover, more popular PPP projects such as transportation should be put on the back-burner. Affordability of projects will most certainly be a consideration that could also see mega-projects being put on hold.

 

Q. Do you see less appetite for emerging markets from investors and developers in the short and long term?

A. Investors will continue to be interested in projects that are well structured. Governments are going to have to do a better outreach to the private sector through market sounding to find out what types of PPP projects the private sector is interested in.  The private sector will be watching how governments handle the crisis in their PPP  markets and this will determine the private sectors interest in re-entering markets in the post-covid-19 era. 

 

Q. What lessons are to be learned from the impact of the pandemic and what to do in future if faced with a similar situation? See combined response.

A. Current events have proven that most countries healthcare systems are not resilient to pandemic shocks due to poor integration of their healthcare systems - both nationally and internationally.

Healthcare preparation for shock events was non-existent and was under estimated in PPP force-majeure clauses in contracts.

What is critically needed are partnerships between the public and private sectors that address short-, medium-, and long-term challenges.

PPP recovery strategies should implement short-, medium-, and long-term phased actions that build on enduring partnerships that encourage robust relationships between stakeholders.  We most certainly need to identify long-term corrective strategies that will address future Covid-19 type virus pandemics that many epidemiologists believe could become increasingly common due to long-term PPP contracts (20+ years)

We should explore building a holistic PPP healthcare ecosystem - at both national and international level for pandemic events

The longer the required commitment of the PPP partnership, the more formalized the relationship between the public and private sectors needs to be to ensure longevity.

In centralized national healthcare systems, partnerships should focus on creating healthcare enabling environments that allow the private sector to be meaningful partners and a back-up to the national healthcare system (e.g. private hospitals being incentivized to seamlessly align with national systems in a time of crises). 

In privatized healthcare systems the focus would be different.  In this case of the USA, for example, private hospitals could be incentivized to align themselves with the Veteran’s Hospital system as well as Department of Defense facilities in the case of national emergencies. 

Stronger government led coordinated relationships supported by private sector innovators need to be established for existing and future project designing, planning, operations, and maintenance.

Longer-term and larger procurements (i.e. healthcare infrastructure) that are address ongoing long-term goals should undergo a more rigorous sustainability and resilience review that assesses them for value for money, commercial viability, and bankability. 

All procurements should be competitive and transparent – with very few exceptions for emergency actions (this should apply to short-term actions only)

Flexible force-majeure requirements need to be included in PPP procurement terms and conditions so that healthcare PPPs are not exposed to punitive measures for missed deliverables which are not the fault of the operator

Reviews of long-term works, services, and goods must have an added filter that stringently applies sustainability and resilience into the required best practices

What is needed are robust and resilient PPP procurement systems that are flexible enough to respond to any unknown force majeure healthcare emergency. 

It is important to avoid the current situation where institutions (both the public and private sectors) are pitted against each to procure emergency supplies and services “competitively.”

 

 

Answers by Marc Frilet, Managing Partner Frilet Société d’Avocats

Secretary of the UNECE PPP Center of Excellence Policies Laws and Institutions

Infrastructure and PPP expert French National Bar Council

Visiting professor Construction and Project Development University of Paris Pantheon Assas and Stuttgart

 

Q: Force majeure evolution In PPP; Who will be the beneficiary Public or Private?

A: Force majeure means that the loss lies where it falls and this may lead to drastic and inequitable consequences in PPP more particularly for Concession PPP.  It is possible by contract to mitigate some negative consequence of force majeure. Many modern users fee  PPP contracts for events like COVID permit to limit the private partner losses beyond a certain threshold by reference to the contract economic balance . The trend for restoring  a minimum economic balance is guided by a joint interest of the PPP partners to continue to operate the public service in an equitable manner. No real winner or loser. Well drafted clause should permit to develop more resilient PPP.

 

Q: If dispute related to COVID how will local court will decide?

A: In practice very few PPP related disputes go to local court and I do not think that the Covid event will make exception. By nature many PPP projects which provide for public services cannot fail.

Renegotiation is the rule and modern approach to renegotiation by reference to the financial and economic viability of the project expressed simply with good indicators deserve to be considered in many  PPP.

PPP contracts should better focus on dispute avoidance and make use of modern techniques .

The partnering process where representatives of the parties at different level meet on a regular basis around the table for exchanging in an organized and transparent manner on their respective views and issues on contract implementation is an efficient dispute avoidance tool.

For large and complex PPP Projects Dispute Boards comprising generally three authoritative person informed of all aspects of the project, exchanging with both parties and proposing equitable solutions to consider have a good track record for resolving disputes. It is recommended that the contract provides for Standing Boards meeting jointly the parties on a regular basis and providing advice even in the absence of Dispute.

When a dispute has crystallized PPP contracts should preferably refer the matter to arbitration administered by an experienced arbitration institution. Depending on applicable law and precedents additional reference may be made to equity or lex mercatoria.

Remember that with notable exceptions of some civil law countries local courts have very little experience and cannot rely on authoritative precedents on several cause of dispute specific to PPP.

 

Q: Many global multi-stakeholders platforms exist for PPP but it seems that none of theme is useful in reality. Are there any global or UN type platform to recommend?

I can mention the UNECE PPP Centre of Excellence program and related UNECE website. UNECE for several years now attempt to identify and promote the rules  and best practices for developing resilient PPP meeting the SDG’s. UNECE promote the PfPPP delivery form to which I have contributed with the International PPP Centre of Excellence Policies Laws and Institutions.  PfPPP  for low and middle income countries is supported now by series of UNECE standards, best practices report and templates. Several of them have been endorsed by the UN member States and UNECE runs a program gathering State representatives and experts from around the world twice a year in Geneva.

Natalia also indicates good initiatives from WEF on how private sector help to combat COVID and she runs a platform on Healthcare PPP.

 

Q: What lessons learned for the design of flexible PPP contracts?

A: Many lessons have been learned already for the more complex and risky PPP contracts which are Concession PPP where the private partner recovers entirely or mostly from users fees. If the contract draws a wall between the parties allocating all identified risks in full to one or the other (ex-demand risk)  there are many chances that the contract will  become a pathologic PPP after few years .

Several modern best PfPPP contractual practices derives from the painful experience of the rigidity of many contracts mitigated by authoritative case law  in civil law countries like France, Italy, Spain and Latin Amercica where according to UNECE over 2500 Concessions contracts are under way.

A UNECE program has addressed the  PPP contracts flexibility issues  digging into  that bulk of experience leading to a list of inclusive contract clauses and guiding principles for Concession PPP for low and middle income countries .This document has been endorsed by the UN  members States as  recommended best  practices .Several work stream  toward the promotion of  flexible and resilient PPP are under way.

 

Q: What advice to government in developing PPP market faced with fiscal limitation; How to use COVID 19 experience to better identify and develop projects within the fiscal crisis?

The fiscal crisis will further limit the potential to conclude PPP funded by public budgets.

It is worth to explore further how much it is possible to develop more contracts, which could trigger users fees in an acceptable manner for stakeholders. Several international development on the related methodology look promising. Of course users fee create some additional situations of risks and is unpopular in many circles but there are nowadays several possibilities to avoid, assign or share much better the risks such as COVID.

COVID may foster a real “partnership relationship” based on precedents inter alia from modern   Concession PPP (PfPPP). The focus of such contracts start by the expression of common goals as part of the contract linked to set of clauses which permits to adjust some contractual obligation impaired  by  the disruptive events. This may include changing needs and scope of service for best continuity in  the  delivery of the service and satisfaction to end users. The contract sets the framework for a real partnership process having some flavor of company law.  The practice has developed various set of economic and financial references to facilitate the  making of  such “collaborative  decisions” when necessary.

 

Q: What are the lessons learned given the impact of the Pandemic? What to do different faced with similar situation in the future?

A: Allow me to propose a bullet point answer by referring to existing PPP contracts and more particularly on PfPPP which is the PPP delivery form initiated and developed by UNECE with the support of the PPP Specialized Centre of Excellence in Policy Laws and Institutions. The Center has produced several analysis, reports and templates related to sustainability and resilience of PPP focusing  on the PPP contract itself and more precisely for contracts where the private party undertakes to design, build or rehabilitate, finance and operate a public infrastructure which is the support of a public service.

It is fair to say that so far such contracts are not equal when an unforeseeable event occurs preventing performance or rendering performance excessively onerous with the risk of bankruptcy of the  private party.

Since PfPPP are designed to meet public needs represented in most cases by the delivery of an essential economic public service several jurisdictions around the world (from Napoleonic Civil law tradition) have developed pragmatic and authoritative case law principles for such «  Public Contracts » ( in addition to traditional Force Majeure limited relief) by reference to the contract economic viability as anticipated by the parties upon contract signature and applying to PPP contracts. The case law generally refers to Hardship. Hardship together with several other equitable underlying principles for public contracts is an implied term which mitigates substantially the risks of the private party in case major change of the « economic landscape » while permitting to adapt the contract to new unexpected conditions of various kind. As such the private party facing an excessive loss endangering its survival can rely on Hardship and require the public Party to the contract to restore the « economic balance » of the contract up to a certain threshold notwithstanding the absence of contractual clause to this effect.

Concession PfPPP (ie situation where the private party  undertakes to provide directly the service to end users and to recovers entirely or mostly from them)  have been developed under the shelter of the above principles in Napoleonic Civil law countries. The parties to modern concession PPP have further developed in their contracts those underlying  equitable principles inter  alia by reference to  the project economic  and financial scenario updated  in accordance with a Project Acccounting Plan and key economic  indicators. Those provisions are becoming more and more usual and often referred to in contract negotiations  since they permit to continue the delivery of the public service and to adapt it to new circumstances with a cost minimized for the array of stakeholders involved.

The lessons learned from this pragmatic approach in modern Concession PPP, where the parties know in advance that unknown factors will occur that they cannot foresee and organize a contractual method to adapt the contract with  includes often a structured partnering process, can be adapted to many infrastructure and PPP contracts around the world .

In order to disseminate such practices for improved PPP resilience the UNECE International Centre of Excellence has drafted an inclusive list of clauses and guiding principles for Concession PfPPP contracts meeting the SDG’s submitted to the UNECE Working Party of Public Private Partnership in November 2017 (ref UNECE website). This document compiles and summarizes many similar balanced clauses from existing Concession PPP projects irrespective of countries and sectors. Pending a more detailed set of contractual conditions under preparation it is designed to become the basis of the contract conditions in bidding documents or used as reference to the negotiation table.

I hope that this information should at least partially answer your question; what to do different faced with similar situation  in the future?

 

 

Answers by Mr Thibaut Mourgues, PPP Consultant, 4IP Managing Partner

Q: What will be the impact of Covid-19 on PPP investments? Will private sector cut back participation?

A: Investors will use more stringent criteria to assess projects viability. Because investors have become more risk averse, projects will need to be better prepared with stronger security packages and limit economic risk, especially in those sectors that are more particularly exposed to the downturn such as air transport or tourism. That being said, all stakeholders should sit around the table and develop innovative financing structures such as blended finance with the support of international financial institutions. Anyhow, some projects that were considered viable before the crisis will have to be reconsidered. Pipelines will need to be reassessed toward prioritization of those projects that have best chances to be implemented.

 

Q: How can businesses most effectively help the millions living below the poverty line who are particularly suffering from the crisis caused by Covid-19?

A: This question would deserve detailed comments but in a nutshell I would suggest as follows:

The most effective answer to poverty is job creations. Government should adequately value the criteria of job creations and particularly local job creations when assessing PPP bids or awarding contracts. Businesses should further train their employees to help them grow and acquire marketable skills.

Businesses should also develop social programs whenever appropriate. Such programs should be aimed at helping to provide basic infrastructure and services in their area of operations to support the local communities

I also believe in corporate social responsibility, which should entice businesses to participate in philanthropic activities in line with their capacities and resources, even though philanthropy is rarely a long term solution to poverty issues.

In a well-functioning market economy, most basic needs are catered by businesses according to the law of supply and demand. Governments have to make sure that the playing ground is not unduly biased and favours investment projects that will increase the society standard of living and create sufficient and sustainable quality jobs.