Brave new world – the impact of COVID-19 on upcoming and ongoing PPP tenders

World Bank :

“It’s no use going back to yesterday, because it was a different world then. So which way should we go from here?” 

As we look into this new year, it does indeed bring a new world in many ways. For those of us who work with infrastructure PPPs, there’s a lot to contemplate: What is the impact of the pandemic on upcoming and ongoing PPP tenders? Will the public sector launch more infrastructure projects to support the economy? Or will it redirect resources from infrastructure to health and social sectors? Will the pandemic help optimize award procedures? Is the private sector more eager to participate in tender processes that may result in winning a long-term PPP with a reliable government counterparty? Or will companies shy away from participation in uncertain times? These are all important questions, as a PPP tender requires a significant upfront investment with no guarantee of success and limited (if any) compensation for bid costs.

In a post-pandemic PPP world, we are all Alice in Wonderland. So what should upcoming PPP tenders look like to attract bidders?  For public sector stakeholders the ideal remains a thorough process with sufficient bidders to ensure a private sector consortium capable of delivering the PPP to the required standard on time and on budget throughout its life. Apart from its key social benefit, predictability of outcome is crucial for the success of a PPP. The private sector’s aspirations are not dissimilar; predictability is key also to sponsors and lenders. Pricing and planning a PPP that will run for decades is a tricky exercise. Doing so while trying to factor in the uncertainties of a pandemic and its resulting measures is almost impossible.

So, what is the single most reliable way to predict future behavior? Looking at the present!

While the pandemic may be global, the response to it is local.  Even within jurisdictions, individual public sector response varies widely. Some authorities stuck to the contractual risk allocation and pushed for flexible solutions. Others reinterpreted force majeure, change of law provisions, and hardship rules—or issued legislation or guidance limiting private sector compensation. Courts and tribunals may set aside such measures if they constitute (illegal) expropriation, but that may take a while. This is time that thinly capitalized project companies simply don’t have.

In assessing whether to participate, the private sector is not only analyzing what measures are taken, but also how they are taken. Are they logical and joined up or did authorities issue conflicting or unclear measures? Did authorities respect the contractual risk allocation or change of law provisions correctly? The pandemic’s impact on a PPP—and the economy as a whole—is really the result of pandemic measures each government takes. A rail PPP, for example, is affected by government rules regarding teleworking and curfews, to name just a couple measures that vary even within countries. In many ways this is logical as circumstances differ, but it is also very much a consequence of political and social choices. Attempts by the public sector to offload this risk onto the private sector will lead to less appetite for tender participation, at least in the short term. Longer term, it will also lead to bigger financial buffers from bidders and thus more expensive bids.

Another important element is public sector messaging on the pipeline and broader PPP projects. Often the private sector assesses the cost-benefit of participating over many projects, not just one tender process. Having a strong pipeline of projects following the same process and structure (for example, contract documents, risk allocation, finance requirements) is more attractive to potential bidders than one-off projects. Governments able to credibly signal that they intend to stand by their PPP programs and see targeted government spending as a way to help the economy recover will be the winners in the post-pandemic world. 

What about the tender process itself? The good news is that an attractive tender process today does not look fundamentally different from a pre-COVID 19 process. It is good to see that many authorities are “fast forwarding” best practices and implementing measures that make the process easier, quicker, and less formal. Live meetings are replaced by video calls; upfront administrative requirements are minimized; more realistic deadlines are being set. More than ever, tender documents need to be clear on minimum standards for negotiating terms and requirements. For a long time, stakeholders pushed standardization and fixed contract terms set out early on in the process. Exceptional times require a more tailor-made approach, with sufficient flexibility to cater to factors such as uncertainties in the insurance market. It is not difficult to draft tender documents and contracts that contain clear provisions to mitigate the impacts—financial and timing—of such uncertainties.

Now, where do we go from here? It depends where we want to go. I’m a paranoid optimist, so I believe that an upside of the pandemic is that it reminds all stakeholders of PPP essentials. The pandemic forces both public and private sectors to rethink the balance required to ensure that PPPs remain attractive to both sides. How each side deals with short-term disruption under existing PPPs will be the most important factor to determine whether the model will remain attractive enough for future projects.