In order to curb fiscal deficits caused by low oil prices and diversify economies to reduce reliance on hydrocarbons, Gulf nations have turned to public-private partnership (PPP) models to develop crucial infrastructure. This move has been outlined in national vision statements, and has led to the completion of projects in sectors such as power and utilities, accommodation, transport and social infrastructure.
Most have been executed on typical long-term project finance solutions based on a ‘whole life costing’ assessment and an integrated approach across the full scope of construction, maintenance, operations, debt and equity financing.
Major GCC infrastructure projects are not immune to the impacts of the Covid-19 pandemic. Companies and sponsors need to consider the implications for continuing development and operations of projects and their associated payments and debt servicing capacities.
Project companies need to first assess if the ongoing situation may constitute a force majeure event. This may depend on whether the impact of Covid-19 is foreseeable – so parties entering into contracts after the pandemic may not get the benefit of force majeure relief. ‘Epidemic or plague’, commonly seen in PPP contracts, is typically drafted as a natural force majeure event, as it is considered to be insurable.
In most regional PPP contracts, to the extent natural force majeure events impact a party’s obligations, they may result in schedule extension or relief from obligations, but not be eligible for financial compensation, which is supposed to be dealt with through the insurance. For such relief to apply, the event would have to directly impact the obligations in question.
Major impacts on operational infrastructure projects around the GCC include:
- Transport infrastructure, such as metros and buses, are experiencing reduced patronage;
- Accommodation facilities may suffer reduced occupancies especially in the hospitality sector;
- Contractors may need to introduce onsite facilities such as disinfection units and isolation rooms to prevent the spread of Covid-19;
- Electricity, water, district cooling and telecoms remain key services, but the impact of the shift to remote working for much of the population is yet to be assessed;
- Availability of assets could be impacted by reduced manpower onsite for asset maintenance;
- Airports could face loss in revenues from gate fees, refuelling charges and service fees.
All of these situations could impact payments to the developer or contractor, which would affect debt servicing, equity returns etc. Some of the potential impact areas are:
Disputes and delays
All of the potential impacts listed may filter down to affect the equity returns of the project company and payments to subcontractors, which could result in claims or defaults.
Projects in the development stage are facing the impacts of Covid-19 through contractors being affected by global restrictions on travel. There is also the potential for delays in construction due to affected global supply chains, ranging from extended customs clearance times to unavailability of parts or equipment due to shutdown of manufacturing facilities.
For delays or increased costs incurred prior to completion, it may be possible for the project company to agree an extension to the commercial operations date and tariff adjustment with the offtaker. This may result in additional financing costs, which would necessitate further discussions with lenders and shareholders.
The project company would require the financial model to be updated to reflect the revised position.
Procurers may need to consider designing contracts where not just force majeure may apply, but with additional provisions for back-up obligations in order to mitigate the effect of any future epidemics, and mechanisms to enable the developer to recoup lost service payments as a result of reduced availability due to a force majeure event.
Given that the ongoing scenario is unprecedented in scale, the project stakeholders need to be pragmatic and sensitive in the handling of these issues, should they arise.
Project and finance arrangements/agreements could see changes in structuring to accommodate the new realities. This would provide comfort to developers and lenders, enhancing project bankability and providing a clear way for GCC countries to realise their national visions, even in these testing times.
About the author
Sudarshan TM is assistant director, Government & Infrastructure, Deloitte Middle East
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