Novel Coronavirus Creates Opportunities in Infrastructure
Updated: Jul 24, 2020
The word crisis comes from the Greek "to separate, to sift" , to pass judgement and keep only what is worthwhile. There is opportunity in every crisis.
The novel coronavirus or COVID-19 pandemic continues to impact communities and economies. It’s the once in a hundred year event that we will recount to grandchildren. Probably aside from Victoria, Australians are hopeful that restrictions will eventually ease; although as I write this, Melburnians are now required to wear masks in public to mitigate the spread of the virus. A return to “normal life” seems months away, and even then, what will the new normal look like? Australia’s infrastructure sector is being impacted by COVID. We can use the current crisis as a catalyst to reflect not only on how infrastructure investments are structured, but also how we engage communities as part of those investments.
Are projects in the development phase still viable and bankable? How will the pandemic affect private sector involvement in infrastructure development and financing? Will the current situation affect investors who have bid for contracts pre-COVID? Can governments that are already borrowing heavily to support stimulus measures continue to deliver major infrastructure? Do current procurement and delivery models support the view on risks post COVID? How do we engage with communities about impacts from infrastructure projects when they are COVID fatigued? The list goes on.
Infrastructure can be a vaccine for economic woes
It’s recognised that well-conceived and effectively delivered infrastructure improves economic and social well-being. Helpfully, we’ve seen announcements of major infrastructure stimulus. After the crisis, or at a time when we can co-exist with the virus, there will continue to be impacts on the infrastructure sector: consumer behaviour change; commuting; how quickly economies recover; attitudes to risk; and government debt. Opportunities exist for infrastructure players with the flexibility, balance sheet and resources to adapt post-COVID.
Traditional public finance sourcing is strained
Many governments now face huge deficits, and budgets will be under pressure and reprioritised. There will be a need to explore new models where private funds are used to support public initiatives and requiring greater private sector involvement as part of the COVID recovery. This scenario could take the form of modified PPPs that are tailored for projects. Financial investors with access to capital and who have good operational experience have the opportunity to engage with governments and service operators to develop new delivery models.
Procurement processes need to become more constructive for both parties
Processes must support the production of robust data that is given to bidders in data rooms; timeframes must reflect the complexity of a transaction; and interactive processes that are actually interactive to encourage deep understanding of risks and the pricing of risk - rather than dry Q&A sessions where parties go through the motions and leave the room with no better understanding of perspectives or how contracts might respond if things don’t go to plan. Procurement (and evaluation) is essentially an exercise in risk management, both for bidders and government. Agencies could examine whether the use of departures tables, for example, to evaluate legal and commercial risk, is still appropriate. For example, a process whereby a bidder is encouraged to articulate its position on key risks and its understanding of how commercial regimes respond under multiple scenarios may be a better way to evaluate whether a particular bidder is informed (a better risk for government), rather than naïve (a bad risk for government). This will equally inform the agency’s understanding of the risk allocation it has put to market.
Community engagement should pivot to thoughtful consultation
This isn’t to say that engagements are never thoughtful, rather, we will need more than cookie-cutter approaches or this is how we did it the last time rationale. Infrastructure projects will be engaging with individuals and communities who are fatigued – think back 6 -12 months to Australia’s drought and summer bushfires. With a pandemic still underway, it’s fair to say that all areas of government will be closely watched as to how engagement is performed, with a public well-versed in what works and what doesn’t. Infrastructure practitioners will also encounter stakeholders who are under considerable financial stress. Community and stakeholder engagement will be a material issue for projects undertaking land acquisition, for local councils seeking to increase rates or levies to fund infrastructure and for infrastructure operators re-setting prices for services.
New realities abound and governments and corporates must identify opportunities to achieve public value
Projects under development or in the pipeline will need to re-check or re-think regimes relating to performance, force majeure, delay and other relief. Technology infrastructure, data and health projects will also come into favour because they tick the post-COVID economic recovery box. Increasing government deficits will mean opportunities for private debt and equity. Having constructive procurement processes that unearth concerns around risks and risk pricing will lead to better informed client/government contractual relationships. Financiers will be more cautious in the short term, but it’s unlikely they will turn away from infrastructure as governments signal a commitment to stay the course on big projects that demonstrate strong economic and societal benefits.
Rob Macey is a Director of Macer Advisory, a transport and infrastructure consultancy based in Melbourne.