Even as the world gradually eases out of lockdown, deals are rekindled and services are remobilized, no one doubts that the impact of the pandemic will continue to be felt for months and, some say, possibly years ahead. The impact of COVID-19 on construction projects will vary significantly from jurisdiction to jurisdiction depending on a range of factors, including the severity of the pandemic, the nature and significance of government orders issued to address the virus, and the effect of government action taken to mitigate financial hardships resulting from the virus.
This final part of a three-part White Paper looks in detail beyond the lockdown in three ways. First, what are the lessons learned for future project planning from a contracting, financing, and due diligence perspective? Second, what types of disputes can be expected to arise from the pandemic? Third, what strategies might be employed to weather the storm and minimize the impact of the pandemic on a project and the business of a construction industry participant?
Part I, published on May 1, 2020, set out an overview of some of the recurring issues facing construction industry participants. It sought to convey a global perspective on these issues, as major companies, particularly those with global operations, must have an understanding of the legal challenges presented by the virus to proactively address the challenges it presents across jurisdictions.
Part II, published on May 12, 2020, provided a transactional and disputes-focused overview of the impact of COVID-19 on a select number of key sectors within the construction industry: real estate development, oil and gas, renewable energy, social infrastructure, transportation infrastructure, and telecoms. It also reviewed the typical insurance policies that cover construction projects and how they may or may not apply to a project that suffers financial consequences as a result of COVID-19.
Even as the world gradually eases out of lockdown, deals are rekindled and services are remobilized, no one doubts that the impact of the coronavirus pandemic will continue to be felt for months and possibly years ahead. The impact of COVID-19 on construction projects will vary significantly from jurisdiction to jurisdiction depending on a range of factors, including the severity of the pandemic, the nature and significance of government orders issued to address the virus, and the effect of government action taken to mitigate financial hardships resulting from the virus. Further, how owners and contractors respond to the easing of restrictions will be important and may themselves be the source of future claims.
The pandemic raises many issues in the immediate term, the mid-term, and long-term. For that reason, we have prepared this White Paper in three parts.
Part I, published on May 1, 2020, provided an overview of the recurring issues relevant to the construction industry, as well as specific legislative and regulatory measures implemented in the countries with the most active energy and infrastructure development programs. Many of our clients are located in these countries, have projects in these countries, or depend on these countries for their supply chain. An overview of these issues and measures in multiple jurisdictions is useful to develop a global, proactive strategy rather than a narrow view confined only to the challenges posed by COVID-19 in the jurisdiction where a specific project is located. The construction industry is a global industry, and the progress of a major project and its timely and successful completion is seldom a function of purely local conditions in the jurisdiction where the project is located. The COVID-19 pandemic has reinforced this reality
Part II, published on May 12, 2020, provided an overview of the impact of COVID-19 on a number of key sectors within the construction industry: real estate development, oil and gas, renewable energy, social infrastructure, transport infrastructure, and telecommunications. This overview is from both a transactional and disputes perspective and addresses issues of global relevance, including several questions that Jones Day encountered in the few months since the start of the pandemic, from owners, contractors, and design professionals. We also reviewed the typical insurance policies that cover construction projects and how they may or may not apply to a project that suffers financial consequences as a result of COVID-19.
This Part III looks beyond the pandemic in three areas. First, what are the lessons learned for future project planning from a contracting, financing, and due diligence perspective? Second, what types of disputes can be expected to arise from the pandemic? Third, what strategies might be employed to weather the storm and minimize the impact of the pandemic on a project and the business of a construction industry participant? This latter point is important because no matter the bleakness of the present, the industry will survive, and the question is how best to avoid, minimize, and allocate risk associated with the next big challenge.
LESSONS LEARNED AND FUTURE PROJECT PLANNING
Project Procurement and Financing
Overview
The COVID-19 pandemic has created unusual countervailing pressures for project sponsors and governmental granting authorities. On the one hand, resulting supply chain disruptions and liquidity issues for contractors and suppliers have, in some cases, negatively impacted the delivery of construction projects. Effects of these disruptions are also relevant for lenders during the availability period for their financing commitments. We have also seen demand risk projects suffer from acute revenue drop-offs, resulting in downgrades of debt relating to certain projects. On the other hand, national and local governments around the world are promoting infrastructure spending as a method to combat rampant unemployment and address needed investments in their transportation and energy sectors. Governments may also direct funding toward environmental, social, and governance ("ESG") programs in the furtherance of previously stated goals or in pursuit of new environmental and social objectives after the pandemic subsides.
In light of continued social distancing requirements and an anticipated second wave of COVID-19 infections, we expect to see a number of changes to traditional project bidding processes and emerging trends in contract negotiations to address past and future effects of the pandemic. Lenders, underwriters, and equity investors need to be creative in their financial engineering, and all parties will likely look to governmental and supranational liquidity sources to cover funding gaps. The debt capital markets should continue to be an accessible source of funding, providing efficient liquidity especially for refinancing solutions on operational projects. Access to reasonably priced funding sources and creative cash flow management will be critically important as projects work their way through the pipeline.
Originally published 20 June, 2020
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