COVID-19 and the Global Construction Business

As Governments, Media and Industries struggle to evaluate the potential consequences of COVID-19 for Economies, both national and global, EIC will collect information regarding the construction business. Our findings will be published on this Website.

Impacts of the Coronavirus on the Global Economy

The coronavirus (COVID-19) outbreak is causing major economic disruption with more severe impacts expected than what had to be dealt with after the global financial crisis in 2007–08, as it hits households, businesses, financial institutions and markets at the same time. Countries with a high degree of openness, less fiscal capacities and a strong dependency on heavily affected sectors, e.g. tourism, might suffer the most.

The economic drawbacks caused by the virus will impact many parts of the world. Imminent insolvency of stakeholders along entire supply chains cannot be excluded. This situation is cause for anxiety, uncertainty and turmoil across all sectors.

Global Consequence 1: Economic Slowdown

Global Econonomic Growth could drop to 1.5% in 2020

The impact on confidence, financial markets, the travel sector and disruption to supply chains contributes to the downward revisions in all G20 economies in 2020
The adverse consequences are significant, including the direct disruption to global supply chains and weaker final demand for imported goods and services

Global Consequence 2: Drops in Supply and Demand

More Uncertainty and Rising Financial Costs

Supply will be disrupted due to morbidity and mortality, but also efforts that restrict mobility and higher costs of business due to restricted supply chains and a tightening of credit
Demand will fall due to higher uncertainty, increased precautionary behaviour and rising financial costs that reduce the (public) ability to spend
IMF makes available $ 50 bn USD to help address Coronavirus, of which $ 10 bn are lend at zero interest
Many countries have put unprecendented care packages in place. But relief tools bring along their own problems: Allowing a broad range of debtors more time to meet their financial obligations can undermine financial soundness; subsidized credit can be misallocated; and keeping already non-viable firms alive could hold back productivity growth later

Read more:
IMF: The IMF and COVID-19
McKinsey & Company: Supply-chain recovery in coronavirus times - plan for now and the future (18.03.20)

Global Consequence 3: Risks for Debt Sustainability in the Developing World

World Bank Group President David Malpass has informed G20 Finance Ministers on a required debt relief for the 75 poorest countries to prohibit the use of financial flows to restore debt sustainability instead of investing in economic recovery. A widescale debt relief policy that also affects emerging markets might be required.
World Bank and IFC Boards approved a $ 14 bn USD package to respond to COVID-19, IBRD and IDA will make $ 6 bn USD available to support health infrastructure, introducing rapid procurement modalities.
World Bank, including IFC and MIGA, could deploy as much as $ 150 bn USD over the next 15 months.

Read more:
World Bank: The World Bank on COVID-19
The Guardian: Urgent call to head off new debt crisis in developing world (22.03.20)

Impacts on the Global Construction Business

The impacts of the virus on the global construction business might prove to be detrimental. Contractors are at the forefront as they are service and product providers at the same time. Covid-19 affects both material and labour, key cost components of construction projects, and by doing so, challenge on-going project delivery, companies’ liquidity and whole business models.

A comprehensive list of legal action to claim an extension of time or financial entitlement defined in JCT, NEC and FIDIC contracts is provided by Pinsent Masons and can be downloaded here.

Impact on Construction 1: Health, Safety and Employment

All-of-society quarantines have resulted in a full stall of different sized construction sites and partially non-operational business to effectively apply social distance in a unified effort to limit a further outbreak
In addition to physical wellness, contractors are considering mental health care following reports on anxiety among workers
Contractors currently prepare the introduction of short-term working conditions to circumvent dismissals

Read more:
OSHAS: OSHAS on COVID-19 and Key Regulations
PWC: Coronavirus – impact on companies with an international workforce (13.03.20)

Impact on Construction 2: Delays in Construction Material Supplies

Many countries such as China and Italy have slowed or shut down their production sectors leading to forecasts of a sharp decrease in production of a wide range of materials ranging from steel to cement
Contractors that rely on Chinese-made goods and materials are likely to be faced with higher costs and, caused by shortages of construction material, slower project completion. This, in turn, implies higher prices and more projects cancelled.
Limited public transportation and travel bans slow down project delivery as sub-contractors are not able to perform or provide required material
While works are stalled, equipment rental companies are starting to face problems with equipment left on inoperative sites

Read more:
New York Times: Chinese Copper, Italian Marble: Coronavirus Shipping Delays Hurt Developers (20.03.20)
Construction News: Materials suppliers shut down amid coronavirus confusion (24.03.20)

Impact on Construction 3: Legal and Administrative

Contractors may be faced with dramatic turbulences alongside their supply chains. With smaller companies facing the real risk of bankruptcy, major contractors will be forced in legal disputes over non-deliverance and “empty” spending
Quarantine periods across the world vary in length. The uptake of cross-boarder projects will require a higher administrative burden
Contractors should be mindful to claim possible time and financial coverage entitlement as early as possible
Borrowers may make back-to-back force majeure claims under concession agreements to avoid breaching milestone completion dates and incurring liability for liquidated damages

NEW: UK Construction Leadership Council: Future Proffing Guide for Contracts, https://www.constructionleadershipcouncil.co.uk/news/future-proofing-gui... (July 2020)

Impact on Construction 4: Distorted Demand and Deterred Financiers

Many countries have introduced financial support instruments of unprecedented scope to cover losses of revenue, but on-going expenses, the lack of income, a prospect of client insolvency or possible inabilities to claim “force majeure” will put a huge financial burden on the sector
As production output is expected to decrease by 20-40%, investment in public infrastructure is likely to fall off the table. Such development has the potential to hit hard on contractors specialised in non-viable public infrastructure
With the real risk of financing drying up in the developing world, contractors may be faced with various challenges including
- Lack of payment for ongoing and lack of finacing for future projects
- Suspension of manufacturing / worksites
- Travel restrictions and less welfare support availablity to wokrers
- Cost overruns and delays
Governments are implementing short term export credit insurances to cover losses in exports of goods and services

Read more:
ENR: A virus shaken economy could erode markets for new construction (19.03.20)
JDSupra: The impact of COVID-19 on Project Financing (21.03.20)
European Commission: State aid: Commission adopts Temporary Framework (19.03.20)

Bi- and Multilateral Stimulus Programmes

To alleviate the impacts of COVID-19 on a global scale, European states have ramped up their international assistance. New short-term loans from governments and their finance agencies, equity with strong incentives to repay in recovery, but also regulatory reliefs regarding debt repayments, interest and lease payments as well as assistance with other significant operating expenses are currently under discussion. The G-20, economies have agreed to support developing countries and emerging economies with stimulus packages totalling USD 5 trillion.

Important financial providers are Development Finance Institutions: The African Development Bank (AfDB) is setting up a USD 10 bn COVID-19 response facility. The AIIB plans to launch a USD 5 bn relief fund. The EU is mobilising EUR 15.6 bn with a contribution of EUR 5.2 bn from the European Investment Bank (EIB), EUR 4 bn from the Member States and EUR 1 bn from the European Bank for Reconstruction and Development (EBRD). By assisting with liquidity shortages and insurance coverages, Export Credit Agencies are also playing a crucial role in navigating the economic consequences of COVID-19.

Do you want to know what your national agencies are doing? Click on the xls file below to get an overview of European DFI and ECA responses to COVID-19.

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EIC Overview: ECA DFI COVID-19 Responses

European Development Finance Institutions (DFIs)

Emerging economies and developing countries around the word are slowly grasping the negative impacts of COVID-19. On the African continent, nearly 20 million people could lose their jobs with nearly 30 million pushed into extreme poverty. Total losses could amount to as much as USD 100 billion, with immediate financing needs in the health and sanitary infrastructure.

To jump start economic engines, DFIs have unified under the “DFI-Alliance” to identify immediate financing needs in the most impacted regions and to resolve liquidity issues, supporting the viability of companies and to promote new investment in goods and services necessary for global health, safety and economic stability. Resilient Infrastructure is one of the most important identified areas. For the time being, DFIs are developing measures with the goal to

loosen up credit criteria to allow more risks so potential growth and development pay-offs can level COVID-19 losses.
set up guarantees to back up risky investments needed for economic recovery.
put a stronger emphasis on private sector financing as well as public infrastructure to ensure proper health and economic sustainability.

European Export Credit Agencies (ECAs)

Export Credit Agencies (ECA) are responsible for providing liquidity for exporters; SACE Simest and UniCredit have signed a EUR 1 bn package to help overcome temporary delays in cash flows and to manage disruptions in deliveries up and down supply chains. The Spanish ECA Cesce has mobilised EUR 2 bn to support exporting activities; the same applies to the French Bpifrance that is collaborating with the banking sector to offer “state guaranteed loans” totalling at EUR 300 bn.

Some newly established guarantee instruments may cover up to 90-100% of existing and new loans with grace periods of 3 to 7 years granted by private banks. While most instruments are targeted at small and medium-sized enterprises (SMEs), there are also tools for larger companies, such as Austria’s EUR 15 bn state-led security package administered by AWS.

While the ECA responses vary in scope and depth, all agencies have implemented short- and medium-term tools to

support exporters through increased flexibility and relaxation of terms for policyholders (exporters) or their clients; expedited processes (approvals/claims processing); some concessions, waivers or flexibility on fees and premium payments.
maintain industry capacity in order to support trade through increasing capacity, easing restrictions, and augmenting private market capacity via new direct cover, reinsurance, or top-up by public insurers (ECAs).
reduce pressure on cashflow and support supply chains through increased support for finance indirectly related to exports: e.g. covering for working capital, pre-shipment finance, bonds, domestic supply to exporters, import guarantees.
minimise defaults on existing loans through directly, or in conjunction with the banking system, facilitating favourable restructuring: deferred payment schedules, extended repayment periods, waivers of some interests and fees.

Read more:
Berne Union: Robust response to the COVID-19 pandemic from the export credit insurance industry (21.04.20)

Information from EIC Partners

FIEC Website with information on the current COVID-19 Situation.