COVID-19 and the Global Construction Business (Site in Progress)

25 March 2020

Impacts on the Global Economy

The coronavirus (COVID-19) outbreak is causing major economic disruption with even more severe impacts compared to the Great 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 heavy affected sectors, e.g. tourism, might suffer the most. 

The economic fallback caused by the virus will strike heavy in many parts of the world. Imminent insolvency of stakeholders along entire supply chains cannot be excluded and is destined to cause anxiety, uncertainty and turmoil across all sectors.  

1. Economic Slow Down: Global 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

Read more:

OECD Economic Outlook, Interim Report March 2020

EBRD: Coronavirus will hit economies across all EBRD regions

McKinsey: Tackling Coronavirus in Africa

 

2. Drops in Supply and Demand: Higher 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: 

The IMF and COVID-19

McKinsey & Company: Supply-chain recovery in coronavirus times - plan for now and the future

 

3. Risks to Debt Sustainability in the Developing World

  • World Bank Group President David Malpass has informed G20 Finance Ministers on a required debt relief for about 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 also affecting 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:

The World Bank on Covid-19

The Guardian: Urgent call to head off new debt crisis in developing world

 

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.

 

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 on Covid-19 and Key Regulations

PWC: Coronavirus – impact on companies with an international workforce

 

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: Cronovirus Shipping Delays Hurt Developers

Construction News: Materials suppliers shut down amid coronavirus confusion

 

3. Legal and Administrative Issues

  • 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

Read more:

Keystone Law on Practical Recommendations to Claim Force Majeure

Deloitte: The coronavirus and its consequences: Legal Impact on supply and production relationships 

 

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

JDSupra: The impact of COVID-19 on Project Financing

European Commission: State aid: Commission adopts Temporary Framework