As a part of weekly newsletter on vital insights for the Energy and Infrastructure community in Turkey and abroad, EEL Events has spoken with Ozlem Kildir on challenges in infrastructure finance in the wake of Covid-19 crisis…

Ozlem Kildir

CEO – Project Finance / Corporate Finance / PPP
PROFINSTANCE

1. HOW IS COVID-19 IMPACTING THE FINANCING OF TURKISH INFRA PROJECTS?

The Covid-19 has triggered many risks in infrastructure projects; force majeure, supply chain, construction, health, and safety which came to the fore, due to Covid19-related lockdowns. Since it is difficult to provide healthy environments at the construction sites, construction works have been disrupted and construction period delay and non-completion risks have emerged. Considering the Covid-19 case and critical patient numbers worldwide, the most important risk can be specified as health and safety risks, as well as payment risks, from all parties with payment obligations in financial agreements. The public is hurt by additional budgetary spendings by the pandemic, while corporates are hit by disrupted demand-supply conditions in the market.

The Covid-19 impact for the financing market in Turkey should be looked deeper into 3 perspectives. For the financing structures that have been completed earlier than the Covid-19 pandemia, the financiers are trying to analyze the effects and disbursement conditions along with force majeure related agreement effects. Financing, which we have not yet closed financially but continue with the negotiations, is analyzed in terms of whether sectors and companies still have viable financing agreements, taking into account the increased risk and relative return profile. Lastly, the project pipeline financing mechanisms have for sure shifted well into 2021 and forward.

On the other hand, due to the Covid-19 situation, the global rescue funds and liquidity provisions have also created a new source of financing. The international development banks, which are active in Turkey along with those who are not directly funding projects about international projects of Turkish sponsors, have extended their Covid-19 support lines to infrastructure sponsors. The local commercial and investment banks are also facilitating the funding lines, through Central Budgetary sources of Public Finance. The effects of the pandemic were mitigated with the loan and support provided in this context.

2. WHAT COULD BE THE SHORT- AND MEDIUM TERM IMPACTS OF CURRENT CRISIS ON FINANCING MARKETS FOR PROJECTS DEVELOPERS AND PPP CONCESSIONS?

Due to Covid-19 with curfew, voluntary quarantine and prohibition between intercity travels, the transportation sector has been one of the sectors that are most affected. Due to the Covid-19 pandemic, the demand for transportation structures is reduced due to the restriction of intercity transportation, quarantine of some regions and the voluntary isolation of people. Since the guarantee mechanisms in those projects are mainly demand-based, the guarantee payments in the projects face the demand risk. Due to Covid-19, there is a shared concern about the capacity of health systems to respond to Covid-19 in countries experiencing large numbers of cases. The data from Turkey suggests that approximately 16% of COVID-19 cases require hospitalization, with around 2% requiring intensive care and 14% of cases of recovered patients. With transportation and healthcare taking the most of PPP structures in Turkey, the OPEX increase of healthcare PPPs and demand decrease triggering higher guarantee payments will eventually require approximately a 20% increase to all guarantee payments -an additional 1,7 billion TL guarantee payments- due to Covid-19 as a result of Profinstance Advisory financial analysis on PPPs in Turkey.

Covid-19 with the heightened risks has changed the risk-return expectations of project developers and financiers. The PPP market has to prove the solidarity of the sovereign support mechanisms existent in the structures, so. The main issue will be still the source of development capital to be secured for new greenfield PPP assets, while brownfield PPP assets should focus on capitalizations of the assets for recover and semi sale of assets. The PPP concessions have been hit by operational, health & safety and completion risks, and these PPPs can be partly re-funded through the Covid-19 relief structures, especially relevant for healthcare PPPs.

3. WHAT TO EXPECT FROM THE PPP SECTOR IN THE NEAREST FUTURE?

The PPP sector after the Covid-19 pandemic should be focusing on people and sustainability, and the financing mechanisms /governmental structures/legal

documentation should be able to fence similar pandemic risks in the near future. In additional creating institutionalization and attracting institutional capital will be at the centre of the financing issues. All the PPPs should be resilient for overcoming re-structuring and re-financing the structures, without excessively destroying the project targets and payment/financing structures. As a final note, the technology infrastructure PPPs like, data centres, telecommunications and energy battery storage would be on-demand.

4. WHAT BIG CHALLENGES HAVE ARISEN FROM THE PANDEMIC AND WHAT ARE THE LIKELY CONSEQUENCES FOR THE SECTOR IN GENERAL?

Of course, health, transportation, and energy sectors will be the most affected sectors by this pandemic. Countries had the chance to test their health infrastructures in the pandemic process, therefore hospital investments increased in countries with insufficient health infrastructure. This trend is likely to continue after the end of the pandemic. Projects such as the capacity increase of existing hospitals, construction of new hospitals, investments in health tech and health sectors will for sure stay to be on the agenda.

The transportation sector can be counted among the sectors that are negatively affected by the pandemic. Decreasing travel numbers have put additional burdens on both contractors and public authorities. The payment mechanism with availability and demand structures have different risk factors due to Covid-19. The transportation sector with its sub-sectors as, airports, railway stations, highways, seaports have all faced decreased revenues. The need for urban transport has also emerged as a crucial area of investment. 

Covid19 had a positive impact on the transformation in the energy sector. Issues such as energy security, clean energy, environmental cleaning, which come to the fore with the pandemic, continue to accelerate the energy transformation. 

5. 5. WHAT IS YOUR COVID-19 RESPONSE?

As Profinstance Advisory, we have responded to the financial market needs beginning from the first days of the pandemic in Turkey as providing ad-hoc advisory services to Turkish infrastructure sponsors and lenders, in terms of project risk analysis, financial forecast/modelling updates, project agreement due-diligence and financial institution responses. A special service has been provided to current customers, about the financing mechanisms and sourcing in the market with the Covid-19 where the pinpoint is to enlarge the match between sources and projects. The sources have a wide range including International financial institutions; Capital Markets; Commercial lending; ECA backed lending; Government-backed guarantees /debt assumption/incentives; and even Private Equity sources. This advisory service has been further extended to all corporates in Turkey. A specific advisory has been provided pro-bono to Health PPPs, and health sector financial management needs, to aid these front runner corporates in our battle towards coronavirus. İn addition, a specific digital infrastructure team has been formed, to analyze digital solutions that can be implemented in Turkey’s infrastructure projects. Last but not least, due to the growing need of Turkish Banks for quick action, an outsource service model has been provided to some banks, where their corporate credits, credit risk, project finance, and monitoring departments have been supported by an expert consultant team in Bank credit operations.