Q&A: Capital projects and infrastructure outlook 2021

April 2021  | SPECIAL REPORT: INFRASTRUCTURE & PROJECT FINANCE

Financier Worldwide Magazine

April 2021 Issue

FW discusses capital projects and the outlook for infrastructure with D. Brennan Keene at McGuire Woods LLP, Mark Berry at Norton Rose Fulbright LLP, and Lance T. Brasher at Skadden, Arps, Slate, Meagher & Flom LLP.

FW: Reflecting on the last 12 months or so, what trends have shaped the global infrastructure sector? How would you describe general activity in the sector, such as the number of capital projects being green-lit?

Berry: 2020 saw a decline in activity due to the impact of coronavirus and lockdown restrictions, with an increase in contractors declaring force majeure. Projects under procurement found themselves under review as governments reassessed spending commitments. Projects under construction suffered delays due to supply chain issues and were in need of contractual remedies and additional funding. And operational projects focused on costs and revenues with a view to longer-term viability. We also saw the roll out in a number of European countries of legislation specifically designed to help successfully restructure financially distressed but viable businesses. The implications of this are far-reaching and pertinent to those operating in the infrastructure sectors and public-private partnerships (PPP) markets. However, we are seeing activity from projects that were at some point along the pipeline pre-pandemic, with a greater proportion of these being green-lit at the desktop stage than in the last 30 years. Time will tell whether there is capacity to actually deliver these projects.

Brasher: The global infrastructure sector sits at the crossroads of public infrastructure spending shortfalls and changes in demand patterns and supply chains, particularly resulting from coronavirus (COVID-19), emerging environmental, social and governance (ESG) priorities, and accelerating deployment of new technologies, particularly in power, in the form of renewable energy, battery storage and smart grids, and urban transportation, such as autonomous vehicles and electric vehicles. In the US, over the past 12 months, we have seen substantial activity in renewable energy, transportation infrastructure and water projects, with much non-energy infrastructure supported by well-funded government lending programmes. Where we have seen a slowdown is in volume-based infrastructure tied to airports, toll roads and transit, which may have been structured as PPPs, infrastructure centred around the use of ‘microcell’ technology, and infrastructure tied to the midstream, such as liquefied natural gas (LNG), pipelines and upstream energy sectors. Nevertheless, there is a tremendous amount of capital available for the right kind of infrastructure, particularly those which are tied to renewable energy or are classified as sustainable, such as the City of Alexandria Tunnel System (RiverRenew) Water Infrastructure Finance and Innovation Act (WIFIA) loan. We saw a number of university energy system PPPs enter procurement, though there were delays, and even reach financial close, as in the case of the Universities of Idaho and Iowa. Infrastructure tied to the midstream or upstream oil & gas sectors have been receiving less investment or have experienced the curtailment of their capital programmes and, with the Biden administration, expect to face greater regulatory challenges.

Keene: The infrastructure sector will continue to be active, but the confluence of recent events will require a very different approach to project planning and promotion than at any time prior to 2020. Social justice issues will greatly influence public and private sector priorities for new infrastructure projects, particularly regarding the location of, and access to, those projects. The long-term impacts of the COVID-19 pandemic will force public and private sector decision makers to reassess which projects should be advanced given potentially different infrastructure needs in an uncertain post-pandemic environment. Winter Storm ‘Uri’ and its impacts on Texas will require an even greater assessment and response to ensure the resilience of US energy infrastructure.

FW: What steps can companies take to optimise the chances of a successful capital project – one that maximises return on investment and meets strategic objectives?

Brasher: The successful execution of a capital project typically features a well-developed plan for obtaining regulatory approvals and permits, negotiation of a sound contractual structure to properly allocate risks and support intended project economics, and management of issues that will be important to project lenders and equity investors. With increasingly heightened ESG awareness, it is more important than ever for there to be careful identification and consideration of the issues of the various stakeholders involved in the infrastructure project, approaches to securing their support, and development of plans to address concerns of potential opposition from incumbents and other groups, including environmental. Infrastructure projects must have a robust outreach programme. Further, understanding national security issues and ESG issues relating to supply procurement is gaining importance.

Keene: Regulations at all levels of government will continue to evolve to include more complex and rigorous social justice and environmental provisions, particularly around climate change issues. For those companies that have a robust ESG plan, the alignment of that plan with regulatory expectations, and the human infrastructure to execute that plan, are much more likely to be able to execute successful capital project investments.

Berry: Companies can focus on the development of sustainable solutions that will benefit the project as a whole, reduce costs over the asset lifecycle and maximise return on investment. The proliferation of ‘green finance’ will make sustainable options easier to fund. In addition, opportunities will be created by the European Green Deal and, in the UK, the Green Industrial Revolution. These go beyond environmental regulation and act as a catalyst for rethinking policies in a number of areas, including clean energy supply, decarbonising construction, large-scale infrastructure and green public transport. Optimising the capital aspects of the project at design stage is also key. Historically this was referred to as ‘value engineering’, which often meant removal of certain aspects of the project or different specifications, often with a focus on efficiency.

FW: What benefits can be gained from creating a procedural framework to guide a capital project? What aspects should this include?

Berry: High-quality infrastructure that supports the effective delivery of services is vital and having a proper procedural framework in place is key to success. Substantial benefits can be achieved by better managing public investment throughout the lifecycle of assets and across levels of government, correlating directly with both public investment and growth outcomes. A framework should cover the entire lifecycle, define accountability for meeting project objectives – and the allocation of risk – maintain alignment between corporate strategy and project objectives, and ensure continuous review and alignment with the general green and sustainability policies. Governance frameworks and wider considerations relating to the environment will only become more important. For instance, the recent decision in Okpabi and others v Royal Dutch Shell Plc and another (2021) ruled that the claimants could continue with their claim that the UK-domiciled parent of a multinational group owed a duty of care to those allegedly harmed by the acts of a foreign subsidiary.

Keene: Companies that create a robust procedural framework that aligns with regulatory and investor expectations are much more likely to execute successful capital projects. That framework will need stakeholders that adhere to the ESG plan, and those stakeholders must have the freedom to challenge assumptions by other stakeholders, and a willingness by all stakeholders to be questioned, in the process so that all issues are fully vetted for the capital project.

FW: How important is close collaboration between project owners, service providers and other partners throughout the full lifecycle of a capital project? What kinds of responsibilities, with clear accountability, need to be established from the outset?

Keene: Those companies that have been most successful in developing capital projects have avoided stakeholders working in silos. A multidisciplinary approach that can be used by all stakeholders – construction contractors, business development professionals, tax advisers, investors, project managers, permitting specialists and others – ensures that all stakeholders have access to a comprehensive view of the requirements to get the project completed.

Berry: Future projects – and their financing – may have to adopt more sophisticated regimes relating to payment structures, performance regimes, force majeure, changes in law, delay and other relief regimes. It is vitally important to ensure that interface issues are provided for and documented in the agreements concluded with the various project participants, and across the lifecycle. Interfaces are the points of interaction between two or more aspects of the project, such as construction and operation. Failure to manage the interface issues is a common cause for problems and disputes. Managing the risks typically involves contractual terms that might include collaboration and cooperation clauses, clear and complete design documents and specifications, fitness for purpose obligations, warranties and insurance provisions. Promoting collaboration, cooperation and active contract and project management, with detailed protocols and procedures, is essential.

Brasher: Close collaboration is essential. From a legal perspective, this starts with having strong contractual arrangements that properly reflect the business intent and intended risk allocation of the parties. The contractual arrangements should lay out a basic procedural framework for the execution of the project, identifying the key personnel and their authority, incorporating the structure for periodic meetings and reports, and rights to participation. These contractual provisions may include logistics for onsite presence by the owner and its representatives.

FW: In what ways has the onset of the coronavirus (COVID-19) pandemic disrupted the development of infrastructure projects? Alongside the challenges, what opportunities might the pandemic offer for project initiators?

Berry: We spent a lot of the early period of the pandemic advising on delays and anticipated delays to projects. Interestingly, there has been an enormous amount of cooperation and can-do attitude to create safe working environments to ensure projects can progress. There have been delays and additional costs, but on the whole, these have been dealt with on a sensible non-adversarial basis as companies look to recover project schedules rather than becoming entrenched in disputes. COVID-19 has created a point of inflexion for infrastructure. It has accelerated the changes that were probably coming but will now be achieved many years ahead of when they were anticipated pre-pandemic. Technological advances, climate change concerns and behavioural shifts will drive change, such as a greater focus on fibre, telecoms, data, data centres and social care, and there will be opportunities for both financial investors and corporates to adapt to the post-pandemic world.

Brasher: COVID-19 has dampened demand, at least temporarily, for certain types of infrastructure, such as transportation, social infrastructure and oil & gas. It has also tested the business models for even the most thoroughly reviewed projects, particularly in transportation and social infrastructure projects. In the case of PPPs, those infrastructure projects with long-term availability payment-based contracts may prove more resilient than demand-risk contracts, the latter now being perceived as vaccine-dependent. However, with reduced traffic resulting from COVID-19, some opportunities have emerged when undertaking massive construction projects, such as airport improvements, toll road upgrades and university facilities improvements, depending on available funding, as coordination issues are fewer with slower operations. Also, for those infrastructure projects considered critical, governments may be eager to fund such projects to keep the economy growing and provide for job creation – part of the stimulus effect which is a top priority for many governments at present. In the US, funding for government lending programmes for infrastructure has been robust. Of course, renewable energy and sustainable infrastructure projects have not seen much of a slowdown and instead have continued to accelerate, particularly in the US. Renewable energy programmes and incentives can be expected to expand while the challenges in the oil & gas sector may continue, particularly in the US, as the Biden administration prioritises climate change concerns.

Keene: The pandemic certainly disrupted projects in the short term, leading to a number of force majeure claims due to an inability to continue construction of projects. In the long term, we expect that there will be a necessary resetting of expectations for infrastructure needs. For example, we are already seeing increased activity to develop data centres and related infrastructure, including new energy infrastructure to power those data centres. Also, a number of companies are increasing their activity in developing logistics infrastructure in anticipation of significant growth in e-commerce.

FW: To what extent are new technologies, such as artificial intelligence (AI), being utilised across the infrastructure sector? How can these solutions help accelerate project completion and increase value?

Brasher: New technologies, driven in part by ESG initiatives, are accelerating change across the infrastructure sector, in renewable energy, battery storage, smart grids, electric vehicles, autonomous vehicles and elsewhere. This on the heels of tremendous technological advancement in the oil & gas sector over the last two decades which, in the US, has facilitated affordable and abundant energy and contributed to energy independence.

Berry: We have seen mining projects move increasingly into artificial intelligence (AI)-type automation and this is now accelerating as we look at renewing mining contracts. This is also being seen in construction more generally, as autonomous vehicles are increasingly being deployed on construction sites to help with various parts of the construction lifecycle. The use of autonomous devices, drones and robotic construction workers has been on the rise. Large-scale projects require the coordination of far more complicated tasks and moving parts that include designs and permits. Advance data intelligence results in improved health and safety, and better forecasting helps ensure plans are in place to deal with unexpected situations. In a future characterised by changing dynamics and rapidly evolving market conditions, planners, developers and operators will increasingly seek a more nimble and flexible approach to infrastructure planning, development and delivery.

FW: What essential advice would you offer on planning, financing, managing and delivering infrastructure capital projects in the current market, especially in terms of avoiding delays and keeping within budget?

Keene: Project developers that can understand and respond most quickly to new regulatory requirements will lead the market on delivery, ensuring projects are on time and within budget. In the last year, we have seen companies rapidly adjust to new regulations that require jurisdictional considerations in the placement of new infrastructure projects. As those regulations mature and are refined, project developers that are best positioned to manage jurisdictional issues, along with new environmental regulations, will be best positioned to successfully execute on new infrastructure projects.

Berry: Major projects suffer from a tendency to cost more and take longer to complete than initial estimates outline. Sophisticated projects each have their own unique requirements, multiple stakeholders, and a disparate workforce across a long and complex supply chain. So, the lengthy time frame it takes to bring a project through gestation to fruition makes infrastructure projects and their delivery programmes complicated. Accordingly, a focus on better governance, the use of technology and AI, data, the sharing of best practice and creating a more inclusive and collaborative working environment for all project participants, particularly during construction to reduce cost overruns, but also throughout the lifecycle, will all support improvements in project delivery. Embedding these concepts in clearly drafted agreements lies at the heart of success.

Brasher: During the pandemic, much attention should be given to contractual provisions relating to COVID-19, including provisions relating to force majeure and change in law and how risks arising from the pandemic are allocated among the contractual parties. In our experience to date, owners are generally willing in new construction and equipment supply contracts to provide schedule and, sometimes, cost relief for COVID-19 impacts that are the direct result of a legal requirement. The issues debated in the contract negotiation of these provisions have been around whether such relief extends to impacts of COVID-19 that are not the result of a legal requirement, such as supply chain issues or shortage of labour. Owners are seeking to make explicit that there will be no time extension or costs for pandemic-related issues that are not the result of a legal requirement, either writing the COVID-19 pandemic out of the force majeure clause or suggesting in change order provisions that change orders will not be granted because of pandemic-related effects. Contractors, on the other hand, are pressing for the broader COVID-19 schedule, and if possible, cost relief.

FW: In your opinion, what is the outlook for the global infrastructure sector through 2021 and beyond? What are your expectations for capital project development in the absence of market stability and predictability?

Berry: New or enhanced infrastructure can play a pivotal role in generating employment opportunities and facilitating an effective economic recovery, so we may see a renewed focus from governments as policy-making bandwidth becomes available as the real-time risk from the pandemic recedes. But pre-pandemic challenges have not disappeared. In the UK, a greenhouse gas emissions target, regional inequalities and low levels of productivity still need to be addressed and infrastructure holds the key to developing solutions. With Glasgow ready to host COP26 this autumn, and the UK government setting out its national infrastructure strategy, the scene is set for new investments. Will the funding for these investments come from government balance sheets or private funding? The rise of private equity and pension funds over the last 10-15 years has been incredible. Many funds have gained substantial experience in delivering and maintaining infrastructure asset classes that match governments’ needs. There is an opportunity for these funds to offer to deliver such infrastructure and provide that infrastructure for use by governments for a fee. With the amount of public debt taken on due to the pandemic this is a real opportunity to look to those ready, willing and able to fill what could be an enormous public gap in infrastructure procurement over the next few years.

Brasher: The outlook for renewable energy and sustainable infrastructure projects is very bright. This is due to the increasing competitiveness of renewable energy, climate change concerns and rise of ESG as a singularly important trend being pursued by governments, investors, pension funds and lenders. Water and certain types of transportation infrastructure projects will have an easier time securing funding going forward, particularly if there are climate-related and environmental benefits, although tighter regulations may make securing project environmental permits for these and other infrastructure projects more difficult. Airport and transit infrastructure projects may have a more difficult time, depending on any future lockdowns, due to any additional variants of COVID-19 emerging and the speed of widespread deployment of the vaccine in 2021. Also, the structural changes to mobility that we have seen during COVID-19 over the last year, with the acceleration of remote working, virtual business meetings, online shopping, and online education, may continue post-COVID-19. As the energy transition continues and the climate change and ESG focus grows, investments in the oil & gas sector may be affected.

Keene: We are very bullish on the outlook for energy companies and logistics developers in 2021 and beyond. The energy industry continues to go through significant change due to the conversion to non-carbon-based energy sources, and under the Biden administration we anticipate that change will only accelerate in the coming years. Also, it is likely that purchasing goods online rather than in brick and mortar stores will continue to grow, and there will be many opportunities to develop the logistics infrastructure necessary for that growth.

Brennen Keene serves as co-lead of McGuireWoods’ renewable energy team. His real estate transactional practice is focused on energy project development, with a particular concentration in the renewable energy sector. On energy projects, Mr Keene assists clients in all facets of those transactions, including development, project financings, acquisitions and dispositions. He can be contacted on +1 (804) 775 1005 or by email: bkeene@mcguirewoods.com.

Mark Berry is a projects lawyer based in the banking team in London, specialising in PPP, PFI, project finance and mining projects. He has particular expertise in the waste, health, transport and mining sectors. His experience includes advising on a number of project financed waste schemes including PFI and merchant/commercial projects. He also advises on rail PPP schemes in the UK and internationally. He can be contacted on +44 (0)20 7444 3531 or by email: mark.berry@nortonrosefulbright.com.

Lance Brasher is global head of Skadden’s energy and infrastructure group. He is a corporate attorney concentrating in M&A, financing and development transactions involving energy and infrastructure facilities in the US and around the world. Mr Brasher advises strategic investors, developers, borrowers, tax equity investors, funds, lenders and utilities in all phases of solar, wind and other renewable energy projects, such as gas and thermal power plants, electric distribution assets and gas processing facilities. He can be contacted on +1 (202) 371 7402 or by email: lance.brasher@skadden.com.

© Financier Worldwide

THE PANELLISTS

D. Brennen Keene

McGuireWoods LLP

Mark Berry

Norton Rose Fulbright LLP

Lance T. Brasher

Skadden, Arps, Slate, Meagher & Flom LLP

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Q&A: Capital projects and infrastructure outlook 2021