PPPs are emerging as ideal financing vehicles for infra projects
Though it has long been associated with regions such as Europe, the term public-private partnership (PPP) is becoming increasingly familiar in the Middle East.
Notably, the first conference dedicated specifically to this sector, PPP Middle East, was held in Abu Dhabi earlier this month, attracting a number of senior government, finance and legal officials. The conference reflected the growing regional interest in the public-private payment structure.
Reflecting on why PPPs are gaining popularity in the region, attendee Michael Palmieri, KPMG Corporate Finance partner for the firm’s global infrastructure and projects, says: “The growth of PPPs in the Middle East is actually not sudden at all. The first PPP in the GCC was actually done 15 years ago for a power project in Oman. In Abu Dhabi, ADWEA has been tendering a large number of projects on a PPP basis for the last ten years or so.”
What is notable currently, he says, is the new trend of applying the PPP model to infrastructure projects generally. “Historically, the power sector tends to lead the way in terms of these projects, and then the lessons learnt are applied to other fields such as roads, schools, hospitals, airports and prisons.”
Of course, the question remains as to why other sectors are catching onto the PPP model. Across the board, experts agree that this is due to a high number of infrastructure projects in the Middle East as governments try to develop their countries’ economies, as well as a limited amount of public finance and a genuine requirement for private expertise.
Speaking at PPP Middle East, Dubai Roads and Transport Agency’s (RTA’s) CEO for strategy and corporate governance Abdul Younes backed up this argument.
“There is a strong need for infrastructure to support expanding populations and economic growth. For these projects, huge funds are needed, which has put big challenges in front of us and led us to think in a different way.”
Other speakers referred to the need for PPPs specifically in sectors such as water, where there is even less financing and an even bigger need for private sector innovation and efficiency.
“There is a need for alternative financing and management in the water sector particularly, due to the high demand for clean water in the region,” said Kathy Shandling, executive director of the International Private Water Association. In her presentation, she suggested that currently less than 10% of municipalities across the world have entered into some form of PPP arrangement for wastewater services.
The good news for these and other sectors is that as governments have turned their focus to alternative financing and management arrangements, so too have they invested resources into developing frameworks for delivery. Whilst Kuwait already has a PPP law in place to standardise and encourage the whole process, the government of Dubai is also close to implementing a piece of privatisation legislation.
“We expect that the law will be implemented very soon,” said Younes at the conference. He added that draft proposals from both the RTA and DEWA were presently under review by the central government, with the hope of introducing the new law in the first quarter of this year.
Though as yet no one knows what the Dubai law will entail, experts suspect it may be similar to that in Kuwait.
“Kuwait is probably at the forefront of PPPs in the GCC in that it is trying to develop most of its infrastructure at the moment on a PPP basis,” says Freshfields Bruckhaus and Deringer lawyer, Marc Fèvre, who specialises in finance, energy and infrastructure.
“The Partnerships Technical Bureau (PTB) is responsible for coordinating and procuring projects, and provides a framework for carrying out the whole process.”
With so much investment in this area, exactly how will PPPs work in practice? And how viable are they for both public agencies and private entities? According to Fèvre, one model that a number of recent PPPs have been based on is the ‘availability-based payment structure’.
Typically, this involves the private sector borrowing money from a bank to build, operate and maintain an asset such as a road, which is paid back through user fees (in this case toll fees) which come to them via the government.
By paying this fee to the private sector for keeping the asset open, the government not only covers the initial cost of the finance, but it also takes some of the risk away from the private sector, (in this case, the private entity would not need to worry whether there will be enough road users, for example).
“The government is also asking the private sector to provide a service under a contract, which is very much performance and output orientated, so the private sector is measured against the quality of performance and penalised if it does not keep the facility available, or provide the service at the required standard.”
Fèvre says this is just one type of PPP model. Currently there are a variety of different options, with a range of discrepancies between models based on how long the private sector owns the asset, their role either in building or maintaining the asset, and the amount of risk that private and public bodies take on.
Mauricio Zuazua, from AT Kearney Middle East, highlights the two main advantages of PPPs as being funding (the fact that the government can execute vital infrastructure projects without having to carry the asset on its balance sheet) and performance (the expertise is brought in from a private sector entity that has incentives to perform well and provide high levels of service).
“One of the key reasons for doing a PPP is that it brings private sector innovation and discipline to a project. Another, from the government’s point of view, is that it can pay for the asset over time rather than upfront.
Also, everything is decided at the beginning of the project, and so there tends to be much more integration between teams in the design process,” Fèvre says, adding that ‘teams’ refer to both construction and maintenance aspects.
For the private sector, PPPs offer long-term investment opportunities with a steady income. “It is a very attractive investment for the private sector,” says Fèvre, as it provides a stable, long-term revenue from the government, and because a special-purpose company is set up to borrow the money, you do not borrow it yourself, and there is a limit to the amount of risk for the investor.”
As with any new trend, there are always disadvantages, and projects that might not be as well suited for the arrangement at hand. In the case of PPPs, the point that the private sector is borrowing the money, rather than the government, tends to increase the total cost of the project (though this may be offset by the efficiency savings).
The process also depends on the private sector being able to borrow, and to structure a project which is ‘bankable’ at a time of restricted liquidity, means the PPP process can be extremely time-consuming and long-winded. Problems can also arise where revenues are too low and the cost of borrowing is high.
The most successful PPPs are in sectors with high demand and limited finance, such as water and affordable housing, or where there is a good revenue for a public service, such as with road, metro and airport projects.
According to Fèvre, there is a case to be made for simply amending the existing laws when appropriate.
“The problem is that a PPP law can be restrictive, particularly for some of the more complicated projects, which may not fit within a law which is designed with a more simple project in mind.
“I think in countries without a long history of complex legislation, a PPP law can be advantageous by putting a structure in place so that everyone knows how things are done, and it can work for routine projects to make lenders and investors more comfortable,” says Fèvre.
Key principles of PPPs
Value for money
Achieved when the required quality of service is delivered at a cost cheaper than conventional public sector delivery.
Risk and responsibility transfer
A PPP contract transfers many of the risks of ownership of the project to the private sector, which puts its capital behind the successful delivery.
Bids should be compared for value, contractors’ ability to accept risk, benefits, innovation and suitability.
Specification of service outputs
The public sector partner should concentrate on stipulating the required service outputs.
Up and coming PPPs
• Dubai carparks across nine or 10 locations (2011)
• Operation of marine transport systems in Dubai (2011)
• Kuwait Metro (2011)
• Prince Mohammad Bin AbdulAziz International Airport
• Madinah KSA (2011)
• Operation of the Dubai Metro
• Construction of other Dubai Metro lines
• Sheikh Rashid Bridge, Dubai (after 2014)
• Dubai Smile (after 2014)