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Dubai: PPP law will boost investment opportunities

Dubai’s public-private partnership (PPP) law is likely to accelerate investment opportunities in the Emirate, say legal experts from Diaz, Reus & Targ

Arti Sangar is a partner at Diaz, Reus & Targ.
Arti Sangar is a partner at Diaz, Reus & Targ.
Ali Awais is a partner and resident at Diaz, Reus & Targ’s office in Dubai, UAE.
Ali Awais is a partner and resident at Diaz, Reus & Targ’s office in Dubai, UAE.

Public-private partnership (PPP) in Dubai, UAE is on the move.

With big plans for major construction projects – such as exhibit halls in advance of Expo 2020 and traditional infrastructure projects to support economic development – the Dubai PPP Law, enacted on 19 November, 2015, is a welcome piece of legislation for many.

Law No 22 of 2015, commonly known as the PPP Law, seeks to ease the path to financing and construction by bringing both clarity and efficiency to the public-private process. Prior to the law being passed, there was no clear federal PPP regime in Dubai. Piecemeal procedures left contractual arrangements to fill the gaps, and investors were often adrift in uncertainty.

The new Dubai PPP Law is indeed good news for both public and private sectors. The law is expected to produce great interest as certain projects come online within the next five years, and is positioned to accelerate opportunities and advantages for all interested parties.

However, there are a number of important obligations and requirements related to the PPP Law about which companies and investors should be aware.

PPP in short
A public-private partnership is a government service or private business venture that is funded and operated through a partnership of government and one or more private sector companies.

Modelled on other successful PPP laws from other global regions, the Dubai PPP Law not only provides clarity to companies on how projects will be identified, parties selected, and contracts implemented, but also ushers in a commitment from the government to establish an environment that will undoubtedly attract private investment, going forward.

Private investors should also find solace in the law’s ability to regulate the manner in which PPP Projects will now be operated. The primary objectives of the Dubai PPP Law are threefold: to lessen the burden on the government’s budget; to procure the best services; and to transfer knowledge from the private sector to the public domain. However, it also provides substantial structure that brings a greater level of certainty for investors.

Procurement and competitive bidding
The procurement process, as set forth in the law, is quite clear and straightforward. The new law introduces changes to the bid-selection criteria, including bidding terms, tenders, selection processes, and conditions of the PPP contract.

Regulations imposed by the Dubai PPP Law now embody the principles of transparency, free competitiveness, and equality (Article 14) in the selection of bidders. Although the law provides government entities in Dubai with a high degree of flexibility and discretion to specify the tender and bidding conditions, it ensures that the grant of an award must be competitive. More specifically, it requires that bids are evaluated on the basis of price and the technical competence of the bidder.

The new law also provides clarity as to the government entity initiating the PPP. It requires that bids are only accepted subject to all of the law’s conditions being met by the bidder and on the whole (Articles 15-26). Some of those conditions are highlighted as follows:

- The Project Company: The Dubai PPP Law asserts that the successful bidder for a project is required to establish a company (the ‘Project Company’) for the sole purpose of performing the project. The Project Company must be licensed by the Department of Economic Development in Dubai. Alternatively, a successful bidder may implement the project using an existing company, provided they procure the adequate financial securities for the project.

Because PPP projects typically involve large-scale investments, they are usually financed by one or more lenders. Under the Dubai PPP Law, lenders will require robust security over the project, not only in matters of financial securities, but also security that all consents and permits to operate the project are granted to the Project Company in Dubai.

In practice, this means that the Project Company will need to be an onshore Dubai entity, as free-zone entities may not meet the requirements of the lender or lenders. This also means that the local ownership requirements under the UAE Companies Law are applicable to the Project Company. As such, careful consideration is needed to ensure that all the requirements and securities of the Dubai PPP Law and Companies Law are met by bidders.

- Partnership Contract: Once the selection process for a PPP project has been completed, the government entity and the successful bidder will enter into a partnership that sets out the respective obligations of the parties, and how the project will be implemented. Here, it should be noted that the Dubai PPP Law has a list of mandatory clauses that must be included in the PPP contract. These clauses include the scope of works to be performed by the Project Company, ownership of assets, financial and technical conditions of the PPP contract, term of the contract, insurance, division of risks, and the performance conditions.

The maximum period of the partnership contract is 30 years from the contract signing, or the date specified by the government entity. Notably, any disputes arising under the partnership contract must be resolved in Dubai by way of arbitration or alternative means.

- Obligations of the Project Company: Investors must be mindful of all their legislative and contractual obligations before participating in any PPP project, including specific obligations of the Project Company as expressed in the Dubai PPP Law. The most important of these may be that the Project Company is not allowed to dissolve, liquidate, change the legal status, decrease the share capital, or transfer the company to any third parties. In other words, the company must be adequately prepared for the long haul.

The Project Company is also obliged to protect and maintain the assets and properties of the project, and to satisfy the health, safety, and environmental (HSE) requirements of the personnel and users of the project. Regular reports to the relevant government entities are required under the law for all the works performed. This information must be provided as and when demanded by any government entity.

- Project Financing: Project Financing is a major component of any sustainable project, but particularly for PPPs, which are typically very large in scale. Even so, it is important to note that the Dubai PPP Law does not deal with the funding of projects in any detail. The only aspect related to financing can be found in Article 36, which provides that the government entity “may authorise” the Project Company to enter into arrangements with banking institutions to finance its works and activities. In such circumstances, the law also stipulates that the Project Company will be solely liable for the obligations under the financing arrangements.

Additionally, unlike the requirements for establishing a Project Company in Dubai, the law does not impose such restrictions on finance sources, or private investors. As such, in the absence of restrictions on private investors, this is a favourable feature that allows international sponsors to come into play, perhaps necessarily so as capital – even during project preparation – can be significant.

Summing up
In conclusion, there was a clear need for new legislation in Dubai, particularly in light of the city’s major infrastructure plans. The Dubai PPP Law opens more certain opportunities for private investment in the UAE, and investors can now be confident that the future of PPP is secure in the Emirate.

Notwithstanding the change in approach to public procurement, it is likely that Dubai will become a significant PPP market in the next five years. Any uncertainties surrounding this untested federal PPP framework are balanced by the fact that it is well structured, based on proven models from other jurisdictions, and that there is momentum and appetite to ensure the success of the new regime.

This article was written by Arti Sangar and Ali Awais, partners at Diaz, Reus, & Targ.

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