Will PPP projects be profitable in the GCC?
Can GCC governments and corporations strike the balance required to deliver efficient and mutually-profitable PPP developments?
Earlier this month, Dubai’s first public-private partnership agreement (PPP) was inked under a law introduced by the emirate in November last year.
Dubai’s Law No 22 of 2015 was launched by Vice President and Prime Minister of the UAE, and Ruler of Dubai, HH Sheikh Mohammed bin Rashid Al Maktoum, and was published in the Official Gazette on 20 September.
The periodical is issued by the Government of Dubai through the Supreme Legislation Committee, and contains all legislation implemented by local authorities, such as laws, decrees, resolutions, regulations, bylaws, instructions, and orders.
In that regard, it is perhaps no coincidence that the first PPP agreement inked in the emirate is for a Dubai Courts development.
On 8 May, the emirate’s judiciary body signed a contract with Park Line to develop a car park facility within its premises through a PPP contract.
Under the terms of the deal, the world’s largest automated car park facility will be developed within Dubai Courts’ premises in the city. The project will be carried out by Park Line, a special-purpose company established by NGP, which is a part of the KBW Investments portfolio. ITNL Infrastructure Developers, a subsidiary of India’s IL&FS Transportation Networks (ITNL), will also work on the project.
In a statement, KBW Investments said the Dubai Supreme Court project, with a built-up area of 5.6ha, will include the development of a 4,420-sqm Supreme Court building, 18,600 sqm of office space, and 3,154 sqm of retail space.
The project is due for completion in 30 months and, upon its launch, will make Dubai Supreme Court the first government building to include an automated car park facility.
A 30-year Concession Agreement was signed for the project between HE Taresh Eid Mohammad Al Mansouri, director general of Dubai Courts; Ravi Sreehari, CEO of ITNL’s MENA region; and Ahmed Alkhoshaibi, group CEO of KBW Investments and managing director of NGP.
The agreement was signed under the directives of HH Sheikh Maktoum bin Mohammed bin Rashid Al Maktoum, Deputy Ruler of Dubai and chairman of the Judicial Council of Dubai.
Remarking on the deal, Issa Najieb Khoory, chairman of Park Line, said: “This [contract] will pave the way for PPP projects in Dubai, and its successful implementation will set a benchmark for developing infrastructure on a PPP basis.
“We will encourage more and more public authorities to adopt the PPP project structure, as it moves the risks from the public sector to private companies.”
Khoory’s latter statement points towards one of the key factors driving PPP contracts’ uptake in the region.
While risk is an inherent part of project development, the past year has seen costs and risks expand in light of oil price uncertainties. Furthermore, regional government spending has also been pulled back from certain sectors as re-prioritsation measures are implemented.
The amalgamation of these factors is an industry struggling to meet steep commercial and financial targets. In such a financial climate, PPP deals could bridge the gap between state and private sector investors, as Ahmed Alkhoshaibi, group CEO at KBW Investments, explains.
“A PPP is a win-win situation for both the private and public sectors across emerging economies,” Alkhoshaibi tells Construction Week.
“The obvious benefit of PPPs is the injection of private sector technology and innovative solution-based models into existing and upcoming governmental infrastructure developments.”
Other advantages for governments include “the attraction of both local and foreign investments, and the strengthening of relevant sectors – be it construction, logistics or transportation – and diversifying the country’s economic base”.
It was to reap some of these benefits that Kuwait established its PPP legislation. According to PwC (PricewaterhouseCoopers), the country’s PPP law was published in 2014, followed by its Executive Regulations in March 2015.
Kuwait’s PPP law – much like its Dubai counterpart – includes stipulations that govern investor categories, project values, and contract terms.
The law entailed the formation of the Higher Committee and the Kuwait Authority for Partnership Projects (KAPP), both of which are mandated to oversee every stage of a Kuwaiti PPP project’s development. As of April 2015, KAPP had the Al-Zour North Phase 2 IWPP, Al Abdaliyah integrated solar combined cycle plant, Al Khairan IWPP, and Umm Al-Hayman Wastewater Treatment Plant projects planned to be built through PPP deals.
Within quiet construction markets such as Kuwait’s, the components of its PPP law might seem like an additional financial and time cost. However, Kuwaiti government officials insist the law is the first of many initiatives they must implement to improve project feasibility and profitability.
“[The PPP law] has become an inevitable necessity because it reduces the burden on the state budget in light of falling oil prices,” Adel Mohammad al-Roumi, the president of KAPP, told Gulf Times in October last year.
One of Kuwait’s ambitions with its PPP law is to reduce the delays and cost overruns that have plagued past projects. As a result, private investors will not receive major payments until projects are operational.
Nevertheless, PPP contracts must typically include terms acceptable to all parties involved, Alkhoshaibi explains.
“From the private sector’s perspective, to maximise the potential of a PPP project, PPPs should be implemented with the proper legal and regulatory framework that protects all entities or organisations entering into the agreement, and include attractive incentives tied to a clearly-defined, realistic, and attainable output expectation,” he adds.
Quantifying these targets is even more important given most PPP projects within the infrastructure sector are developments that governments eventually take control of. The relative novelty of PPP deals in the GCC simultaneously challenges and aids the region’s construction finance industry, Thomas Wilson, managing partner for law firm Squire Patton Boggs, says.
“Perhaps a key consideration with PPPs [in the GCC] is to understand what the appetite for tenders here is,” Wilson tells Construction Week.
“The essence of a typical PPP is that the private sector party secures finances, and these private funders pay off the loans through revenue generated from the project. There are certain industries in this region that have used private funding to fund construction costs for many years, with notable success in the power and water industry.
“These projects are relatively easy to finance because of [familiarity with] the value income they generate,” Wilson adds.
Contemporary discussion about PPP contracts and privatisation models is focused on uncharted infrastructure categories, such as transportation in Dubai or Saudi Arabia. This, in turn, results in some unclarity about the value stream that could be created by using PPPs for such projects.
Wilson explains: “There’s a lot of discussion of privatising airports in Saudi through PPP, but a recent study showed that out of the kingdom’s 20-odd airports, some did not have the [requisite] components that would make them good candidates for PPP structures.
“A key challenge to PPPs in the region is demonstrating that such projects are reliable and sufficient to be developed through PPPs, and that they will gather returns,” he continues.
“It is something that will gradually build up and, to some extent, require a ‘socialisation’ of the concept of paying a market rate for infrastructure services.
“If you’re willing to develop a transportation network through a PPP programme, then the cost of using those services must be sufficient to regain private investment – users must pay the cost. That’s not an unusual challenge, however, and a lot of regions that rely on PPPs have to overcome these,” Wilson adds.
It is difficult to say whether this principle will be in effect when Dubai’s Roads and Transport Authority (RTA) launches its first development planned under the PPP model, Union Oasis. Regardless, Wilson is quick to applaud the transport body’s initiative, which marks a new approach towards project development in the emirate.
“A challenge for PPP development in the region is that the entities that have traditionally delivered infrastructure projects or services have to give up some of their control on that development,” he says.
Government authority in this respect could extend to considerations pertaining to a project’s design, construction, and operation.
“The government has an interest in those issues since in most PPP scenarios, the asset – after a contracted period of time – goes to the public sector. So the government ultimately has control of the asset, and has to understand how it is maintained. Essentially, the government has an interest in ensuring that the asset is up to the standards [and delivers] a high quality of service,” Wilson continues.
“The private sector has an interest in ensuring it can build and operate the asset in a way that generates the returns required by the equity investors.
“So you need to find a balance of interests and a method that is acceptable for both the government and private sector.”
Purely due to the relative newness of the PPP model, it is likely that the GCC’s construction industry will spend some time in the pursuit of this balance. Nevertheless, there are no doubts regarding the long-term benefits of PPP implementation.
“The culture of service delivery and receipt in the PPP model could be a painful process at times. But I think there’s a good chance the region will see more PPP projects in the next five years, because it is a model that’s time has come,” Wilson concludes.