Face to Face: Peter Blackmore, Pinsent Masons
Peter Blackmore discusses the local perception of PPP within Qatar.
Peter Blackmore discusses the local perception of PPP within Qatar.
Qatar’s government is urging diversity and private sector involvement as part of its National Vision 2030, bringing the country to the point where it is knowledge-based and self-sustaining, with less emphasis on the hydrocarbon sector. While this is clear indication of a maturing economy, there remains a degree of wariness around ‘handing over the reins’ to private business.
Pinsent Masons, according to its website: ‘Guide(s) a diverse range of multi-national clients through transformational change. Operating under the auspices of the Qatar Financial Centre, the company aims to combine local knowledge with an international perspective to effectively advise clients across the globe.’
As a partner in the company, Peter Blackmore specialises in construction and engineering procurement and is presently working on wide-ranging projects including commercial development, regeneration schemes and energy from waste (EfW). CWQ asks him about the opportunities around public private partnerships (PPP) in Qatar.
What is the PPP stand in the UK vs Qatar?
“If you are looking to introduce public private partnerships (PPP) in a civil law jurisdiction such as Qatar, there is a strong feeling that you need enabling legislation to permit and also facilitate PPP as a successful form of procurement, on the basis that, under a civil law code jurisdiction, unless you are expressly permitted to do something, the starting point is that it may not be lawful. Coming from a common law jurisdiction personally, the assumption is that you can do something, unless prohibited. In the UK there is no PPP law as such, yet we’ve done more PPP than any single country,” he states.
He emphasises that as Qatar is under civil law jurisdiction, there is a view that primary permission is required to do something such as PPP, “which is seen as a new and innovative approach”.
Who would enact that law and how close is Qatar to realising PPP implementation?
“The state would have to enact the law,” Blackmore says and then draws attention to other countries in the region such Kuwait and Dubai, where there are existing PPP laws. He says: “Qatar as well as Oman are currently understood to be in the process of making such laws. I’m not sure exactly when, but it is very close. It was expected to have been published in August and it was not, but we expect it soon and we know that lawyers are working on it.”
There is a long legislative process with the sponsoring ministry understood to be the Ministry of Economy and Commerce. It will then have to go to the Ministry of Justice, and once they have signed it off it will have to pass through the Emiri Diwan, as all legislation has to. After the Emiri Diwan sign it off, it will appear in the Gazette and then come into force. Once it becomes law, it will make it permissible under Qatari law for government entities to grant concessions to private companies – on a privately funded basis – to perform state functions.
“PPP is essentially government granting a concession to the private sector to do something that government normally does – under a long term contract. They are almost handing to the private sector a government function, or a part of it – like mini privatisation in a sense,” Blackmore explains and adds that PPP can be used to procure widely differing functions: “Banks will lend the money to make PPP-backed projects happen, for the construction of the building or facilities which this concession is going to be operated in, or for working capital, or for the delivery of a service. PPP can apply to hospitals, schools, roads, railways, airports, and a range of other different projects.”
What is your view around the observation that government is pushing for private sector involvement in the wake of the oil price drop and diversification etc, to supplement revenue?
“I think we can go too far on the ‘revenue’ explanation. Whilst revenue is important, I think the focus is a combination of revenue and private sector discipline.” Blackmore explains that in Europe, the real driver for PPP has not been just private finance and off-balance sheet accounting, but bringing in the skills of the private sector to do for the state what the private sector is better at doing, namely, assessing client needs, designing a solution and implementing it efficiently: “giving you value for money and whole life support on projects” he expands.
“If the private sector has a building to design and construct for the lifetime of the project, it’ll be designed to minimise maintenance and thus operate and maintain for 25, 30 or even 40 years over the term of the concession, because they know it is their responsibility to keep it going for that period. You will get a better management structures because while the private sector will think about life-cycles, the government tends to focus on the cheapest build solution – which they get delivery of on completion and the government has to look after it.
“The private sector will design in a way that will allow change to be implemented over the lifetime of the project. If the private sector knows that a facility of services is going to have to adapt over time, they’ll procure the design to facilitate change. I think Qatar, like other governments is thinking about that too. They know that the private sector has certain skills as providers which may deliver more efficient services to the population of Qatar.”
In which sector do you see PPP being most implemented?
Blackmore believes that initially PP will be implemented in schools and hospitals but hastens to add: “I’m not talking about larger general hospitals but more along the lines of clinics for example. It could be anything from ambulatory care centres, to specialist clinics or primary care. There are a lot of different needs within the health sector. While there has been a lot of investment, that program still has some way to go. If you talk to health professionals in Qatar, it is clear the state has many aspirations; some specialist, for example diabetes is a big issue and they can do with more facilities for cardiovascular, women and children health and so forth.”
While economists see a number of opportunities and schemes that they think are appropriate for a PPP solution, it doesn’t necessarily mean that Qatar would hand clinical services over to a private operator, “that’s the extreme model” he comments.
However, Blackmore explains, once the patient is involved, the state takes over: “The private sector provides the envelope for the state to provide clinical services. Nevertheless, in other countries they have actually handed over clinical services to the private sector. In the UK that has been a no-no. I don’t know about Qatar – maybe they are prepared to allow an outside operator who could bring in surgeons, doctors and nurses to operate a facility? This is what happens in Turkey.”
The PPP model is not however, designed as ‘a one size fits all’ solution he takes pains to emphasise and stresses that “It is an incredibly flexible concept and depending on the host nation or jurisdiction that wants to progress it, it can be finessed in all sorts of different ways.”
What are the PPP challenges in Qatar?
Within a region that relies heavily on trust and relationships – both of which take time to nurture – PPP will obviously encounter a number of challenges. Blackmore expands on these: “If you are talking about bringing in private sector investment and privately procured debt finance, what typically happens in a PPP is the funding that the private sector generates for the project is a mixture of equity and debt – say 20% equity and 80% debt – depending on the project and depending on the risk that the banks are prepared to live with.
“If it is a waste to energy, it may be a 40/60 or even a 50/50 split, because banks are very nervous about the deliverability of projects with a complex technological performance element like that, so they require more equity.”
PPP projects work best if they are long-term, analysed for their longevity and security, with some concessions more easily granted than others: “If outside funders and investors are not used to a jurisdiction or they do not see it as being particularly stable as an investment environment, they are going to be nervous about investing and are going to look at the nature of the concession.”
“If we look at the history of project finance in this region, it has worked well in the power and the water sectors. The reason it has worked is because the deals are long-term and secure due to the stability created by the off-take.
“A bank that lends money to a contractor who is going to design and build and operate a desalination plant, takes the view that water is necessary. So if you can produce the water, it’s going to be bought and paid for. The off-take agreement – which is the long-term supply and purchase agreement for the water – underpins the project, it guarantees the project.
“The banks are happy to lend on that security. So if the project falls over, they can step in and they have the income stream. As long as they can produce the water, it can be paid for,” he explains.
Blackmore points out that banks tend to be a little more nervous about projects which are less clear-cut in terms of deliverability and, as the power and water projects have a secure output, they are better favoured. “With social infrastructure, where the output is a school classroom or a student classroom, the demand is less predictable. While it has worked in the UK, in this market, lenders may regard such projects as risky. They look at government policy and demand: How can they be sure that pupils will be attending that school, for example? In Europe, the market is more predictable.
“What do I mean by that? As demand for power and fresh water is increasing in the region, the state utility companies which supply the domestic or commercial customer are prepared to give the state-backed guarantee by the output from the plant in question. This ‘off-take’ gives the project security from a lender’s perspective. It’s all about the nature of the concession and the stability of the jurisdiction. Investors like clarity of purpose and long-term certainty.”
How does solar power feature within the PPP model?
If water and power are viewed favourably, then Qatar’s sustainability drive – and in turn, its focus on renewable energy – could also benefit by the PPP model. Blackmore believes that this sector is showing growth and highlights projects in the region that have used this financing model: “There have been three or four solar projects that have been signed recently in the region. They are on a project finance off-take basis, with the electricity off-take sold to underwrite the financing of those projects. These are long-term projects,” he reiterates and adds that pricing is becoming highly competitive, with the consumer the beneficiary.
While he observes: “We will soon see solar projects in Qatar,” it is the roll out of a pipeline of projects that is key. “PFI in schools and hospitals became an easy roll out in Europe. However, the projects should not be ‘one-offs’ because the cost is high. We are talking about a programme of schools and a program of healthcare projects here, which would be really exciting,” he enthuses.
“In Oman they have done power and water, but now they are talking about social infrastructure. Carillion and the Oman Investment Fund have been appointed preferred bidder for the Barka Health City and, although not signed as yet, a preliminary award has been made.”
Blackmore continues: “In this region, there is a cycle. Power and water have made people comfortable with the concept of long-term funding relationships, so there is definitely a real will for it and to move forward with PPP into schools and hospitals.”
“What will create an attractive market for PPP is government commitment and guarantees; attractive long-term concessions and a clear legislative. In the contractual landscape for those in the construction industry who are focused on conventional procurement – and most are – this has been a challenging year.
“However, I think 2017 will see a comeback of PPP projects in the market and this will create new opportunities for designers and contractors alike.”