Is Dubai ready for PPPs?
Will Dubai be hit by the recession?
In the latter part of 2008, when the West started to feel the impact of the global economic crisis, the local press asked: will Dubai be hit by the recession? Nine months later, only one answer can honestly be given.
While there is absolute faith in the State’s power to macro-manage its house and even catapult itself out of the stickiest of spots, there is an undeniable unease and deep-seated trepidation at the magnitude of the market regression.
So comes the more pertinent question that has not been properly addressed to date: can anything really be done? The answer is yes.
The key to the successful implementation of any commercial strategic plan, including the Dubai Strategic Plan 2015, is risk identification and risk management.
The market must realise potential opportunities and limit adverse effects using systematic application of management policies, procedures and practices, and realise the innate strength of its burgeoning private sector by dumping its conventional master-servant contracts and looking to partnering options such as Public Private Partnerships (PPPs).
Validation of the UK PPP model can be found in its repeated application by Dubai’s more cautious neighbour, Abu Dhabi.
The PPP model has recently been applied for the AED25 billion Midfield Terminal expansion by Abu Dhabi Airports Company (ADAC), the AED5.8 billion infrastructure project for Abu Dhabi Energy Future Company (Masdar), the development of the Industrial City of Abu Dhabi (ICAD) Special Economic Zone, and the $323 million financing of the Paris-Sorbonne University Abu Dhabi.
PPP in a nutshell
While the administration of PPP contracts is complex, the PPP principle is simple: rhe public sector enters into a venture with the private sector, in which the private party assumes substantial financial, technical and operational risk in a project to develop, build, maintain and operate a government asset for a fixed contracted period.
A private sector consortium (typically made up of the building contractor, a maintenance company and bank lenders) is set up and operated through a Special Purpose Vehicle (SPV).
The collaboration will generally encourage the process of collaborative review; in turn culminating in a comprehensive risk register used to track risks, minimise their potential impact and avoid time-consuming inter-party disputes, while paving the way for effective and informed decision-making.
PPP procurement strategies can be used (1) where capital investment is made entirely by the private sector [i.e. private finance initiative (PFI)]; (2) where the government provides a capital subsidy in the form of a one-time grant; or (3) where the government supports the project by providing revenue subsidies, fiscal exemptions or by providing guaranteed annual revenues for a fixed period.
The possibilities are limitless, offering much needed fluidity, particularly in a market forum where capital investment is or has been at a lock down. The operative principle is to allow the parties to shift high-level risks to the party best suited to manage them.
Dubai to learn from its neighbours
Pros and cons aside, in times of financial strangulation, innovation is crucial. Dubai must deliver a new innovative way of working, supporting a centralised risk management approach. Partnering contracts such as PPPs offer a great deal of much-needed respite, and can be adapted to be Shariah-compliant where necessary.
The UAE is uniquely positioned to learn from its counterparts. Historically the Portuguese have sought to reinvent the wheel with every new project, and incurred unnecessary difficulty, time-loss and cost. The Spaniards have learnt that operating without public concessions stifled their progress, resulting in the fragmentation of their PPP contracts.
The French have been heavily hindered by strong political barriers. The Germans’ regulatory bodies have made it difficult for the public sector to operate as business entities and develop PPPs, abandoned partnering for privatisation.
A genuine shift in the established operating norms is integral. In the way Abu Dhabi Law No. 1 of 2007 launched a legal framework for the government’s new construction contracts based on rules applied by the International Federation of Consulting Engineers (FIDIC), a new uniform legal standard must be introduced through either local or federal law to enable the proper integration and long-term sustainability of the PPP model in the region.
Proper legal and contractual advice must be sought and applied. One universal truth stands: without a sound foundation, any stronghold will collapse.
A proper legal interface supported by a Sustainable Construction Public Private Partnership Task Group comprising of a team of experienced specialists would stand to propel Dubai to the forefront.
There is a silver lining to every cloud. Public Private Initiatives in the context of worldwide recession is a fine silver lining.