The publication on 20 September, 2015 of Dubai’s new public-private partnership (PPP) law (Law No 22 of 2015) is significant because it signals a clear statement of Dubai’s intent to use private sector finance and expertise to help meet Dubai’s future infrastructure needs.
Whilst Dubai has implemented a handful of PPP projects prior to the introduction of this new law, notably the recent Dubai solar photovoltaic (PV) projects, the general approach to procurement in Dubai has been that infrastructure projects should be let on a pure engineering, procurement, and construction (EPC) basis with those infrastructure assets then being owned, managed and run by ‘Dubai Inc’. Promulgation of the new PPP law sends a clear message to the market that Dubai is now open to non-traditional procurement approaches, such as PPP.
For those market participants that are not active players in the PPP sector, the expression “PPP” can be confusing. Before turning to analyse what the new law says, it is worth noting that there are many alternative government procurement strategies that are commonly labelled as ‘PPP’. In broad terms, the formal introduction of a PPP model in Dubai does not mean ‘privatisation’. It simply means that there will be much greater collaboration between the private sector and the public sector than in the past with the Dubai government looking to develop new forms of long-term concessions or partnerships in a number of sectors. In turn, this will result in an increasing number of tenders being released whereby the private sector will be offered the opportunity to play a more strategic role in the design, construction, financing, and ongoing operation and maintenance of certain Dubai infrastructure assets in the future. As things currently stand, Dubai tends to run competitions to select a contractor to build a particular infrastructure asset. Stage payments are made to the contractor by the Dubai government and then, when the final completion certificate is issued, the asset is handed over to the state to operate, manage, and maintain.
It appears that one of the government agencies at the forefront of development of future PPP projects in Dubai is the Roads and Transport Authority (RTA). As far back as 2011, the RTA issued a new ‘policy on public-private partnerships for transport and services’, launched an internal PPP committee, and then committed to model 30% of its projects on the basis of PPP procurement. Subsequent to that, the RTA produced an early discussion draft of a new PPP law in 2013, and in the last few months, it has engaged advisers to assist it in developing forms of PPP contracts and tender documentation for this new style of project. In terms of specific projects, the RTA has announced its intention to develop both the Union Oasis Station and the Dubai Transportation Academy projects as PPPs. The Dubai Transportation Academy project is still at the early conceptual stage, but the Union Oasis Station is well advanced. The RTA announced earlier this month that it is now inviting developers and investors from the private sector to complete the prequalification requirements. Union Oasis, which was formerly a public park, will offer a mixed development that will include recreational facilities and green areas, residential apartments, and commercial spaces, as well as retail outlets. It is also envisaged that the project will comprise the construction of towers above the Union Square Metro Station spanning an area of about 15,000 sqm. Abdullah Yousef Al Ali, CEO of RTA, has advised the market that the concession agreement will be valid for 30 years.
Given how far advanced the RTA is in developing a portfolio of PPP projects, we expect many of the early deals will come through this agency.
What does the new law say?
Article 3 sets out some of the objectives of the new law. These include (i) lessening the financial burden on the state budget, (ii) transferring risk from the public sector to the private sector, and (iii) changing the key role of the public sector from “investor and developer” to “policy maker and regulator”. Given Dubai’s breathtaking growth over the last few decades, it is no surprise to see this change in emphasis. Most Middle East and North Africa (MENA) countries, and all GCC countries, have to a greater or lesser extent begun to adopt a similar position either for pure fiscal reasons or in order to try to develop the private sector more generally.
The new Dubai law is a ‘horizontal’ PPP law (i.e. it covers multiple sectors), rather than a vertical law, which only contemplates the development of PPPs in a particular sector.
Do other regional countries have PPP laws?
Algeria, Bahrain, Oman, Jordan, Lebanon, Morocco, Kuwait, Tunisia, and Egypt have already promulgated similar horizontal PPP laws and associated implementing regulations. Abu Dhabi, Dubai, Qatar, and Saudi Arabia have vertical laws in place, largely providing a legal platform for delivery of PPP projects in the power, water, wastewater, and telecoms (Saudi Arabia) sectors. Draft PPP laws had been prepared in Syria and Libya prior to the respective conflicts in those countries. Some MENA countries have no PPP laws in place at all.
Why is a new law needed in Dubai?
The short answer to this is that most PPP style projects could be implemented in Dubai without this new law. In the UK, the private finance initiative (PFI) led to the development of hundreds of PPP projects without the country having a PPP law in place. There are also numerous other global examples where PPP projects have been successfully implemented without any PPP laws being in place.
In Dubai, there are very few legal impediments to PPPs being implemented, and what impediments there are can be successfully overcome by appropriate contract drafting. So why pass a new law?
There are two main reasons why a new PPP law is a good thing for Dubai, neither of which are legal considerations. Firstly, it sends a clear statement of policy intent to the international developer, investor, and lender community. The new law says to the market that (i) this style of project is welcome and has the full backing of the state, and (ii) it can expect ‘dealflow’.
The second reason is particularly important because bidding for this type of project is time consuming, complex, and the front-end bid costs are high. Normally, a bidder will need to engage its own legal, financial, and technical consultants to assess the proposed contractual framework and suite of project documents. The lenders will also need to do the same, passing these costs on to the bidder. What this means is that the developer community will not normally be interested in focusing on a jurisdiction where there are occasional, ad hoc PPP deals. What they are looking for is a market in which there will be multiple bid opportunities so that if they invest the time and money, the chances are they will eventually succeed in winning a project.
What noteworthy provisions are contained in the new law?
The new law will come into force 60 days after publication in the Dubai Official Gazette. The law was published in the Official Gazette on 20 September, 2015. Consequently, the new law will come into force on 18 November, 2015.
A summary of some of the key provisions of the new law is set out below:
- the new law applies to all government bodies that are funded by the state budget;
- there is flexibility as to what form of contract can be used. It can take the form of management/operating agreements, leases, concessions, BOT, BOOT, BTO, DBO, DBOT, etc.;
- projects in the power and water sector are not covered by this new law. They remain regulated by Law No 6 of 2011;
- a private sector developer is permitted to make an unsolicited PPP proposal to the relevant public sector body that regulates that sector and the public sector can then award a PPP contract to that developer if the proposal is fair, transparent, competitive, and appropriate levels of probity are in place;
- ultimate oversight for the PPP lies with the Dubai Financial Audit Department;
- a public body is permitted to take market soundings, seek feedback from the market, and undertake initial ‘strawman’ work from potential bidders prior to officially going to the market with a request for proposal (RFP);
- an RFP needs to be fully developed in all material respects before it is put out to RFP, including specification of the key financial, administrative, and technical requirements. The RFP must also include an information memorandum, the form of contract and a clear evaluation methodology;
- bidders are permitted to form consortia;
- other than in exceptional cases, the relevant government agency is obliged to cancel a tender where only one bidder submits a bid, all bidders have submitted a number of material reservations, bids prove difficult to evaluate technically or financially, if the preferred bidder’s price is too high as compared with the government’s own estimates and benchmarking, or there are public policy reasons to withdraw the tender;
- the government may take an equity stake in the project special purpose vehicle (SPV);
- save in exceptional cases, all projects must be executed through an spv whose sole purpose is to undertake the relevant PPP project;
- the form of PPP contract has to provide clear terms in relation to a number of matters, including Emiratisation quotas and environmental protections;
- other than in exceptional circumstances, the maximum tenor of a PPP contract is 30 years;
- subcontracting and sale of PPP assets is not permitted save with the consent of the relevant government agency;
- UAE governing law is mandatory; and
- disputes cannot be subject to overseas arbitration.
Some general observations
One issue that is not addressed in the new law is whether the Dubai government will issue sovereign payment guarantees to sit behind any offtake/payment obligations of a government department or agency. Such guarantees have previously been on offer for Dubai power projects, but we anticipate that these will probably only be offered up on PPPs in other sectors where they are absolutely essential to support the financing of the project. Additionally, the law is silent as to whether a project SPV can be established in a free zone or not. It is also silent on capitalisation requirements for the SPV and whether the 51/49 rule will apply or not. Article 25 (B) of the law provides that supplementary regulations will be promulgated to further stipulate what conditions must be satisfied by the SPV. No indication has been given as to when these supporting executive regulations will be issued.
It will be interesting to see which government agencies push ahead with new PPP initiatives following the promulgation of this new law. Clearly, the RTA will be at the forefront, and perhaps we will see some of the government departments responsible for social infrastructure projects moving forward to launch their own projects in the healthcare, education, or affordable housing sectors.
In any event, the new legislation will be welcomed by the market. It is a clear and well-drafted law that will encourage the private sector to seek out future PPP opportunities in Dubai. If Dubai is able to roll out a series of successful PPP projects over the next few years, we are likely to see an uplift in the number and frequency of new infrastructure projects being brought to the market.
By tapping into the liquidity of local, regional and international banks, Dubai will be well placed to move forward with its ambitious infrastructure development plans.
Adrian Creed is projects partner at Clyde & Co.
