PPP in the Middle East

Ian Tempest
GCC governments turn to public-private partnership financing structures, as oil revenues decline.

Tighter government budgets and growing infrastructure needs have brought the public-private partnership (PPP) methodology under the spotlight in the Gulf Cooperation Council (GCC) countries. Regional governments are now seeking private sector involvement for sectors that were once exclusively state-funded.

The region’s sizable infrastructure investment gap is driving the PPP interest, as governments work towards honouring their publicised visions for their peoples’ futures. Infrastructure is at the forefront of each country’s development plans, but the public sector can’t do it alone. Sectors such as water, power, transport, education, telecommunications and healthcare are ripe for transformation, with PPP providing a potential solution.

PPP can harness private sector efficiencies, bringing levels of financial, administrative, technical and technological expertise that may be lacking in government agencies. The mechanism provides a comprehensive transfer of risk and responsibility for delivering and maintaining the asset, optimising capital and whole life costs. Public sector borrowing is reduced, inward investment may be easier to attract, and there may also be economic diversification benefits.

Sectors such as water, power, transport, education, telecommunications and healthcare are ripe for transformation, with PPP providing a potential solution.

PPP remains under-utilised and less understood here than in more mature markets such as Australia, Canada and the UK. The GCC countries are drawing on PPP principles honed in these more mature markets, but country-specific models are expected to evolve. A comprehensive PPP landscape includes national legislative, regulatory and process frameworks, and this will take time to embed in each country.

Until recently, most Middle East PPP has been undertaken without specific PPP law or government policy underpinning the project. Dubai and Kuwait have surged ahead, with Kuwait expanding its PPP law in 2014 and 2015, and Dubai introducing its PPP law in 2015. Elsewhere, Saudi Arabia and Oman have indicated that they are actively exploring PPP frameworks.

In project terms, Kuwait is leading the way with just under $49bn worth of projects under its PPP programme. The UAE is a close second, with approximately $35bn of projects planned or under way since introducing its PPP legislation.

In project terms, Kuwait is leading the way with just under $49bn worth of projects under its PPP programme.

PPP success depends on establishing a greater understanding of the challenges, benefits and risks. Historically, the region’s procurement approach has loaded project risk on to the private sector and this has been reflected in higher construction costs.

Governments now need to demonstrate their commitment to PPP, to attract private sector investors and project operating companies. Transparent policy frameworks, with fair allocation and acceptance of appropriate levels of risk, will be expected. Attractive deal structures, with properly defined project scope and adequate guarantees over the likely revenues to be generated, will do much to encourage participation.

Bidding for PPP projects can be time-consuming, complex, and expensive, but sufficient interest must be generated to attract a competitive range of bidders. Governments will need to consider ways of making the opportunities attractive and viable, ensuring that the private sector can have confidence in the schemes.

...the region has the advantage of the lessons learned from mature PPP countries, with the opportunity to benefit from global best practice.

New PPP programmes typically bring an initial learning curve, as laws and procurement procedures are tested for the first time. Efficiency gains may not be fully realised until several projects have been delivered and the laws tested. However, the region has the advantage of the lessons learned from mature PPP countries, with the opportunity to benefit from global best practice.

Thus far, large complex projects in the power and water sectors, and, to a lesser extent, transport, have been the main users of PPP, but there are many untapped opportunities. Healthcare, education, waste management and street lighting are likely to be explored, as PPP matures in the region.

The recent PPP legislation enacted in Kuwait and Dubai has been welcomed by the private sector, with local and international consultants, contractors and operators interested in helping develop the methodology in the region. Faithful+Gould has global experience of PPP and we are currently advising clients on schemes in the UAE.

Written by