How should Dubai’s infrastructure be funded?
How should Dubai’s infrastructure be funded? Is the new PPP Law an answer? Scott Lambert, regional head of Construction and Infrastructure at Al Tamimi and Company, attempts to answer these questions
2016 is emerging as a year of challenges for the budgets of many GCC governments. There is talk of the introduction of a VAT to raise revenues, as well as governments reducing fuel subsidies and considering selling off stakes in government-owned businesses to help balance their budgets. The region still needs ongoing investment in infrastructure and projects for its population, to sustain economic growth and more diverse economies.
There appears to be little prospect of a resurgent oil price to boost funding, so aside from issuing bonds or taking on debt, governments are starting to again look more seriously at alternative funding arrangements to fulfil these needs. Even one of the more advanced economies in the region, Dubai, needs more infrastructure with its planned growth in population and tourism and the hosting of the World Expo 2020.
Firmly signalling an intention to explore alternative arrangements for projects, in November last year Dubai implemented new laws promoting and facilitating the use of public-private partnerships as a means for the delivery of projects in the emirate, in the form of its new law governing public-private partnerships (Law No. 22 of 2015) which came into force in November 2015 (“PPP Law”).
The PPP Law allows the parties to structure the project based on a range of PPP models, including the models traditionally known by the private sector: concession agreements, build-operate-transfer (BOT), build-own-operate-transfer (BOOT), build-transfer-operate (BTO), and manage and operate arrangements.
Flexibility is built into this law to allow the emirate to explore other types of project structures, as the PPP Law gives the Financial Department and the proposing government entity an ability to propose other arrangements to the Supreme Committee for approval. Once a model has been selected by a government entity and the Financial Department, the Financial Audit Department will then have oversight over the project.
One innovation the PPP Law introduces is that a private sector company may propose partnership projects, not just a government entity. When a private sector company proposes a project, it may bypass the public tender process (set out in more detail below). The PPP Law provides that if the project is specifically developed by a private sector company, the interested government entity may directly contract with that company for the project without need of a public tender.
However, the PPP Law sets out several preconditions. The private sector partner must form a limited liability project company (a special purpose vehicle) licensed to operate and implement the partnership contract in Dubai. Also, the project must be economically, financially, technically and socially feasible. In addition, a PPP is not permitted where it will require the relevant government entity to make payments that have not been allocated to the project entity’s budget.
It should be noted that not all types of infrastructure are available, as the PPP Law expressly excludes projects related to the production and supply of water and electricity. The Supreme Committee may also from time to time exclude other projects or sectors from the PPP Law.
The PPP Law sets out clear rules which apply to most PPP projects. Where a government entity is the proponent of a project, it must first obtain certain approvals. Depending on the value of the project, as well as the cost to the government entity, the approvals may be internal or external. In summary:
– If the PPP will result in financial income or savings to the government entity, the director general, secretary general or chief executive officer (or a nominee) of the relevant government entity must approve the project.
– If the total costs to the government entity are up to AED 200 million, the director general, secretary general or chief executive officer (or a nominee) of the government entity must approve the project.
– If the costs to the government entity are between AED 200 million and AED 500 million, the Financial Department must approve the project.
– If the cost of the project exceeds AED 500 million, the Supreme Committee must approve the project.
The government entity must also form an internal committee, the Partnership Committee, made up of people nominated by the director general of the government entity. The resolution nominating the committee members also sets out how the Committee is to function.
If the project requires the government entity to incur costs exceeding AED 200 million, then the director general of the government entity must also nominate a representative from the Financial Control Department to sit on the Partnership Committee.
The government entity must seek private sector partners by means of a public tender. The tender can occur after all approvals are obtained. The invitation to tenderers must be accompanied by project details comprising financial, administrative and technical requirements to be satisfied.
When the government entity has a private sector partner, the PPP project agreement to govern the relationship must address the following:
– the nature and scope of the works to be performed by the SPV;
– intellectual property rights, title of project assets and transfer of title;
– financing specifications;
– financial and technical obligations of the parties;
– determination of sale price or consideration related to project product or services, as well as a mechanism to amend and determine price;
– termination and amendment of the partnership contract;
– allocation of risk;
– environmental safety.
The term of a PPP project may not exceed thirty years, though the Supreme Committee may approve a longer term for public interest reasons. The governing law must be the law of Dubai, unless otherwise provided in the partnership contract.
The PPP Law signals that Dubai is interested in business innovation. It is an opportunity for those who wish to innovate, as the economic times might be right for Dubai, and all governments, to be looking more closely at opportunities to work with the private sector on PPP projects.
The new PPP law seeks to encourage the private sector to be innovative and creative in identifying and funding projects for Dubai. If successful, this law will lay the foundation for reducing the financial burden on the government to provide and maintain world-class infrastructure in a rapidly growing international emirate.