Putting PPP in the frame

Why hasn’t the region fully embraced PPP funding, experts offer insight into the barriers to success and the need for a legal framework

“Collaboration between the public and private sectors in the GCC has been around for some time. However, the relationship has generally been restricted to service contracts and to the water, energy and transport sectors” – Ahmed Almihdar, senior research analyst at JLL

Public-private partnerships (PPP) have come to the forefront across the GCC in recent years, due to significant infrastructure requirements and reduced government budgets. Budgets have shrunk for many reasons, but primarily due to the steep decline and continued stagnation of hydrocarbon revenues. The result is that projects and sectors once exclusively funded by governments have now been opened to the private sector.

Through PPP, regional governments can leverage efficiencies and expertise in the private sector to achieve their development goals. Despite this potential, however, PPP has yet to gain significant acceptance and traction in the GCC.

“Collaboration between the public and private sectors in the GCC has been around for some time. However, the relationship has generally been restricted to service contracts and to the water, energy and transport sectors. Most projects in GCC markets developed using a recognised PPP model have traditionally done so under each market’s own version of tender and procurement laws,” says Ahmed Almihdar, senior research analyst at JLL.

One of the key reasons PPP has yet to make a mark is due to a lack of legislation; however, this has begun to change. Almihdar elaborates: “A PPP legislative framework is currently lacking in most GCC markets, with the exception of Kuwait and the emirate of Dubai. Kuwait has made the most progress in establishing a PPP framework, having released a PPP law in 2008 and expanding it in 2014. Dubai introduced its own PPP law in 2015 and is looking likely to update it in the coming years. Oman and Qatar have also announced that they are drafting a PPP law, while Saudi Arabia established the National Centre for Privatisation in 2017 and is thought to be drafting its own PPP law as well.”

Parsons’ Javad Farooq agrees with Almihdar’s assessment, adding: “Considering the sustained depression in hydrocarbon prices, the region appears primed for public-private partnership opportunities. Some countries are more advanced than others in the legislative process, supported by appropriate authorised bodies; however, all of the countries appear to be exploring this form of project delivery.”

As governments look to fulfil their commitments for the delivery of infrastructure, especially with regards to time-sensitive mega projects such as Expo 2020 and the 2022 Qatar World Cup, the benefits of PPP are perhaps even more relevant to them today.

“New accommodation is generally provided as part of the process. This will be aligned to design and construction best practice, with new facilities being maintained for a concession period, typically 20 years or more. The public sector entity makes no payment for the facilities or services until the contractual handover date, so there is always a powerful incentive for the developer to complete the works in accordance with the programme. There are also significant sanctions for failure or non-performance, both during the construction and concession periods. These keep the building contractor and facilities management contractor focused on performance. PPP projects are also described as being off balance sheet, which is a significant consideration for businesses when capital-funded versus revenue-funded alternatives options are being planned,” comments Paul Sweeney, regional director – head of Programme Management KSA at Faithful+Gould.

Yasser Khan, business director at Arcadis, adds: “Access to third-party finance is an obvious benefit as it reduces the need to borrow; however, when done well, the value extends much further. PPPs can harness the expertise of the private sector to drive efficiencies on a project, and can often bring in levels of financial, technical or technological expertise that may be less developed in some government departments.”

While PPP as a form of procurement offer several benefits, there are also risks that can have a significant impact on the delivery of projects.

“There are several financing-related risks, so it’s important to ask the following questions: Does an enforceable legal framework exist? Are there funding guarantees? Is the government committed to meet its obligations? If the answer to these questions is no, securing the requirement capital from banks may prove difficult or costly. If there’s a failure on the operator side, the costs of re-entering the business could be significant. It should also be understood that the procurement and tendering processes are complex, costly and lengthy compared to the more traditional procurement methods, and the public body needs to remain committed throughout the process,” cautions Parsons’ Farooq.

JLL’s Almihdar notes that the immature PPP sector and the lack of established legal framework are risks for international firms looking to enter GCC markets for the first time. That said, he says there are benefits to entering the market at this nascent stage. “Those who choose to absorb the risk and enter while the market develops could benefit in the long term. Early participation can develop relationships with government agencies, as well as the practical skills and knowledge to position private sector consortiums as frontrunners for future PPPs.”

Taking the complexity of PPP into account, clients must fully understand and chart in detail their requirements, while the public sector should select partners who are committed to the project and have the capacity to take it on.

F+G’s Sweeney is keen to point out that obsolescence is another real risk on projects of this nature. “Design, specification and construction obsolescence is also a risk. For example, technology is constantly evolving at pace, so what is state-of-the-art today could become obsolete in 12 months. On major projects, technology to be installed three or four years hence is a real challenge, as solutions at that time will be better, smaller, more efficient or fundamentally different. In this case you have to ask, how can the public sector get what they need, as educational or healthcare demands evolve?”

Barriers to PPP Success

Research published in 2016 by MEED found that 23% of the 80 PPP projects brought to market in the MENA region since 1996 failed to conclude in a deal. A number of reasons cited in that report have yet to be addressed, while new challenges have also appeared.

“Up to now, one of the biggest barriers to wider adoption of PPP in the region has been the procurement approach that’s traditionally followed. The current model transfers most of the risk on to the private sector; however, in some instances, this just adds higher costs to a project rather than additional value,” Arcadis’ Khan points out.

Recent political issues have also had an impact, according to Parsons’ Farooq. “Political changes, the assignment of risks and a lack of due diligence with respect to determining the value for money (VfM) have all contributed to numerous PPP projects in the region not being concluded. Risk allocation is probably the largest barrier to success. It is imperative that risks are allocated to whomever can best manage them. Assigning all the risks to the private sector results in unsustainable projects.”

“Seeking to retain control of the asset, while expecting the private sector to provide the necessary investments comes a close second. To attain maximum benefit from a PPP, owners should be comfortable in allowing the private sector to manage all aspects of the project from construction to operations. A change in mindset is required whereby the public entity transitions from its traditional owner/operator role to a position of overseeing the output and performance based on agreed key performance indicators (KPIs); that is, they need to focus on the services rather than on directly owning and operating assets. For organisations with limited PPP experience, this can be extremely challenging, as it can result in a feeling of loss of control.”

JLL’s Almihdar notes, “Each GCC market operated separately in the implementation of PPPs, therefore there are a number of reasons behind PPPs not fully launching in the GCC. Reasons include the structure of models used not falling within traditionally defined PPP models, which makes it difficult to adopt and use in similar/other projects. A failure to establish a stable governing body to oversee the bid process, resulting in delays, also led to investor frustration and hence hesitation in some markets. Political will pre-low oil prices was not as strong as it is now in most markets. This, combined with a lack of legislation, a governing body and clear policy towards PPPs, restricted the growth of the PPP sector in the GCC.”

Building a Conducive Environment

It’s obvious regional governments still have work to do to ensure that PPP projects conclude favourably in the region. F+G’s Sweeney advises, “There is a requirement to ensure fair regulation and contracting of PPP to make sure both parties are treated amicably – something which traditional contracting in the region hasn’t always been incredibly strong at. A true understanding of risk and reward needs to be understood and accepted by all. The contracting nature of the region rather leans towards contractors taking the downside risk – lump sum – and clients taking the upside risk – VE, etc – which will ultimately cause PPP to fail.”

Arcadis’ Khan agrees: “To attract private sector investors and operators, transparent policy frameworks and a fair allocation of risk are key. Similarly, attractive deal structures with a clearly defined project scope and adequate guarantees on the expected financial return will help to encourage participation in PPP deals. When it comes to the framework put in place, avoiding unnecessary intricacies is also important as this could put off some stakeholders, particularly those with no previous exposure to this procurement model.”

In contrast, JLL’s Almihdar says, “Establishing a PPP law is not a prerequisite to successfully complete a project under a PPP framework, and we have already seen examples of this across the GCC markets. In more established, mature real estate markets (the UK, Australia, etc), it is not uncommon for there not to be formal PPP legislation but principles and guidelines instead, and PPPs in those markets have been successfully carried out this way for decades.”

He is also quick to point out that GCC market pressures are different to others around the world, which means the region may not be able to adopt the same approach. “While the GCC markets can follow in the same path, growing populations, limited budgets and ambitious plans have placed pressure to develop the PPP market in a short timeframe. The GCC markets are also disadvantaged by there being a number of failed PPP projects, limiting the usage of precedent to develop and progress the sector as mature markets have done.”

While successful PPP projects have been few and far between in the GCC, signs of positive change have been seen in recent years. Parsons’ Farooq says, “A successful, albeit relatively small PPP project is the Muharraq Sewage Treatment Plant, the first PPP in Bahrain. Now in the operational phase of the 27-year period, the project has achieved numerous recognitions. I think the project has been a success because it really sought to exploit the benefits of involving the private sector. The project was well structured, the selected private-sector consortia were of high calibre (a testament to the prequalification process), risks were justly assigned and the private sector was able to innovate and introduce new technologies into the Kingdom for the provision of quality services.”

In Saudi Arabia, there have been more recent successes. “In the Kingdom, GACA has been a prevalent user in recent times on PPP. We’ve seen Madina airport successfully delivered by the TAV consortium and have seen a further three airports awarded in this format in 2017. Furthermore, in the power and water sectors in the Kingdom, the dominant delivery vehicles are alternative funding – IWPs, IWPPs and IPPs. The successful delivery of these schemes can broadly be attributed to having experienced organisations within the delivery consortia and a client understanding of correctly partnering to bring the value the delivery model has to fruition,” F+G’s Sweeney concludes.

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