Exclusive: Can PPP regulations support private sector investment in infrastructure?

MECN speaks with senior associates from international law firm Pinsent Masons on the impact of Abu Dhabi’s recently issued procurement guidelines and what it means for PPP projects in the region

In September, the Abu Dhabi Investment Office (ADIO) issued new public-private partnership (PPP) procurement regulations to support greater collaboration between private and public sectors in the emirate. This follows Abu Dhabi’s announcement earlier this year to procure approximately $2.7 billion (AED 10 billion) worth of infrastructure partnership projects under Ghadan 21 – the emirate’s accelerator programme which drives development by investing in business, innovation, and people.

In light of this, MECN spoke to senior associates from Pinsent Masons on the impact of the recently issued guidelines and what it means for investments in PPP projects in the region.

Tim Armsby, partner at Pinsent Masons, said that governments worldwide are currently looking to see how they can kickstart their economies post Covid-19.

“Infrastructure has always tended to be a useful tool in helping governments to combat economic downturns, be it from the impact of a recession or natural disasters. This is so because it delivers assets that benefit the economy as a whole and gives private sector opportunities to generate income.”

Another key area to drive increased certainty, and therefore investment in PPP infrastructure projects, lies in improving project preparation for infrastructure projects, stated Catherine Workman, partner and head of Middle East region at Pinsent Masons.

She added that this is one of the central pillars of the G20 strategy as it is acknowledged that projects that are fully prepared before launch have a better chance of success.

“They are also more capable of attracting investment which improves the level of competition, giving governments and the private sector a balanced and fair risk allocation. Outside the energy and utilities sector, PPPs are still not that common. With governments, developers, or financial institutions going through a learning curve, it is important to encourage open dialogue, training and discussions to ensure the market is prepared and the projects are structured properly,” she explained.

On that note, she stated that PPPs often look to attract foreign investment from the private sector. However, with respect to the UAE, uncertainty still remains around what level of foreign ownership each emirate will allow in which sectors, and what conditions (if any) will be imposed. This lack of certainty may result in a reticence for foreign companies to invest, she added.

Workman elaborated that while the UAE Foreign Direct Investment Law (the “FDI Law”) was passed in November 2018, it set out a framework for allowing up to 100% foreign ownership in certain sectors. However, each emirate was to separately determine which sectors it will allow up to 100% foreign ownership, and there still remains a lack of clarity concerning the applicability of the FDI law to PPPs.

Meanwhile, Gurmeet Kaur, partner at Pinsent Masons Middle East, pointed out that revenue risk is a hot topic for PPPs and ultimately depends on the sector, the specific project, and the service that the government is asking the private company to do.

She explained that in the case of a hospital, if the private company is only providing the assets to be used as the hospital, then they would not generally be expected to take on any risk. However, in some projects, most commonly transport projects, where there is a predictable revenue source, it may be possible for the private sector to accept some risk.

Workman also added that one of the key advantages of PPP is the ability for governments to access private sector finance and expertise, which allows them to move infrastructure financing off the government books.

“Another advantage is the private sector’s ability to bring innovative ideas and work more efficiently. PPPs provide governments with complete visibility of the full financial commitment required over the entire lifespan of the asset or contract (usually around 25 years).”

“In contrast to traditional procurement, where the government will be responsible for the maintenance of the asset, there is an increasing incentive to ensure the asset is designed to be efficient to use and cost-effective to maintain, bringing efficiency to the forefront of the project. This, in turn, should result in better assets for the government, while also minimising the overall cost,” Workman further explained.

Additionally, Kaur stated that PPPs could also be a way to resolve and reduce disputes compared to traditional procurement. With PPPs being a long-term relationship, the involved parties must take a longer-term view, and some issues or disputes can be managed in a less combative manner.

Armsby summarised that PPPs are also a crucial tool in developing local talent through knowledge sharing. PPPs can provide the opportunity for countries to develop and establish long-term expertise in-country, in turn leading to greater diversification and economic opportunities outside the oil and gas sector.

“Most countries in the GCC have issued – or are close to issuing – regulations for PPP, which provides good reason to be optimistic that PPPs will become more common in the infrastructure space in the coming years. This will lead to increased competition for expertise and investment across the GCC, which in turn will boost the business ecosystem across the region,” he concluded.

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