Dubai working on new law to stimulate private-sector infrastructure spending

05 October 2010

New regulations are the latest sign that Dubai is changing its development model

The Dubai government is working on a public-private partnership (PPP) law, as the emirate looks for new ways to fund infrastructure development after a fourth year of recording a budget deficit.

The law is currently being drafted with the involvement of the Dubai Electricity & Water Authority (Dewa), the Roads & Transport Authority (RTA) and the Department of Health & Medical Services (Dohms). All three government arms are currently planning to use the private sector for the delivery of infrastructure projects.

The government wants the legislation to be all-encompassing for any projects that are developed with the private sector

Source close to the legislation

Sources close to the government say it is unlikely the law will be finalised for at least six months. Once in place, it will act as a comprehensive piece of legislation for PPP in Dubai, including the independent water and power plant (IWPP) currently being planned by Dewa.

“The government wants the legislation to be all-encompassing for any projects that are developed with the private sector,” says a source close to the process. “Rather than putting in place something to cover the IWPP and then having to write more legislation for the RTA’s projects.”

Dubai revenues and infrastructure spending ($bn)
Development spending0.572.433.903.672.91
Total expenditure4.727.2110.3411.269.64
Budget surplus0.68-0.24-1.46-3.52-1.63
Source: Department of Finance

Another source involved in the development of PPPs for the RTA says: “We have already seen the first draft of the law to make sure that the RTA’s projects will fit within that framework.”

Once enacted, the law would enable Dubai to pass the costs of developing new infrastructure to the private sector, which the government then pays off over a concession period that can last up to 20 years.

That would represent a dramatic shift in the way Dubai funds infrastructure. Typically the emirate has funded new projects, such as power plants and transport schemes, through direct government spending.

“The government’s back is against the wall,” a Dubai-based banker close to the PPP plans says. “They don’t have the money to continue spending like they have been, so they have to look at other sources to fund infrastructure projects.”

Recent figures issued by the Dubai government indicate that a budget deficit of AED5.99bn ($1.6bn) is predicted for 2010. The government is also reducing the amount it spends on development as revenues fall.

“Introducing a PPP law will help to increase direct private investment, thereby reducing the need of government-related entities to raise capital and develop projects alone,” says Monica Malik, chief economist at EFG Hermes in Dubai.

The emirate plans to spend AED10.7bn, about a third of its budget, on development projects in 2010. This is down from AED13.5bn in 2009. The Dubai Metro has taken most development spending in recent years.

Dewa’s plans for an IWPP at Hassyan are the most advanced of Dubai’s private-sector projects, but the RTA has recently appointed advisers for a PPP water transport scheme that could be developed ahead of Dewa’s plans (MEED 3:10:10).

Although the introduction of PPP in Dubai is welcomed by the private sector, some concerns remain. Industry insiders say the debt problems of Dubai’s state-owned firms mean many private companies are wary of the government’s ability to keep up repayments on infrastructure and services provided by the private sector over the course of a 10- to 20-year contract.

“Clearly there are concerns about whether a Dubai government guarantee is bankable,” says the Dubai-based banker. Instead, a guarantee from a UAE federal government body, or an Abu Dhabi government body, may be required to reassure the private sector.

Abu Dhabi already has a strong reputation with private-sector companies for developing PPPs. Abu Dhabi Water & Electricity Authority (Adwea) has one of the most successful IWPP programmes in the region. It has also used the PPP model to develop several universities in the emirate and is planning a $2.7bn redevelopment of the Mafraq-Ghweifat highway using a PPP structure.

Kuwait is also working on a PPP law to get private-sector efficiencies into the provision of public services. It has identified 32 privatisation projects that represent a $28bn capital injection in Kuwait’s infrastructure.

Dubai government was unable to comment on the draft law.

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