Public Private Partnerships (PPPs) have been the talk the market for over a year now as governments, consultants and contractors look for new ways to deliver projects.
Low oil prices have forced a rethink of how projects are funded, and it is inevitable that with government spending cuts in the key oil exporting markets of Saudi Arabia, Kuwait, Qatar and the UAE the private sector is being sought to bridge the funding gap.
Traditional PPPs appear to be the solution of choice for governments because they remove the initial financial burden of a project, and replace it with smaller and more easily affordable payments over a longer concession period. They are also not entirely new. In the power sector the Independent Power Project (IPP) model has been deployed with great success across the region, and for water the model has been used for desalination and waste water schemes.
Away from the power and water sectors, there are problems with this buy now and pay later approach. For the client, financing costs for the private sector are greater which means the overall cost at the end of the concession period is greater than if the government funded the project directly. This concern is widely said to have been the reason for various PPP failures in the past.
On the other side of the table, privately-held contractors feel that PPPs do not offer strong enough returns and the financial woes of the few listed construction companies in the region mean that the construction sector is likely to be a reluctant participant in the PPP market.
The market also needs more trust. Most contractors in the region have been told by large government clients, most notably in Saudi Arabia, that they have to offer discounts for the construction work they have recently completed. This is a move that has seriously undermined the construction sectors willingness to fund PPP schemes in the future. As one contractor says: If a client wants to renegotiate a contract signed less than two years ago, I do not want to find out what will happen with a 20 or 30 year agreement.
The cost of financing, limited returns and lack of trust would suggest that the prospects for PPP outside the power and water sectors in the region are limited. While this may turn out to be the case for traditional PPP projects with a project company that is awarded a concession by a government, the power of the private sector could be harnessed in other ways.
If a broader definition of PPP is allowed, then one of the most successful PPPs in the region is Dubai-based developer Emaar Properties. It is owned by the governments Investment Corporation of Dubai (ICD) and private shareholders who trade their shares on the Dubai Financial Market (DFM), and has been used – under the direction of the government – to deliver billions of dollars of new infrastructure for Dubai.
In fact, the Emaar PPP model has been so successful that it is largely forgotten that it is actually a partnership of the public and private sectors.
Emaar is not necessarily the model for every government or potential investor to adopt for all the regions future infrastructure requirements, but it does show that it can be done in the region if a looser definition of PPP is allowed.