Growing signs of a softening of stance towards using private finance
- Low oil revenues and sustained infrastructure spending challenge budgets
- Kuwait and Dubai now have comprehensive PPP frameworks in place
- Qatar and Oman currently seeking advisors to develop PPP framework
Government entities across the region are reconsidering the adoption of public-private partnership (PPP) frameworks to fund infrastructure projects.
The authorities want to ease mounting pressure on budgets from lower oil prices and the need to sustain spending to deliver long-term economic diversification programmes.
A third issue, increased military spending, is also impinging on the budgets of states supporting the Saudi-led coalition in Yemen. In Qatar and Dubai, a fourth issue arises from the need to deliver a critical mass of their infrastructure projects within specific timeframe ahead of the 2022 Fifa World Cup and the 2020 Expo.
During the second week of September, Qatars Economy and Commerce Ministry is understood to have received bids from the Big Five consultancy firms for a PPP advisory role.
The potential for using PPP in Qatar is vast. It has a $125bn infrastructure investment programme to support its National Vision 2030 economic development plan. The $35bn integrated rail programme as well as the planned expansion of the newly-opened $15.5bn Hamad International airport and the Hamad Port are part of the countrys massive development programme.
Qatars move follows Dubais recent passing of a law to encourage private sector participation in infrastructure projects. PPP is considered a logical route for the emirate, which has lined up multibillion infrastructure projects ranging from airports to power, and whose main government-related entities (GREs) need new sources of funding for their projects.
The pathfinder project for Dubais new PPP framework is the Union Oasis project being developed by the Dubai Roads and Transport Authority (RTA). The 15,000 square metre mixed-use project has been modelled using a transit-oriented development (TOD) concept.
In Oman, the Supreme Council for Planning began preparing frameworks for private sector investment in affordable housing in May this year. Bahrain pioneered this concept much earlier in 2010, although its private-led affordable housing project only got off the ground three years later when Ithmaar Bank, partly owned by the master developer Naseej, agreed to invest $450m in the project.
Oman Rail has also began seeking advisors as it considers developing sections of its 2,135-kilometre railway network project using a PPP model. The entire project will require a budget in excess of $15bn, according to regional projects tracker MEED Projects, which if implemented without private financing, will cause a major dent to the sultanates already limited budget even prior to the sharp decline of oil prices.
Saudi Arabias aviation sector set a regional precedent with the development of the $1.2bn Prince Mohammed bin Abdulaziz airport in Medina using PPP. The kingdom is now currently prequalifying developers and investors for the second airport PPP in Taif.
Kuwait is the GCC state with the most ambitious plans for PPP. It is understood to be the only GCC state that has a comprehensive regulatory framework that is adaptable to other industries, with an independent agency, the Kuwait Authority for Partnership Projects (KAPP), overseeing all PPP projects in the country.
It is likely that not all countries in the GCC will follow Kuwaits all-encompassing PPP lead. However, most analysts and project finance companies agree that certain variations to obtain private funding will have to be introduced if the regional governments were to maintain a healthier balance sheet by avoiding major hits to their budget by tempering large-scale capital spending.
Outside the GCC, Egypt is one of the first countries to have adopted a PPP framework and like Kuwait, established an independent PPP agency. Egypts PPP Central Unit is now overseeing the tendering process for the Abu Rawash wastewater treatment plant. Jordan, for its part, has launched several PPP initiatives mainly for its airport infrastructure projects.
PPP use by other sectors
The PPP model has slowly gained acceptance in the regions power and water sector, with special purpose vehicles formed for typically 15-25 year concession agreements. However, it has hardly been used in other sectors.
A number of independent power and water projects (IPWPs) are currently under way or planned across the GCC. These include the 800MW third phase of the Sheikh Mohammed bin Rashid al-Maktoum Solar Park, the 3,200MW Sohar 3/Ibri independent power project (IPP) and Salalah IPP in Oman, the Al-Khiran and Al-Zour North 2 IWPPs in Kuwait, and the Fadhili IPP in Saudi Arabia, among others.
Much of the indifference towards PPP stems from the complex regulatory framework that needs to be established to govern a broader number of actors which could include project sponsors, consultants, equity investors, international finance institutions or export credit agencies, legal advisors, special purpose vehicles, lenders and contractors. The acceptance of PPPs in the oil and gas sector is primarily down to the affinity of the sector to long-term concession agreements, which hardly featured in the regions non-oil industries.
Another obvious reason underlying the governments indifference towards the PPP structure, however, was the availability of budget surpluses, which accumulated over years of high oil prices, to bankroll high-budgeted infrastructure projects.
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