Since the drop in oil prices started putting pressure on Middle Eastern governments to cut subsidies, there has been a great deal of interest in public-private partnerships (PPPs).
But it is not just off-balance sheet financing that drives government interest in the PPP option to deliver their vast infrastructure needs; it has become even more urgent due to the regions demographics and the need for greater diversification into industry and tourism. The primary driver is the concept of allocating risk to the party best able to manage that risk.
Since Besix started operations in the region 50 years ago, GCC governments have demonstrated good forward thinking in terms of masterplanning infrastructure schemes. However, in our experience, some assistance is required when it comes to the long-term issues of implementing such plans.
Conventional tender processes for asset delivery tend to only consider capital costs and not the cost of the whole life cycle. Moreover, there is limited scope for the adoption of new technology due to the conservative design approach. Once constructed, there is limited capability in the public sector to maintain the infrastructure, or to find ways to adapt and extend the life cycle. Adding more infrastructure is usually the route chosen by governments in the region to meet growth in demand. This tends to result in assets being replaced sooner than necessary and absorbs time and money that could haven been invested in other necessary infrastructure.
Additionally, the GCCs rapidly developing population mean there is significant pressure on governments to deliver infrastructure faster. A PPP model can address these issues in the following ways:
- A well-structured PPP scheme takes into account the whole life cost of the asset being built, as the PPP structure will require facilities to be handed to the government at the end of the concession period in a pre-defined condition.
- The PPP operator is required to maintain the asset in good order to deliver on the long-term contract performance standard, and ensure there is no unforeseen early replacement of equipment/assets that would affect the projected financial performance of the PPP.
- The private sector partner can apply operating skills to integrate new technology during the life of the concession to sweat the assets. This is possible wherever the owner within such a concession can work with the operator to devise low-cost enhancements that improve efficiency without compromising the durability of the infrastructure.
- The governments role should be that of a regulator, ensuring legislation and regulations are in place to facilitate the PPP, which also protects the interest of the end user. After all, the government is the guardian of the peoples interest.
- Funding from private investors will continue to grow as governments begin to remove subsidies. This will allow services to be provided through the PPP model, which in turn generate a revenue base that is as close as possible to a user pays model.
So why do we believe PPPs are likely to increase in popularity in the GCC?
Over the years, Besix has observed that an increasing number of GCC government departments are becoming more acquainted with the benefits of PPPs. In our experience, when the government is a shareholder in a special-purpose vehicle, it provides reciprocal comfort to all the stakeholders, which in turn ensures the longevity of the scheme.
Some key developments that support the growth in PPPs include the fact that GCC governments have, over the years, built up the capacity to be able to translate their masterplanning into bankable PPP projects. The capability of the management in key public departments has also been improved in the past few years to fully understand the complexity of PPPs and the roles of the public and private sectors.
Many governments are now recruiting external consultants to devise appropriate PPP laws to allow them to accelerate the use of PPPs for a range of infrastructure requirements. Private firms with extensive experience in the region are therefore able to commit in the long term to PPP schemes.
The funding sources available to private companies are now also much more flexible since the post-financial crisis issues have settled down and there are wider options on debt funding available in the market to make projects affordable when risks are correctly allocated within a well-structured PPP.
Besix believes there is indeed added value for governments in the adoption of a PPP model for delivering enhanced infrastructure services to their residents and industries. Governments that see the connection between the various sectors of transport, power, water and waste management infrastructure will be the first to deliver on the expectations of their young population through well-developed PPP arrangements.
About the author:
Eryl Edwards is the commercial manager for Besix Concessions & Assets in the Middle East