While public-private partnerships have increasingly been undertaken in the Gulf since the mid-1990s, the financing model has yet to become common place
PPP in numbers
1994: The year the region’s first PPP was signed: the Al-Manah IPP in Oman
$385bn: Amount Saudi Arabia plans to spend on infrastructure over the next five years
$28bn: Value of PPP projects in Kuwait in 2010
IPP=Independent power project. Source: MEED
As the region presses ahead with plans to develop much-needed infrastructure, many governments are showing an increasing interest in using public-private partnership (PPP) agreements to procure and build these projects.
Despite varying levels of wealth and different political systems, the states all share extensive infrastructure requirements, driven by strong economic and population growth. They also share low levels of private-sector investment and project delivery problems. PPPs are now viewed as an increasingly attractive option for overcoming these issues and for delivering projects.
[Mafraq] will make every government look at its infrastructure plans and how it should procure them
Project financier at an international bank
The PPP model has been used extensively in the region’s power and water sector since the signing in 1994 of the Al-Manah independent power project (IPP) in Oman, the region’s first PPP. However, until recently the PPP model has been used sparingly in other sectors.
In the past few years, the model has gained interest in the healthcare and education sectors and is now being planned for transport and housing schemes. The large social and transport infrastructure projects planned for the region under the PPP model will be welcomed by the region’s construction industry, which has been hit hard by the global recession.
Under PPP, pricing is more difficult, as the contractor and designer will form a consortium and price it accordingly
Karim Yazbek, Hill International
While the PPP infrastructure schemes promise to provide much-needed work for the region’s construction companies, the procurement method is still in the development stage and has many potential hurdles to pass before projects move ahead.
PPPs provide several benefits for governments by utilising non-public funding sources. Affordability is a key advantage of the PPP project model, which enables government funds to be allocated to other areas of need.
This is particularly beneficial for countries such as Egypt, Syria and Jordan, which do not have an abundance of natural resources with which to fund development plans. PPPs enable these countries to push ahead with key projects to expand their infrastructure. “Affordability for these countries is an issue, so paying over time for these large infrastructure projects is an option they wish to pursue,” says Mark Richards, partner at UK-based Berwin Leighton Paisner, which is involved in several PPP projects in the region. “They are looking to use PPP for the same reasons that the UK did in past years; they don’t have enough money to spend, short of raising taxes.”
Another reason for governments in non-oil exporting countries to support the PPP model is there is a significant amount of support for the schemes from international agencies, such as the World Bank and International Finance Corporation. These multilateral agencies are able to assist developing countries with procurement expertise and the delivery of projects.
PPPs also offer financial incentives for the oil-rich states of the region. The vast size of the schemes planned in these countries means that even with their significant natural resources, paying for everything upfront without private-sector assistance is unrealistic. This is particularly the case for countries, such as Saudi Arabia, which plans to spend $385bn over the coming five years to improve its infrastructure.
“If you add up the scale of the ambitions of the rich countries and you tot up what they have got in mind for their infrastructure plans, it would not make economic sense for them to attempt to pay that out of their balance sheet,” says Joss Dare, partner at UK-based law firm Ashurst, which is advising on the Kuwait metro project.
PPP project quality higher
The PPP model also tends to facilitate more efficient project delivery and a higher quality finished product.
Project delivery improves as private investors will not usually release payment until the project is complete. This prevents unnecessary cost and time overruns. It can also result in a higher quality of facility and services, as the private sector does not just have a vested interest during the construction phase of a project, but for the entire life of the project.
This is seen as a key factor behind Kuwait’s decision to launch some $28bn of PPP projects in 2010. With oil reserves and substantial government surpluses, it is the drive for efficient project delivery rather than finance that is behind the country’s ambitious programme.
Another reason behind the region’s increasing interest in PPPs is that the financing model transfers a large proportion of risk to the private sector.
According to MEED Insight, until August 2010, more than 90 per cent of the $50bn-worth of projects structured as PPPs in the Gulf were in the power and desalination sector. In recent years, this trend has started to change, particularly in Abu Dhabi, where PPPs have been used in the education sector to build new schools and universities.
In 2006, UAE government-owned developer Mubadala awarded a 27-year contract in 2006 for a new campus at the UAE University in Al-Ain. Since then, Abu Dhabi has also used design-build-finance-operate agreements for the New York University and Paris Sorbonne Campus projects.
Apart from the utilities, healthcare and education sectors, the PPP model has been used for few other construction schemes in the region to date. This is also changing, as there are currently plans and negotiations under way for several new PPP schemes in the Gulf.
Saudi Arabia is setting a precedent for the GCC aviation industry with its planned $2.4bn expansion of Prince Mohammed bin Abdulaziz International airport at Medina. This is set to be the first airport in the Gulf developed on a public-private partnership (PPP) basis. If successful, it could become the model for the kingdom and the wider region. Saudi Arabia also used the PPP model for the Red Sea Gateway port project in Jeddah in 2008.
Abu Dhabi is currently reviewing bids for the estimated $2.7bn Mafraq-Ghweifat highway project, the first road project in the region to be developed on a PPP basis. “Mafraq will really launch PPP infrastructure in the Gulf,” says a project financier at an international bank. “It is a groundbreaking transaction, so will take time, but it will make every government in the region look at its own infrastructure plans and how it should procure them.”
Egypt is following suit by tendering its 35-kilometre Rod el-Farag highway project, which will run between Cairo corniche and 6 October City, a satellite town. Prequalified contractors have until August to submit bids for the estimated $1bn scheme.
Another pioneering social infrastructure scheme to be procured using the PPP model is the low-cost housing programme in Bahrain. Some 5,000 housing units are currently being tendered and if successful this will be extended to cover the construction of 20,000 low-cost properties. The Bahrain housing scheme has the potential to offer governments in the region a private-sector answer to a shortage of low-income housing for nationals.
Two local bidders are in the running for the contract: Al-Moayyed International Group with a price of BD217m ($575m), and Naseej, which bid BD260m, although the two are understood to have lowered their prices in subsequent negotiations with the government.
Ambitious PPP plans in Kuwait
One of the region’s most ambitious PPP programmes can be found in Kuwait. The government set up the Partnerships Technical Bureau (PTB) in 2008 to implement 32 PPP projects worth about $28bn. The schemes include the $7bn Kuwait metro, the $3bn Failaka Island tourism development and the planned $10bn rail network. The PTB is expected to select an adviser for the railway project by the end of January. If the PPP model is successfully adopted as a procurement method for more projects in the region it will result in significant changes in the way that contractors will bid for work.
“It will have quite a big effect on the contractual process,” says Dare.
“You will be looking at a completely different framework. The structure of PPPs will most likely be in a consortium with other service providers, preferably operation and maintenance providers, or, for example, with railway operators if it is a metro project. This creates a new set of issues that they have to deal with.”
Contractors will not only be concerned with pricing buildings, but will have to think about structuring arrangements with service providers and the extent of the risk they are willing to take on the performance of these companies.
“Contractors will also have to take a decision on whether they are going to take equity in the project vehicle and all that goes along with that,” says Dare.
Karim Yazbek, vice-president for Middle East operations at US-based project management firm Hill International, agrees that the complex PPP procurement process will initially cause some challenges for contractors.
“Contractors are used to conventional procurement methods, where the price of construction is known, fixed and understood,” he says. “Under PPP, pricing is more difficult, as the contractor and designer will form a consortium and will propose a solution to the PPP and price it accordingly.”
In addition to pricing the construction, contractors will have to think about the long-term financing, how much they are going to pay the public sector for the concession and what rates they will charge the end-user. Despite the initial costs and complex tendering and structuring process, PPPs offer potential benefits over the traditional model to contractors.
“The attraction in the UK was that if you could cope with the big initial costs, you got a decent mark-up on it and a much better return on your money compared with the very harsh environment of fixed-price bidding,” says Mike Gibson, partner, Berwin Leighton Paisner.
Despite a growing interest from governments in using PPP for infrastructure projects, the model faces a number of challenges before it can offer a real alternative to traditional procurement methods in the Middle East.
A key challenge to the progress of PPP in social infrastructure projects is the availability of private finance. In its 2010 report, Building Blocks for Global Infrastructure, Berwen Leighton Paisner found that the availability of debt finance was the biggest challenge to PPP globally.
Those within the PPP industry feel that there is a need to increase usage of short-term debt, with governments taking on refinancing risk. At the moment, governments seem unwilling to share this risk and this issue will need to be resolved if PPPs are to flourish in the region’s projects market. Another challenge is the slow and bureaucratic tendering process in the Middle East that has stalled many of the region’s projects in the past.
PPPs are complex transactions and require effective and efficient tender processes to succeed. Some of the initial PPPs in the region have suffered from delays and congested tender processes.
Abu Dhabi’s Mafraq-Ghweifat road scheme has suffered several delays as the emirate attempts to award the region’s first PPP road project. Three consortiums submitted bids to develop the scheme on 24 December 2009, but negotiations with the first-ranked bidder are still ongoing as Abu Dhabi’s Department of transport seeks to get a lower price for the development of the project.
Plans to develop Saudi Arabia’s Medina airport as a PPP have also suffered from a series of delays and setbacks.
The kingdom’s General Authority of Civil Aviation has recently extended the deadline to 28 February for prequalified firms to submit bids for the estimated $1.5bn first phase of the airport project.
For PPP schemes to succeed in the region, it is vital that the structuring of projects and tendering processes are improved to avoid delays and cancellations.
As the Gulf continues to grapple with high rates of economic and population growth, PPP offers states an attractive option to execute infrastructure projects. It offers the less-wealthy countries an opportunity to proceed with vital development work, as well as enabling the rich oil producers access to expertise from the private sector and improve efficiency and delivery of projects.
Pioneering road and airport projects in Abu Dhabi and Saudi Arabia and the creation of dedicated PPP units in Egypt, Kuwait and Jordan show that the Middle East is serious about accessing private financing to upgrade their infrastructure.
But PPP is still in its early stages in the region and it will take time and perseverance before the model offers a credible alternative to traditional procurement methods.
“PPP plans are still rather sketchy and it is still an experiment for the region,” says Gibson.
With the scale of work needed to upgrade the region’s infrastructure, analysts see increasing the role of the private sector and utilising PPPs as the only way much of what is planned will be completed. As the region’s contractors are hungry for work following the economic crisis, they will be keen to see these plans succeed.