New PPP laws just a first step

07 October 2015

Model requires political will and mindset shift to succeed

Excitement and caution over public-private partnerships (PPPs) abounded in equal measure during the recently concluded MENA Rail and Metro Summit.

Caution was offered especially by advisors in terms of the motivations driving the renewed attention given to PPPs by the public sector.

Lower government revenues due to low oil prices have been largely reported as the key trigger point for the re-emergence of PPPs in the agenda of most government entities.

The need to cust costs, advisors point out, is exactly the wrong motivation for turning to PPPs.

The coming into effect of a new PPP law in Kuwait in March this year and Dubai’s PPP law by November can be easily interpreted as a desperate measure to avert potential budgetary constraints in the coming years.

However, a closer consideration would reveal that these laws, or their revision, began being drafted prior to the oil price decline.

The Dubai Roads and Transport Authority (RTA), understandably a key stakeholder that pushed for the Dubai PPP law, has announced as early as 2011 and three years prior to the latest oil price decline, that it was hoping to undertake 30 per cent of its projects on a PPP basis.

While Kuwait is projected to experience its first budget deficit in 2014/15 for the century, it must be recalled that its first PPP framework was put in place in 2008. The poor response from investors, with only one scheme procured under the old PPP regulatory regime, triggered the revision that began in 2014. The old law, lawyers say, was too restrictive especially among Shariah-compliant banks.

One can then conclude that while the new fiscal scenario prompted the relatively quick approval of these laws, they nonetheless resulted from a broader intention by the government to increase private sector participation in the region’s economies where public infrastructure investments have been overwhelmingly dominated by cash-rich government entities.

These new laws are largely seen just as an important first step towards the right direction. Whether strong political will and broad acceptance among decision makers will follow the passage of these laws remain to be seen, given the complexities involved in negotiating long-term PPPs compared to traditional procurement methods.

Furthermore, the most crucial factor for the successful adoption of PPPs now seems to lie on governments’ strategic thinking to shift from acquisition  to total life-cycle costs orientation, which involve forecasting  the services, maintenance and operations costs over long periods of time.

What is clear is that only a fraction of the planned infrastructure projects in the region will be compatible with a PPP model at least within the existing frameworks, and, for Dubai, pending the release of its PPP law’s implementing regulations. This would be due to either the limited financial risks that lenders are willing to take on or the fear among government entities that PPPs could threaten their role or limit their stakes in the provision of infrastructure and services.

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