Oman to narrow down PPP plans

18 November 2015

Implementing public-private partnerships could be challenging, with questions around legal frameworks, bankability and the capacity of local banks

Oman is in the process of appointing a consultant to help it set up a public-private partnership (PPP) unit. New PPP laws are under study and ministries are considering which projects will be suitable and attractive for private investment.

But plans remain at a very early stage, despite the sultanate’s long experience in the utility sector. There are questions around legal frameworks, bankability and the capacity of the local banking sector to continue lending to major projects under more difficult economic conditions.

More expensive

Oman’s main motivation for embarking on a PPP programme ranging from healthcare and tourism, to transport and even sewerage, is fiscal. But over the life cycle of a project, PPP is more expensive, just pushing investment costs into later budget years.

It also takes longer to tender projects, and they must be brought to market carefully to attract the right quality of developers and financiers. 

The long delays that plagued Kuwait’s PPP programme should stand as a warning, given Oman’s urgent infrastructure needs.

The framework

“We are already establishing a framework for PPP,” Talal Suliman al-Rahbi, deputy secretary-general for the Supreme Council for Planning, told MEED’s Oman Projects Forum on 26 October. “The Higher Ministerial Committee for PPP, under the Royal Court of the Diwan, is working on PPP, with representation from the business sector. They are drafting the framework, as part of the new five-year plan.”

An international consultant is being appointed to advise on the issue. It will be fast-tracked and the first, simple, pilot projects could come to market as soon as the end of 2016.

The eventual structure will come out of the recommendations, as well as the role and responsibilities of the PPP unit and the government department.

The projects

No projects have been firmly identified as suitable for PPP, although internal plans have been drawn up.

More commercial, wholly privatised projects can already go ahead in the tourism and real estate sectors. They will be based on a model of infrastructure and public areas built by a government-related entity, with private investors taking plots for clearly profitable projects such as hotels, malls and luxury housing.

These are expected to include Oman Tourism Development Company’s (Omran’s) Medina Irfaan project and the Transport & Communication Ministry’s Port Sultan Qaboos waterfront scheme.

The healthcare sector is following a similar model, which has had some success in the UAE and will be seen as a solid investment for the private sector.

“Our focus is on the Sultan Qaboos Medical City,” Ahmed bin Mohammed al-Qasmi, director of planning and studies at the Health Ministry, told the Oman Projects Forum. “The government will do the project, but we will seek partnerships in certain areas. Possibly the private sector will build and run the hospitals, and we will buy the service. We need to see the direction of the government. How will it work? PPP has different models.”

Judging priority

Beyond this, civil servants are still considering which sectors and projects would provide steady revenue and good returns for the private developer. Affordable housing is a priority. In the transport sector, it is likely airports are more easily privatised than rail and roads.

“The public regards roads as free to use, so a PPP toll model would be difficult,” says a Muscat-based consultant.

“An annuity type project where the government pays an annualised sum is potentially possible, but when you start looking at performance indicators, it becomes more complex, necessitating a more complex PPP structure.”

The structure of projects in sectors outside utilities is more complex and variable. This is where the GCC has faltered in previous PPP attempts.

Attracting interest

The 2016-20 five-year plan should clarify Muscat’s intentions and allow developers to see which projects are open to PPP. But there should be an adequate level of interest from the private sector.

“Developers will want to know there is complete support from the government, land available and masterplanning to show how people in the area will use the asset over its lifetime,” says the consultant.

“If it’s a feasible project, banks will probably ask the private sector promoter for guarantees. Annualised revenue streams would need to be guaranteed by the government client.”

The financing

For banks, the key questions will be revenue streams, government guarantees and risk allocation.

Oman has the best track record in the GCC on tendering independent water and power projects (IWPPs).

“Oman has strong enablers; it is stable, investor-friendly and has a decent domestic population,” says Rajeev Singh, partner and Middle East and North Africa transaction advisory services leader for infrastructure and project finance at London-based EY.

“The government has a track record of being very sure what it wants to do once it gets moving.”

Liquidity concerns

But by the time the majority of schemes are at the financing stage, banking sector liquidity could be a concern. Major projects such as the $3.6bn Liwa Plastics and Sohar 3/Ibri independent power projects may affect liquidity. Deposits peaked in May and growth slowed to 6 per cent year-on-year at the end of September, while loan growth remained at 10 per cent. The credit-to-deposit ratio for conventional banks reached 100.2 per cent in September, and will only fall if lending slows in 2016.

US-based Moody’s Investors Services expects problem loans in the banking sector to increase from 2.3 per cent in 2014 to almost 3 per cent, while loan pricing will be pushed up by a greater need to rely on market funding.

“Liquidity in the short term will be a little bit of an issue,” says Singh. “But it will depend on the quality of the deal and the certainty of the revenue model. Lenders will just be that much more careful on due diligence.”

As usual, Oman will need to look to international financing and project bonds to tap other sources of liquidity. But as its economy slows, especially given the fragile global economy, debt will become more expensive and harder to secure.

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