Private finance not a cost-cutting solution

06 October 2015

Government entities need political will to carry out PPP projects

  • Political will not budget constraints should drive public private partnerships (PPP)
  • PPP may not be suitable for rail due to length of tenor, complexity and passenger interface

Falling oil revenues and constrained budgets are not a good driver for public private partnership (PPP) projects, according to panellists at MEED’s MENA Rail and Metro Conference in Dubai on 5 October.

Government entities should not see PPP as a short term solution to lower budgets, but have the political will to commit to PPP as a way to manage a project over its lifecycle. PPP projects driven by a desire to reduce costs are often unsuccessful.

“There has been a lot of interest in PPP before; it goes up and down depending on the oil price,” says Khaled Amri, director, EY. “It is not just funding tool to bridge gaps, there are other reasons.”

“It is more expensive, but it is not only a matter of cost, you have to look at risks and the whole life cycle management for a rail project, meant for three, four, or five generations,” continues Amri. “It takes a lot of investment from the private sector, which they won’t do for free, and the public sector needs to be ready.”

Interest and opportunities for PPP, especially in transport in rail, are greater than ever before. However, the experts were not convinced that PPP was the best method to carry out rail projects in the Middle East. This is not only due to the extended timeframes to tender PPP projects.

“There is a very successful model in the power sector,” says Trevor Butcher, partner and head of finance for DLA Piper in the Middle East. “The key difference is the interface with the travelling public, the government should be very concerned to maintain this interface.”

The experts also recommended that rail projects be split into station, rail, and ticketing concessions on the successful model of the aviation sector. This would make massive rail projects more manageable.

Even Egypt, which has a well-established PPP law, has no experience applying it to the rail sector.

“In the power sector, each project is typical but in transport each sector is unique,” says Sameh Refaat, vice-chairman of Egypt’s National Authority for Tunnels, which manages the Cairo metro. “Should we start to prepare the private sector, and the customers who pay very low prices? Should we continue subsidising this? How do we transfer the PP model, if we have the political will?”

They also downplayed the importance of legislation in successfully implementing PPP, citing political will as the key factor.

“Having a good model will help, and the new Dubai PPP law removes some obstacles,” says Butcher. “It is broadly drafted and enabling, based on projects that have already been carried out. Specific legislation can be a problem when it is too rigidly drafted.”

Finance may also be challenging in the rail sector, where projects have extremely long life-cycles.

“Development banks and export credit agencies can support and fill the gap, especially for technology,” says John Mantzavinatos, senior investment officer for infrastructure at the Washington-based International Finance Corporation, part of the World Bank. “Commercial banks are quite restricted. Rail is difficult… with a 50 to 100 year life cycle there is a very long tenor.”

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