Banking key fact
Egypt has led the way in the region with its landmark PPP law passed in May 2010
Over the past decade, a steady stream of advisers, bankers and lawyers have arrived in the region’s capitals, armed with a simple proposition: stop funding infrastructure and let the private sector take the strain instead.
That message is slowly being digested in markets from Morocco to Kuwait. Across the region, there is an urgent need to address an acute infrastructure deficit. Faced with rapid population growth, governments are under pressure to provide modern infrastructure to underpin the next wave of economic growth.
The advent of public-private partnerships (PPPs) in the Middle East offers the authorities an array of benefits, chief among them replicating private-sector efficiencies in the provision of public services.
Rise of PPP in the Middle East
Over the past couple of years, governments have become increasingly interested in developing PPPs. Egypt has led the way with its landmark PPP law passed in May 2010, directed by a PPP Central Unit that reports to the Ministry of Finance.
In the Gulf, Kuwait is working on a PPP law and has earmarked 32 privatisation projects to be undertaken by its Partnerships Technical Bureau. The schemes include the $3bn Failaka Island tourism development, the $7bn Kuwait metro, the $10bn national rail network, a large hospital project and five airport PPPs. The plans call for 40 per cent of shares in the project companies to be listed on the Kuwait Stock Exchange.
Egypt has a fairly good model contract that they are intending to use as a basis for most projects
Tim Armsby, Trowers & Hamlin’s Egypt office
In the UAE, PPP operators now run 176 schools in the cities of Abu Dhabi, Al-Ain and Al-Gharbia, piloted by the Abu Dhabi Education Council, which from an early stage sought to tap the expertise of the private sector in improving education provision. Saudi Arabia, meanwhile, is looking at introducing PPPs in its aviation sector.
PPP is not a new concept in the region. Several countries have already deployed PPP-style private financing arrangements in their power and water sectors, with Abu Dhabi and Oman stewarding successful independent power and water projects since the late 1990s.
|GCC PPP deals, by sector|
|(percentage of $54.4bn*)|
|*as at September 2010|
|Source: MEED Insight|
Whether these energy-related schemes can be regarded true PPPs is a subject for debate. PPPs are typically defined as medium to long-term contracts between a public sector contracting authority and a private sector provider for the delivery of specific public service.
“You have to draw a distinction between the more simple project financing deals and PPPs,” says Patrick Townsend, executive director at Bahrain-based Instrata Capital. “True PPP tends to be social infrastructure, schools and hospitals. Power is fungible – it’s not like a school, hospital or prison, where more of the accent is on providing good service delivery.”
|GCC PPP deals, by country|
|(percentage of $54.4bn*)|
|*as at September 2010|
|Source: MEED Insight|
The simpler evaluation mechanisms associated with power projects become less appropriate once private provision moves in to areas such as health and education. At that point, there is a requirement for more interaction with bidders during the tender process.
“Most general procurement laws will try and limit that interaction to avoid corruption and not prefer one particular bidder over another,” says Tim Armsby, a partner at the UK-based Trowers & Hamlin’s Egypt office.
“But if they want hospital projects to be built that meet the needs of doctors and patients, they will need the ability to discuss elements that will have a cost impact with bidders. Most non-PPP laws, even BOT [build, operate and transfer] laws will be quite limited in that respect.”
The key to success of PPPs in the Middle East and North Africa region will be a solid legal and regulatory framework. Most past efforts at PPP were transacted under existing procurement laws, largely designed to enable governments to make a one-off purchase of goods and services, rather than engage in long-term contracting.
“The level of performance monitoring is different,” says Armsby. “There’s a whole new level of complexity, which is why even for jurisdictions that have a track record of private sector involvement through BOT, it’s worthwhile taking a step back and reviewing the legislative framework.”
Most states now have some sort of PPP programme, although not all are moving at the same speed. Only a handful of countries have passed legislation, says Moazzam Mekan, Dubai-based manager of the International Finance Corporation’s infrastructure advisory.
Egypt PPP progress
Egypt has been at the forefront of the PPP drive in the region. Between 2011 and 2015, Egypt plans to use PPP across 33 projects totalling £E44.3bn ($7.4bn), of which 11 will be within utilities and 10 in education.
The driver behind Cairo’s PPP push is clear. Investment bank EFG Hermes estimates that Egypt needs $45bn-worth of investment in transport, power and utility sectors over the next five years. Private-sector participation is expected to be sought for some $17bn of this.
Several PPP projects are already being implemented, including two hospitals in Alexandria, sewage treatment plants in Cairo, Abu Rawash and Alexandria, and the Rod el-Farrag access road that will connect the existing ring road around Cairo with the Cairo-Alexandria highway. Two university campuses in Cairo are also planned and prisons are being looked at as potential candidates for PPP.
“Egypt has a solid programme, a functioning PPP unit and a PPP law,” says Mekan. “A number of transactions are in the works and will be put in market very soon or are already in the market.”
Egypt’s PPP projects were never intended be self funding projects. Under the PPP law, project agreements must be backed by government guarantees.
While doubts remain over the efficacy of Cairo’s tendering procedures, that Egypt now has a form of standardisation across sectors is seen as positive. “Egypt has a fairly good model contract that they are intending to use as a basis for most projects,” says Armsby. “The law itself is a benefit as it puts a clear legal framework in place, which gives lenders and investors more comfort.”
PPPs losing momentum in Egypt
But Egypt’s strong push on PPP may be delayed by the recent political turmoil. The PPP law, although passed, is not fully in force yet, with some underlying regulations due to be issued in the next few weeks. With Finance Minister Youssef Boutros-Ghali having being removed from office by President Hosni Mubarak in late January, there is a concern the PPP programme could lose momentum.
The head of the PPP Central Unit Rania Zayed sought to reassure bidders in early February, saying planned projects would be not be cancelled, but would continue on an adjusted schedule. Zayed also said the government would offer guarantees for equity providers.
Much of Egypt’s advance in PPP is down to Boutros-Ghali’s personal enthusiasm for private service delivery. “They had a dynamic finance minster who got the right person to run the PPP unit and who is very hands-on and has been able to pass the PPP law,” says Mekan. “But if you go down to the ministries, it’s clear that not all have converted their thinking. It’s really a top-down approach in Egypt.”
The same applies in Syria where the nascent PPP effort has been led by Damascus’ reformist deputy prime minister for economic affairs, Abdullah al-Dardari.
Cash-strapped governments in Syria and Jordan have alighted on PPP as an economically viable means of ensuring essential infrastructure projects are delivered on budget and on time. Syria is planning to spend at least $30bn on developing infrastructure, with much of this structured as PPPs. A series of transport projects have been touted as PPPs under the government’s 2011-15 five-year plan, including two highways from the Turkish to the Jordan borders, costing $1.8bn. A $400m ring road in Damascus and a $311m railway linking the capital to the Jordan border, as well as a new $466m terminal at Damascus International airport, are also in the planning stages. However, Syria needs to pass a long-awaited law providing a framework for PPPs if it is to meet its ambitious timetable.
Jordan’s draft PPP law is due to be submitted to parliament in early 2011 and is designed to boost infrastructure investment by ensuring project evaluation, adequate risk transfer to the private sector and proper accounting and reporting procedures.
There are, however, a number of challenges confronting PPP schemes across the region. In Jordan, several PPP projects have been withdrawn from tender following selection of preferred or shortlisted bidders, due to inappropriate or over-ambitious project scope, lack of preparation and project viability assessment and a failure to agree terms.
The long-delayed Mafraq-Ghweifat highway in Abu Dhabi is another case in point, highlighting the dangers of failing to structure PPP schemes properly from the outset. The lack of progress on the project may have undermined wider confidence in PPP as a way of delivering public schemes in the emirate.
“The problem with that is that it doesn’t give the right impression and leads people to think that PPP isn’t the right way to go forward,” says Joss Dare, a partner at UK law firm Ashurst, which is advising on the Kuwait Metro. “The real issue is the way poorly structured and administered PPP tender processes operate. If you put together a PPP proposal with a faulty allocation that the private sector runs a mile from, your project won’t work.”
Key challenge to PPPs in the Gulf
Having a PPP law in place is by no means a cure-all. Mekan identifies a lack of leadership in steering PPP as another challenge facing regional authorities.
“The motivation in some cases is that governments have budget restrictions,” says Mekan. “But the moment they start thinking about availability payments, it becomes a political process and they quickly realise PPP may not be as easy they’d like it to be.”
Governments have so far tended to go with the easier PPPs, focusing on airports and utilities, where they do not have to deal with major challenges on the tariff front.
Motivations for adopting PPP differ across the region. The idea of bringing private sector experience in to deliver better performance has gained acceptance in countries that are facing fiscal constraints. But there are also good reasons for cash-rich governments such as Abu Dhabi and Kuwait to go for PPP.
“In Kuwait’s case I don’t think it is sensible to try and build the metro or light rail system off its own balance sheet,” says Dare. “Just because you have money in the bank account, it doesn’t mean you should spend it all in one go.”
If the argument for PPP has been won, governments across the region now need to focus on making their infrastructure sectors more appealing to investors, contractors and lenders. Improving tendering processes will be key.
PPP has its critics, but it is here to stay. The massive scale of the infrastructure requirements in the region demands that private expertise be deployed to roll out the much needed roads, rail networks, schools and hospitals.