The right balance of risk allocation is the crucial element in public-private partnerships (PPP) in the GCC, according to speakers at the MEED Construction Leadership Summit in Dubai on 25 May.

“Why haven’t we seen the PPP projects that we have been expecting for years?” says Frank Beckers, head of project finance advisory at National Bank of Abu Dhabi (NBAD). “There has to be something in this for the public and private sectors and an attractive risk-return relation.”

Previous attempts at PPP have not found the correct level of risk. Some projects put too much risk on the developer side. Without good historic data on, for example, passenger numbers, to base revenue estimates on, private companies were unwilling to bid.

The Taif airport PPP project has been delayed, reportedly due to concerns around guaranteeing sufficient passenger numbers for the scheme to be profitable. In Dubai, the Roads & Transport Authority has offered revenue guarantees for PPP transport-oriented developments (TODs).

Other projects did not transfer enough risk away from the public sector.

“There has to be a certain risk transfer otherwise the public sector might as well do it themselves the quick, cheap way,” says Beckers. “There is an opportunity to push risk onto the private sector, even banks, but it comes at a price.”

As Basel III capital adequacy regulations are affecting banks’ appetite for long-term finance and liquidity constraints are raising loan pricing, the cost of borrowing may put off some government clients.

“Even the traditional European project finance banks are pulling away from project finance on their own balance sheets,” says John Iossifidis, head of corporate and investment banking at Dubai’s Mashreq bank. “As an alternative, investment funds and insurance are looking for long-term, fixed-rate sustainable funds for their investors.”

But investment funds seek the best returns globally for a certain level of risk. This means returns would have to be higher than current margins in the GCC allow, in order to be attractive in comparison with schemes in other regions.

The GCC’s new push to clarify legal frameworks could improve the outlook for PPP. Qatar and Oman are preparing PPP frameworks, and Saudi Arabia is expected to take similar steps.

“The laws and regulations are not really in place,” says Iossifidis. “Local legal frameworks are not so easily navigated, and risk allocation can be in the contract, but PPP frameworks would facilitate the process.”

Clear frameworks would also clarify the pipeline for developers, who commit significant resources to bidding on each project. An steady deal flow would attract interest for the region.