Governments refocus on public-private partnerships
Tightening fiscal space broadens Middle East opportunities for public-private partnerships once again
Outside the power and water sectors, public-private partnership (PPP) projects have had only limited success in the Middle East and North Africa (Mena) region, particularly in the wealthy GCC states, where abundant oil export revenues underpin capital spending by the government without the need for financing support from the private sector.
The fall in oil prices in 2014 has seen the picture changing as lower oil revenues have forced governments to seek alternative ways to fund infrastructure projects. And the regional pipeline of PPP projects has swelled as countries such as Saudi Arabia and Oman – which have 100 and 49 PPP schemes, respectively – have identified private finance as a vital enabler of their development programmes.
In 2020, the Covid-19 pandemic and retreat of global oil prices below the $50-a-barrel mark are providing further impetus for the region’s PPP programmes.
“The tightening fiscal position of most GCC countries means that all expenditure, in whatever guise, will be reconsidered,” says partner at US-headquartered legal advisory firm Bracewell, Andrej Kormuth.
“This will no doubt affect planned infrastructure and potentially under-execution projects as most GCC governments hunt for savings in their budgets.”
Pandemic and PPPs
While widening budget deficits have “certainly increased the desire to do more PPPs,” as one Dubai-based senior finance executive tells MEED, none of the short- to mid-term scenarios are straightforward.
Project activity slowed significantly in the first half of the year as governments focused on the emergency response to the Covid-19 pandemic.
Priorities are being reassessed on the one hand, as investor appetite for risk is declining on the other. Governments will have to balance the need to kick-start their post-Covid-19 economies in order to protect and create jobs with the imperative of avoiding fiscal stress, notes Muneer Ferozie, regional manager and head of Mena transaction advisory services at World Bank’s International Finance Corporation (IFC).
As attention returns to infrastructure development in this tighter fiscal environment, regional governments are coming to freshly appreciate PPP models and their potential to defer capital expenditure through multi-decade amortisation.
“Gone are the days when any government has the surplus spending power to pay for infrastructure developments in a lump sum amount or short milestone payments, as would be the case under the direct engineering, procurement and construction (EPC) model,” says Kormuth.
An increased PPP pipeline does not necessarily guarantee that more projects will be successfully procured or delivered, however, unless countries ensure that their national PPP frameworks adequately support their proposed project models.
Projects like the Saudi Landbridge and the Kuwait metro have been in the planning stage for more than 10 years, during which time the procurement model for each has shifted between the EPC and PPP models in line with oil prices or sector restructuring schemes.
In 2018, Dubai’s first PPP project – a car park and cassation court building at Dubai Courts – stalled following the collapse of India’s Infrastructure Leasing & Financial Services, a project sponsor. Despite a sovereign guarantee offer, the planned Dubai Metro transit-oriented development is also being retendered after a long, unsuccessful negotiation with the preferred bidder.
In Saudi Arabia, the build, transfer, operate contracts for four regional and domestic airports, awarded in 2017, remain on hold.
“The reality is that PPPs face challenges everywhere, even in some OECD countries,” says director of World Bank’s infrastructure finance, PPPs and guarantees group, Imad Fakhoury. “PPPs need an enabling ecosystem with strong institutional set-up and significant buy-in from all stakeholders, anchored in strong communications with stakeholders, transparency, disclosure and political commitment from the cabinet level on down.”
Fortunately, countries in the region have increasingly recognised the specific demands of complex PPP projects and adopted – to varying degrees – policies and legislative, regulatory and institutional frameworks to accommodate them.
Some of the earliest countries to have enacted PPP laws or established PPP units include Morocco, Egypt, Jordan, Lebanon, Kuwait and Dubai; Oman joined the list more recently. Other countries, such as Saudi Arabia, are finalising their PPP laws or have updated their tenders and procurement laws to allow for more effective and transparent allocation and management of financial resources.
However, much more needs to be done. “It takes time, patience and dedicated expertise to develop an institutionalised PPP ecosystem and programme,” says Fakhoury.
Fostering an enabling environment requires “continuous and sustainable policy, institutional and regulatory reforms; capacity-building efforts; and proper infrastructure planning”.
This ecosystem must at once encompass and consider public investment management, financial commitments and contingent liabilities, explicit – and funded – government support mechanisms, and proper operational PPP frameworks.
According to Fakhoury, such ecosystems help ensure governments have the capacity to establish whether a certain project is a good investment and then apply a filter to test whether it makes sense to deliver it as a PPP.
Picking the right projects is key. Some infrastructure schemes are simply too large to be delivered as pure PPPs.
“In a greenfield environment, the private sector is unlikely to take any risks related to ridership, fare and stakeholder-related issues,” a GCC-based engineering consultant tells MEED.
“The best compromise would be a design, build, operate and finance or a design, build and finance (DBF) model,” he continues, citing schemes such as Dubai tram and the Dubai Metro Route 2020, which utilised loans from Spanish and French banks.
Yet in terms of risk allocation, there is little difference for governments between implementing DBF models and taking on loans and executing projects on their own. Besides, as one Dubai-based financial transaction advisor notes in reference to the downturn: “It would be extremely difficult, if not impossible, to do DBF now.”
Alternative financing models also tend to undermine the wider rationale for PPPs, which is to incentivise the private sector to minimise the project’s costs and maximise efficiency by bundling services from the building, operation and maintenance of the asset through to its transfer to the government at the end of the contract.
“The PPP model helps transfer risks to the party that is best suited to handle them,” says Fakhoury, whose firm’s affiliate, IFC, has supported some of the region’s earliest PPPs, including Saudi Arabia’s Medina airport and Jordan’s Queen Alia International airport.
Some governments have taken a different approach. Abu Dhabi, which plans to procure $2.7bn-worth of infrastructure projects through PPPs, is piloting its approach with smaller schemes, such as a street lighting contract, in order to test the process and build confidence prior to moving on to larger projects.
Overall, there has been a growing focus on social infrastructure projects, particularly in Saudi Arabia and Oman.
Due to their size, these projects may offer more acceptable risks to long-term international and local lenders, yet caution is still advised in terms of their final financing structure.
“While some projects are too big, others may also be too small to succeed,” the senior Dubai-based financial consultant says.
While PPPs have undergone a protracted evolution in the region, their prospects look good.
“Most regional governments have either already implemented PPP legislations and regulations, or have investigated the approach well enough for it not to be a novel idea altogether,” says Kormuth.
“Previous downturns have steadily built towards more private business inclusive markets and the public sector’s view of PPPs as the bridge over essential infrastructure needs seems far more realistic than ever before.”