Low oil prices may have been the catalyst for the promulgation of the public-private partnership (PPP) law in Dubai but the legislation’s implementation is likely to hit snags even as the emirate seeks private sector partners and their ethos for some big ticket projects.
Through the law, Dubai will be able to invite private companies and investors to finance and operate assets that otherwise would have been funded by government budgets.
With oil prices dipping below US$40 a barrel this month, the time to rely on private sector money may be more urgent than ever before not only for the UAE but for all Arabian Gulf countries.
With the IMF warning that some regional economies could use up their financial buffers within five years as they face a combined fiscal deficit exceeding $700 billion between 2015 and 2019, the incentive to go for PPP is urgent. Even Kuwait has revamped its PPP law to try to attract more investors to its slew of projects.
“In a high oil price environment, there was limited incentive for the regional governments to use PPP structures outside of the traditional power and water sectors,” says Dubai-based Mario Salameh, the head of project finance MENA at HSBC bank. “We will be watching closely for signs that the mood is changing given the lower oil price environment and the additional pressure this brings when developing and funding infrastructure projects.”
Dubai’s new PPP law excludes the power and water sector, which has its own legislation. Dubai Electricity and Water Authority has awarded few IPP projects, the latest being the $1.8bn Hassyan clean coal power project in October.
Abu Dhabi Electricity and Water Authority already has Independent Water and Power Plant (IWPP) projects and so do other Gulf countries such as Oman and Kuwait.
Dubai’s PPP law, which went into effect on November 19, is just the start. Experts expect the Government to issue further supplementary regulations to define the remit of the PPP legislation, which is likely to cover various sectors from property to transport.
“The flexibility of the PPP law in Dubai, we believe, is what sets it apart from other PPP laws in the region and we welcome this,” says Maarten Wolf, a partner and and the Middle East infrastructure finance leader at the consultancy PwC. “However, with flexibility comes a lack of certainty, so government departments and agencies should be minded to be sure that when the law is not specific enough, the contractual arrangements should reflect the necessary regulation that is required for individual transactions to be bankable.”
A month before the law was introduced, the Road and Transport Authority (RTA) had announced its first PPP project, the new Union Square station plaza containing a number of towers that are set to be built above the existing Dubai Metro station.
The jury is still out whether a property project will make a successful PPP, experts say, due to the unpredictability of the cash flow.
However, the metro expansion is a good example of a PPP project, they add. The consortiums bidding to build the extension to the Dubai Metro Red Line will be able to use PPP models as part of their bids, the Dubai RTA’s chief engineer for rail operations, Shahrin bin Abdol Salam, said in October.
“For the PPP model to be successful, it is important to choose the right sector and project and clearly define the project scope and the risk allocation before launching it to the market,” says HSBC’s Mr Salameh.
“In addition, the bidding process has to be fair and transparent in order to attract high-quality bidders who will spend considerable time, effort and money to prepare their bids.”
In a PPP project, private financing is key. Now that Government deposits at local banks are dwindling due to lower oil revenues, national banks, which were always lenders of first resort to government projects, may not be able to hold the fort as they did in the past.
In addition, international banks are more and more reluctant to lend long term, especially since governments usually seek loans of 10 to 20 year tenure for projects.
“It is increasingly difficult to raise long term financing from international banks, especially at the historically attractive pricing that the developers and procurers have been used to in the GCC,” says Mr Salameh. “It will be interesting to watch the development of the PPP market in the region, specifically the willingness of governments to partially cede control over public projects to the private sector, with all the additional scrutiny this brings from the project finance lenders.”
Dubai, though, has the advantage of having all the elements to make a successful PPP. Banks, lawyers, engineers and accountants who have worked on PPP projects before operate out of Dubai.
Serco, for example, the company operating the Dubai metro in partnership with the RTA, is keen to take part in Dubai’s PPP projects, particularly in the fields of transport, aviation, defence and health.
“The most effective PPP examples can be found in markets that are stable and have long-term growth potential – these factors build confidence for both sides,” says Tarek Jundi, the managing director for corporate and business development at Serco Middle East.
“Ideally the law will include insight into the structure of PPPs and the timelines for them so that both the government and the potential investors and private sector partners can have a greater degree of certainty from a cost and performance perspective.”
For the French natural gas and electricity supplier Engie, formerly known as GDF Suez, the key to participating in PPP projects in Dubai is the quality and also the quantity of projects coming on line.
The company already operates several power plants in Abu Dhabi and the wider Gulf region and is keen to take part in Dubai’s PPP projects in the field of waste-to-energy and district cooling, for example.
“We think it’s a model where generally, a company like ours, we are very happy to work with because it is a good combination of local government, international parties, project financing et cetera,” says Lucas Hautvast, the chief executive of Engie’s South Asia, Middle East and Africa business.
“The law is the beginning, not the end. “What we would like to see as a developer and investor is that a lot of projects will come up.”