Wednesday, 23 January 2019

Prospects for PPPs in the Middle East

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The Gulf and the wider Middle East should be a fertile ground for private infrastructure investment. By Ivan Woods, head of infrastructure advisory, and Holly Hyde, BDO Corporate Finance (Middle East) LLP.

Young and fast-growing urban populations across the region, together with a historical pattern of under-investment, have created significant pressure on regional governments to boost investment in infrastructure.

The current economic background – with increasingly constrained public budgets, and the desire across the region to bolster long-term economic growth and private sector employment – is also leading governments to encourage private sector involvement towards “basic” infrastructure projects and social infrastructure, and away from the less critical (typically real estate-driven) projects under way before the financial crisis.

In principle, such projects – including mass transit, ports and airports, utilities, education and healthcare – lend themselves well to public-private partnership (PPP) structures.

Indeed, project volumes announced in the region are enormous, with many intended to use the PPP model: notably in Qatar (with planned metro projects alone totalling more than US$25bn) and Abu Dhabi (US$68bn planned for its Surface Transport Master Plan). Kuwait’s Partnerships Technical Bureau is also putting forward a number of PPP projects across various sectors and Dubai, after some delay, is progressing with its PPP Law.

However, with exceptions in certain sectors, and also in countries where oil and gas revenues allow for government funding or support (and give general investor comfort), there has been a notable lack of success to-date in developing private sector infrastructure on a PPP basis.

A number of high-profile delays or perceived failures of regional PPPs have brought into question the potential for successful partnerships across the Gulf and the wider Middle East. This includes (still-unconfirmed but widespread) reports that the US$3bn Mafraq–Gweihat highway in Abu Dhabi will not proceed on the originally intended PPP basis, after taking bidders through a lengthy tender process, and a similar story for the US$10bn Landbridge in the Kingdom of Saudi Arabia.

The overall picture appears striking: that PPPs have simply failed to take off in the region, and when they are attempted, they often appear to be plagued with the same issues. Why is this the case?

The successes

We should begin with the positive stories of private infrastructure provision in the region, which should not be understated. There have been great successes in the power and water sectors in many countries (eg, the UAE, Saudi Arabia, Oman) that have brought significant private investment.

These have been generally model transactions (even if it can be argued whether they are strictly PPPs, given no interface with the end-user). Well-run and highly competitive bid processes have led to low-cost independent power/water plants, generally built to schedule and budget and operated to the highest standards. Project structures have passed on real risk (construction, technical and financial) to the private sector – as banks noted to their cost when construction prices were escalating fast in the region.

In addition, some countries including Egypt and Bahrain have closed significant PPP projects in recent years, and several (Egypt, Kuwait, Turkey) have formed central units to drive the PPP concept forward and expand its reach across different sectors. In North Africa, notwithstanding the ongoing political issues, Morocco and Tunisia among others are looking to PPP-type structures to encourage more – and more efficient – investment.

Madinah Airport in Saudi Arabia is another example of success. Although not yet financed, this was recently awarded after a hotly contested bid. The project passes significant risk – including traffic risk – to the developer, with a revenue share for the government going forward; a good example of how a well-structured project can succeed in the region.

Again, however, the problems cannot be ignored. Mafraq–Gweihat was considered a bellwether for PPPs in Abu Dhabi: given that last year the Emirate’s Department of Transport said that up to a third of the Government’s Dh300bn (US$81bn) of projects outlined in its Vision 2030 plan could be built using PPPs, its (reported) cancellation as a PPP is a blow to the UAE’s desire to lead the region in such developments.

So, are there clear reasons why the region has fallen behind and such high-profile projects have failed on a PPP basis? Or, to put it the other way around: how can the region learn lessons from these projects, to ensure PPPs can succeed going forward?

Key success factors

Many of the issues set out here are clearly not unique to the region; indeed most apply anywhere in the world for a successful PPP. However, it is not a case of simply trying to “import” PPP from a global template (even if one existed); regional factors must be addressed head on.

* Stakeholder alignment – A source close to the Mafraq–Gweihat project was said to have noted wearily: “Not many governments [in the region] are familiar with how PPP works … Obviously, it is hard to educate all decision-makers on the specifications of such a project.”

Getting buy-in on a PPP from the right people in the right parts of government is critical. This can be true in this region more than most: governments can be less “joined up” (to borrow one of Tony Blair’s more useful phrases) here than elsewhere, and a number of departments or individuals may have the ability to block an initiative, even at a late stage.

At its simplest, this means keeping all stakeholders fully informed – and educating them on PPP issues as needed – from the beginning of the project. It is also a question of aligning interests across relevant departments, to ensure that all understand the (potential) benefits of the PPP approach, and the differences from a conventional procurement.

In too many cases an adviser – or the lead government agency – can find itself fighting a rearguard action to defend fully-formed plans against criticism from people who may literally have never seen the details before.

To take a recent example, it isn’t easy to defend a value-for-money comparison at the eleventh hour to a sceptical official who is unfamiliar with the terms, let alone the concepts, and to whom the headline figures may understandably seem outlandish: “total project cost (including risk adjustments) over a 30-year concession period…” compared with the simpler metrics he is used to.

* Ensuring institutional capacity – A related issue is that many governments in the region have relatively little internal capacity to appropriately plan for the complexity of the project structuring, bidding and evaluation process.

As always, upfront planning pays dividends, but it can often be the case that a particular government entity pushes a project without considering all that is required, and ensuring the right concept is brought to market.

Putting in place a comprehensive PPP programme – legislative, regulatory and process – has been key to a number of countries’ success with PPPs. Projects implemented pursuant to a clearly articulated statutory framework are of course more likely to be attractive to private partners.

These programmes have successfully been led by central PPP units, preferably reporting to a Ministry-level committee across a number of relevant departments, and dealing directly with the project advisers. This helps in dealing with the stakeholder issues noted above, as well as in avoiding the ad-hoc planning (with occasionally abrupt changes in direction) that can delay or disrupt a project’s progress.

Similarly, choosing the right advisers early on – technical, legal and financial – effectively adds to a government’s institutional capacity, and the support available both internally and externally to successfully structure and “sell” a project.

* Choosing the right project – “Good projects will succeed” remains the mantra, in this region as everywhere. However, governments should choose their projects – particularly their first PPPs – carefully, to ensure that a robust programme can be built up before embarking on more ambitious schemes.

This appears to have been an issue with Mafraq–Gweihat as well as the Landbridge. Taking large, complex developments, with significant economic risk to be transferred to the private sector, as early PPP pathfinder projects is never straightforward. (That said, the US$1.5bn Madinah Airport has succeeded at least to award stage, so large PPPs are achievable if properly put together.)

Defining the project appropriately is also critical. This is important on the technical scope, but also regarding the principle that procurement should be based on output, rather than input, specifications: a principle easily forgotten, particularly in early projects, which can significantly reduce the PPP model’s benefits.

* Principles of risk allocation – Again, clearly not specific to the Middle East: it is always critical in a PPP to balance risks shared between the public and private sectors. However, learning the lessons of other regional countries on past failures is a good place to start.

Unrealistic risk transfer expectations can at worst make a transaction unfinanceable, and drive away potential bidders; at best, it will drive up overall project costs, as the private developer pushes up its return requirements to compensate. Regulatory and political risks – particularly in parts of the region, given the continuing impact of the Arab Spring – are obvious areas where governments cannot expect to pass significant risk to the private sector.

As well as the classic project finance “risks should be borne by those best able to manage them”, a particular factor in such a relatively new PPP markets is bidding risks for the private sector.

In a number of major projects in the region, bidders have been asked to prepare highly technical tender offers, and shoulder significant up-front bid costs. If projects are then cancelled or their scope significantly changed, this clearly represents a major disincentive to future participation.

Some reimbursement of bidding costs – at least where a project is cancelled, with the government partly responsible – should be considered: this is also a powerful incentive for governments to get it right first time.

* Bidding and evaluation process – A clear, robust and transparent tendering methodology should be ensured for each project, preferably on a consistent basis within a country (as far as possible). This has been true for most Middle East projects, but not in every case, and can cause much angst for unsuccessful – and even successful – bidders.

An unambiguous and well-structured RFQ and RFP process, including bidder interaction and setting out the government’s and bidder’s commitments during and after the tender, is an early sign to bidders of a government’s commitment and ability to complete the bid process expeditiously.

Similarly, a clear (and preferably simple) evaluation process should be adopted, to avoid potential conflicts on award of the PPP concession.

* Financing – Even in the midst of the ongoing financial crisis and the constraints in the banking market, it can reasonably be hoped that again “good projects will succeed” in attracting private finance – at least in the Middle East; North Africa is likely to rely heavily on multilateral funding for the foreseeable future, except for special cases.

The Middle East region itself is liquid, and there remains (to-date) appetite for well-structured and commercially robust projects from local and regional funders as well as international banks. Increasingly, as elsewhere, alternative sources of risk appetite (ECAs, multilaterals where available) will be looked to – but as always, the lesson is to first get the project right.


It is clear that the region’s infrastructure needs cannot be met through the public purse alone. PPPs across the world have – when properly structured and implemented – helped raise efficiency, created quality private-sector employment, and saved governments the upfront cost of major infrastructure investment.

The Middle East and North Africa has seen a number of cases where the much-publicised problems of some projects have been overcome: problems which, again, are not specific to this region and have arisen in most countries’ PPP programmes at some point.

With the right institutional framework and a clear understanding of the PPP model, we confidently expect to see more successes in regional PPPs going forward.

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