The new PPP law introduced by Dubai is a step in the right direction, says STUART JORDAN*, who indicates that its success would encourage other governments in the region to follow suit.
A message for contractors, consultants, funders, lawyers and financial advisors: things are about to change! Dubai has just introduced a new law (No 22 of 2015) which sets out a framework for public-private partnerships (PPP) as a means of procuring public facilities and services. It is an important step for the Gulf region, which has not so far embraced this model although other states have similar laws in place.
Let’s consider what it means:
PPP has been around for more than 20 years and has become a common procurement model across the world. Instead of a public authority (such as transport or health or justice) commissioning new facilities (roads, hospitals, and prisons) with its own capital spending, the authority enters into a concession agreement with private sector companies for them to design, build, finance and operate the facility for the term of the concession. For this, the authority pays a regular charge and/or the concession company may generate revenue from individual users.
One advantage of this model is flexibility: the best PPP tenders encourage innovative responses. As with other legislation, selection is based to the most economically and technically advantageous tender.
So why has Dubai taken this step? Until now, the Gulf region has stuck to the traditional model of capital spending for public facilities, which historically they have been more able to afford. Perhaps this is a signal that the situation is changing due to the low oil prices. Limited public money and public borrowing limits were the main reasons for the original PPP model. There are other factors – good and bad – and we can look at whether they apply in Dubai.
Benefits: Apart from unlocking private capital, and the transferring of project risk to the private sector, the main advantage is the importing of private sector expertise and efficiencies in the procurement. It is thought that the private sector is simply better at managing risks in construction and operation; also, more innovative in coming up with new ways to do things.
The profit motive is powerful and this can result in better service provision as well as cheaper services. This is borne out when we look at the concession companies themselves. Across the world, they are typically a consortium of building-engineering contractors, facilities management contractors and institutional funders. Clearly, the private sector works by gathering true specialists together to bid for and to handle these concessions.
So can we say that this model is viable in Dubai? This new law is partly in recognition that the private sector expertise is strong enough in Dubai. There are certainly such contractor specialists working locally and ready to take on this role. Others will surely come as well. This is the case on the financing side as well: although the PPP model has not been much used, there is already a great deal of private project financing of power and water infrastructure in the region: built by the private sector under long-term offtake (supply) agreements with public utilities. These sectors are subject to separate existing laws and are excluded from the new PPP law. In the support roles, the international finance and legal firms have the experience from 20 years of PPP in other parts of the world.
Stumbling blocks: Firstly, all new things can go slowly and can go wrong. PPP deals in the UK were very slow and expensive to put together at first. The UK Treasury put out a lot of guidance on them and slowly the basic structures became standardised and market norms were established for key risks. Deals became much quicker and cheaper to do. Unfortunately for the lawyers!
Dubai will, of course, benefit from the lessons learned elsewhere but a lot will still depend on the ability of the public authorities to do good deals.
If public authorities are generally not as good at procuring projects in the traditional way, the adoption of the PPP model can exacerbate the problem as PPP deals are complex. This has been a problem in other places where concession companies are seen to be making “super profits” in the later years of the concession, with services costing a lot more than the equivalent facility procured in the old way. The private sector efficiencies will not necessarily accrue to the public side of the deal.
We understand that one of the first projects earmarked for the PPP model (at least as a bidding option) will be the Dubai Metro Red Line extension, so at least the sponsor is a big public body – Dubai’s Roads and Transport Authority (RTA) – with recent experience of big projects and of procuring similar facilities in the traditional way. This is bound to help.
The Dubai PPP law does provide that the public sponsor may take a stake in the concession company as an investor. This is an interesting twist, in that profits can come back to the public purse but it also means that project risk is not fully transferred. The big question is about control within the concession company: will the private sector allow strategic or project operational control (that is, in doing the PPP deal or operating it) to be shared with the party on the other side of the deal?
There are some uncertainties about foreign ownership and the required place for disputes resolution, which will no doubt be ironed out. The new law is a positive development and I would hope that its success will encourage other governments in the region to follow suit. If nothing else, it adds an option when considering commissioning new projects. Looking at it selfishly, as always, anything which encourages more projects is a good thing!
*Stuart Jordan is partner and co-head construction for the international law firm King & Wood Mallesons (KWM). Based largely in Dubai, UAE, he specialises in engineering and construction matters, cross border, both front end and disputes.