Aug 10 2012
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Public-private partnerships vital in GCC
Friday, Aug 10, 2012
Dubai: The six Gulf countries that have historically been investing state funds generated from huge oil windfalls in infrastructure and development projects, could take advantage of the presence of a more mature private sector by forging partnerships in executing infrastructure projects.
GCC nations are set to spend over half a trillion dollars on national development plans which aim to promote the growth of the private sector as well as significantly decrease the countries’ dependence on natural resources, according to a the report by Booz and Company, a management consultancy.
Building upon this premise, the report has found that one method of investing this money effectively — from both fiscal and development perspectives — is through the establishment of Public-Private Partnerships (PPPs).
The GCC has already witnessed several success stories in PPP projects, such as Madinah Airport, a 25-year $1.4 billion airport development project, and Taweelah A-2, an independent water and power project (IWPP) in the UAE with a capacity of 710 MW and 50 million imperial gallon per day (MIGD) of desalination that was built under a build, operate and own (BOO) framework contract.
According to the World Bank, annual investment and maintenance needs in the infrastructure sector of the Middle East and North Africa (Mena) is estimated at $78.5 billion. Private participation in infrastructure investment is estimated at $7.8 billion only, indicating the high potential for public-private partnership.
GCC accounts for about 10 per cent of the Mena population and 50 per cent of GDP but over 80 per cent of private infrastructure investment, particularly in Saudi Arabia, UAE, Qatar and Oman, World Bank said.
“Most countries (of the Mena region) developed infrastructure stimulus packages to sustain economic growth and weather the impact of the financial crisis but there is still a $30-40 billion per year deficit in infrastructure investment out of $100 billion of spending needs estimated by the Bank. Improving governance is critical to give confidence to private sector to (re)invest in infrastructure,” World Bank said in a recent report.
As collaborative mechanisms between the public and private sectors, PPPs have been successfully applied in myriad countries at all levels of development for over two decades. The combined value of PPP transactions on funded road, rail, buildings, and water projects worldwide between 1985 and 2011 reached $774.1 billion, including $353.3 billion in Europe and $187.2 billion in Asia and Australia. United States recorded $68.4 billion worth of PP transactions while Africa and the Middle East had seen 31.5 billion worth of PPP projects, according to a Brookings-Rockefeller report.
Over the past two decades more than 1,400 PPP deals were signed in the European Union, which represent an estimated capital value of approximately €260 billion. In 2010, the value of PPP transactions reaching financial close in the European market totaled EUR 18.3 billion, according to the European PPP Expertise Centre (EPEC).
“Indeed, by drawing in private-sector expertise and capital while adjusting the risk to the public purse, well-implemented PPPs can undoubtedly further advance the GCC’s national development agenda,” says the report.
The region’s private sector has matured over the last four decades and currently has the ability to partner with governments in large infrastructure projects. However, since the governments here are cash-rich, private sector partnership wasn’t felt so badly - something that is changing, especially in the face of global economic uncertainty.
For example, Dubai Electricity and Water Authority (Dewa) recently said it will partner with the private sector in building the Hassyan Power Plant - its largest single plant. Private sector will have a greater role in its future development plans.
“Given that the balance sheets of GCC governments are healthy, financial requirements are not the main driver for PPP projects,” says Atalla.
“Accordingly, the financial crisis did not increase the need for PPPs, but did however negatively impact the access of private sector investors to cheap sources of financing. This implies that GCC governments need to be very diligent in the selection and design of the PPP projects that they launch, to ensure that these projects do reach financial closure and achieve their economic objectives.”
There are a number of PPP models including Build, Operate and Transfer (BOT), Build, Operate and Own (BOO), design-build-operate-maintain, Operations and Maintenance as well as Long Term Lease Agreements.
When used in a rigorous and targeted manner, PPPs can ensure efficiency, speed, transparency, and economic impact in the delivery of services or vital infrastructure. In truth, the GCC countries’ particular economic profiles make PPPs an attractive transformation mechanism - helping governments better achieve their national development plans and introduce foreign capital into priority areas, the report says.
“PPPs can also improve national competitiveness by bringing in top-notch foreign companies with transferable skills and superior practices,” explained Atalla. “By encouraging legislative and governance changes, this mechanism will create an investment-friendly climate as well as enhance the delivery of services such as education and health.”
Furthermore, GCC countries’ natural resource endowment makes PPPs a development option rather than a fiscal necessity. “Thanks to trade surpluses and manageable public debt profiles, these nations have the relative luxury of selecting PPPs that will actively promote long-term economic development,” said Karim Aly, a Senior Associate with Booz & Company. “Today, the use of PPPs in the GCC is set to considerably increase with states such as Saudi Arabia, Kuwait, Qatar, and the UAE currently engaged in massive development programmes which aim to change their economic structures.”
However, the GCC countries need to develop a multi-sector road map which connects this mechanism to national developments goals.
“The GCC needs to use this rigorous methodology because it identifies where PPPs are most likely to succeed and helps their governments focus their limited specialized expertise in this area on high-impact projects,” said Aly.
“Similarly, the road map will alert investors to the government’s objectives and allow them to mobilize for upcoming projects.”
International Finance Corporation (IFC), a private sector lending arm of the World Bank, invested about $1.5 billion in 38 projects in the infrastructure space in the Mena region, with an additional $600 million mobilized from third parties. “There is an appetite for well structured deals in the region with multiple sources of funding available,” said the World Bank report.
PPP opportunities are spread across sectors (independent power producers, integrated water and power projects, solid waste, toll roads, urban transport, ports, airports, logistics hubs, wastewater treatment plants, schools, hospitals), but need to be well prepared and structured to attract investors, it said..
GCC governments certainly need to proceed with caution when implementing the road map. In particular, they need to carefully manage the fiscal consequences of PPPs in order to avoid long-term budgetary liabilities as well as build their capabilities to execute and monitor projects, the report says.
“GCC countries can improve the use of PPPs as part of their ambitious national development programs if they adopt the road map method. However, these nations must also consider that PPPs are not the answer to every development problem. Governments must therefore proceed with caution and complement the road map with meticulous assessments of the financial viability and fiscal impact of PPP projects, while building the public sector’s planning and oversight capabilities” concluded Atalla.
What are Public Private Partnerships?
There is no broad international consensus on what constitutes a PPP. According to the World Bank, PPP broadly refers to arrangements, typically medium to long term, between the public and private sectors whereby part of the services or works that fall under the responsibilities of the public sector are provided by the private sector, with clear agreement on shared objectives for delivery of public infrastructure and/ or public services.
PPPs combine the public and private sectors in projects that the state needs but that private companies can best deliver. In fact, experience stemming from countries who have employed this mechanism shows that the public sector reaps the following benefits from PPPs:
• Fiscal benefits: PPPs free public funds for other uses
• Risk allocation: When properly vetted and structured, PPPs allocate risk to the party best suited to handle it
• Economic benefits: PPP projects increase efficiency by accelerating the speed of delivery of services and improving service coverage and quality
• Technological benefits: PPPs facilitate the transfer of technology and know-how from the private to the public sector
• Social benefits: PPPs improve service coverage, quality, and timeliness.
By Saifur Rahman, Business Editor
Gulf News 2012. All rights reserved.
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