Finding a regional model for PPP
Investors require a concerted display of political will to engage in the hundred billion dollars-worth of planned PPP projects across the region
Sustained low oil prices between 2015 and 2017 drove many governments across the Middle East and North Africa (Mena) region to vigorously pursue economic diversification strategies. It also spurred a review of governments’ preferred procurement strategy for infrastructure projects, which until 2015 were predominantly funded by the state.
Similar to previous low oil-price periods, governments shifted their focus to public-private partnership (PPPs) contracts as a means to deliver major infrastructure projects, not only to safeguard their balance sheet from hefty capital expenses but also to strengthen the private sector’s role in their economies.
As a result, a raft of new projects, from schools to airports and railways, were launched as PPPs. According to MEED and MEED Projects data, the value of planned PPP projects in the Mena region now stands at $224bn.
Too much, too soon
A shift from traditional to private procurement should be treated with caution, says Alexandre Leigh of the PPPs and Privatisation Financial Advisory division of Washington-based International Finance Corporation (IFC), lead adviser for the $1.2bn Medina airport PPP project in Saudi Arabia, which entered operations in 2015.
“There is tendency in some markets to try and do too much too soon, or push too much risk onto the private sector, or develop waves of projects across many sectors in parallel, and within short timeframes without the appropriate capacity or regulations to support them,” says Leigh.
This tendency creates a potential crunch from the lending side, which can slow the pace of project progress.
“One should not assume there is infinite liquidity as both investors and lenders – particularly international ones – have the choice to invest in different countries or regions,” says Leigh.
“This is especially true given the lowering of sovereign credit ratings in some markets in the region, which has diluted interest from some lenders to operate in these same markets.”
Need for PPP guarantees
The delay in financial closure for the four airport build, transfer, operate (BTO) contracts that Saudi Arabia’s General Authority of Civil Aviation (Gaca) awarded to a team of international and local contractors in early 2017 confirms Leigh’s assertions.
These projects, which involve the redevelopment of existing airports in Yanbu, Hail and al-Qassim, as well as a new international airport in Taif, were expected to reach financial close in the first half of 2018.
However, unlike the successful Medina airport BTO contract executed in 2011, the risk of payment for these four airport projects is understood to have been transferred from the Finance Ministry (MoF) to Gaca.
“Risk of payment being transferred to Gaca instead of [the] MoF could work if Gaca will have control over its revenues or cash and if it were rated by international agencies,” a Saudi-based banker tells MEED.
“Sponsors or lenders, particularly international ones, would want to ascertain Gaca’s capability to meet termination payments.”
Similar issues pertaining to sovereign guarantees are magnified for multibillion-dollar projects such as the Saudi Landbridge and Kuwait Metro, both of which have been at the planning stage for more than a decade, during which their procurement model and ownership have changed multiple times.
While local banks have enough liquidity to support smaller projects such as a school or small airport, rail projects usually require the participation of international banks, which demand contractual commitment from the government.
“Local banks would tend to accept any semblance of support from the government, [but international banks] would not necessarily rely on a view that the government would support a project despite not being contractually liable,” the Saudi-based banker tells MEED.
“PPP projects have to be connected to a functioning economy and viable projects, and at times viability is linked to some form of government subsidies.”
The planned metro projects in the region – particularly in Saudi Arabia, where they fall under the remit of different municipalities – could face similar issues.
Unlike in other countries, where municipalities are regarded as good as sovereigns, potential investors in the region may want assurance from the treasury or a similar central government department in order for PPPs to work, says a senior consultant with a UK-based firm, who has advised on PPP projects in Saudi Arabia.
“Contractors want confidence not only that payments will be made, but also that they will be made in a timely manner,” he explains.
PPP uptake challenges
PPPs accounted for under 5 per cent of the estimated $3.2tn-worth of contracts awarded between 1998 and 2018 in the Mena region.
Even then, conventional and renewable energy and water projects dominated the PPP contract awards, leaving transport and social infrastructure projects such as schools and hospitals largely on the peripheries of the region’s private procurement landscape.
Reasons for the low uptake of PPPs in the transport sector range from the significant investment they require, and for which sovereign guarantees are seen as necessary, to the lack of appropriate regulations and the considerable risks arising from these countries’ limited history in running successful public transport infrastructure programmes.
Measures such as the introduction of new PPP laws are expected to help mitigate these risks and lead to the successful execution of these projects.
Several countries in the region have already adopted – or are in the process of finalising – their PPP laws. Dubai and Kuwait have already enacted PPP laws, while Oman and Saudi Arabia are finalising legislations of their own.
Egypt, Tunisia and Morocco have likewise adopted PPP legislations and established PPP units.
Saudi Arabia’s draft public sector participation law intends to provide financial support in the form of guarantees and subsidies, in addition to clearly identifying the powers and functions of various agencies involved in the programme’s implementation.
According to IFC’s Leigh, such measures can help boost investor confidence, especially in markets where the existing regulatory frameworks “are more suited to a public procurement model and ill adapted to deal with the flexibility required for a PPP, or does not address bankability issues that any reputable international investor is going to require”.
Such measures can prove effective in unblocking projects that might otherwise stall, or proceed on less favourable terms.
“Any form of explicit or implicit financial support demonstrates the commitment of the government to ensure the success of the project, especially when the contracting counterparty is not creditworthy on its own, which is often the case,” he says.
Analysts agree a lot of work will be required – including a review of all existing investment-related regulations – to ensure the final PPP legislations do not conflict with these and will not hamper the implementation of future projects.
However, the nature of a project, as much as the existence of appropriate regulations, plays an important role in determining successful outcomes.
“You cannot use PPP to make a bad project look good,” the UK-based consultant tells MEED.
“There are many projects that do not get past the study phase because of the absence of a good economic case.”
He adds that stakeholders need to learn to manage impatience and frustration, particularly on large projects. “Negotiations for the first PPP project in any sector will always take time,” he explains.
“There is always a risk of prolonged negotiations. That is why you need a long-term vision and a concerted display of political will to follow through on projects – not just words, but the kind that is worth the investment to hang around.”
Here to stay
The rush to launch PPP projects since 2015 has not eliminated fears that stabilising oil prices will set many of the planned projects back to state-funded or traditional procurement yet again.
History is clearly on the side of many contractors, which are betting against the region’s ability to break with the ease and speed that traditional procurement affords as well as its aversion to impose fees in exchange for public services to cover debt.
After all, interest in PPPs over the past decades have tended to rise and fall, albeit in inverse proportion, to oil prices.
The Saudi-based banker, however, thinks otherwise. “When was the last time Saudi Arabia increased gasoline prices and removed subsidies? The admission of reality is leading to economic reforms and they are in the right direction,” he says.
A growing population and high unemployment rate especially among the youth also reinforce the economic imperative for PPPs, says the UK-based consultant.
“Governments will push ahead with PPPs because they want to strengthen the private sector,” he explains. “There is growing acceptance that young people want to go into private entrepreneurship and that the old, centralised procurement system cannot create jobs quick enough to absorb young people entering the workforce.”
Indeed the ongoing discourse shows that neither PPP nor traditional procurement can exclusively deliver the region’s multibillion-dollar infrastructure needs.
What appears to be a desirable recommendation is for governments to help develop an optimum environment for PPPs to succeed, where they offer the more suitable solution. Doing this will increase the likelihood of each country meeting their long-term economic diversification objectives.