Finance plans

Public Private Partnerships (PPPs) are emerging as a viable financing model in the region
By Elizabeth Broomhall
Sat 11 Feb 2012 09:44 PM

Despite Saudi Arabia being one of the richest countries in the world, a lot of its infrastructure is stretched to breaking point. To date, the Kingdom has managed to finance much of its national infrastructure schemes by itself. However, it has also led the field in the use of Public Private Partnerships (PPP), a financing model that is catching on elsewhere in the region.

Today, the state-backed Saudi National Water Company (NWC) has several short-term management contracts with international operators in Riyadh, Jeddah, Taif and Makkah, who are employed to manage the water cycles in these cities. “Water demand in Saudi is increasing year by year,” says Saud Rifki, the senior manager for NWC’s privatisation programme. “First you have the issue of population growth, and also we depend a lot on the desalination of water.”

PPPs provide a viable option for improving the water sector quickly, and for boosting the quality of customer services, he says. “We need to enhance the services to cope, and we need to do it quickly – we don’t have time to wait. PPPs are a quick fix, and are also good for knowledge transfer.”

In the wake of the Arab Spring in particular, PPPs have become ever more important to GCC governments, whose commitment to improving living conditions for their citizens is heavily reliant on a significant financial outlay and degree of international know-how.

However, it has not all been easy going. In Saudi Arabia, in particular, massive projects that were initially conceived under the PPP banner have been put on hold. Landmark projects such as the Dammam-Riyadh-Jeddah ‘Land Bridge’ rail link were initially planned as PPP initiatives. However, authorities dropped that plan two years ago, and are now opting to finance the entire project – at an estimated cost of $7bn — on their own. The same is true for the massive independent power and water desalination project at Ras Al Zour on the Kingdom’s Gulf coast.

Though the concept is not new — many of the region’s power and water projects have been running as PPPs for more than a decade — experts say the business model is now being applied across a broader range of sectors. Indeed, last year, Dubai’s Roads & Transport Authority (RTA) said some 30% of all transport deals would be offered as PPPs in a bid to spread the risk and cost of large projects, while Qatar’s Ministry of Business and Trade recently assigned a unit to examine PPPs as a possible source of funding for its infrastructure spree. Kuwait, potentially the most active in its PPP programme, spent a large part of 2011 earmarking new projects for private involvement.

“There is definitely a more positive attitude towards PPPs in the region now, particularly in Kuwait,” explains Charles Lloyd, partner and head of capital projects and infrastructure at PricewaterhouseCoopers (PwC). “They set up a PPP law back in 2008, but that has only really become a reality in the last year. They have projects in the market now.” Among Kuwait’s biggest PPP projects are the Az Nour power and water plant and the Public Rehabilitation Hospital. The Gulf state also plans to tender its national metro project as a PPP in the future.

Other changes in the last year concern the types of partnerships being chosen by authorities. According to sources on the ground, many governments are moving from shorter-term, privately-controlled contracts to longer-term, more government-led partnerships. “We are moving now towards what I refer to as localisation,” says Roger Eyre, director of management advisory services at Hyder Consulting. “In Saudi Arabia, they needed the support of the private sector to address the serious issues in relation to water and wastewater services, and they used the management contract model to enable the step change to take place. But going forward they are looking more at JVs. One of the drivers for that is the need to find employment for the local population, and to have more control.”

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The trend is likely to be GCC-wide, says Eyre, given the Gulf’s burgeoning population and the cross-state need to provide additional employment opportunities and to manage the facilities themselves. “We have also come across this in Oman. We worked with a wastewater company there which was established to take over responsibilities for wastewater for Muscat Municipality, and what they were seeking was self-sufficiency. They wanted to do it themselves.”

Government officials agree. Rifki says NWC is also eyeing longer-term partnerships, which guarantee the support of the private sector over a significant period of time. “We are venturing into a different thing now; we are not going with management contracts anymore. We want to have a real partnership. I do not want companies to come here and leave, I want them to stay for 20 to 25 years, as this is good for both parties.”

Unlike some other Middle Eastern countries, Saudi Arabia is not engaging in PPPs primarily for the financial aid, but more for the knowledge and proficiency that private firms can bring to the table. In other states and emirates, such as Dubai, there is a greater need for monetary support. “Historically, the bulk of the project financing in MENA has been provided by international banks,” explains Adrian Creed, a partner at legal firm Clyde, which specialises in project finance. “Now, most of these are finding it very difficult to continue supporting the regional project finance market in the same way as they have done in the past because of the limited liquidity and increased capital adequacy requirements being imposed by central banks in home jurisdictions.” As a result, many analysts are expecting an increase in PPPs in poorer countries and states.

“Some countries will do PPPs because they think it is the right way to do things, but other countries, particularly in the Levant [such as Jordan, Lebanon and Syria] are not cash-rich, and there is much more of an economic imperative to use PPPs,” says Lloyd. “I think we will see more activity in the northern part of the region, and possibly Dubai. Dubai is certainly talking about PPPs in the transport and health sector, and they have an economic driver.”

Lloyd adds, however, that there is no inclination towards PPPs in every area of the region, with some authorities veering away from these kinds of ventures as the negatives begin to emerge. In Abu Dhabi, the biggest PPP taking place in the emirate was recently abandoned for reasons which are still widely unknown.

“The market sees that as a lack of commitment to the PPP model, at least for new sectors,” he says. “I do not think there is an anti-PPP programme right across the board. There are some sectors, such as power and water, where PPPs have proved successful and will continue. I think the issue comes when you try and apply those principles to other sectors where the government is not used to procuring large projects on that basis.”

In other regions such as Qatar, the lack of PPPs is likely due to the need for a quicker project completion. Asset-intensive PPPs especially, which require a private firm to design, build and operate a large infrastructure project, as opposed to just running it, typically take a long time to turn around, say experts.

“Asset-intensive PPPs are big, complicated deals and they take a long time to do,” says Lloyd. “Countries such as Qatar, which have the World Cup coming up, are in a hurry, and given that they are cash-rich, they may decide to do it themselves. So I think that is a challenge for the PPP market.”

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