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Analysis

Analysing Dubai’s new partnership programme

Dubai’s new public-private partnership law aims to draw foreign investment and international expertise to the emirate’s infrastructure market.

By Stuart Matthews

There’s a new law in town and it has investment in its sights. Where once the development of large-scale infrastructure was solely the purview of government, the door is now open for public-private partnerships (PPP) to push Dubai forward.

The emirate’s new PPP law was passed on 20 September 2015 and entered into force on 19 November. If it can catch the eye of construction consortia it may herald a new era in the way projects in the emirate are developed, providing new opportunities for contractors agile enough to take advantage of them. The law is a broad piece of legislation and while observers may be keen to see what additional resolutions will come to pass, the message the law sends is clear enough: Dubai is open for business.

“The law allows foreign businesses essentially the opportunity to put a different slant on the construction of infrastructure projects,” says Simon Hobart, group general manager of the Links Group, which provides a corporate local partner for construction firms.

While Dubai’s development has been rapid by global standards, it has primarily been funded from government coffers. The new law opens the door to alternative forms of funding and procurement and could add greater pace to the market, bringing a wider diversity of projects into play.

“They’ve been doing electricity and water projects for years, with infrastructure being government funded” says Hobart. “I think what they are looking at now is a different, better and cleaner way of doing it. The introduction of a PPP procurement process not only brings foreign investment in for a project, but also allows them to bring expertise into the market.”

While government agencies may be keen to look at more innovative ways of pricing work via a PPP model, such a financial structure could still form part of a standard tendering process. This could see a mixed tender with the winning bid selected from a conventional contract or a PPP model, pitted head to head. Either way the emphasis will fall on bidders to come up with innovative financing strategies in order to win business.

As there may only be a small number of companies globally that could put together a PPP model for the largest of projects, Dubai could find itself attracting the biggest and best companies from around the globe to come in and build its next wave of infrastructure.

“Larger projects will be where consortia come into their own,” says Hobart. “That is probably the biggest enticement to companies; they can come into this market and really make their own money from it.”

It’s a model which could herald a shift from what has been a very price conscious development since 2009. With future profit up for grabs, it may no longer be a case of simply being the cheapest tender in the bag. The PPP model may encourage expertise and management to come in and run projects to a higher standard, since they will have a stake in the finished product.

“Let’s not get away from the fact that a PPP model should give a good return to the consortium financially,” says Hobart. “They’re not doing it for a margin, they’re doing it to make decent money on their investment, so they will have a different financial model to someone who just wants to get the job built quickly.”

A new era for projects

While the law may kick start a new style of project development in the emirate, it is not a new idea. The prospect of such legislation emerging has been on the table for half a dozen years or so, as the government has explored new ways to fund projects.

“Dubai specifically has been looking at alternative forms of procurement for a while and there are obvious reasons for that,” says Tim Armsby, partner and head of energy and infrastructure, Middle East for law firm Eversheds. “Dubai has been very successful in growing the city and the economy but most of that has been through traditional design and build type arrangements. Increasingly – and I suppose this is being driven in part by the global financial crisis and now what seems to be a period of sustained lower oil prices – Dubai is looking for alternative means of finance.”

While there may have been a willingness and a demand for PPP style structures for projects, the absence of a specific law has until now acted as a constraint. Attempts to purchase a project would have fallen under the general procurement law (number 6 of 1997), which, says Armsby,  follows the typical approach seen in many similar laws and is primarily aimed at the purchase of goods and services on a short-term basis.

“It’s not aimed at long-term contracts and generally the method of procurement is lowest price wins,” he says. “If you’re entering into a 25 year deal with someone, of course price is a consideration, but ultimately you want to be absolutely sure they are technically capable and you’re going to get the best possible service and partner.”

While the regulations held back PPP progress they also acted as a constraint from a market perception perspective. Without a firm framework in place there has been uncertainty in the market about how projects would be carried out. Awareness that there was a draft law in consideration for some time also raised questions about the willingness to use this form of procurement.

“I think that is one of the biggest benefits of the issuance of the law is that it’s now clear to everyone there is full support for PPP projects within government and that should yield a number of projects in the coming years,” says Armsby.

While Armsby believes that the opportunities this will create for contractors in the emirate are significant, there will be challenges ahead.

“If you look at the track record of these types of schemes in the Middle East and the GCC in particular, it has been dominated by projects in the energy sector, particularly power and water projects,” says Armsby. “So what you have at the moment is a large contractor and supply chain geared around independent water and power projects (IWPPs) and you have lenders and equity participants who are interested in taking the long-term stakes in these projects. When you move to another sector – particularly projects which are really more civil work – there might not necessarily be the technical components that you see in power and water projects. You’re moving into a different contractor and investor base and I think that will be the challenge at the moment for these first few projects.”

Regional initiative

The solution suggests Armsby is engagement with the developers, lenders, investors and the whole supply chain to make them fully aware of the opportunities and to get the market ready. It’s the kind of outreach the emirate is already seeing through events such as the Dubai Investment Forum, which targeted international investors and saw them briefed by directors from a number of the emirate’s key agencies, including Dubai Electricity and Water Authority (DEWA) and the Dubai Municipality.

“For those contractors and developers who get in early it’s a significant opportunity to diversify their business and gain a track record in types of projects that we will definitely see more of, both in the UAE and the wider GCC,” says Armsby. If the idea of PPP takes hold and the region gets a few successful projects under its belt, contractors who earn their stripes in Dubai may be well placed to push on to other countries.

“If you look at Kuwait they have struggled with their PPP scheme to date but recently replaced the PPP law to deal with some problems they faced under the old legislation,” says Armsby. “That has led to them tendering a number of projects attracting significant interest. Qatar is looking at a PPP programme, Oman is looking at a PPP programme, and Egypt has relaunched its PPP programme. Potentially there is a significant market both in the UAE and the wider region that contractors who have the experience, or want to diversify, can make the most of. There will be excellent opportunities.”

There is a clear desire for the legislation to also encourage innovation and not just in how the finances are structured. A provision in the legislations allows for unsolicited proposals to be put to the relevant authorities on a speculative basis. Put simply, this means companies with a bright idea can actively seek to have it adopted. While this may lure innovative ideas to the emirate Armsby cautions that more details are needed to be clear on exactly how such a proposal may play out.

“The so called unsolicited proposals is an approach we’ve seen in other PPP laws,” he says. “Generally you see a little bit more detail on how exactly that will play out. There needs to be a balance between encouraging the private sector to come up with ideas, which is obviously a positive, against ensuring that if the government decides to use that approach they are getting cost-effective solutions procured in a transparent manner, while also compensating or providing a price preference to the entity which initiated the idea.”

It’s a process already in action in Kuwait where the concept has led to the government tendering for an integrated solar combined cycle plant. The result is effectively a standard gas-fired power station but with a solar thermal component included, aimed at making the plant more efficient. Armsby describes it as an example of an innovative solution that has flowed out of that kind of approach.

“It is encouraging to see they’ve included that type of provision in the law,” he says.

The small print

While the legislation has yet to have detail added through resolutions, or be tested in action, the response to the framework has been positive. Observers say the broad nature of the law leaves the options open for plenty of flexibility in where it can be applied and for what kinds of projects. Importantly it has a clear mechanism on the approval process for projects, which will gives both the entities procuring the project and the private sector comfort.

That approval will come through the Department of Finance (DoF) which has pivotal role to play in the administration of any prospective PPP projects. This responsibility includes financial approval of projects that exceed the AED200m threshold for approval by any particular agency. Projects in excess of AED500m need the seal of approval from the Supreme Fiscal Committee.

“In effect the DoF sits at the top but then each government agency has to create its own PPP team to procure and evaluate projects,” explains Armsby.

Armsby suggests that means there will need to be a considerable amount of upfront training and preparatory work before individual government agencies will be in a position to procure projects.

“The exception is the RTA, because they are ready to go,” says Armsby. “They’ve got a well publicised pipeline of projects they want to do by PPPs, but other departments will need to either recruit or train people so that they understand fully how PPPs work in order to be able to identify suitable projects and procure them.”

Just how important this will be is demonstrated by how a lack of knowledge has caused a number of schemes around the Middle East to fail, says Armsby. “There hasn’t been an appreciation of how these projects work and how to value them compared to traditional procurement.”

“It’s important you’ve got a team of people who really understand how these work and are able to make decisions, otherwise there’s a likelihood that projects will not be specified correctly. You could face a situation where the risk allocation isn’t appropriate and that either means a tender isn’t successful or effectively you’re paying more for a project than you really need to because you’re forcing contractors to price for risk that best sits with the government.”

The thirst for knowledge is an important part of the new legislation, which emphasises the transfer of skills and experience from the private to public sectors. There is a clear desire to treat projects as an opportunity to train and develop agency employees’ skill sets in the area of project management and operation. As such, the key to winning projects may prove to be the ability to transfer knowledge. With the law in place and in force, many people will simply be asking what happens next.

“The headline is that this is good news,” says Sachin Kerur, partner and head of Middle East Region for Pinsent Masons. “We’ve probably got a sustained period of budgetary pressure for government ahead so anything that enables the private sector to take part in opportunities that otherwise might have been less forthcoming under these current budget conditions has got to be welcome.

“All areas all of the construction sector ought to be interested because it is broad ranging and it could mean that PPP is seen across a wide variety of infrastructure procurement.”

Kerur says that the fact it’s quite a broad general framework as opposed to a very detailed bit of legislation, means gaps need to be filled through further resolutions. Areas such as where the law intersects with things like the Commercial Companies Law and insolvency laws are all things which need to sit alongside the PPP law. There will also be questions about how company ownership and any potential joint ventures might be structured.

“What now needs to happen is there will be certain resolutions that need to be issued which finesse or promote the detail,” he says. “Now, whether people will await the next stage, such as resolutions or other aligned legislation to come out, or whether they will go forward and bring their ideas to government I’m not sure.

“There may well be some advantage in being an early mover in the field. That is probably quite sensible in many ways, but equally some will say, let’s just see what further details come out and get some of the questions which need to be answered sorted out.”

Kerur believes that the passing of the law clearly signals to the private sector that the government wants to develop infrastructure in a way that hasn’t been done before.

“It sends a really strong message as an enabling piece of legislation,” he says. “In terms of discipline, commitment, and a signal of sentiment, it’s a very good thing to have.”

Regardless of what laws are in place, for PPP projects to fly they will need to be bankable and rigorously structured, with a heavy dose of transparency. Contractors may ask the same questions as banks and other equity providers because, while it will be in the interest of contractors to have projects in the market, it is the equity providers and the banks who will need to be convinced that each one is created with sufficient rigour and demand. That demand will be key in shaping the first project to be carried out under the new law, whatever it may be. Social infrastructure may prove to be the easiest of target sectors, with high demand for education and healthcare facilities in the emirate. If PPP is put to use alleviating bottle necks in infrastructure development, then there will be plenty of reason to welcome the law’s passing.

 

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