REUTERS | Tobias Schwarz

PPPs in the Middle East: the new way forward?

Given the current climate created by declining oil prices, more pressure is being placed on government budgets in the Middle East. This month a new PPP law, specifically drafted to regulate partnerships between the public and private sectors in the delivery of projects, is due to come into force in Dubai. Could this be the start of the PPP as a viable project delivery model for costly government projects in the Middle East?

How does PPP work?

Although there is no one widely accepted definition of public-private partnerships (PPPs), in essence, PPPs typically constitute medium to long-term arrangements, whereby the public and private sector come together to deliver certain services to the public: very often in the delivery of economic infrastructure projects such as power plants, roads, ports or social infrastructure projects such as schools and hospitals.

Typically, the private sector bears significant risk and management responsibility in the execution and delivery of the project and remuneration is linked to performance: either through the collection of fees from end users of the project (for example, tariffs or tolls), by payment directly from the government, or by a combination of these methods.

The key players in the arrangement are a government body or other regulatory authority and the project company, a limited liability entity created by the private sector participants to undertake the specific project and protect its sponsors and shareholders. Lenders finance the project company and generally maintain review powers over the project through direct agreements giving them step-in rights. The project company engages the contractor to design, build and commission the project, and the operator maintains and operates the project over an extended period.

Dubai’s new PPP model

Other than water and electricity production, which is addressed in a separate legislative framework (Law No. 6 of 2011 Regulating participation of the Private Sector in Electricity and Water), most PPPs in Dubai have generally been undertaken on an ad hoc basis, without a specific PPP enabling law underpinning the delivery of projects. Law No. 22 of 2015 Regulating partnerships between the public and private sector (“Dubai PPP Law”) seeks to address this gap. It provides a legal framework for the public sector to enter into contracts with the private sector in the delivery of PPP projects. The Dubai PPP Law will come into force on 19 November 2015. Further ‘Resolutions’ will accompany the new law. However, they are still to be issued.

Which projects does Dubai’s PPP Law cover?

The new law intends to have a wide-reaching scope, with particular emphasis on infrastructure projects. For example, Article 6 sets out those factors which must be taken into account when selecting projects which are the subject of a PPP, including:

  • The cost benefit analysis of the project for both the public sector and the general public.
  • The economical feasibility and the extent to which it positively influences Dubai’s development plans.
  • The environmental risk element of the project.
  • How the scope of capital investment and technical expertise may improve the performance of public utilities and ensure the quality of services.

The Dubai PPP Law excludes projects related to water and electricity production covered by the existing water and electricity law; “works contracts and the supply of materials and services” covered by Law No. 6 of 1997 relating to Contracts of Government Departments (the supply of materials and execution of works on a smaller scale); and any other contracts which the government resolves should be excluded.

A ‘Government Entity’ is defined in the new law to include any government department, public authority or agency, including a Free Zone authority. The ‘Partnership Contract’ is defined as a contract made by a Government Entity with the ‘Project Company’ to perform the project in accordance with the new law. The Project Company is defined as a sole proprietorship or local or foreign company licensed to operate in Dubai to implement the Partnership Contract and which complies with the conditions set out in the Resolutions (yet to be issued).

The forms of Partnership Contract that may be entered into between the government and the Project Company include, but are not limited to, Build-Own-Operate-Transfer (BOOT), Build-Lease-Operate, management contracts and any other method determined by the ‘Supreme Committee’ (defined in the new law as the Supreme Committee for financial policy) on recommendation by the Government Entity.

Different Government Entities may approve projects, namely:

  • The CEO of a Government Entity, where projects have a total cost of AED 200 million or less.
  • Department of Finance (“DoF”), where projects have a total cost to the government of AED 200 million to 500 million.
  • The Supreme Committee, where projects have a total cost to the government of over AED 500 million.

Media predictions for future PPP projects in Dubai have included the expansion of Al Maktoum International Airport, the new Union Square station plaza and the extension of the Dubai Metro Red Line to the Expo 2020 site.

Tendering and selection criteria

Articles 12 to 24 of the Dubai PPP Law deal with selection criteria that are based largely on principles of transparency, free competitiveness and equality. Notably, a Government Entity may directly contract with a Project Company where the Project Company has its own proposal. In practice, this provision is likely to stimulate private sector involvement in innovative, ground breaking projects.

Provisions in the new law dealing with pre-qualification meetings with proposed bidders, financial securities and bidding processes largely reflect typical provisions under comparable procurement laws at UAE federal level. However, these provisions are to be linked to the further Resolutions which have not yet been issued. It will be interesting to see the level of prescription that will apply to these processes.

Project Company structure and the Partnership Contract

A Government Entity may elect to jointly participate in the project with the bidder, but this is subject to the Project Company being established as an LLC. If the Government Entity chooses not to participate by way of an LLC, the successful bidder must establish an SPV, the sole purpose of which will be to undertake the project. Further Resolutions are needed to clarify the requirements for SPVs. If a bidder is authorised to use an existing company to undertake the project, the approval of the DoF is required to ensure the company has the requisite financial and technical capabilities.

Many of the terms addressed in the Partnership Contract, including intellectual property rights, termination provisions and Emiratisation quotas, reflect standard provisions under comparable PPP contracts. Under the Dubai PPP Law, the term of the Partnership Contract is agreed between the parties, but may not exceed 30 years from the date of the execution of the contact. Any disputes arising under the Partnership Contract must be resolved in Dubai (by way of arbitration or otherwise).

Gaps in the new law

As the Resolutions accompanying the Dubai PPP Law are yet to be issued, the new law is currently silent on a number of matters, including:

  • How ownership of an SPV will work with the 49% restriction on foreign shareholding under the UAE Commercial Companies Law. For example, will further legislation be passed to alter the local ownership rule or, as seems more likely, either the government will mandate that a Government Entity holds 51- 60% of the shares in the SPV or a consortium is formed with local (UAE or qualifying GCC) investors having a majority interest.
  • No specificity is given on the licensing requirements of the SPV. Further legislation may clarify this or it may be that SPVs will be required to be licensed in the ordinary way by the Department of Economic Development.
  • Whether the Dubai government will issue government guarantees to secure the offtake payment obligations of the contracting Government Entity.

PPP in the region

At present there is no similar PPP legislation in place in Qatar, although a number of projects based on a PPP delivery method have been undertaken there, including a recent project to procure the construction of workers’ accommodation. A working party in Qatar’s Ministry of Economy and Commerce is in the process of assessing existing PPP models in other countries with a view to developing draft PPP legislation in Qatar.

A structural shift in Saudi public spending plans has recently been mooted with the country increasingly looking at using shari’a-compliant PPP to finance its infrastructure plans, particularly in transport, education and healthcare. Supporters of PPP point to its successful implementation in the new US$1.2bn Prince Mohammed bin Abdul-Aziz International Airport terminal in Medina. Opened in July 2015, it was constructed by a consortium including Saudi and Turkish contractors, under a 25 year Build-Own-Operate agreement.

The government of Kuwait recently introduced a new PPP law (Law No. 116 of 2014) which supersedes the old law. This has seen a rise in the flow of deals, with requests for proposals for projects in the transport, health and education sectors hitting the market in Kuwait.

PPP – the way forward

To date we have seen and been involved with the delivery of successful PPP projects in Dubai that have been implemented under the existing water and electricity law, but without recourse to a PPP-specific enabling legislation. So why is a PPP law needed?

The introduction of the Dubai PPP Law demonstrates the government’s commitment to the private sector and shows that there is a clear road map for the development of infrastructure in the Emirate. It also provides an opportunity for the private sector to devise and propose projects. The provision of a clear legal basis for a project reduces the potential for conflicting laws and ambiguous procurement rules and practices. It is likely to strengthen investor, developer and lender confidence.

Pinsent Masons LLP Liz Mungara

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