Call for more clarity in Mena public-private partnership projects

Almost a quarter of the public-private partnership (PPP) projects launched in the region over the past 20 years have been subsequently abandoned, according to Meed. Its new study on the PPP market states that 23 per cent of the 80 PPP projects that have been brought to market in the Middle East and North Africa […]

Almost a quarter of the public-private partnership (PPP) projects launched in the region over the past 20 years have been subsequently abandoned, according to Meed.

Its new study on the PPP market states that 23 per cent of the 80 PPP projects that have been brought to market in the Middle East and North Africa since 1996 have failed without any deal being signed.

It said that the main reason for the failure is that governments fail to offer deal structures that are attractive enough to investors because they carried too much investment risk – either because the project scope was not properly defined, or there were inadequate guarantees over the likely revenues that would be generated.

The study, which did not include independent power and water projects, found that 49 per cent of projects brought to market had achieved financial close, and that the remaining 28 per cent that had not been abandoned “remain at different stages of development”, ranging from early-stage expressions of interest through to PPP contracts being signed but financial close not yet being achieved.

Land transport projects had experienced the highest failure rate, with projects such as the Mafraq-Ghweifat International Highway scheme in Abu Dhabi and the Saudi Landbridge projects among those that proved to be too expensive for PPP.

The Mafraq-Ghweifat scheme is a road project providing a 327km-long link to the Saudi Arabian border that was initially due to be delivered via PPP. The Department of Transport abandoned this plan in 2011 and decided to fund the scheme through its own resources. It is being delivered by Abu Dhabi General Services Company, Musanada, which said this month that the Dh5.3 billion project is now 72 per cent complete. It is being delivered in six packages and is expected to be finished by the end of next year.

Andrew Jeffery, the managing director of Deloitte Mena’s capital projects division, said that PPP is still “less understood” in the Gulf than in more mature markets such as Australia, Canada and the UK. They had typically adopted PPP due to a scarcity of government cash, which has only recently become more of a concern in Gulf countries.

“That foreign ownership or investment is something that is quite new, it is a bit different and naturally it makes people more cautious. Rightly so.”

He also said that for potential investors who do not trade in US dollars (to which several Gulf currencies are pegged), changes in the cost of capital could also cause projects to falter.

Despite this, he said that as the PPP market matures in the region and more formal laws are introduced, the success rate for project closures will improve.

“I think there will be lots of GCC members looking at Dubai to see whether or not it works. If they can successfully deliver PPP that blends expertise and finance, that will be the litmus [test] as to who else adopts it. I think Abu Dhabi will be quite close behind.”

Andrew Greaves, the GCC head of law firm Addleshaw Goddard, said that the tighter financial climate in which many GCC states find themselves has meant that “governments are much more open-minded to the market and to service providers bringing project finance for important projects”.

“In addition, there is a perception that you drive better quality and better value through a PPP model,” he said. “If you’ve got an operator coming in who is designing, building, financing and operating the product, he is going to want a quality, fit-for-purpose facility so he maximises his return.”

mfahy@thenational.ae

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Source: Business

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