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20| pfi | Middle East Report 2010 Infrastructure

MENA govern- ments are well known for their efforts to adopt industry best practice models.

significant concern in a number of MENA jurisdictions. PPPs allow governments to “de-risk” projects by outsourcing key construction and operational risks to experienced private sector developers under the heightened scrutiny of their shareholders watching over their investment. In typical PPP tender situations, private developers bid a defined, non-renegotiable tariff and bear the risk of cost overruns during construction and operation, while their bids also need to withstand the test of rigorous due dili- gence and monitoring from project finance lenders and other commercial financiers.

The net result from the government procurer’s per- spective is a minimisation of construction delay and cost overrun risks, weaknesses for which public sector projects, on a global basis, are notorious. In addition, the unitary payment stream characteristic of most PPP proj- ects provides visibility and predictability for govern- ments on their future infrastructure expenses, which is critical given extraneous effects on government budgets in the MENA region. Abu Dhabi, Saudi Arabia, and Oman in particular are cases in point where jurisdictions have benefited from substantial interest from the private sector for I(W)PP proj- ects, forcing equity returns and financing margins to lev- els comparable with many developed markets. The result: many projects have become near commodities with bidders compressing capital and operating expens- es to bare minimums.

One such tender process recently resulted in five bid- ders’ tariff bids being no more than 9% apart from high- est to lowest. While striking the right balance of commercial, technical and financial risk allocation does require an extra upfront investment of time, particularly true in emerging markets, that additional effort when combined with a competitive tender process ultimately pays off, as witnessed by the strong global track record of PPPs for cost effective, on-schedule completion and operational excellence. MENA governments are well known for their efforts to adopt industry best practice models that introduce new technologies or market entrants when feasible. By catalysing knowledge and technology transfer through a collaborative approach between government procurers and private sector developers, PPPs provide MENA gov- ernments with the benefit of learning externalities that would be limited by traditional public procurement strategies. In this context, a PPP strategy can also support government targets to employ more local citizens in pri- vate sector companies. Another consideration favouring the PPP model is the widespread adoption of long-term non-recourse financ- ing structures. These shift debt default and re-financ- ing/roll-over risk, and the negative publicity associated with such, away from governments by placing it on ring-fenced project companies.

Though nay-sayers may claim long-term non-recourse funding is all but dead, the recent track record, notably in MENA, suggests otherwise – with substantial liquidity pro- vided in the 15 to 20-year band. The right model, deployed in the region, can attract significant long-term liquidity – Abu Dhabi Water and Electricity Authority (ADWEA) for example, closed a 22.5 year non-recourse financing at the height of the credit crunch, in October 2009.

Harnessing the potential of PPPs in MENA Time spent early is exponentially saved later. Leveraging from the experience of other jurisdictions – good and bad – will facilitate the definition of a programme that is real- istic and credible for the private sector, and deliverable for government stakeholders. Identifying a dedicated team drawn from the various host government stakeholders to act as the principle driv- er of a PPP initiative, and as liaison with external advis- ers, can be an effective start. Banks, technical and legal experts have an important role to play in the early “con- cept” stages by supporting the stakeholder buy-in process with considered international perspective and advice. Choosing advisers is as important as choosing any long-term private sector partner. The wrong adviser for the job means the wrong advice for the programme, and the inevitable mis-direction in risk allocation and com- mercial appetite – a difficult lesson learnt by some in the region.

Once initiated, there are several notable elements of success for PPP programmes relevant to the region: First, in order to fully leverage the benefits from pri- vate sector developers, MENA governments should define a tender process based on “output” rather than “input” specifications where the private sector takes substantial ownership for, and shared benefit from, a technical and commercial solution that best meets these requirements. This contrasts with the traditional, input-driven pub- lic procurement process that rigidly defines project design specifications and thereby restricts creative and innovative solutions. The extent of philosophical shift – from “build it” to “buy it” cannot be understated in the MENA region, where standard procurement models still prevail in many sectors and jurisdictions. Education, transparency and, ultimately, strong stakeholder support from responsible ministries (including notably, finance) will be critical to embracing this (r)evolution. Second, PPP projects should benefit from a fair risk allo- cation between government procurers and private sec- tor participants, guided by the principle that those parties that are in the best position to manage and mit- igate the risk should bear the risk. In practice, this means, for example, that private sector developers should be responsible for construction and most opera- tional risks, while procurers should bear a certain level of demand risk, regulatory and force majeure risks.

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