PPPs are an attractive option for developing the urgently-required infrastructure in the region.
PPP: the way forward for region’s projects
While there are constraints to the implementation of PPPs in the Middle East, the region remains a fertile ground for innovative PPP solutions and governments are working hard to overcome the obstacles that currently exist, writes Joanne Emerson*.
01 December 2007
Unsurprisingly, the demand for infrastructure and public utilities development has grown in parallel with the wider construction boom and the recent period of rapid immigration in the Middle East.
Together with increasingly limited oil reserves and traditionally low rates of taxation, this demand has forced governments in the Middle East to consider PPP (public private partnership) procurement as a viable option for the realisation of public facilities and services.
Traditionally, Middle East countries have been able to procure infrastructure and the majority of public services and utilities through treasury or prominent local and regional family-held funds.
Procurement through a public private partnership structure, therefore, requires a genuine shift in the established political, social and economic paradigms that would typically apply in the Middle East. Despite this, Middle East governments are increasingly looking to the private sector for the delivery of public services and the construction of public facilities.
Although the region has a reasonably long history of co-operative public/private development, the use of complex PPP models, such as road concessions, are, in most cases, non-existent.
Some countries in the Middle East have, however, recently approved PPP procurement and privatisation schemes as part of long-term policy initiatives and public finance reform packages. These policies will increasingly transform regional governments as builders, suppliers and financiers of public facilities into facilitators, policy-makers and regulators.
Within the next one to three years, pilot PPP projects will also start to emerge as the region begins to implement privatisation schemes in a variety of different sectors. In Bahrain, for example, the government is currently considering PPP procurement strategies for the provision of social services such as social housing and sanitary engineering.
While the benefits provided by PPPs in the Middle East are similar to those that have motivated PPP uptake in other parts of the world (for example, reduction in public expenditure, the efficiency of the private sector leading to reduced tariffs and improved quality of services and the allocation of delivery risk to the private sector), PPPs also offer the Middle East other benefits, including flexibility to allow financing and leasing arrangements to be implemented on Shariah-compliant basis and incidental provision of industrial and technological advances developed overseas.
Despite these benefits however, PPP implementation in the Middle East has been slow largely due to the following key issues:
• Lack of statutory and regulatory framework to support PPPs;
• Difficulty in transplanting the existing PPP/PFI (private finance initiative) models into the region due to language and cultural differences;
• Lack of political will to reduce public sector control over provision of public facilities and services;
• Sensitivity to the well-publicised failures of PPP procurement overseas;
• Political and country risk (perceived or actual);
• Lack of international investor/consortia confidence;
• Lack of PPP experience by regional government departments; and
• Difficulty in attracting the number and type of private sector participants required to achieve the appropriate level of private sector competition.
While there are clearly constraints to the implementation of PPPs in the Middle East, the region’s governments are working hard to overcome the political and economic obstacles that currently exist. Once the necessary economic, political and legal reforms are in place, the pilot projects have been concluded and the relevant government personnel have been equipped with the necessary know-how which underpins a PPP roll-out, the region will no doubt become a hotspot for significant and groundbreaking infrastructure and public utilities development on a PPP basis.
Meanwhile, the region remains a fertile ground for innovative PPP solutions.
* Joanne Emerson is a Bahrain-based senior associate (Construction and Projects) at the legal practice of Norton Rose (Middle East) LLP. Legal queries related to the construction sector can be addressed to Norton Rose (Middle East) LLP through Gulf Construction magazine at editor@gulfconstructionworldwide.com.
