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DEC 19, 2016

Public Private Partnerships Law

We explore the partnership between the Government and independant private sector

Public Private Partnerships (PPP) are partnerships between the government and the independent private sector, pursuant to which the delivery of a public service is transferred from the public sector to the private sector. In 2015, the Ruler of Dubai has passed the new PPP law. Its purpose is to (1) encourage the private sector to participate in development projects, (2) mitigate finance burdens placed on the general budget, (3) increase productivity and improve the quality of public services and (4) facilitate the transfer of knowledge and experience from private to public sector.

Essentially, PPPs have recorded success stories in areas that require greater operational input from the private sector and where the public sector can agree on fixed payments. However, there exist some pitfalls that need to be accounted for such as implementing rigid contracts (where adaptability is needed), securing the necessary skills and resources for enforcement and transparency. We discussed the purpose, opportunities and outcomes of the new PPP law with Nabarro executives Nick Kramer (Partner) and Rashid Khan (Associate).

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Why build an effective regulatory framework?

Securing the level of commitment required under PPPs means governments must establish clear institutional arrangements for both their procurement and implementation. A set of uniform rules and procedures is required to govern the relationship and cater for the range of contractual scenarios as well as securing a risk profile which is both underwritten, where appropriate, by the public sector, and acceptable to the PPP market. Specific PPP laws can also often close gaps in domestic law which may not be sophisticated enough to cater for PPP arrangements. Foreign investors will expect robust, transparent and balanced regulatory platforms to be in place before investing. A single framework administered at a central level will help to achieve a deliverable and “bankable” PPP structure.

Let’s talk about MENA. Which countries are leading this trend?

Egypt’s budget deficits, combined with increasing pressure to improve infrastructure and public services, make it an attractive investment opportunity for the private sector. It has a well-established PPP legal framework[1], which applies to projects in all sectors, as well as older legislation dealing with the grant of concessions[2]. Egypt's PPP Central Unit is responsible for implementing its PPP projects and currently has around $39bn worth of projects in its pipeline.

Kuwait updated its 2008 PPP Law in 2014[3] making important developments including the establishment of the Kuwait Authority for Partnership Projects (KAPP). KAPP leads Kuwait’s PPP strategy with a PPP project pipeline of $20bn.

Dubai (UAE) enacted a PPP law in 2015 which sets out how PPPs are to be tendered and awarded and also offers a direct proposals scheme, whereby private sector investors can approach the government directly with proposals for innovative new projects. The new regulatory landscape demonstrates Dubai's commitment to PPP and to meeting the demand for improved infrastructure and public services for its rapidly increasing population.

Saudi Arabia has great potential for private sector investment. The country's government is under increasing pressure to meet the demand of its growing population and diversify its economy away from oil generated revenue streams. Saudi Arabia has a large young population with some 750,000 families eligible for public housing[4]. As part of its "National Transformation Plan", the Kingdom has allocated SR59bn for housing and is looking to the private sector to develop affordable housing solutions. However, the Kingdom has not yet established a dedicated legal framework for PPPs and it is likely to be some time before a dedicated PPP regulatory framework is put in place.

Historically, land transport projects have seen a high failure rate in the region. Are some sectors more suited to PPP than others?

Land transport (such as road and rail) projects, with high construction costs and a lack of revenue guarantee, could be considered too costly for PPP. Such projects are perhaps better suited to traditional procurement methods, rather than PPP.

A lack of regulatory clarity combined with a large investment requirement means these projects represent a high risk investment for the private sector. Also, governments in the Region appear keen to ensure that land transport services are provided at affordable rates and, therefore, prefer to maintain control of the services and the tariffs charged for them (rather than the private sector under a PPP).

Sectors showing the most promise for PPPs are those that require greater operational input from the private sector and where the public sector can agree fixed payments to the private sector investor. Sectors such as power, waste, water and social infrastructure (including hospitals, schools and social housing) seem to be more suited as the private sector's good construction experience, coupled with innovation and established synergies between the design and operational phases.

Sectors showing the most promise for PPPs are those that require greater operational input from the private sector and where the public sector can agree fixed payments to the private sector investor

Any tips for contractors?

The success of any PPP arrangement will be largely dependent on the degree to which risks are properly allocated down the supply chain. Sub-contractors should bear in mind that the project company under a PPP arrangement is often structured as a “man of straw”, created solely for taking the transaction forward. It will, therefore, be essential to ensure that all significant obligations have been passed on to the party best able to satisfy them: this will require any sub-contractor to take on significant risks.

Construction sub-contracts under PPP arrangements will essentially therefore be “back to back” with the relevant project agreement. The key provisions of the construction contract will need to mirror the provisions of the project agreement such as the scope of work, procedures and grounds for claiming an extension of time and payment (a contractor may only be entitled to contractual relief where the project company is entitled to the same under the project agreement), delay damages payable to the project company, dispute resolution mechanism and governing law. Force majeure, particularly political force majeure, can also be a key consideration in some parts of the Region, in light of the current geopolitical climate.

What are the opportunities for them?

PPPs provide contractors with an opportunity to demonstrate their specific skills, in return for a comparable rate of return. This includes:

·       introducing private sector innovation, (operational and/or technological) which will demonstrably improve public services;

·       delivering long term value for money through building in incentive based risk and reward mechanisms over the term of the PPP;

·       securing local benefits (delivery of infrastructure or employment opportunities); and

·       establishing an on-going legacy, which can facilitate a move from a state led economy, to one with increasing levels of private sector participation.

What can we learn from more mature PPP markets?

Key pitfalls, based on the UK experience, include:

·       Implementing PPP arrangements which are contractually too rigid and cannot adapt to the changing needs of the procuring authority/consumer/occupier. Most PPP arrangements are 25 years plus and so adaptations may be necessary during the contract term;

·       Securing the necessary skills and resources to properly enforce the key contractual mechanisms to drive value for money;

·       Ensuring an appropriate level of transparency in relation to financial information to monitor PPP arrangements (specific disclosure requirements can be included in the contract). 

[1] PPP legislation enacted in 2010

[2] Egypt Law No. 129 of 1947, revised in 1958

[3] Kuwait Law No. 116 of 2014

[4] www.arabianbusiness.com


Nicholas Kramer, Partner, Head of Commercial Construction at Nabarro Middle East

Nick specializes in the drafting and negotiation of construction related contracts as well as advising on associated disputes. His experience includes building contracts; EPC contracts; consultancy services contracts; public works concession contracts; and O&M contracts. He has considerable experience using and advising on the FIDIC standard forms of contract.

Nick has advised and represented clients from all sides of the construction, engineering and project development industries, including international construction and engineering contractors and consultants; commercial real estate developers; government ministries and agencies; developers of industrial projects, process plants and petrochemical plants; promoters and developers of independent water and power projects; and oil and gas multinationals.

Rashid Khan, Associate, Construction and Engineering Group at Nabarro Middle East

Rashid qualified as a solicitor in the firm’s Construction and Engineering group in London before moving to Dubai. He has experience of advising a wide range of clients on procurement strategy, the drafting and negotiation of contract documentation and dispute resolution on a variety of development, infrastructure and energy projects.