On public-private partnerships, this is what the Gulf economies need to focus on

0

On the infrastructure side, Gulf governments are opening the funding taps.
Image Credit: Gulf News Archive

As we emerge from the pandemic-induced recession and seek to revive growth, we see governments relying in part on proven stimuli for their economies. Although economic credibility may be questioned by some, governments are starting to roll out broad infrastructure development policies to sustain and emerge from the large GDP contractions seen in 2020.

When looking at the GCC, there is a strong need to correct local economies and continue to promote non-oil activity for GDP growth. In many ways, the recession represents an opportunity to make a further correction in the non-oil sector by focusing the attention of policymakers. The oil sector may see a recovery based on a further rise in global demand.

Ticket size increases

The point is that real estate and construction are major contributors to GDP in the largest GCC countries and account for a significant proportion of the population and wages paid in those states, along with a pipeline of projects of 1.9 trillion dollars expected. In the United Arab Emirates, which experienced a 6.1% contraction of GDP in 2020 and a 4.8% drop in construction contribution, industry accounts for 8.1% of GDP.

Abu Dhabi skyline

Laws and support networks are in place to facilitate PPP projects.

As such, GDP is expected to start growing and is expected to pick up in 2021 at 3.1% and with a continuation of 2.6% per year until 2026. In Saudi Arabia, the impact on the economy in 2020 was slightly lower, although still significant, with a contraction of 4.1%, with growth expected to be 2.9% in 2021, 4.3% in 2022 and 3.3% in 2023, and construction contributing to 6.2% of GDP, although it increased in Q1-2021 to 6.4%. Considering the programs across the Kingdom, this will maintain a significant CAGR (Compound Annual Growth Rate) as we see large works programs reaching construction.

The question is, how do you embark on major infrastructure plans when the debt-to-GDP ratio has risen dramatically in 2020? The UAE’s debt-to-GDP ratio fell from 26.8% to 38.3% at the start of 2021 (mainly due to the stimulus package of 395 billion dirhams – or 31% of GDP -) and the debt ratio / Saudi GDP of 22.8%. at 32.7% at the start of 2021. Although still low by international standards, the main GCC countries have always been cautious in their borrowing.

There are obviously direct investments in infrastructure through wealth levies (by ADIA, Mubadala, ADQ and PIF in Saudi Arabia) and traditional bond issues and loans. But the pandemic presented a golden opportunity to effectively implement PPPs (public-private partnerships) as a means of keeping states’ balance sheets healthier and to engage the private sector in further expanding the non-oil sector in the country. the region.

Construction

Private sector participants should not be confused by the costs of accumulation and try to take shortcuts.

In the United Arab Emirates, laws enabling the implementation of PPPs were passed in 2015 in Dubai and in 2017 at the federal level, which were officially rolled out in 2019 and an advisory book published in 2020. In Saudi Arabia, it now exists a PPP office to allow the continued deployment of such projects.

The Kingdom and the United Arab Emirates have already engaged in a variety of alternative financing options in the electricity and water sector, through Independent Water Projects (IWP), Independent Water Projects electricity (IPP) and independent water and power projects (IWPP), as well as in the renewable energy sector. However, in recent years there have been developments in new sectors.

New sectors, new opportunities

This can be seen with Medina Airport in the Kingdom, which was the first full PPP airport in the GCC, and with Tatweer awarding its first phase of schools to a private consortium. We also see in Abu Dhabi that the schools PPP program is now underway with the first project in the market right now.

It is clear that the commitment to pushing PPPs forward has started to gain traction. We see that Saudi Arabia has a pipeline of some 142 projects worth around $ 45 billion in the pipeline or in the pipeline, while the UAE has 89 known projects with a combined value of $ 22 billion. dollars. We even see Qatar enacting a PPP law in May 2020 with a small pipeline of some 28 electricity, water and schools projects worth $ 1 billion. Indeed, Oman is also involved in 28 ongoing or ongoing projects in the PPP sector.

Ways to get funds

So the next question is how to put this investment on the ground? Saudi Arabia has already committed SR 99 billion in 2021 to infrastructure development at a direct financing level, which is the traditional route in the region.

A multitude of options are available to regional governments. What works in each state is the key. There are significant challenges in the region to engage, administer and implement PPP models. The policy change has begun, but it will take time to change and effectively implement and engage the international experience at the level required by the visions of nations.

Areas that need to be addressed to ensure delivery is met include:

  • Risk sharing: Historically, the region has operated under a “push down” contract or master / slave type agreement, where the client side releases as much responsibility as possible. This model is not conducive to partnership and provides little incentive for the private sector to engage in any meaningful way.
  • Fair contracts: As an extension of risk sharing, procurement methods should ensure refinement of risk allocation as well as a level playing field and support arrangements for the use that the client should support and cover. To protect both parts, a ratchet device can be applied, but this should be applied in both under and over rated use.
  • Seniority: 25 or 30 years, or more? As most PPPs consider rolling finance parameters over a 5-7 year period, it is essential that the tenure structure is defined in such a way as to achieve profitability within a reasonable timeframe in order to avoid capital costs. significant funding for programs. Without clarity on the break-even point, or an unclear horizon as to how it will be achieved, the program will fail before it begins.
  • Donor exit plans: for all financially responsible parties, there must be a clear path to profit (if delivery is successful), as well as the need to give investors confidence in long-term success and the client’s commitment to the body project. Without this transparency, borrowing costs and investor interest will become difficult.
  • Refinancing: Governments should support the local development of financial institutional capacities and the ability to engage in refinancing opportunities within 5 to 8 years after the closing of the transaction in order to create a sustainable fiscal ecosystem in the region for PPP.
  • Refine delivery models: As in other regions that have deployed PPP models, there is an inherent need to constantly refine the terms and scope of agreements to ensure an appropriate balance between risk and return and delivery products and services required. This cycle of “lessons learned” is essential to maintain interest in both the private and public sectors.
  • Life cycle design, operations planning: in a region traditionally more focused on delivering the cheapest product possible for the stated specifications, a change in mindset is needed. A reflection on the whole life cycle is necessary. The cost of building an asset is likely to be only 20-25% of the total life cost of that asset. The private sector should also be aware of the critical factors to consider when considering delivery.
  • Conceptualization: Costs are most likely to go up or down in the early stages. Effective engagement with the client organization and detailed planning and analysis will mitigate many risks and present opportunities to improve asset and service delivery.
  • Delivery Methodology: As with client entities, most regional private sector companies focus on delivering an asset at the lowest cost. The regional supply chain is also largely set up in this way, requiring an education and management process which, while not unheard of in the region, is not widespread.
  • Resources: As with supply chains, professionals in the region tend not to administer delivery with life cycle costs and benefits in mind. This challenge is being met, but a function of time and education still applies.
  • Lifecycle Operations: Careful planning in all phases of delivery will reduce the costs of lifecycle operations, but unlike the status quo, it is critically important to involve the operations team from conceptualization.

With the parameters for approaching delivery under the leadership of the PPP office in Saudi Arabia and the UAE Ministry of Finance, the policy changes are clear. But time and education are the two essential factors in the implementation.

If we note another example of policy change, nationalization programs in the GCC have now had some significant successes. However, this process has taken several years to bear fruit, so even if the opportunity is great, obtaining a critical mass of devices in the field may prove to be an ambition in the longer term.


Source link

Leave A Reply

Your email address will not be published.