The Qatari Government is increasingly interested in public private partnerships (PPPs) for the delivery of its infrastructure projects. As we will explore later in this article, some of the key drivers for the Qatari Government’s desire to use PPPs as a form of procurement model for specific sectors differs from other parts of world. However, it is clear that given the number of projects connected with the Qatar 2030 Vision, alternative procurement structures will need to be considered to help alleviate the public sector burden.
This article will provide an overview of PPPs, consider some of the main PPP procurement options and how to facilitate PPPs from legal and regulatory perspective as well as examine some recent trends in relation to PPPs in Qatar.
WHAT IS A PPP?
There is no widely agreed, single definition or model of a PPP. However, PPPs are arrangements typified by joint working between the public and private sector. As the name suggests, they are meant to be partnerships but the reality is that this is not always the case.
PPPs are an alternative to the more traditional form of procurement. Traditional procurement characteristics might include:
- Where a government procures assets, not services, from the private sector; or
- Where the private sector is only responsible for delivering the asset and is not responsible for its long-term performance.
With PPPs, the private sector returns are linked to service outcomes and performance. The private sector is responsible not just for asset delivery, but for overall project management, implementation and operation.
PPPs can encompass a variety of structures comprising freehold ownership, leasehold ownership, a combination of the two or an alternative.
Click here to see a typical PPP structure.
WHY SHOULD A PPP BE CONSIDERED?
There are many potential benefits to structuring a project as a PPP. One of the main benefits of a PPP is that it removes the up-front capital costs from the public sector’s balance sheet. Consequently, PPPs may allow for the delivery of an asset which a government may have been unable to finance directly.
Some of the other key potential benefits of PPPs are:
- Access to private sector know how. PPPs can encourage innovation and good design through use of output specifications;
- Increased productivity and efficiency to help ensure delivery to time and price. The private sector does not receive payment until the asset has been delivered, which encourages efficiency;
- Cost savings can be achieved through the reduction of bureaucracy and administrative burdens that are often experienced by the public sector;
- The private sector can often provide a better service to the public sector through experience, innovation and the adoption of best practice methods; and
- PPPs can encourage the allocation of risks to those most able to manage them. Therefore, PPPs may be able to deliver risk transfer to the private sector.
BRIEF HISTORY OF PPPS IN THE GCC
One of first PPP projects was in relation to the Al-Manah independent power project (IPP) in Oman in 1994. This project was procured on a build-own-operate-transfer basis and involved the construction of a 90 MW power station.
Since then, Abu Dhabi successfully launched its PPP programme in 1998 with the 710 MW Taweelah A-2 IPP. Between 2001 and 2004, both Saudi Arabia and Bahrain embarked upon the PPP journey.
A pervasive theme across most of the GCC is that the drivers behind the current focus on PPPs as a viable means of procuring public infrastructure differ from other parts of the world. Whereas for most countries, the main benefit of PPPs is the access to private capital and for governments to procure projects they wouldn’t ordinarily be able to fund, given the abundance of natural resources in most GCC countries, the focus for PPPs is more towards:
- Developing the private sector;
- Increasing foreign investment into key sectors;
- The transfer of knowledge and expertise;
- Achieving economic diversification; and
- Ensuring state control over key assets.
There are a number of different procurement models which can be used as part of a PPP and the method of choice will depend on the type of project and risk allocation which the parties seek to achieve.
The most common form of long term PPP model is the Concession Arrangement.
Concession Arrangements are long term agreements which can be used by the public sector as a means of procuring infrastructure assets, including their ongoing maintenance, by the private sector. Such assets can be as diverse as roads, schools, hospitals, wastewater treatment plants etc.
Concession Arrangements can be categorised depending on how revenue will be derived. There are essentially two models:
(1) Tariff Model; or
(2) Availability Model.
A Tariff based model is used where the private sector is able to obtain revenues directly from the end user. A good example of a Tariff based model is a toll road. In this scenario, the private sector will take demand and collection risk in relation to the revenues from the end users. Under a Tariff based model, the private sector will need to undertake due diligence to ensure that there is likely to be sufficient demand for the product or service it is procuring.
Availability based Concession Arrangements, also known as Private Finance Initiative or PFI in the UK, are used where it is not possible (for a variety of reasons) to obtain revenues from end users but where there is a need to make the relevant infrastructure asset ‘available’. The procurement of schools, hospitals and other social infrastructure projects are likely to fall within this type of model. The key characteristic of the Availability based model is that the public sector will make payments to the private sector on the basis that the asset is made available and these payments are made irrespective of usage. The Availability based model removes demand and collection risk from the private sector.
A variety of contracts can be used for Concession agreements – each with their own acronyms (e.g. BLT (build-lease-transfer), DBO (design-build-operate), BDO (build-develop-operate) etc). However, two of the most common forms of contract are known as:
- BOT or BOOT (build-(own)-operate-transfer); or
- BOO (build-own-operate).
The main difference between a BOO and BOT is that a BOO provides for a transfer of legal title from the public sector to the private sector without any transfer back obligations.
If an Availability based model is being considered, the public sector is likely to incur significantly more costs in relation to a BOT than an BOO. The reason being that under a BOT, the public sector will also be paying for the capital expenditure in relation to the asset.
KEY ISSUES WITH PPPS
The public sector pays for the risk transfer inherent in PPP contracts. It is also important to note that risk can never fully pass to private sector as the public sector retains the ultimate risk of the private sector failing to deliver the relevant asset.
Some of the issues will depend on how a PPP is being procured and which model is being adopted. For example, an outsourcing contract for a specific service or a simplified lease structure in relation to a particular asset will not be as technically complex or contain the same term as a Concession Arrangement for a large infrastructure project.
Whilst PPPs seek to remove the up-front costs of procuring the asset from the public sector’s balance affordability issues can still occur depending on the nature of the PPP. This is especially the case in relation to large value projects which require a government to make payments over long concession terms (e.g. 25 to 30 years).
As a result of this, more advanced PPP structures have been developed where the public sector grants the private sector rights over additional land to enable the private sector to undertake development on that land. The intention is for the capital receipts generated by the private sector in relation to such development to be used to ‘subsidise’ the costs to the public sector.
This concept is enshrined within the Hybrid PPP model as shown here.
LEGAL AND REGULATORY FRAMEWORK
Maximising private sector engagement in PPPs requires the establishment of a clear:
- PPP policy rationale;
- Legal framework;
- Investment framework; and
- Operating framework.
Briefly taking each one in turn:
A Policy Rational should set out the core rationale for PPPs and how the public sector will go about making them happen. The private sector will expect to have visibility on key points such as:
- What sectors are being prioritised for PPPs;
- Why the public sector is seeking to use the PPP procurement model and how committed they are to it; and
- How the public sector see their role in a PPP (e.g. their responsibilities during tender and evaluation, allocation of decision making and monitoring etc).
Understanding the legal landscape within a particular jurisdiction will be part of the due diligence by the private sector and will help determine the level of private sector engagement and investment.
The private sector will want to have answers to some of the following:
- Does the relevant government authority or ministry have the power to contract with the private sector;
- Is the private sector able to perform certain services which were previously provided by the government?
- Is the form of PPP model workable? More specifically, some of the key questions will be:
- If considering a BOO model, is divestiture permitted?
- If considering a BOT, what type of land / proprietary rights can be granted to the private sector?
- Are there any restrictions in terms of foreign ownership (both at a corporate level or in relation to land ownership that may impact the level of private sector engagement (particularly where foreign capital and/or expertise is essential));
- Are there any restrictions in relation to the term of the Concession Arrangement?; and
- What rights are available to lenders / financiers providing project finance (i.e. is the project bankable?).
Some of the answers may be covered in the existing general law of a particular jurisdiction or within the project agreement itself but investors will want certainty. Consequently, developing a PPP Legal Framework that plugs any gaps will be essential to help facilitate PPPs.
The need for an Investment Framework will depend on the number of PPPs being procured in a particular jurisdiction.
However, a well prepared investment plan will help the private sector understand the level of support for PPPs by a particular government and the general environment for specific sectors. For example, a new port or airport may not make commercial sense unless the private sector is also aware of government plans for connecting transport infrastructure into the port or airport.
The private sector will want assurances that the operating framework within a government is capable of managing the PPP process from start to finish.
Whilst PPP projects are usually better being procured by their respective public authority or ministry, there is also a strong argument for a more centralised PPP unit to support and assist each project. A PPP unit will help overcome any resourcing issues or lack of expertise within a particular public authority or ministry (especially in relation to complex PPPs). It will also ensure that the relevant PPP aligns with the Policy Rationale and is properly and correctly monitored and assessed against appropriate benchmarks and other PPP projects across different sectors.
FOCUS ON PPPS IN QATAR
It is important to note that PPPs will be usually be more expensive than direct or traditional procurement given the operation and maintenance requirements. The payments from the public sector will therefore need to reflect the costs of:
- Maintenance and operation; and
- An agreed profit or return.
Notwithstanding the above, increasing interest is being shown by the Qatari Government in relation to PPPs. Whilst the Qatari Government is less concerned with avoiding the up-front capital expenditure and amortising costs over the project term, the impact on energy prices and government budgetary issues is a factor.
However, the key drivers are primarily to assist with the development of the private sector, to support and help achieve certain Government objectives including the Qatar 2030 Vision and to achieve economic diversification.
Consequently, PPPs are being seen as a viable alternative to more traditional procurement in relation to certain key sectors and will increasingly be used as a way to support the delivery of projects connected to the Qatar 2030 Vision, which some commentators have estimated will total nearly USD 350 billion .
In this regard, we believe that PPPs will be considered for a range of schemes and not just the high value, large-scale infrastructure projects, which are typically associated with PPPs. For example, we have advised on more simplified PPP structures for certain sectors such as warehousing & logistics and worker accommodation and consider that this could extend to other sectors / asset classes in the future.
There is also a recognition that using standard form contracts (such as the SoPC version 4 in relation to PFI contracts in the UK) is not appropriate and documents need to be tailored to not just the relevant jurisdiction but also the size and complexity of the project.
Finally, we expect to see a rise in the use of hybrid PPPs as a way of bridging any ‘affordability gap’ or simply helping to subsidise the cost of certain projects. This will particularly be the case where such projects give rise to significant ancillary development potential and private sector engagement.