The Gulf countries not only have ambitious objectives with regard to infrastructure, but also a pressing need for such development to provide a platform for continued growth.
Public Private Partnership (PPP) projects are usually implemented in countries where there is a shortage of funding. Although, in general terms, there is no shortage of finance in the GCC, a properly structured PPP model may provide a more efficient and effective means of procurement of a project.
PPP is essentially a long-term contract between the government and a consortium of private sector entities in which the latter provides most of the financing and assumes technical and operational risks in return for a revenue stream throughout the duration of the concession. The perceived benefit of PPP should not be seen as limited to the provision of financing.
Why is GCC shying away?
It also provides an opportunity for a project to avail itself of the benefit of international standards and technical expertise. Why, then, has there been reticence in the GCC to adopt such a model for procurement of infrastructure?
From a cultural standpoint, there has been historical resistance to the perceived loss of control of national assets to the private sector. The absence of legislation to regulate the model has also been a drawback.
And PPP, based on international experience, should not be seen as a panacea. A core element of the model is added value; yet a recent report by the UK Treasury Select Committee concluded that PPP funding for new infrastructure — including schools and hospitals — does not provide good value for money.
The report highlighted the higher financing costs associated with private financing relative to public sector debt and the rise in the cost of private debt since the financial crisis.
Notwithstanding these negative factors, in the GCC and further afield in the region, there is a pressing need for infrastructure, particularly in the rail, large-scale energy and water sectors.
As an example, Saudi Arabia's strategies for water and wastewater are expected to embrace the PPP model, given the success of the private sector in building and operating water plants in the kingdom. Saudi Arabia has not suffered from the financial crisis and local and international banks in the kingdom have maintained the liquidity to invest in major projects.
PPP is seen more as an opportunity to benefit from the expertise available in the private sector, and the current development of PPP models in Saudi Arabia should encourage the use of similar models in other GCC countries.
Shortage of funds
As indicated above, the scope for use of PPP models increases in those countries where there is a shortage of funds. Infrastructure neglect in Lebanon after the civil war has led to enthusiasm for the PPP model to deliver much-needed public infrastructure.
Lebanon has reached the point where it needs spending on infrastructure from the private sector. A PPP solution is seen as ideal where the current level of indebtedness and financial constraints prohibit the government from launching and funding much-needed infrastructure projects. Furthermore, the spectre of increased taxation to fund infrastructure is unlikely to meet with electoral approval.
Need for investment
The conditions in Dubai (still recovering from the property collapse) and Abu Dhabi (with a perceived moratorium on spending on infrastructure) would also seem ripe for recourse to the PPP model. The forthcoming PPP Middle East conference in Abu Dhabi reflects the emirate's interest in bolstering private sector investment for 2012 and beyond across a range of projects.
Particular focus will be on the transport, healthcare, water and power sectors. This enthusiasm is also mirrored in neighbouring Kuwait which has a significant pipeline of PPP projects. Government agencies in Kuwait have consulted with international financial and risk management firms with expertise in PPPs to guide the country's growth and development plans.
In conclusion, although those countries where there is a shortage of funding are naturally driven to consider the PPP option, provision of financing is not the sole factor. The benefit of information and technology transfer from international expertise should not be ignored.
The positive experience in Saudi Arabia where the private sector has successfully built and operated infrastructure, coupled with the need to look to the private sectors for funding, should inevitably lead to heightened enthusiasm for PPP models for procurement of projects in 2012 and beyond.