Abu Dhabi is re-evaluating plans to build the country's biggest road project using private finance, calling into question the viability of billions of dirhams' worth offuture deals.
The Department of Transport has for the past three years been preparing a public-private partnership (PPP) to build a Dh10 billion (US$2.72bn) road to Saudi Arabia from the capital.
Last month, the department declared it had selected a preferred PPP bidder for the Mafraq-to-Al Ghweifat Highway project and that formal approval could be weeks away.
But this week it said it was "currently evaluating different options" for the 327km road project in the interests of ensuring "best quality and value".
The comments come after Meed, the regional business magazine, reported that the Government's Executive Council was opposed to developing the Mafraq project as a PPP, citing the high bid costs from the two shortlisted consortiums.
Issues arose in discussions with contractors over how the project would be managed, according to a private industry source familiar with the discussions.
"Not many governments are familiar with how PPP works," said the source, who asked not to be identified. "Obviously, it is hard to educate all decision-makers on the specifications of such a project."
Construction of the road has been considered a bellwether for PPP deals in Abu Dhabi. Last year Department of Transport officials said as much as a third of the Government's Dh300bn in metro, tram, high-speed rail, motorway and bridge projects outlined in its Vision 2030 plan could be built using PPPs.
A PPP is typically structured with a builder sharing the price of an infrastructure project by paying the upfront costs of construction. The government client then pays for the project incrementally over the life of the assets, which can be up to 30 years in the case of a motorway.
But the deals are often difficult to complete. "PPP is a complex exercise," said Michael Wing, the regional director of Capita Symonds. "There is always an issue of whether expectations are realistic."
There is a long track record in the Middle East of using PPPs on energy and water desalination projects, as well as with schools and hospitals. But GCC governments are exploring new ways to help pay for more than $450bn in infrastructure projects planned for the next few years.
PPPs are underdiscussion to help to build a metro system and airport in Kuwait, expand the Medina airport in Saudi Arabia and to develop social housing in Bahrain. But some construction industry executives are sceptical the concept will take hold in the region.
Plans fell through to use a PPP to build the Saudi Landbridge, a road connecting Jeddah to Riyadh.
Sources familiar with the Mafraq road deal said it was now likely a more traditional financial structure would be used to build the road, citing several reasons why the project was too challenging a prospect for a PPP.
This included the high cost of private-sector financing following the global economic downturn, compared with borrowing costs the Abu Dhabi Government could secure through its sovereign rating. The political unrest in the region has also made private lenders wary of expensive, long-term construction projects.
The Middle East and North Africa region is "a high-risk zone for any foreign investment", said Jay Palmos, a management consultant with Hill International. "Banks don't want to take on risk."
PPP transport deals have a mixed track record in international markets. Unrealistic revenue forecasts have meant several well-publicised failures, including toll road projects in the UK and Australia.
The financial downturn has led the Abu Dhabi Government to re-prioritise some of its ambitious mass-transit projects under its 2030 plan, lessening the need for it to rely on the private sector to shoulder some of its financing burdens and cash-flow demands.
The desire to privatise functions and services, such as the Mafraq road, was a major element of the Government's thinking in 2007 but that does not necessarily hold true today, industry sources say.
The Department of Transport wanted to structure payments to the contractor for the Mafraq project based on the contractor's performance in building and maintaining the road. But questions emerged about how different situations would be handled, such as the impact of illegal lorries damaging the road, a construction industry source said.
If Abu Dhabi decides to scrap plans for a PPP for the road project, it will make many contractors re-evaluate their willingness to participate in future PPP proposals, said Wael Allan, the regional managing director of Hyder Consulting. "I honestly think it will make people think 100 per cent before discussing PPP."
PPP will primarily work in Bahrain, Jordan and other GCC countries that need financing support for projects, Mr Allan said. PPP deals "really serve no purpose" in wealthy countries such as the UAE, he added.