x Abu Dhabi, UAEThursday 27 July 2017

Partnership deals back in favour for construction

Public-Private Partnerships will be a hot topic of discussion at this week's CityBuild conference.

Public-private partnerships (PPP) are again a hot topic in the construction industry after years of false starts and failed deals.

Financing sources have dried up, leading government agencies to seek alternative funding for their ambitious infrastructure plans.

"It's an ideal market for PPP because the government doesn't want to commit capital," said Michael Wing, the regional director of the construction consultancy Capita Symonds.

"I don't think there is any way out except to investigate PPP."

Several panel discussions will focus on PPP at CityBuild, the construction business conference that runs concurrently with Cityscape at the Abu Dhabi National Exhibition Centre from today to Wednesday.

The agenda includes a presentation today by John Lee, an adviser to the Abu Dhabi Department of Transport, which is developing a PPP for the 327km Mafraq-Ghweifat motorway running to the Saudi Arabian border.

The project, which has been in development for more than a year, is expected to create a model for future PPP deals in the capital.

Last year Mr Lee said the Abu Dhabi Government might ask the private sector for Dh100 billion (US$27.22bn) in financing to help build Dh300bn in transport projects detailed in the emirate's 2030 plan.

The Dubai Government, which has shunned PPP in the past, is also developing a framework for private-sector partnerships.

"There is very little alternative in terms of infrastructure projects," said Paul Abbosh, the regional development director for the engineering and design consultancy Atkins, which is working on the Dubai Metro and Union Railway.

"The PPP model for future projects allows them to pay over a longer period of time."

But the construction industry remains wary of PPP deals.

"There will be a certain amount of interest in the construction industry because it is seen as a potential source of work and you don't have to bid," Mr Abbosh said. "But the flip side is that it is harder to get financing."

PPPs typically call for the builder to pay a portion of the upfront construction costs in exchange for a percentage of the revenue generated by the project. The government is able to defray the costs and the builder gains what could be a lucrative contract.

There was $54.4bn in PPP deals in development in the GCC as of last September, Meed Insights estimated. Egypt, Jordan and Syria are developing framework guidelines for PPPs.

Bahrain wants to use a partnership to develop $6.6bn in housing. Kuwait is developing a PPP to build its $7bn metro system.

In total, GCC governments are committed to building $452bn of infrastructure over the next few years, according to a report released yesterday by Ventures Middle East. Eighty per cent of that is in Saudi Arabia, the UAE and Qatar.

"They can't put all this on the national balance sheet," said Karim Nassif, the associate director for Standard & Poor's Dubai office. "They need to find alternative ways to finance these projects."

But PPPs have a spotty track record around the world. They have typically worked best with energy and utility projects, which offer steady cash flows. Other deals have suffered from cost overruns and delays.

Government agencies often take over design projects and then PPP "becomes horribly inefficient", Mr Wing said.

The $2bn Saudi Landbridge deal to expand the kingdom's rail system was structured as a PPP, but never came about.

To make PPPs work, "government agencies will have to basically provide regulatory certainty of cash flow", Mr Nassif said.

Cash flow is the biggest hurdle in PPP negotiations, industry officials say, and governments are misjudging the construction industry's perception of PPP deals.

"Public-private isn't a source of free money," Mr Abbosh said. "The biggest benefit is getting the private sector's experience rather than benefiting from new funds."

kbrass@thenational.ae