Abu Dhabi's department of transport is encouraging private enterprise to pay for roads, highways and rail lines.
Driving a new approach
Along a 327km stretch of motorway between Abu Dhabi and Saudi Arabia - scene of the much publicised long queues of lorries waiting to transport goods to the kingdom - the Government is about to face its first real test since the onset of the economic downturn on setting up big-ticket infrastructure contracts with the private sector. Under Abu Dhabi's 2030 plan, the Department of Transport (DOT) is considering building more than Dh300 billion (US$81.74bn) worth of roads, highways and rail lines for trams, metro and high-speed trains over the next 20 years. The ambitious plans are designed to ease growing congestion, improve the quality of life for city residents and make Abu Dhabi one of the world's great capitals. Many projects will be financed using public-private-partnerships, or PPPs. The schemes can take a variety of forms, but in all of them governments seek the highest quality and workmanship, while staggering the payments over the full life cycle for these multibillion-dollar projects, such as a road or a bridge - and this can last decades. Some are called build-operate-transfer deals, since they involve a group of companies forming a concession to design the transport network, and then operate and maintain it for several decades. These schemes all lessen the risk for governments should the construction not measure up, says David Harley, a partner at the law offices of DLA Piper in Abu Dhabi. "The temptation for contractors is to bid the lowest price to get the job, since they know that then they don't have to look after it for the next 30 years," he says. When governments pay for roadway work up front, cost overruns are common. But not so under PPPs. The roads are constructed quicker and better, and managed well under the PPP structure. This can reduce total life cycle costs by up to 30 per cent. Abdullah al Otaiba, the chairman of the DOT, described infrastructure projects as attractive to investors due to their low risk and long-term opportunities to earn income. "We expect that investors will be keen to invest in some projects," he said. But the Government is not pursuing these partnerships because it is short of money; it is pursuing them because they produce a better result. The key challenge for planners is to structure a "recession-proof" PPP, because many assumptions made about these schemes during economic booms simply do not apply today. In some deals, concession holders have sought to recoup their costs through advertising revenue, user fees or toll receipts. As the events of last year demonstrated, however, advertising and travel can fall significantly, and at any time. The DOT has already learnt a valuable lesson about relying too much on projected advertising revenue with one PPP that did not meet expectations - and is unlikely to do so again. Last month, it said it rescued a scheme to build 550 air-conditioned bus shelters around the emirate after the private company contracted to install and maintain them pulled out over concerns that it would not recoup its costs. The build-operate-transfer deal announced last July with Ströer Concept Outdoor, a partnership between the German Ströer Group and the UAE company Concept Outdoor, would have seen the contractor spending more than Dh100 million on installing the shelters and recouping its costs by selling advertising. DOT officials said the company backed out because of the impact of the global financial crisis on the advertising market. In the case of the Mafraq-Ghweifat motorway, the Government wants to spend Dh10bn to improve and widen the roadway, and this is seen as a key test for its approach to public-private deals. Recently, the DOT has begun devising new ways to pay for it, based on a rewards scheme for performance. Under the plans, the winning concession will agree to design and build a motorway and then maintain it for 25 years. The department decided against tolls, since it can discourage road use and is an imperfect tool in motivating commuters to switch from one mode of transport to another. Instead, the Government will pay performance-based fees, such as for high availability of the motorway - meaning few road closures for maintenance - while payments could be delayed if the new road failed to reduce the number of crashes. This approach should attract private contractors that might otherwise see such schemes as being too risky. Jean Berge, the vice president of sales at Bombardier Transportation, which builds rail networks, said his company would weigh various PPP schemes carefully to ensure his company could recoup its costs. "We are manufacturers, and our strategy is very clear - we just want to take risk that we can control," he said. Mr Harley added: "The private sector gets nervous to be asked to accept risks they can't manage. And banks need to be satisfied that the Government isn't putting all the risk on to [their client]. This comes at a time when many PPPs are getting more difficult to complete, since the downturn has made it difficult to raise capital." There are signs, however, that the global credit crunch has begun to ease. Handled correctly, PPPs are highly successful in bringing together capital and knowledge. This includes toll-based projects such as the Confederation Bridge in New Brunswick, Canada, a 12.9km structure that opened in 1997 at a cost of C$1.3bn (Dh4.13bn). The government of Canada pays C$44m per year over 33 years to Strait Crossing Development, the concession group, which also reaps tolls receipts. In the Middle East, PPPs have worked for government projects including hospitals and schools. But in the new economy, these deals will require a different approach. Structuring them in terms of repaying contractors over time based on the success of their endeavours, rather than in uncontrollable factors such as tolls or advertising, should ensure the end results meet expectations and deliver dividends to the city for years to come. * with additional reporting by Matthew Chung firstname.lastname@example.org