A partnership for the ages
By Toms Varghese Published: 14/02/2017 12:00 pm
When challenges arise, there are two alternatives – succumb or overcome. Oman was enjoying steady economic growth for almost a decade until it came to a halt towards the end of 2015.
Dwindling oil prices, which hit all the GCC economies, had a wider impact on the sultanate as it had kickstarted many ambitious infrastructure and development projects aimed at diversifying the economy. Though saddled with deficits, the government still continued its commitment towards key development projects by resorting to austerity measures and sourcing funds from local and foreign markets in 2016. But it became more and more evident that the government needed to find ways to continue development projects without taking up more burdens on its shoulders. The solution to this issue manifested in the form of public private partnerships (PPP).
PPP is a broad term that can be applied to anything from a simple, short term management contract (with or without investment requirements) to a long-term contract that includes funding, planning, building, operation, maintenance and divestiture.
PPP arrangements are useful for large projects that require highly-skilled workers and a significant cash outlay to get started. This model is of great significance to Oman as it will lessen the financial burden of the government and at the same time ensure efficient execution of important development initiatives.
Paul Callaghan, partner, KPMG in the Lower Gulf (Oman), says, “One of the main advantages of the PPP framework, particularly in an economic slowdown where regional governments are finding it difficult to plug fiscal deficits, is that they enable governments to cost-effectively finance major infrastructure projects.
“Currently there are US$13bn worth of infrastructure projects in the pipeline. Further, the 2017 budget envisages over US$3bn of development expenditure. These projects are essential in further driving the economic growth and diversification of the sultanate, as well as attracting foreign investors and lenders into Oman. As the 2017 budget predicts a US$7.7bn deficit, PPP represents a tried and tested formula for funding major projects. Further, PPP can enable additional major projects to be undertaken which are either not budgeted for or have been postponed due to fiscal constraints.”
PPP is a broad term and it can take all forms of partnership. Arguably a services agreement is also a form of PPP. And in those terms, Oman has had PPP ventures for a while starting from the Al Manah power plant in 1994, which was the first integrated power project (IPP) in the whole region.
A PPP is more like a public private relationship more than a partnership or a joint venture. IPPs are in one end of the spectrum of the PPP relationship structures (see table 1). In Oman, majority of the utilities projects work in the BOO (build own operate) format and they are not transferred back to the government after the end of the purchase agreement. A few like Al Manah works under the BOOT (build own operate and transfer) format. The government has a contractual relationship with these IPPs by which it purchases the power produced by them, but does own stakes.
A general misconception about PPP is that it is similar to a joint venture (JV). Though on the outset it may seem so, a PPP enterprise is different from a JV. Mary Allan, partner at the law firm Curtis, says, “There are crucial structural differences between a JV and a PPP. In a JV, two or more (usually private sector) partners contract together (either on an incorporated or unincorporated basis) to jointly implement a project and share the profits.
“A PPP can constitute a JV between public and private sector entities if the public sector takes an equity interest in the project company. But a PPP need not take the form of a JV. It can take the form of many other kinds of contractual relationships between public and private sector entities, eg a structure in which the public sector entity provides the financing, construction and operational services in relation to infrastructure by means of a concession under a BOOT structure, or under a PPP contract for financing, construction and operation services under which the public sector retains ownership of the applicable asset.”
Oman has successfully implemented various IPPs and it has set a template for future PPPs. But the terms of relationship can vary based on the sector. Mary says, “Whether or not the government takes a direct or indirect equity stake in a private sector PPP project company varies from project to project and jurisdiction to jurisdiction. For example, in Abu Dhabi’s power sector, ADWEA typically takes an equity stake, together with private sector entities, in IPP project companies. In contrast, in Oman the government has not tended to do so, and under Oman’s Electricity Sector Law, IPP companies may be 100 per cent foreign owned.”
The other sectors that are fit for PPP projects are infrastructure, real estate, tourism, mining, agriculture and industries. Callaghan says, “A direct beneficiary of the PPP framework is the construction sector as it will benefit from the overall increase in new build infrastructure. Other sectors that can benefit include transport (rail, ports, roads), healthcare, and renewable energy. In each of these sectors, PPPs could facilitate the use of the latest technologies.
“Another sector to benefit will be housing, where several PPP models have been used throughout the world to promote affordable housing.”
To move things faster, the government has started formulating a dedicated PP law which is expected to be launched in the summer of this year. While the particulars of the said law are still under wraps, the legal community and analysts see this as a move in the right direction.
Ahmed al Barwani, head of Oman office of the law firm Al Tamimi & Co, says, “The government envisages the new law as a one stop shop for the legal and regulatory framework required to implement PPPs using an international model and honed in other jurisdictions. The government seeks best international practices while formulating the new PPP law. And I believe the government will formulate it in a way to attract private investors to Oman.”
Callaghan is of the opinion that the country needs PPP-specific legislations in the along the lines of PPP models that have been established elsewhere in the GCC. For instance, the UAE has helped fuel infrastructure projects through a robust PPP legislation that was passed in 2016. Qatar and Saudi Arabia are also working on a PPP framework to further attract capital for financing the projects pipeline. He says, “A national level law will inevitably be generic to some extent, and as a next step, the law should be used as a basis to develop sector specific PPP regulations.”
This doesn't mean that the country's current legal system is inadequate for PPPs. Mary says, “The country's existing body of legislation already contains enough provisions to enable PPPs in various economic sectors to be implemented. So a special law governing PPPs is not an absolute necessity to permit PPPs to be implemented in Oman.
“For example, several BOOT concessions with respect to Oman’s ‘public resources’ have been granted to date under and in compliance with article 11 of Oman’s Basic Statute of the State. And PPPs in respect of various activities within Oman’s power and related water sector have been granted on the basis of a BOO structure under Oman’s
Electricity and Related Water Sector Law
Though the government is aiming to introduce the law this year, it might get delayed owing to the various processes and stakeholders involved in such a move. Existing laws have to be amended and it should be ratified by all the ministries as PPP projects can be implemented in diverse sectors. Barwani says, “The law has to go through various processes before being approved. There will be amendments in business related laws such as the tender law, foreign investment law, commercial companies law etc. The draft law will need to be approved by the Shura council, the State Council and ultimately by His Majesty Sultan Qaboos bin Said. Each ministry will require time to study the provisions before implementing the law. A realistic timeframe for implementation of the law is 2020 to fit with Vision 2020 goals.”
Risks and rewards
PPP has become more attractive for the government due to the recent drop in oil prices. It is a way in which the public sector can promote development projects as the private sector can bring efficiency plus funding for the projects either by themselves or through syndication of local and international banks.
Another key aspect of a PPP project is that it transfers the risk of financial burden from the government to a private entity. But it should be done judiciously. Mary says, “Infrastructure PPPs generally involve the transfer of some project risks from the public to the private sector, on the basis that the private sector may be better able manage such risks. However, the initial analysis of project risks and of the kind of project risks which it makes sense to transfer to the private sector is crucial, since public to private sector risk transfer comes as a cost, particularly in terms of a risk which the private sector cannot completely manage, such as revenue or demand risk.
“The retention by the public sector of some project risk which the public sector cannot entirely control is usually advisable in terms of project cost and project success. For example, transfer of all traffic volume risk to the private sector in a road PPP may in reality not be sensible, since the private sector is unlikely to be able to control fluctuations in traffic volume leading in a worst case scenario to the bankruptcy of the PPP project company.”
Hiring and firing
While the government is working on laws to fast track PPP projects, there are certain challenges that could impair the future of such enterprises. One of the most important factor is manpower. The success of any enterprise relies on the talent that it hires and retains. And most of the PPP projects will require the best people to deliver stellar results. This brings the delicate matter of Omanisation targets to the fore. Barwani says, “For private entities to operate efficiently, they should have complete control over important decisions such as attracting and keeping talented individuals.
“PPP is a new model for Oman and its projects will require a large proportion of their work force to be expatriates, including senior management with experience and know how gained from their home jurisdictions. Recruiting expatriates with pre-existing know-how and experience will maximise efficiency and use of state resources. Of course Omanisation will need to be handled carefully. It is a key tenet for Oman’s growth and development of a knowledge-based economy. If achievable milestones are set by the government, PPP will enable Omanisation to build its way up to a significant percentage in future years once the knowledge and know how has been effectively transferred.”
As far as the government is concerned it is a great leap to transfer power to private companies for projects in key sectors. But it is a move that will benefit the economy in the long run by ensuring that important development projects come fruition.
Different models of PPP funding
Different models of PPP funding are characterised by which partner is responsible for owning and maintaining assets at different stages of the project
The private-sector partner designs and builds the infrastructure to meet the public sector partner's specifications, often for a fixed price. The private-sector partner assumes all risk.
Operation & maintenance contract
The private-sector partner, under contract, operates a publicly-owned asset for a specific period of time. The public partner retains ownership of the assets.
The private-sector partner designs, finances and constructs a new infrastructure component and operates/maintains it under a long-term lease. The private-sector partner transfers the infrastructure component to the public-sector partner when the lease is up.
The private-sector partner finances, builds, owns and operates the infrastructure component in perpetuity. The public-sector partner's constraints are stated in the original agreement and through on-going regulatory authority.
The private-sector partner is granted authorisation to finance, design, build and operate an infrastructure component (and to charge user fees) for a specific period of time, after which ownership is transferred back to the public-sector partner.
This publicly-owned asset is legally transferred to a private sector partner for a designated period of time.
The private-sector partner designs, finances and builds a facility on leased public land. The private-sector partner operates the facility for the duration of the land lease. When the lease expires, assets are transferred to the public sector partner.
The private sector partner is granted a licence or other expression of legal permission to operate a public service, usually for a specified term. (This model is often used in IT projects.)
The private-sector partner, usually a financial services company, funds the infrastructure component and charges the public-sector partner interest for use of the funds.
Following are the sectors in which public private partnership ventures have been successfully implemented across the globe
Agriculture and related sectors directly affect the lives of most of the world’s population. It employs over 40 per cent of the population, inclu-ding 70 per cent of the ‘bottom billion’. It also accounts for more than 70 per cent of the world’s fresh water usage and contributes to around 30 per cent of greenhouse gas emissions.
Great progress has been made over the past few decades towards increasing access to education at all levels and improving basic literacy. However, there are still major issues in the quality of education at all levels, access to early childhood educa-tion, as well as gender equality and access to higher education.
Access to affordable, quality healthcare is a key driver of economic growth. But, persistent epidemics, spread of non-communicable disease, increasing cost and complexity of diagnosis and treatment, along with growing global demand for more and improved healthcare create a complicated and costly challenge.
Improved mobile and broadband access is one of the most fundamental enablers of private sector growth and job creation today, especially in emerging markets. It creates business oppor-tunities and has a great impact on the lives of those it reaches, quickly increasing the inclusion of people once cut off from economic growth.
Municipal governments provide many essential and basic infrastructure services, like solid waste management, water, electricity, health, education, transport etc. And as the proportion of the world’s urban population continues to grow municipalities will face increasing demand for new and improved infrastructure services.
Access to affordable, reliable and sustainable energy is vital to ending extreme poverty and promoting shared prosperity. While there have been substantial strides in improving access in recent years, today more than 1.1bn people live without electricity worldwide, almost all of them in developing countries.
Tourism in emerging markets is on the rise, with the share of inter-national tourism receipts in developing countries reaching almost 40 per cent. With faster connections, a growing middle class and a rapidly increasing array of options for travelers, it is likely these numbers will only continue to grow in the coming years.
Transport is a key driver of economic and social development. Transport infrastructure connects people to jobs, education, and health services, and enables the supply of goods and services around the world. Modernising ports, airports, roads, railroads and urban transportation systems is essential to development.
Water & sanitation
Clean, accessible water for all is an essential part of the world we want to live in. Today at least 663mn people lack safe drinking water and 2.4bn lack access to improved sanitation, such as a toilet or latrine. By 2050, at least one in four people is likely to live in a country affected by chronic or recurring shortages of fresh water.