From strength to strength: Changing laws governing PPPs have attracted more private capital for infrastructure projects

Across the GCC, governments have strengthened their commitments to major capital expenditure in spite of the prevailing oil price environment. To offset the cost of this spending, officials have been working to recruit help from the private sector through public-private partnerships (PPPs). In November 2015 authorities in Dubai implemented a new PPP law, which was expected to loosen restrictions in the emirate’s projects market and provide funding for major construction programmes, such as the expansion of Al Maktoum International Airport and Dubai Metro’s red line. Bahrain has also recently changed its PPP framework in recent years, and Qatar announced it would implement a PPP overhaul by the end of 2016.

Regional Leader

Kuwait has emerged as a leader in the GCC with regards to PPP reform. Like its neighbours, the Kuwaiti government has also been keen to tweak its PPP framework to support its growing list of capital expenditures. In 2008 parliament passed regulations that made important legal changes and brought the PPP issue to the forefront of the political scene. Laws passed in 2014 and 2015 took reforms even further, building on the knowledge gained from experiences with the previous framework.

Within the GCC, Kuwait has led the way not only in legal reform but also in project volume. The country has $49bn worth of government projects planned as PPPs, followed by the UAE ($35bn). With the government keen to keep the project pipeline moving, the timing of the new regulations could prove fortuitous.

Cash Up-Front

Regulatory changes are logical given the recent fiscal squeeze borne out of low oil prices, and the country has seen its fiscal situation shift significantly in recent years. In 2013 Kuwait exported more than $108bn worth of oil, according to IMF estimates. By 2015, oil earnings had declined by more than half to $51.8bn, a direct result of crude prices tumbling in mid-2014. In response, the state has been working to introduce more fiscal restraint in several spending areas. Major construction projects, however, have thus far avoided cuts. By utilising PPPs under the new framework, the authorities hope the projects market will remain strong. “This has become an inevitable necessity because it reduces the burden on the state budget in light of falling oil prices,” Adel Mohammed Al Roumi, the then-president of the Kuwait Authority for Partnership Projects (KAPP), told media in October 2015.

In support of this approach, stakeholders point out that PPPs can provide a strong alternative to fully state-run projects, especially during the current period of fiscal restraint. “When considering the capital programmes across the GCC and the diversification agenda for all the GCC countries, it is key to note that the liquidity issues currently being experienced can be addressed through alternative funding arrangements and PPP type structure, which will also drive operational efficiency and better return on investments as all stakeholders will be incentivised to maximise returns if the PPPs are structured effectively,” Cynthia Corby, construction industry leader at Deloitte Middle East, said at a March 2016 conference in Dubai. Indeed, use of PPPs could lessen the demand for up-front state capital and increase the efficiency with which projects are undertaken by avoiding bureaucratic red tape.

Practice Makes Perfect

To facilitate this, the government has been loosening certain restrictions. The previous PPP framework was governed by the 2008 decrees that created the former Partnerships Technical Bureau (PTB). Building on the experience gained under the PTB’s leadership, the parliament passed new laws to overhaul PPPs in 2014, which took effect in March 2015. The new PPP legislation created a Higher Committee for PPPs and transformed the PTB into the KAPP. Both bodies are endowed with more autonomy and executive power than their predecessors; measures intended to help projects in the PPP pipeline clear bureaucratic hurdles. Financing terms have also become more favourable for potential investors. Under the 2008 rules, private partners found it difficult to raise money; the new regulations introduced in 2015 allow a broader range of assets to serve as collateral, easing project financing.

Significantly, the new regulations loosen restrictions on foreign ownership of PPP companies. Lawmakers also scrapped a regulation that automatically pre-qualified companies listed on the Kuwait Stock Exchange, creating a more level playing field for domestic and foreign companies to participate in PPPs, according to a briefing issued by UK-based legal firm Ashurst in April 2015. The amendments, lawmakers hope, could create more interest among foreign companies considering investments in Kuwait.

Past Successes 

The new laws build on the successful progress being made on the first phase of the Az Zour North Independent Water and Power Project, a complex that is expected to be developed over five phases for a total capacity of 4800 MW of electricity and around 1.3m cu metres of water per day. In January 2014 Al Tamimi & Company executed the project financing agreement for phase one – an electricity production and desalination plant – on behalf of a consortium of local and international lenders. The agreement, worth $1.43bn, included Japan-based lenders Japan Bank for International Cooperation, Nippon Export and Investment Insurance, Sumitomo Mitsui Banking Corporation, as well as UK-based Standard Chartered and National Bank of Kuwait.

The building, execution, operation, management and maintenance contract for the first phase went to Kuwait-based Shamal Az Zour Al Oula. In December 2015 the company and ministers celebrated the plant’s on-schedule production of 40% of its daily projected output of electricity, according to the Kuwait Times. Full completion of phase one is expected by the end of 2016, when the installation will generate 1500 MW of electricity and produce 105m imperial gallons per day of desalinated water.

Future Projects

KAPP hopes to replicate the successful tendering of the first phase of the Az Zour North project. As of the first quarter of 2016, there were over 22 ongoing PPP projects worth KD3.2bn ($10.6bn) in real estate, power and water projects, according to Marmore MENA Intelligence, a subsidiary of Kuwait Financial Centre. While that amounts to just over 3% of projects in progress by value, KAPP is moving to expand the PPP project market. In 2016 the agency aims to award KD2bn ($6.6bn) in PPP contracts, including the second phase of Az Zour North and other power and water projects.

In February 2016 KAPP announced the bidding process for phase two of Az Zour North, the largest PPP in progress. With a planned budget of KD820m ($2.7bn), the second phase is set to produce 1800 MW of electricity and 464,100 cu metres of desalinated water per day. Also on the docket for 2016 are two waste-to-energy schemes. Bidding for the KD450m ($1.5bn) Umm Al Hayman Wastewater Treatment Plant commenced at the end of April 2016, while KAPP plans to issue the build-operate-transfer contract for the Kabd Municipal Solid Waste Project – which will process solid waste through an electricity-generating incineration scheme – in the third quarter of 2016.

Fit For Purpose

With a leading position in the GCC by project value and several key successful tenders under its belt, the country is in a strong position to grow its portfolio. Like those of its neighbours in the region, Kuwait’s major PPPs have been in water and electricity projects. These sectors are well suited to the PPP model, since demand for water and electricity are relatively inelastic and are expected to grow steadily. In addition, since the government already provides subsidised utilities, it can more easily provide long-term commitments to buy water and electricity generated via PPP projects. These guarantees on future revenues can make investments more attractive for potential private players.

The government aims to use its PPP framework for other large projects with demonstrable expected future revenues. These include the planned $6bn national railway system, set to link up to the proposed GCC regional railway, and the $20bn Kuwait metro, Al Roumi said in an October 2015 interview with Reuters. As with utilities infrastructure, transport facilities can also offer the steady returns on capital that add to the desirability of private investments.

The benefits that PPPs yield would not be limited to the construction sector alone. The authorities anticipate that between 70% and 80% of funding for PPPs could come from banks, which they hope will offer a welcome boost the country’s financial sector. Future successes, along with a more even playing field for Kuwaiti and foreign companies alike, could attract more firms from abroad, thereby facilitating not only further project opportunities at more competitive prices, but also increased knowledge transfer, employment rates and economic diversification.