A model of success: New report recommends the government partner with private firms on infrastructure development

With Qatar about to embark on a multibillion-dollar infrastructure spending programme, debates over how this should be funded and managed are beginning to emerge. While the government undoubtedly has the capital and will to build to its own programme and specifications, there are increasingly vocal calls for it to look at other possibilities. Chief among these is the public-private partnership (PPP) model.

REPORT FINDINGS: In February 2012 Markab Advisory and Qatar Financial Centre Authority released a report titled “Public Private Partnerships: A Vehicle of Excellence for the Next Wave of Infrastructure Development in the GCC”, advocating the adoption of the PPP model to fund a number of projects in public infrastructure, from the transport network to social infrastructure, such as hospitals and schools.

Over the past 25 years, there have been more than 1000 PPP projects globally, with a value of at least $15trn. In the past few years the annual value of PPP transactions has averaged between $50bn and $60bn, according to data from Markab.

CRITICISM: However, while the framework is well-established in many places, it has not been without its critics there, and not everybody is convinced globally. While Markab believes that the industry could grow to more than $200bn worldwide if a mere 10% of all infrastructure projects were executed on a PPP basis, the reality is that the percentage of projects financed in this way around the world remains in single digits.

Furthermore, many people are unconvinced the PPP model would be viable or necessary in the Gulf setting. Speaking at the CW Public Infrastructure Conference in Dubai in early March 2012, Wael Allan, the regional director for Hyder Consulting, said, “If you think about PPP, it’s being driven by financial constraints in the West, so the model comes from Australia, the UK, the US and other countries where they don’t want to increase taxes, so they rely on the private sector. If we have the money here, where is the value in the PPP if it’s not structured where finances drive everything?”

GOVERNMENT FUNDS: The Qatari government is certainly not in a position of needing to generate private sector funding for public infrastructure. According to the IMF, the country’s real GDP grew by 13% in 2011, bolstered by high hydrocarbons revenues. Indeed, the success of Qatar’s liquefied natural gas export industry has allowed the government to run up significant surpluses and budget on very conservative energy prices. For example, the country recorded a fiscal surplus of QR44.5bn ($12.2bn) in 2011-12.

This is certainly not a one-off. Between 2002 and 2009 the surplus averaged around 10% of GDP, according to the National Development Strategy 2011-16. It is also expected to remain robust in the future. According to information outlined in the strategy, gross national savings are expected to remain above 40% of GDP through 2014, while the fiscal surplus is expected to hover around 6% of GDP by 2016.

The government admits these are conservative estimates, suggesting that it is extremely well placed to completely fund the country’s ambitious development plans itself. Indeed, this seems to be the expectation among many within the local construction industry. “I doubt we’ll see a move towards PPP in infrastructure. The government has the financial muscle and we’d have more of a say under a PPP. It would be difficult to change the culture,” said Ammar Ammar, the business development manager of Al Jaber & Partners in Qatar.

In October 2011 Yousef Hussein Kamal, the minister of economy and finance, reported that the government would allocate 40% of its budget each year through 2016 for infrastructure spending. As such, it seems likely that much of the country’s transport, housing and social infrastructure projects will end up being financed directly through public coffers.

The government has also been using the banking sector’s strong capacity to support its building programme, launching a $5bn bond issue in December 2011 that is likely to support infrastructure development. As such, there is little evidence that the government is looking at using the PPP model for its latest round of dedicated infrastructure expansion.

PAST EXPERIENCE: Qatar is not a complete stranger to the PPP model. As with much of the GCC region, Qatar has adopted a PPP framework for much of the expansion in the power sector. Ever since the success of the 710-MW Taweelah A2 project, signed under a PPP agreement in Abu Dhabi in 1998 by Emirates CMS Power Company, the framework has been seen as a successful means of expanding and improving the utilities network in the GCC region. In Qatar, the first experiment with the PPP framework came in 2011 with the construction of the first Independent Water and Power Project (IWPP), Ras Laffan A, in which the US firm AES Corporation was the developer and operator of the plant. The IWPP model now supplies around two-thirds of installed capacity, according to Markab Advisory. Qatar’s Public Works Authority, Ashghal, has used the PPP framework, with a design, build, operate model for a waste management project, and it is a stated aim of the National Development Strategy to encourage greater private sector participation in developing infrastructure and supporting economic diversification. Furthermore, the Ministry of Business and Trade has established a PPP directorate to look at the use of the framework for infrastructure development. Continued reluctance by some can be frustrating. Robert Hardy, the director of Mott MacDonald’s Middle East Transport and Planning division, told the CW Public Infrastructure Conference: “PPP was an opportunity lost, because the idea of lumping together one team that designs, builds and then is responsible for all of the operation is actually really beautiful. Right from the beginning you’re thinking about not just how a project can be designed to produce the service it has to, but how you can design it to keep construction costs down, and right the way through you’re thinking of the whole 25-year cycle of service you’re delivering to the end-user. You become a service provider.”

EFFICIENCY: Proponents of the PPP model suggest that the funding element to the agreement should be a secondary consideration. For the GCC, the involvement of the private sector in all stages of the delivery and operation of public projects helps build local knowledge and improves efficiency. According to the Markab report, “The scale of infrastructure development in the GCC is such that efficiency gains in the order of 15-20% by avoiding time and cost overruns alone could be worth billions of dollars. A 10% saving on the planned infrastructure investment of $2trn with a two times multiplier effect on the economies alone could result in savings worth $400bn. The case for efficiency is too strong to be ignored.” In Qatar, Markab estimates that efficiency savings and the economic benefits of PPPs could add up to $30bn, or 25% of annual GDP. Therefore, while there is no financial imperative for the state to embrace the model for its infrastructure drive, the potential benefits help make a compelling argument.