Oman looks to public-private partnerships in construction

Many large construction projects in Oman are developed under public-private partnerships (PPPs), whereby a state-linked institution joins forces with a private company or multinational to carry out a project in the common interest.

In light of low oil prices and straitened budgets, the government is looking to expand use of this structure to carry out its investment and diversification agenda under the country’s ninth five-year plan, which covers 2016-20, and its Vision 2040 development blueprint – a shift that should further “catapult growth of the construction industry”, according to Ventures Middle East, a management consultancy.

Project Pipeline

As of October 2017 some 11 PPP projects worth $2bn were in various stages of planning and execution in the sultanate, according to MEED, a business intelligence outfit that tracks construction projects across the Middle East.

In MENA, the value of these projects outside the energy sector more than doubled in the 12 months to October 2017 to $185bn, with most of the 151 projects being undertaken in the GCC and within the utilities sector. “The rise in PPPs over the past few years is one of the most strategically significant shifts in the business landscape of the Middle East since the nationalisation of the oil industry in the early 1970s,” Richard Thompson, MEED’s editorial director, told press that month.

Recent Developments

Several PPP projects have moved ahead lately. In October 2017 the Oman Power and Water Procurement Company (OPWP) sought bids for advisory services in preparing a PPP contract to develop an independent water project on a build-operate-own basis in Wadi Dayqah near Muscat. Earlier, in February 2017 the Oman Logistics Company announced an open tender to develop the Khazaen Logistics Hub, an integrated transport and shipping complex to be built on a PPP model in the governorate of South Al Batinah, west of the capital city. In March 2017 the OPWP pre-qualified six bidders in a contract to develop a PPP water desalination plant in Khasab, in Oman’s northern Musandam Governorate, following a tender launched the previous November. The plant will have a capacity of 16,000 cu metres per day.

Other large projects to be built through PPPs include Port Sultan Qaboos Waterfront, a $1.3bn mixed-use development covering 451,000 sq metres in Muscat, and Sultan Qaboos Medical City, a $780m hospital complex comprising 1250 beds and slated for a build-operate-transfer model over a 30-year term. In the utilities sector – the industry in which PPPs are most developed – the government plans to use the model for the 200-MW Oman Desert Solar Farm, to be tendered as an independent power project (IPP); Muscat IPP, a power plant with a capacity of 800-1000 MW; and a water desalination complex with a 225,000-325,000 cu metres per day capacity in Muscat’s Barka area; and four further desalination plants in Duqm (with a capacity of 60,000 cu metres per day), Sharqiyah (80,000 cu metres per day), and two units at Salalah (one with a capacity of 100,000 cu metres per day, and the other yet to be disclosed).

Government Impetus

State support for PPPs is widespread. In 2013 the government set up a PPP “taskforce” under Sharakah, the state entity for supporting entrepreneurship, to look into ways of expanding use of the structure in carrying out public investments. In December 2015 it hired a consortium of consultants including EY, AMJ and Squire Patton Boggs to advise the creation of a PPP law and oversight agency, and the expansion of PPP procurement. In October 2016 the minister of commerce and industry, Ali bin Masoud Al Sunaidi, announced that greater use of PPPs was an explicit goal of the ninth five-year plan launched that year, which also reaffirmed a commitment to collaborate more closely with the private sector on its public investment agenda. Meanwhile, Tanfeedh – also known as the National Programme for Enhancing Economic Diversification, an initiative launched in 2016 to accompany the ninth five-year development plan – supports greater use of PPPs as one of its key initiatives. More recently, the Diwan of the Royal Court has been overseeing development of a legal framework for PPPs and a state entity to oversee their administration and procurement.

Efficiency Gains

The benefits of having a structure for public works are well documented. An outline of these is captured in the World Bank’s definition of a PPP as “a long-term contract between a private party and a government entity, for providing a public asset or service, in which the private party bears significant risk and management responsibility, and remuneration is linked to performance.” Because the government does not usually make any payments until the facilities in question are completed, there is little upfront expenditure.

During the operational phase, the government then typically pays based on actual usage or availability, reducing the risks of over-investment or overcapacity. The model also allows officials to measure the private sector’s effectiveness in the project through key performance indicators, as a result guaranteeing better oversight. It can also reduce costs and accelerate timelines accordingly.

According to a recent UK National Audit Report on the subject, infrastructure projects carried out on a PPP model had average cost overruns of 22%, compared with 73% for their non-PPP counterparts, and time overruns of 24% compared to 70%. A 2007 study by Australia’s Allen Consulting similarly found use of PPPs shrank budget over-runs from 35% to 12%, and cut delays from 26% to 13%. Not only can PPPs bridge funding gaps for critical infrastructure; they also tend to enhance project management, engender a healthier business environment, spread risk more appropriately, boost competitiveness and private investment, and result in the more efficient allocation of both public and private sector resources.

Legal Framework

The authorities have also been working to shore up the legal side of such arrangements. “At present, undertaking a PPP is risky given the commercial and regulatory uncertainty,” Ameet Hirani, director of Muscat-based construction firm Al Rawahi International, told OBG. “If PPPs are to become viable means of financing projects, clearer and simpler rules will need to be established.”

In the early months of 2017 moves to address this were undertaken, and a steering committee composed of public and private sector stakeholders, as well as consultants specialising in PPPs, held intensive discussions to develop new legislation setting out a legal framework for these structures. As of April, approval of the law was in the works and making notable progress: “A new PPP law has already been drafted and will be enacted very soon to adopt some of the existing bodies and functions under the existing Privatisation Law,” Abdulaziz Al Risi, studies expert at the Diwan of the Royal Court, told a seminar hosted that month by the Oman American Business Centre. A report by global law firm King & Spalding in June 2017 said the law was expected by year’s end; however, as of January 2018 it was yet to be enacted. To accompany the legislation, officials plan to establish a Central PPP Unit charged with preparing tenders, administering procurement and ensuring competitiveness throughout the process.

Challenges

The shift to greater use of PPPs has not been without obstacles. “The transition from full government control to private-sector control requires a host of difficult changes to be implemented, covering everything from the way entire industries are regulated, to how much things cost over, to who has the decision-making authority,” according to Thompson. “It requires new skills and technical capacity. And it requires not just a change in business models but also in the political mindset.” There may also be room for improvement in transparency: officials have been talking of passing a PPP framework since at least 2013, yet have since released few detailed, public updates on its progress.

Prospects

Nonetheless, the strong commercial case and political support for using PPPs in the sultanate suggest the model will continue to see increased development and use in the near term. While oil prices have recovered from their low of $28 per barrel in January 2016 to $69 a barrel as of January 2018 – which has eased some pressure on public finances – they are still a long way from their post-financial-crisis high of $128 in March 2012. In the meantime, sovereign budgets have largely adjusted their management models, and officials their mindsets, to accommodate the prospect of relatively low oil prices over at least the next few years. The impetus to rely increasingly on the private sector for development and economic growth has built critical momentum. The key now is to sustain it.