New public-private partnerships law in Dubai changes finance options

As 2015 drew to a close, one of the most eagerly anticipated pieces of legislation due in Dubai was new legislation governing public-private partnerships (PPPs). The new law, No. 22 of 2015, was published in September and introduced on November 19, 2015. Thus tendering rounds opened in 2016 offered the first opportunities for companies to assess the impact of the new law on contracts in the emirate.

This provided a major boost to infrastructure projects in particular, with the transport sector expected to be one of the main beneficiaries. Indeed, amongst the first projects likely to be implemented under the new law are two in transport, with the emirate’s Roads and Transportation Authority (RTA) announcing in mid-2015 that the mixed-use Union Oasis Station and the Dubai Transportation Academy projects would both be open as PPPs. The RTA was later reported to also be considering PPPs for the Route 2020 Red Line metro extension. The RTA has said that the main objective of PPPs is to provide better services by improving efficiency and quality, enhancing value for money through the distribution of risk, encouraging innovation and the better use of available resources over the life cycle of projects.

Regulations & Rules

Behind the new financing and management law lies a major shift in emphasis by the authorities in Dubai, from public to private. The state still will participate in public works projects, but sees its future more as the regulator and policy maker rather than as the investor and developer. This should ease pressure on the emirate’s budget, a move that comes at an opportune moment, given reduced hydrocarbons reserves and the fall in oil and gas prices. The new PPP law also comes about in an environment where value-added tax legislation has been passed and a range of other new tax measures are being discussed, highlighting the possibility of an increasingly normalised state income and expenditure model in the emirate, marking a turning point.

The previous legal framework around contracts in Dubai, however, already allowed for PPP-style arrangements to be put together on an ad hoc basis. Such arrangements were simply drafted into a contract. At the same time, limited private finance rules exist that cover utilities projects in particular. These provide for the government to act as a guarantor for such initiatives, under a project-specific law.

Working Together

Indeed, some projects have already been undertaken with private outfits in partnership with the government under an operational concession. An example is phase two of the Sheikh Mohammed bin Rashid Al Maktoum Solar Park, where the government is partnered with a private company in constructing a photovoltaic project. Developers tend to prefer a market where such a framework for PPPs exists, as high bid costs and the complexity of such deals require developers to establish dedicated teams in country. The new PPP law, Law No. 22 of 2015, signals to these developers that they can expect a whole stream of such projects to come up, raising the chances for each developer of ending up with a successful bid.

Letter Of The Law

In detail, the new PPP law sets out which areas are to be covered and allows flexibility in the type of management contract that can be used. Private developers can make unsolicited bids, and all government agencies funded by the state can also participate. The Dubai Financial Audit Department has ultimate oversight for PPP deals, with a detailed request for proposal one of the things it will be looking for and examining. PPP contracts will also have to provide very clear details when it comes to areas such as environmental standards and quotas for Emiratisation – the percentage of employees in the project who must have UAE nationality.

Consortia may also be formed among developers, with special-purpose vehicles (SPVs) required in most circumstances. Press reports in October 2015 suggested that these circumstances would depend on the value of the project, with an SPV necessary for those over Dh200m ($54.4m). A committee including the project CEO and a representative from the Department of Finance would oversee such SPVs. Those over Dh500m ($136.1m) would in addition require the approval of the Supreme Committee. The government may also take a stake in an SPV, with UAE governing law mandatory in all projects. Subcontracting and sale of PPP assets is not allowed, unless the relevant government agency has given its permission, and the maximum tenure is 30 years.

Supplementary laws are also required to determine whether SPVs can be based in free zones, or if they can offer foreign entities a stake greater than 49%. The PPP law also assures investors by stating the government will issue sovereign payment guarantees to back up the payment obligations of any government department or agency involved.

Next Steps

The new law’s introduction means Dubai will start to move away from the traditional construct-only basis for projects, with design and build, build-operate-transfer and other models, as well as engineering, procurement and construction contracts, becoming more common as the process continues. As PPPs become more widespread too, the authorities will have to address some of the shortfalls that have emerged elsewhere. Big infrastructure projects are risky, with the PPP model requiring major private financing up-front, a prospect that many banks and other financial institutions find onerous without major government guarantees.

Achieving an acceptable return on the investment may also require a very long-term view, perhaps longer than many boardrooms may wish to entertain. The question whether the end result is delivered more efficiently is still widely debated.

The global environment in which the new PPP law was launched is also one of increasing caution among lenders and corporations. Global economic growth slowed in mid-2015 and early 2016, while the oil- and gas-based economies of the Gulf are feeling the squeeze from falling prices; there is a motivation to trim budgets and invite the private sector in, but also a deterrent for the private sector to finance expensive projects. One area generally considered more successful for PPPs, however, is transport. Smaller projects, or phases of larger projects, are particularly appropriate for PPP financing. Construction in Dubai is now shifting towards a more phase-based approach in its tendering and contracting, which bodes well for potential PPPs.

Pioneer

It may be no coincidence that the RTA is leading the way in PPP projects, with health care, education and affordable housing following closely. Indeed, the RTA has been at the forefront of PPP development in Dubai. In 2011 it issued a policy document on PPPs for transport and services, launched a PPP committee and said that it wished to have around 30% of all its projects financed on a PPP basis. It was also a major influence on the new law.

The RTA announced that the Union Oasis Station project was open to PPP bids when the project was already at an advanced stage, too, indicating its determination to be first in the field. Union Oasis is a mixed-use development built around and above the Union Square metro station, and will include recreational features. The PPP concession would be for the maximum 30-year period.

The Dubai Transportation Academy, meanwhile, is the second project the RTA wishes to have as a PPP. Another project that has been widely mooted as likely to be open to PPPs is the Route 2020 project. This is a 14.5-km extension to the Dubai Metro Red Line, with work on this due to have begun in April 2016.

Challenges & Advantages

Another potential stress point in regards to PPPs can be the sometimes considerable difference in objectives and cultures between public and private partners. Ensuring harmonious communication is crucial for the projects to succeed, and transparency is fundamental.

Abdulla Al Kindi, CEO of business development at Emirates Transport, told OBG, “The main challenge for us is to change the mentality within the public sector and ensure it works as a privately owned company would. Dubai is now competing at a global scale, becoming an international hub for transport and logistics in the region and beyond, so the ideal benchmark should be that closer to a ‘seven-stars concept’ of customer services.”

In this area, Dubai has great experience of collaboration between the public and private sectors, as well as a history of encouraging entrepreneurship and innovation. This is possibly a key advantage that the emirate has over some of its peers where the state has had a less harmonious relationship with private enterprise. A strong mercantile tradition in government – and private partners with experience in working with the public sector – may provide Dubai with the keys for success in its new PPP endeavours.