Public-private partnerships - what's not to like?
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Last Updated: May 02, 2011
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Government agencies and construction companies come together to share the risks and pool expertise. The public gets projects built; the private sector gets jobs. Everyone joins hands and skips off to the sunset singing Kumbaya.
The reality is far more complicated. And there are good reasons why these deals, known as PPPs, have failed to take hold in the Middle East, despite years of discussions and enthusiastic PowerPoint presentations.
A complete reworking of the fundamental approach is needed if PPP is going to develop as a tool to reshape the way things are built in the region.
"PPP means lots of money from the Government and zero risk from the private sector," a local government official told me.
During last month's CityBuild conference I spoke to a dozen construction executives who scoffed at the idea of PPPs taking hold in the Middle East. A wide variety of reasons were cited but common themes developed.
High on the list was scepticism that government agencies in the region are willing to cede control to the private sector. Companies are not eager to team with partners who can impulsively change designs and increase costs.
Construction companies are desperate for work, but not so desperate they are willing to commit time and capital to a long-term project based on the whims of bureaucrats.
For PPPs to work best, UAE government agencies may have to change the rules requiring private consortiums to be majority-owned by local interests, John Lee, an adviser to the Abu Dhabi Department of Transport, suggested at CityBuild.
Mr Lee is working on developing a PPP to build the 327km Mafraq-Ghweifat motorway, which will connect the capital with Saudi Arabia, a process that is now three years old. The project could be a bellwether for PPP deals in Abu Dhabi, which is eager to find new ways to fund its ambitious plans.
In the past PPPs have worked well in the energy and healthcare industries, where there is clear demand and steady revenue streams. But infrastructure projects such as roads, bridges and railways, where the cash flow is not as clear, provide different challenges.
Mr Lee emphasised payments to contractors on roads should be tied to construction and management standards, not traffic. Contractors need to share the risks, but the focus should be on keeping them accountable for the quality of their work.
There are lessons to be learnt from PPPs around the world, which have often focused too much on unrealistic revenue projections.
In Australia, where PPPs are common, a dozen road projects have gone bankrupt because the parties wildly miscalculated the potential traffic, in some cases by more than 30 per cent, said Brett Skinner, a principal at the advisory company Evans & Peck.
That is one good reason financial institutions are wary of PPPs. They have been burnt too many times. In some cases PPPs have lowered costs and reduced problems, but in many other projects the lofty goals have not panned out, the synergies and efficiencies did not materialise and expenses soared.
Rather than saving money, PPPs usually are more expensive, industry experts say. With money tight, lenders are not eager to jump into complex schemes with long-term payouts.
"Anyone who has the money to finance these types of projects has the ability to finance other kinds of projects," says Jay Palmos, a management consultant with Hill International.
Construction companies need work but they are equally apprehensive about committing their resources. PPPs are not a source of free money for public agencies, industry executives say.
To work, such agencies are going to have to bite the bullet and guarantee cash flows on projects, something they are reluctant to do, construction industry executives say.
But that is the power the public sector can bring to a project - the ability to bring money to a development to make it happen. It is the public sector that can make the financing work.
At the same time, state officials are going to have to back away and acknowledge that the expertise in most projects lies in the private sector - the companies that build and manage projects on a daily basis.
In exchange, deals to the construction companies must be based on strict construction performance standards, not cash flow. That is the lesson of PPPs around the world. Private-sector companies can help raise financing but ultimately their compensation should be tied to variables they control.
At the risk of sounding like a chamber of commerce marketing geek, the key word in PPP is partnership.
For all parties, there is a pot of gold at the end of the rainbow. GCC governments are committed to building infrastructure to an estimated value of US$452 billion (Dh1.6 trillion) over the next few years, according to a report by Ventures Middle East.
Eighty per cent of those contracts are in Saudi Arabia, the UAE and Qatar.
That should be enough incentive for both sides to make deals.