Despite the wealth of many of the Middle East region’s governments, private finance is expected to play an increasingly important role in the regional infrastructure sector, PwC said in its “Middle East Capital Projects & Infrastructure Survey June 2014” report.
This is in part driven by the desire to get access to private sector expertise and rigor, but also because of the sheer scale and public financial commitments of the developments planned around the region, the report noted.
In addition, some lower income countries want to spread the cost of new projects over a longer period of time and share the long term operational and financial risks with the private sector. While fewer than 10 percent of respondents thought public-private partnerships (PPPs) were not necessary in the region, the requirement for private sector funding is likely to increase, PwC said in the survey.
Four in five respondents expect some form of private finance to be involved in next year’s projects, and 83 percent stressed the importance of private sector financing. Now is a good time for projects to look at raising money from the private sector. Banks are recovering from the global financial crisis and liquidity is plentiful, driving down borrowing costs.
During 2013 several large projects demonstrated this ability, with Saudi Aramco and Dow Chemical reaching financial close on a $19.3 billion funding package for the development of the Sadara Chemical Company. That deal was one of the largest project finance transactions in the world last year and attracted capital from major Western banks, export credit agencies, and the Islamic bond market.
Rather than creating another layer of complexity, private sector finance can play a significant role in bringing in outside expertise, and help to incentivize projects to be delivered on time and on budget. In total 41 percent of respondents said they thought PPPs increase the likelihood of delivering a project on time and on budget.
Private sector finance however will not be a panacea to constraints on government funding, the report further said.
Although the banking sector and capital markets are in a bullish mood, there are still expectations that rising demand will exceed the supply of capital.
Over the last year 45 percent of respondents said funding constraints had resulted in projects being delayed or deferred. Around 65 percent of respondents said that restrictions on the availability of private finance would result in some delay on their projects over the next 12 months.
In order to overcome the challenges that the Middle East capital projects and infrastructure sector faces, governments and government agencies need to shift from the current typical mind-set of viewing infrastructure projects as one-off capital costs. Instead, more emphasis should be placed on long-term operations and maintenance costs and who will be responsible for them.
There are many successful examples of how government bodies in the region have used production-sharing agreements to deliver projects on time and on budget. The energy and water industry in particular uses contract forms (Independent Power Plant and Independent Water Power Plant) to foster an approach where the state and private sector are incentivized to work together in a long-term offtake arrangement. In the oil and gas sector production-sharing agreements put the onus for finding, developing and exploiting natural resources on the private sector, but also offer the promise of substantial financial reward to encourage delivery.
Since its first use in Oman in 1994 the Independent Water and Power Plant (IWPP) has become an extremely successful model that has been replicated throughout the region. It has been responsible for bringing in billions of dollars of private investment and the involvement of some of the world’s most experienced power companies.
Incentivizing a ‘whole of life’ mindset In traditional engineering – procurement – construction tenders, the contractor is encouraged to do whatever necessary to submit the lowest bid. By tying the construction and operations together in a public private partnerships model, and passing the risk of cost overruns, delays or long-term operational costs to the private sector, bidders and developers are incentivized to consider
The challenge now face in the region, is how to extend this model into areas such as transportation, healthcare, education and housing, the survey said.
Often in these cases it will be more complicated to arrange a set of outputs that a hospital or school should meet, for example. Coupled with this, many regional governments are trying first to meet social and political objectives – for example the provision of housing, access to healthcare or the creation of jobs. In many cases it may not be possible to marry these objectives to a long-term commercial contract that will be attractive to the private sector.
Successful partnerships with the private sector also require governments to completely overhaul the procurement process. They require a robust commitment from the state to an open and transparent tender process to attract internationally experienced operators. Governments should carefully consider which form of contract they use to incentivize their contractor or a partner from the private sector, while being aware using a PPP contract will not always be appropriate.© Copyright - Saudi Gazette