Drivers for change
Against the backdrop of new oil market realities and the geopolitical landscape in the Middle East the oil exporting and non-oil economies are implementing structural reforms to diversify their economies away from hydrocarbons and generally to boost the role of the Private Sector.
Regional development plans including Saudi Arabia's Vision 2030 identify key strategic sectors: logistics, tourism, energy, financial services, health care and manufacturing. A push for smart government in the Region is timely against the background of population growth – the population of the GCC will have tripled in 50 years – water and oil supplies will not be able to cope. Solar energy is expected to account for nearly two thirds of the Middle East energy mix by 2050.
These drivers and realities have stimulated progress to increase the role of the private sector in Kuwait and Oman. Other countries such as Iran are developing privatisation plans. Kuwait, Oman and Saudi Arabia are in the planning stage.
Dubai's new PPP law, Law No. 22 of 2015 (Dubai PPP Law) now provides the legislative structure for PPP projects by the Dubai Government in the Emirate.
Objectives of new Dubai PPP Law
The new PPP law, marks an intention to deviate from self-funding as Dubai's traditional tool to procure major infrastructure and energy projects. Objectives (Article 3) include:
- encouraging the private sector to participate in development projects;
- enabling the Government of Dubai ("Government") to implement its strategic projects efficiently and effectively;
- increasing productivity and improve the quality of public services;
- reducing the front-end costs and the financial risks to Government; and
- ensuring private sector entities transfer knowledge to partnering Government agencies.
The new Dubai PPP law in practice
The new Dubai PPP law will apply to all Government agencies that are subject to the general Government budget (Article 4). The law can be extended to those agencies not subject to the general budget by authorisation of the Supreme Fiscal Committee (the Supreme Committee).
The new law will apply to all types of projects, except for electricity and water projects and contracts of works and the supply of materials (Article 4), which are governed by separate laws: Dubai Law No. 6 of 2011 and Law No. 6 of 1997 respectively.
The structure of the PPP will depend on the economic, financial, technical and social feasibility of the project and must follow one of the following prescribed methods (Article 7):
- private entity finances, completes and operates the project for the time period agreed before assigning and transferring full ownership to the Government agency in a concession type agreement or build-own-operate-transfer (BOOT) model;
- private entity finances, completes and operates the project for the time period agreed before assigning and transferring the usufruct rights (the rights to use and enjoy the project) to the Government agency or a build-operate-transfer (BOT) model;
- private entity to complete the project and then transfer ownership to the Government agency but maintain rights of commercial use and operation for an agreed time period; or
- Government agency transfers the benefit of the project to the private entity for commercial use for an agreed time period.
Although it is early days the intentions of the Dubai Government are clear.
Solar power in the UAE
In recent years, solar power has started to attract the levels of investment one might expect in the sun-baked UAE. The country's first solar plant was commissioned in Abu Dhabi in 2013. This relatively slow uptake of solar power has been attributable to various technical difficulties and the traditional availability of Government-subsidised gas in the UAE, which remains the primary source of energy.
Clean Energy Strategy – Dubai
Dubai recently announced its Clean Energy Strategy 2050, which consists of five pillars, the key points of which are:
Infrastructure: Implement more renewable energy and allocate AED500m for research and development in clean energy. Establishment of the Dubai Green (Free) Zone to attract the set-up of clean energy companies.
Legislation: Introduce legislation for schemes to encourage the installation of rooftop solar PV panels connected directly to the electricity network. Consumers will receive payment for electricity generated and fed into the network (a "feed-in" tariff scheme). A mandatory requirement will also be introduced for solar panels to be installed on all rooftops by 2030. A net metering scheme will also be introduced, meaning consumers can earn credit against future bills for any energy fed into the network. Recently, as part of the Shams Dubai Initiative, 5,240 PV panels were installed at Jebel Ali Power Station Dubai. There are plans to install 90,000 PV panels across the Jebel Ali Free Zone.
Funding: Allocate AED100bn to establish a Green Fund to support research and development in clean energy and provide finance, including low cost loans to investors, in clean energy projects.
Building capabilities and skills: Build human resources capabilities through clean energy training programmes in co-operation with international organisations.
Environment-friendly energy mix: Achieve an energy mix of 25% solar power, 7% nuclear power, 7% clean coal and 61% gas by 2030 and source 75% of Dubai's power from clean energy by 2050.
Most solar projects in the Middle East are procured through the IPP model, whereby a private entity is awarded a concession by the government and delivers a fully operational plant, which it operates for an agreed period of time (normally 10 to 25 years for solar projects) under a power purchase agreement. The Government may invest by taking an equity stake in the project company. In the United Kingdom (UK), the Public–Private Partnership (PPP) model has been used for delivery and operation of solar power projects, whereby private-sector companies partner with the Government and assume the financial, construction and operational risk in the project under the relevant PPP legislative framework.
While Dubai's new Law No.22 of 2015 provides a legislative structure for PPP projects in the Emirate – under Article 4, electricity projects governed by Dubai Law No. 6 of 2011 (regulating the participation of the private sector in power generation) are excluded. This suggests that Dubai's PPP law does not apply to solar projects.
Regional Legislative Incentives for Renewables
The UAE may look at legislative developments elsewhere in the world that provide investor incentives for solar (and other renewables) projects.
- Morocco's Law 13-09 of 2009 on renewable energy (amended by Law 58-15) provides for feed-in tariffs and net metering schemes for solar and wind-generated power. Renewable energy power producers (both public and private) are entitled to be connected to the electricity grid and specific areas of land will be allocated for solar and wind projects.
- Jordan's Renewable Energy and Energy Efficiency Law No. 3. (2010) was the Middle East's first feed in tariff scheme, under which, privately generated power can be transmitted through the main grid. A direct proposals scheme has enabled developers to submit proposals for renewables projects directly to the government.
- Egypt's recently passed Law 203/2015 seeks to boost private-sector interest with schemes including a feed-in tariff, guaranteed access to the main grid and permission for IPPs to sell power directly to consumers via the main grid.
In the European Union (EU), the Renewable Energy Directive (2009/28/EC) sets legislative targets to source 20% of the EU's energy from renewable energy sources. Member states have individual legally binding targets. To achieve its target of 15%, the UK has implemented legislation and schemes to provide feed-in tariffs (the UK FIT Scheme); a renewable energy generation requirement for electricity suppliers (the Renewables Obligation); and financial assistance for green projects (the UK Green Investment Bank).
Renewables Forecast – UAE
With recent technological advances, reduced production costs and the price of solar-generated power at a record low, solar projects are in vogue in the UAE. Dubai's recent plans to provide a legislative framework for incentives, such as feed-in tariffs and net metering, should pave the way for the wider UAE to exploit more fully the high levels of sunlight it receives and bolster the private sector's appetite for involvement in more groundbreaking solar projects consistent with Strategy.
Liquidity Impact – Law and Development trends
Deficit reduction measures have been introduced in the GCC and the wider MENA Region to reflect the enduring low oil prices. While new approaches have been introduced to enable infrastructure investment to be maintained and enhance prosperity (PPP's / Co-investment vehicles) the ongoing liquidity problem has serious and traditional consequences for the local Construction industry. This will impact upon real estate development and conventional project financing: bank lending. IPO's may become more difficult.
- Build-to-Suit – An alternative means of funding new development in the face of tightening liquidity is 'build-to-suit'. BTS involves developers building schemes according to the specifications provided by corporate tenants, who then commit to either lease or purchase the premises upon completion. This concept is popular in more developed markets, and signals further evidence of maturity in the UAE real estate market. BTS and Sale and Leaseback solutions (whereby occupiers of existing buildings can free up capital for reinvestment in their core business) have been most prevalent in the office and industrial sectors (warehousing / logistics) in the UAE (and Omani) markets to date. There is also increasing interest in these concepts in the education and healthcare sectors.
- A by-product of the slowing market conditions is likely to be a continuing trend of shelving / delaying projects
- The risk of Employer's who cannot or will not pay is also ever real.
In the UK one of the main drivers for the introduction in 1996 of compulsory ADR (by adjudication) was to improve cash flows in the construction industry coupled with outlawing the practice of "paid when paid" clauses in the sub-contract supply chain.
However in the UAE conditional "pay when paid" clauses are common place for sub-contractors. In addition UAE law places a protective barrier for the employer and confirms in the Muqawala section of the UAE Civil Code (specifically, in Article 891) that no claim may be addressed by the sub-contractor directly to the employer, save for instances of assignment.
While under UAE law and jurisprudence there are ways to defeat the basic position on sub-contractor liquidity and claims the onus is placed firmly upon the sub-contractor to enhance his position.
ADR in UAE / Middle East
As to the broader future of ADR in the Middle East these are early days. Whilst ADR concepts have been considered and used in the civil law jurisdiction of the UAE (and also enshrined in the current rainbow of FIDIC Contracts traditionally and widely used in the MENA Region), there are both legislative and practical reasons why the use of mediation, conciliation and other forms of ADR in disputed matters is not common place. Issues include confidentiality, power to bind and audit trail.
Despite commercial and historical reluctance the framework for amicable settlement of disputes is in place in the UAE:
- His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, created the Centre for Amicable Settlement of Disputes in Dubai under UAE Law Number 16 of 2009. The publication of this law demonstrated that the Government wished to encourage and increase the use of mediation in Dubai.
- The Centre deals with amicable settlement of civil and commercial matters excluding certain categories of case and those involving Government bodies. The settlement of a dispute before the Centre is reviewed by a number of mediators under direct supervision of the concerned judge and based on relevant laws and regulations.
Dubai International Financial Centre ("DIFC") and Mediation
- The DIFC Courts have their own rules regarding ADR, found in Part 27 of the Rules of the DIFC Court. While emphasising its primary role as a forum for deciding civil and commercial cases, the DIFC Court encourages parties to consider the use of justice by reconciliation (such as, but not confined to, mediation and conciliation) as an alternative means of resolving disputes or, particular issues within a dispute.
- The DIFC-LCIA Arbitration Centre, established in February 2008, offers mediation as well as arbitration services to users of the Centre under the rules contained in the LCIA mediation procedure. If mediation is conducted under the LCIA Rules, Article 10 of those Rules will guarantee the confidentiality privilege.
RICS UAE Mediation Panel
- The RICS has been actively promoting its mediation services in the UAE and elsewhere in the Region (e.g. Qatar) with some success. The launch of the RICS Mediation Panel demonstrates growth in the anticipated demand for mediation in the region.
New UAE Insolvency Law
Federal Decree Law No. 9 of 2016 on Bankruptcy was issued for publication in the Official Gazette on 29 September 2016 and will come into force on 29 December 2016 ("New Insolvency Law").
This New Insolvency Law replaces the insolvency regime contained primarily in the Commercial Code (Federal Law No. 18 of 1993). Momentum for change has been driven by recognition that the existing regime has proved cumbersome and time-consuming for users.
The New Insolvency Law contains provisions which are likely to prove popular with parties involved in proceedings:
- wider application – extends beyond "commercial traders"
- current insolvency regime under the Commercial Code (Chapter V) to be repealed together with bankruptcy related crimes in the Penal Code
- approved list of insolvency practitioners under a newly formed Financial Restructuring Committee
- introduction of a new insolvency "balance sheet" test
- bounced cheques – stay of proceedings – if restructuring activated
- minimum AED 100,000 threshold for creditor – initiated insolvency proceedings
- no offence of "bankruptcy by default".
It is early days but looking forward the New Law introduces a modern framework for use by parties facing or advising upon financial difficulty in the UAE.