In a climate of falling oil prices and tightening government budgets, several states in the Gulf Cooperation Council region (GCC) are looking again at Public Private Partnerships (PPP) as one of several business models for the development of essential infrastructure assets and services.
PPPs can be undertaken in a variety of different forms, but in their purest, they can be described as policy-driven partnerships between a public sector body and a private sector entity for the delivery of public assets and their related core and non-core services.
PPPs allow the private sector to assume some of the development and operational risks that the public sector would otherwise have to retain under more traditional forms of infrastructure procurement. Under PPP, the public sector harnesses the private sector's expertise and access to finance, which frees up public sector resources so that they can focus on policy aspects and core services in their sector.
PPP is again on the radar of GCC Governments. Saudi Arabia has indicated that it may privatise certain essential infrastructure. Oman has appointed advisors to devise a PPP Framework. Dubai and Kuwait are taking the lead, however, through the expansion (Kuwait) and introduction (Dubai) of their respective PPP frameworks.
This article seeks to highlight recent and exciting PPP legislative developments in Dubai and Kuwait. In doing so, we compare the approaches taken in relation to key PPP issues, such as the role of government in PPP projects, ownership restrictions and private financing of PPP projects.
2. Dubai and Kuwait – Recent PPP policy developments
In 2014, Kuwait replaced its existing PPP law2 with new laws regulating how PPP projects are to be delivered in Kuwait.3 This was followed in March 2015 with related Executive Regulations4 (collectively, the Kuwait PPP Law). The Kuwait PPP Law governs the procurement of all PPP projects in the state of Kuwait, including independent power producer projects (IPP).
Dubai introduced its PPP law5 (the Dubai PPP Law) in November 2015. The Dubai PPP Law applies to all public-private agreements entered into by a government agency, with the notable exception of electricity and water projects (notably IPPs and IWPPs) and contracts for works, materials or services which are subject to Law No. 6. of 2011 and Law No.6 of 1997 respectively.
The Kuwait PPP Law and the Dubai PPP Law both foreshadow the publication of accompanying PPP guidebooks. In the case of Kuwait, there is an existing PPP guidebook which was issued by the then PPP authority, the Partnership Technical Bureau. We expect this will be updated to align with the Kuwait PPP Law by the new PPP authority (see below).6
3. Dubai and Kuwait – different approaches, same goal?
The laws introduced by Dubai and Kuwait seek to achieve the same goal: the promotion of PPP as a method of procurement for certain infrastructure projects which are to be backed by supporting legal frameworks and policy.
Notwithstanding the similarity of objective, the approaches taken by the two governments have several noticeable differences. We explore some of these below.
A) Coordination of PPP Projects
The Kuwait PPP Law creates the Kuwait Authority for Partnership Projects (KAPP), which is mandated with responsibility for managing the implementation of PPP projects in Kuwait. KAPP operates under the supervision of the 'Higher Committee for Public Private Partnerships'. KAPP is responsible for establishing project delivery vehicles, developing standardised PPP documentation and conducting feasibility studies for PPP projects. The Higher Committee's role is to sanction and oversee the operations of KAPP.
The Dubai PPP Law has not at this stage established a specialist PPP authority. Instead, the approval and management of Dubai PPP programme falls under the remit of the Supreme Fiscal Committee. Further, the authority to approve PPP projects with a 'total cost to be borne by the government' of less than AED 200 million (approx. USD 55 million) can be approved by the 'CEO of a Government Entity'. PPP projects with a total cost between AED 200–500 million (approx. USD 55–135 million) can be approved by the Department of Finance. The Dubai PPP Law does not articulate how the 'total cost' of a project is to be calculated, so we expect guidance to come in the form of supporting regulations in this regard. In international PPP jurisdictions, the procuring agency derives a 'Public Sector Comparator' for PPP projects, which is designed to compare the cost of procuring infrastructure and services traditionally by government, compared to the risk adjusted cost proposed by the private sector. This is one way to derive the cost to government and at the same time determine whether adopting a PPP model can generate value for money for government.
B) Procurement Procedures
Both PPP laws require competitive bidding, including bidder qualification, selection rounds, evaluation of bids and provisions concerning the award of the project agreement. The Kuwait PPP procedures are prescriptive, with the Executive Regulations detailing a process commencing with an Expression of Interest, proceeding to an Invitation for Qualification, a pre-qualification selection stage, submission and evaluation of bids resulting in a final award decision.
The Dubai PPP Law contains a high level description of the procurement procedures, which include a commitment to core WTO Rules principles (such as transparency, freedom of competition and equality). It is anticipated that supplementary guidance and regulations will provide further detail in this area.
Both PPP laws permit unsolicited approaches for projects from the private sector. In Dubai, where this occurs, the procuring agency is permitted to make a direct award to the proposer if the project is feasible. In Kuwait, the Kuwait PPP Law envisages a competitive process for unsolicited approaches, however, the proposer is given certain advantages in the competitive process and an underwriting of costs incurred in undertaking feasibility studies.
C) Project Company – governance and ownership
The Kuwait PPP Law provides that for any PPP project with a cost estimate of under 60 million Kuwaiti Dinar (KD) (approx. USD 197 million), the project company may be fully owned by the consortium members. For projects exceeding 60 million KD (approx. USD 197 million), a public joint stock company must be established, of which 50% of the shareholdings must be offered to the general Kuwaiti public. The remaining 50% will be jointly held by the successful bidder (with a minimum guarantee of 26% shareholding) and the relevant Kuwait procuring authority.
The Dubai PPP Law also deals with ownership of project companies. For example, in the event the procuring government agency wishes to participate in a PPP project, the project company must be constituted as a limited liability company. There is no IPO requirement under the Dubai PPP Law. Under the Dubai PPP Law, any bidder that can demonstrate that it has the requisite technical and financial capabilities (and is also willing to offer financial security to the Dubai Government's satisfaction), can undertake the project itself without the need to establish a separate project company.
It is important to note however, that the Dubai PPP Law does not appear to supersede any restrictions on the foreign ownership of companies in the UAE.
Both PPP laws require an ownership lock-up period during which no transfer of ownership in the project company will be permitted. The actual timeframe is to be determined on a project-by-project basis.
D) Financing and Other Incentives
The private sector's ability to secure external debt finance for a PPP project is a critical aspect of PPP projects. It relieves the public sector from the up-front capex burden required to develop large infrastructure projects.
The Kuwait PPP Law permits share pledges over the project company, step-in rights (subject to Higher Committee approval), a charge over the project company's assets, and to book debts and/or income generated. The Kuwait PPP Law prohibits sales/mortgages of the land on which the project is established. It also requires the term of any security to match the project agreement term. It further caps the borrowing level to a pre-agreed amount, which is specified in the project documentation. The Kuwait PPP Law also envisages incentives to the private sector such as exemptions from tax, duties or fees, which are to be specified on a project specific basis.
Whereas, the Dubai PPP Law includes an express right on behalf of the project company to seek authorisation for debt finance from the procuring Government Entity and the Department of Finance. We expect further regulations to be issued relating to financing as projects approach the bid stage.
E) The Project Agreement
The project agreement is the key legal agreement between the public sector and private sector for a PPP project. It regulates all aspects of the partnership. Both PPP laws provide their respective Governments with a degree of flexibility in the negotiation of the commercial terms of the project agreement. Both PPP laws set out a list of mandated provisions which must be contained within a project agreement. These requirements are broadly similar and matters which would generally be included within PPP arrangements as a matter of course, such as ownership of assets, intellectual property and insurance.
Additionally, within both sets of PPP laws, there is a requirement that the governing law of the Project Agreement must be that of the domestic legal system. The use of arbitration (conducted within the jurisdiction) is also broadly permitted in both PPP laws.
A significant difference between the two PPP laws relates to the duration of the Project Agreement. Project Agreements in Kuwait can last up to 50 years from the completion date of construction, with the incumbent allowed an advantage in any following competitive process to continue to operate the asset. Project Agreements in Dubai are limited to 30 years, with any longer period requiring approval from the Supreme Committee for Fiscal Policy.
Finally, both PPP laws envisage the transfer of the project back to the respective Governments at the end of the project term, which follows the build–operate–transfer or 'BOT' model. However, the Dubai PPP Law also expressly permits the build-transfer-operate or 'BTO' model. Under the Dubai PPP Law, the Government can transfer its interest in an existing project to a private sector entity to operate.
PPP projects have been successfully implemented in international markets, such as the UK and Australia, which are now considered mature PPP markets. Advocates of PPPs point to its many advantages, such as private sector investment, private sector expertise and knowledge transfer and, of course, job creation. All of these can have a significant, positive impact on a country's economy.
Advocates also point to PPP as a solution for the delivery of government infrastructure in today's climate of low oil prices and tightening government budgets. It is certainly true that PPP can relieve the public sector from the up-front capex burden required to develop large infrastructure projects. However, the government still has to pay for the cost of the development and operation of the infrastructure over time. The key in this regard is demonstrating 'value for money'.
In addition to the value for money proposition, not all projects tendered necessarily will, or should, be delivered under the PPP model. PPP projects are complex, time consuming and include a variety of contractual arrangements involving many participants. These participants include the government, bidding consortium members, financiers, designers, contractors, operators and their subcontractors. These arrangements make it essential for participants to have experienced legal, technical and financial advisors from an early stage in the PPP process.
The recent PPP legislative developments by the Governments of Kuwait and Dubai will be welcomed by the private sector, particularly local and international contractors and operators looking to expand their business offerings beyond traditional procurement. It will require them to partner with investors and funds, who will all watch with keen interest as PPP pipelines continue to develop. This is going to be a very interesting year.
- Authors: Tim Burbury (Partner), Usman Ahmad (Senior Associate) and Timm Smith (Associate) King & Spalding LLP.
- Law Nov. of 2008 regarding the Regulation of Build, Operate and Transfer (BOT) Operations and Similar Operations.
- Law No 116 of 2014 Regarding Public Private Partnerships.
- Decree No.78 of 2015.
- Dubai Law No.22 of 2015 on the Organisation of Public-Private Partnership in the Emirate of Dubai.
- We have referred to English translations of these laws available at the time of publication. The Arabic versions of the Kuwait PPP Law and the Dubai PPP Law prevail.