Ziad Hayek discusses new PPP projects

New PPP projects underway to upgrade infrastructure

Photo by: Greg Demarque/Executive

At the end of October, Executive interviewed Ziad Hayek, secretary general of the High Council of Privatization and PPP (HCP), to learn of proposed public-private partnerships. The HCP had organized stakeholder meetings to discuss public-private partnership (PPP) proposed projects. This interview primarily discussed two PPP projects that are now in the pre-planning phase—the expansion of the Beirut airport and a toll road plus highway extension. A third PPP project, discussed as part of a published interview with Hayek in Executive’s November issue special report on entrepreneurship, concerns the construction of a national data center.

E   Two projects—relating to Rafic Hariri Airport, the toll road and highway extension—have been officially mentioned as PPP projects that are underway.

The airport expansion project is to build Terminal 2. This is a longer-term plan for a new terminal and not about the immediate improvements planned for airport Terminal 1. This new terminal will be on your right-hand side if you are going to the airport. Just before you reach the main building, there is an open area on the right, where you nowadays can see some private jets parked. The project is to build a new terminal on this land and build the access roads to it [at an] estimated cost of about $500 million, and we are now at the stage where we have retained the International Finance Corporation (IFC) to advise us. The IFC selected [four] technical consultants and legal advisers, (yet to be announced). We had our kickoff meeting for this project [on October 22], where everybody came together, all the stakeholders in government as well as the consultants. Ministries—the Ministry of Public Works, the airport, the Directorate General of Civil Aviation, Middle East Airlines, Middle East Airport Services, the Ministry of Interior, the Ministry of Tourism, the Ministry of Defense, the Council for Development and Reconstruction—all the stakeholders were there. As of today [October 23], consultants are conducting separate meetings with each stakeholder to gather more information [for] a full-fledged feasibility study, which will include a transaction structure that we can present to the Council of Ministers for approval, at which time we would launch the process starting with requests for expressions of interest, receiving them, prequalifying companies, and then work with [the winners].

E   What is the planned timeline for this project?

We hope to be able to go to the Council of Ministers sometime in March [2019].

E   A second PPP project under consideration is a toll road from Dbayeh to Nahr Ibrahim including a highway extension from Khalde to Dbayeh, what can you tell us about this?

Our consultants are the European Bank for Reconstruction and Development (EBRD). The total project is more complicated [when compared with the airport project], because we have the [government] decree for expropriation of land for one segment of the [planned highway], but we need [the expropriation decree related to] the second segment as well for it to be a viable project. We are waiting for the new government to come up with that decree. What we have done in the meantime is to optimize the design of this road, which will go from Dbayeh to Okaibe, near Nahr Ibrahim. We optimized the design of this road and made sure that the road will have access points from all roads running from east to west that lead up the mountains in the Keserwan area. We also optimized the design to use tunnels as much as possible,  decrease the cost of expropriation, and make traffic flow more smoothly.

E   Is there already a map of the planned optimized route?

There is a map, but it is not an official document without the approval of the Council of Ministers. The planned road will be running through a tunnel under the mountain of Harissa. The total project, including the Beirut ring road which is supposed to run from Khalde to Dbayeh, has an estimated cost of about $3 billion.

E   Does this include the cost of expropriation of land for the two stretches of highway in Beirut and from Dbayeh to Nahr Ibrahim?

I am including everything in the cost. We are reducing the cost of expropriation by including tunnels, but these are expensive in themselves. The current [draft] expropriation decree covers Dbayeh to Nahr Ibrahim; what we are waiting for is the decree for the route from Khalde to Dbayeh. In this project, we think it will take some time before we can finalize the design because we have to do most of the design. Also, we need to do the expropriation of the land before we can award [the project]. We think it will be about three years before we can award [the project]. If we are lucky, we think construction can commence in 2022, with the road set to be completed in 2030.

E   In two large infrastructure projects in Lebanon that were carried out or discussed at the height of the national reconstruction in the 1990s, a very different toll road concept called Altoroc could not be financed with planned private sector participation. The rehabilitation and expansion of the Beirut airport involved late design changes, significant cost overruns, and arbitration with contractors Consolidated Contract Company and Hochtief. As cost overruns are always a danger with large infrastructure projects, what mechanisms can you deploy to counter such tendencies when contractors might bid low and deliver at higher prices when concepts are modified during the contracting period?

We have learned from international best practices, the way we designed the PPP law and our specialist PPP team. The approach is no longer about having a tender for project, awarding it to the lowest bidder, and then bringing in variation orders and all this stuff. [The approach] is slightly different now. First, we have a very strict prequalification process. Then we are sharing the information with all the stakeholders. In the case of the toll road, this involves municipalities and various ministries. From the design of the project, the selection of the prequalified companies, and then the involvment of all bidders in the contract, and by having the contract as part of the tender documents, we are making sure that all elements in the process lead to full transparency and the ability to do a good assessment of the proposals. Thus, it is not necessarily the lowest [bid] that will get awarded. You can have a low price and still lose the tender because of the way that company history, quality, and the other aspects are taken into consideration. There is no foolproof system, but I think with those control mechanisms we are improving the procurement a lot.

E   How are you distributing the risk between the public partner and the private ones?

It is exactly a partnership in risks. It is through this process of working with prequalified companies when you determine who is bearing what risk and [who] is best positioned to bear which risk. Generally, with this type of project, the private sector will bear the construction risk, the financing risk, [which includes the] interest rate and exchange rate [risk]. The government will bear the risk of tariffs [related to setting the toll rates], the risk of force majeure, airstrikes, and whatever security issues. There are so many things. When you are starting to talk about risks, the first impression is that there are two or three risks. In reality, there are 20 or 30 risks that you need to deal with.

E   How about the operational risk for toll roads, such as working with revenue projections that turn out to be wrong, as it has been seen in some countries in Europe in recent years?

About the toll road tariffs, traffic estimates are always the most difficult thing to deal with. But there are two things to keep in mind. One thing is that you cannot question your decisions. Each one of us will make decisions in our lives, and there is a saying that there is no wrong decision. When you make a decision, you are convinced that this is the best thing to do. To look back and say, ‘We screwed up, this was wrong,’ is fine. There is no shame in having gotten something wrong and we all do in our daily lives. There is shame in not doing your homework, in not considering all the variables and mitigating all the risks. So [in regard to the operational risk of estimating traffic forecasts and setting tolls], I want to say first that the onus is on us, and the private sector companies, to dot all the i’s and cross all the t’s. The second thing is that having a PPP project with a contract that is not flexible enough to deal with changes that will happen in the future, is a badly designed PPP project. PPP projects are meant to last for 20 and 30 years, yet no one has a crystal ball to determine what will happen. For example, now we may be working on a toll road but in 15 or 20 years, roads may be obsolete and we will be using flying cars.

E   Some very large multinational companies in the automotive sector are considering trends in automated driving, like autonomous delivery vehicles, as survival issues. Does this suggest that the operational risk in a toll road scheme today is daring from such perspectives?

It is daring. Your PPP contract has to be flexible enough to deal with uncertainty. We are not talking here about having rigid contracts where you end up having to go to court. There are provisions for discussions and arbitration mechanisms; flexibility needs to be built into the contract. Coming back to my point about how one should not be concerned over making the wrong decision but should do their homework, I would add that in case of a toll road, the thing to remember when people later criticize such a road and say there was an overestimation of traffic is that there was a decision made at some point in time whether we need a road or not. If we need a road, there is a cost. If you do it through normal procurement, the government is bearing all the risk. If you do it through PPP, the government is sharing the risks [with the private sector]. PPP will always be better, because you [as a government] are sharing the risks, instead of bearing all the risks yourself.

E   Does a successful partnership require goodwill from both sides, with potential asymmetries in mutual readiness to invest goodwill?

Sure. But that is all hypothetical. In practice, the question is, ‘Do we need the road?’ If we say, ‘We don’t need a road, we are fine with the current situation,’ then fine. If we say that, ‘Yes, we need a road,’ the question [for the government] becomes whether you build the road yourself or do it with the private sector. If you have the money to do it yourself, go ahead and do it. It is faster and it is cheaper financing-wise because the government borrows money [at lower rates] than the private sector. If you don’t have access to the money and still want the road, then you should work with the private sector and accept the risks while doing your best to mitigate these risks.

E   In regard to doing this homework, have you assessed extreme scenarios, such as radically decreasing amounts of traffic in 10 years because of shifts in mobility and traffic behavior?

We have not done the traffic assessment yet, and we don’t have that expertise. This is what the technical advisers will do. We will be relying on experts to do this. But I venture that the best thing one can usually do is estimate traffic increases based on population increases, urban development, and GDP increases, and then discount that [to allow for these predictions to be inaccurate].

Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years.

Jeremy Arbid

Jeremy is Executive's in house energy and public policy analyst.