Growth in the MENA region is enticing strategic partnerships between governments and private companies to create infrastructure critical to support and sustain growth.
A Public Private Partnership (PPP) provides a mechanism for the forging of the strengths of the private and public sectors to deliver more economical, higher quality services to the community.
Nizar El Hachem, Principal – Head of Investment Banking at Injazat Capital Limited (ICL), the first regional bank to have submitted a proposal for a $3 billion dollar PPP deal in the region – tells us more.
Provide us with a broader understanding of the PPP concept.
A PPP involves a government engaging the private sector to design, construct, finance and operate infrastructure traditionally developed by governments. In return, the private operator is rewarded with revenue generated from tariffs levied on users of the infrastructure, periodic service payments from a government, or a combination of both. Typically such an agreement spans 25-30 years.
Is it true to say that the current development of the GCC region provides the perfect platform for PPP arrangements?
The region is experiencing significant economic growth that is expected to continue well into the future, this combined with the fact that GCC countries have some of the highest population growth rates in the world provide private enterprises compelling incentive to invest in the area through a PPP. Likewise, governments in the region are looking for innovative solutions to ease the financial burden of providing quality services across all sectors particularly health, transportation and education.
What are the key principles of a PPP?
A PPP allows each of the parties involved to concentrate on activities that best suit their respective skills. The government ministry will focus on developing policies based on service needs and requirements, whilst the private sector consortium goal is to deliver the services at the most efficient cost and provide mechanisms for risk transfer.
Why should governments consider PPPs?
The current strain on infrastructure as a result of the development across the region is placing increased pressure on governments to renew, maintain and operate existing infrastructure and to build new infrastructure. The ramifications for governments with budgets insufficient to meet levels of consumer demand for quality infrastructure in each sector are significant.
The decision to enter into a PPP arrangement is driven by two major criteria:
1. Will the quality of service provided by the private sector continue to meet/ exceed government and the general public’s expectations?
2. Will the service provision provide value for money for both the government and the general public?
For the government, value for money will be achieved if the provision of services under private sector management results in cost savings and improves service quality to the general public.
The key benefits include:
Improvement in the quality and quantity of public services and public access to improved services now, not when a government’s spending programs permit
Deliver greater value for money compared with that of an equivalent asset procured conventionally through government
Transferring the risk of performance of the asset to the private sector
Reduction of government debt and freeing up of public capital to spend on other government services
Bringing in innovation and enhancing best practices resulting in reduced cost, shorter delivery times and improvements in the construction and facility management processes
Enhanced investment decisions based on symmetrical information
Decreasing the tax burden on citizens who do not need to pay higher taxes to finance infrastructure development
Supporting the reform efforts of the public sector
What are the key success factors for the structuring and execution of a PPP?
The key structural considerations for a government and the private sector are represented in the diagram below.
In addition to these structural considerations, there are five requirements key to the successful execution of the PPP:
Political support
Public support
Enabling legislation
Expertise
Project prioritization
A real challenge considering the nature of the PPP investments appears to be the financing of projects. What size of investment is called for and what type of financiers are attracted?
Typically, PPP projects require large investments – for example, the recent proposal submitted by ICL in the healthcare sector approximated $3 billion. Fortunately, a number of sources of financing are available to the private sector. Equity and debt financing, government to government debt or government funding in the form of aids and grants are potential sources of financing that may be utilized.
Financing requirements will differ by sector and region and may be capital intensive. A valid regional concern for lead managers in the Middle East is the prominence of Islamic banking. Islamic banking accounts for some $15 billion in sukuks, $500 billion in Islamic assets and $350 billion in Islamic funds. Further, the sophistication of Islamic financing tools are driving complex financing schemes that are attracting an increasing number of institutional and individual investors. It is evident that expertise and networks of the lead manager in both the sector and the region can be crucial to securing project funding and ICL has a clear advantage in the MENA through the provision of its sharia-compliant financial services and well established network with financial institutions.
The sector and region in which a PPP is conducted will also dictate the type of investors attracted to participate. In the emerging market for PPP projects in the Middle East, partners and shareholders of ICL have displayed a strong appetite to participate in investing and financing activities. In addition, international organizations are breaking ground in showing a willingness to co-finance PPPs through grants. ICL was successful in securing the support of international organizations such as the OECD in their recent proposal.
Who are the key stakeholders and how do they contribute to a successful PPP project?
A diverse consortium of stakeholders collaborates to reach the common objective of a PPP project. The government ministry holding the infrastructure that is the focus of the PPP provides:
Objectives of the PPP in consideration of community expectations
Education of the public on the benefits of the PPP
Legal and regulatory environments suitable to PPPs
Lenders, equity investors and consultants provide the funding required to obtain private sector involvement in the PPP to provide an off-balance sheet transaction.
Design, engineering and construction contractors bring the skills and experience in infrastructure development and construction.
Project managers manage and monitor the performance of the project to PPP objectives and operators and managers bring the skills and experience in operating in the sector.
Special purpose vehicles, formed by the private sector participants for the delivery of the PPP project oversee the delivery of the PPP project.
Insurers, legal and financial advisors provide administrative, legal and financial support to the PPP.
Finally, consultants provide the link between the government ministry and private sector financiers.
In the recent $3 billion PPP proposal, what was ICL’s role?
The role of ICL entails guiding a PPP from inception through the inception, structuring, fundraising, and finally management stages.
The attractiveness of ICL in the recent $3 billion proposal submitted in the North Africa region was promoted through its broad corporate advisory experience and the strategic networks relevant to each stage.
At the inception stage ICL performs the necessary market research to collect information relating to the PPP from the government and other relevant sources, as well as and identifying and resolving critical strategic issues.
In the structuring stage ICL utilizes its experience in financial modeling, valuation and funding options appraisal to develop an appropriate deal structure, manages the tender process and identifies consortium partners.
At the fundraising stage, ICL sets the investment terms and fund raising process, ensures the optimal financial management of the transaction and provides treasury management to the PPP.
In the management stage, ICL monitors and measures performance of the PPP to ensure key strategic objectives.
The success of PPPs has spread internationally with application to a diverse number of projects. What particular sectors are taking advantage of PPPs?
Sectors where PPP has been applied in the United Kingdom, Europe, Australia and Canada include:
Aviation
Road and rail transportation
Health
Energy
Water
How does ICL foresee the future of PPP in the region?
The current regional dynamics, particularly the accelerated economic and population growth, continue to place a significant burden on the existing infrastructure, highlighting the need for the heavy investment in infrastructure in order to support growth and secure a sustainable future. Governments and key financial institutions in the area are becoming increasingly aware of the necessary role the private sector must play in providing the resources required to develop the region and provide citizens with world class standards of living.
The current focus on PPPs as a viable solution to the growing burden on infrastructure in the region is evidenced by the exposure it has received in dedicated summits and through the attention of government bodies region wide. The stage has been set for PPPs and ICL believes the sophistication of the current financial markets is adequate to facilitate private sector involvement in the region.
All indications make it clear that the future delivery of traditionally government funded services and infrastructure lies in strategic alliances with the private sector.
