Markab Study: QFCA’s Yousuf Al Jaida on PPPs

In February Dubai-based Markab Advisory released a new research study entitled Public Private Partnerships: A Vehicle of Excellence for the Next Wave of Infrastructure Development in the GCC. The study, sponsored by the Qatar Financial Centre Authority (QFC Authority) and the State of Qatar Ministry of Business and Trade (MoBT) concludes that Public Private Partnerships (PPPs) are poised to play a key role in underpinning the success of the next wave of infrastructure development expected in the Gulf Cooperation Council (GCC). TheEDGE spoke to Yousuf Al Jaida, director of asset management and banking of QFC Authority, about the Markab study and what it might mean for Qatar.

The Markab Advisory study goes into detail regarding the economic advantages that PPPs have shown in other countries, but not much information exactly how this occurs. Can you elaborate on this briefly?

The Markab report does briefly address some ways in which economic advantages have been achieved via PPPs in other parts of the world, for instance via efficient risk sharing by incorporating two different approaches to PPPs in the case of Australia. Furthermore, the usage of PPPs offers specific benefits that deliver both financial and non-financial advantages. Firstly, PPPs engage the private sector, which owing to its domain expertise, profit motivation and incentive to maximise the economic value of a project, is typically better equipped than the public sector to perform certain tasks and undertake certain risks, resulting in efficiency gains throughout the project’s lifecycle. Secondly, PPPs can provide fiscal space to the public sector as well as mitigate the non-financial limitations of the public sector with respect to procurement. A wide variety of projects including roads, airports, hospitals, railways, power projects, schools, waste management systems, stadiums and even prisons have been successfully built and managed with private sector participation. PPP projects are estimated to have exceeded US$1.5 trillion (QR5 trillion) over the last 25 years and over 50 countries have established a PPP Unit at a governmental level.

Which countries offer the most efficient models to take as the best examples?

Countries at the top of the PPP league, such as the United Kingdom (UK), Canada and Australia, share key attributes, for example, they have all have developed well-defined PPP policies and laws, established well-functioning dedicated PPP units, demonstrated a track record of several projects in various sectors, and acquired access to competitive project financing. In the example of the UK, the PFI was established in the 1990s and is considered an outstanding success in terms of the number and diversity of projects delivered. From 2002 to 2005 between US$6 billion to US$12 billion (QR21 billion to QR43 billion) of PPP projects were completed per year across sectors such as healthcare, defence, education and transport. This level of efficiency was achieved because the UK was able to develop a well-defined programme for various sectors – it provided clarity on the nature of partnership, type of contract and bidding process etcetera, so private contractors had historical reference and a sense of predictability about the process. In the case of Australia, the country’s fiscal position is very strong – public debt is around 26 percent of gross domestic product (GDP) – but PPP is still central to its public use infrastructure. Between 2005 and 2009 at least 55 PPP deals worth US$28 billion (QR101 billion) were completed. Australia operates two PPP models in parallel with different payment scenarios. Firstly, the ‘Core Services PPP Model’ is where the private sector only undertakes ancillary service responsibility, whereas the government assumes the revenue and demand risk. In the second model, the ‘Economic Privately Funded Project Model’, demand and revenue risks are transferred to the private sector, for example utilities and toll roads. Australia has also been very successful in securing debt from banks and capital markets, and in this respect project finance has consistently exceeded 80 percent of the project. In the example of Canada, the PPP programme has been built on a ‘bottom up’ basis since PPP programmes were first established at provincial level. In 2008 the government created PPP Canada, the first federal level organisation to support the development of PPP projects throughout the country and in 2009 PPP Canada established a CAD1.2 billion (QR4.8 billion) fund.

What can Qatar’s public and private sectors learn from this?

There are key lessons to be learned from these success stories. Firstly, these examples demonstrate how efficiency gains can be achieved via effective risk transfer. By deciding on which kind of risk to transfer to the private sector, and which risk retaining, for a particular project, the public sector has better control over the total project costs. Secondly, on time and on cost project delivery is a key source of efficiency gains, while transparency that PPPs and the relevant infrastructure to enable PPPs entails, is another key driver for keeping costs under control. Thirdly, transfer of expertise and technical knowhow reduce the risk of mistakes in planning, building and operating the projects. Thirdly, by providing the public sector access to more diverse funding mechanisms and at times by transferring some of the costs associated with financing to the private sector, PPPs may impact the overall cost and availability of financing for a project. Expensive and delayed financing can completely offset any efficiency gains and so this is an important element of success to the PPP model. The Infrastructure Fund Unit in the UK, the PPP Fund in Canada and the government co-lending model in Australia are examples of the different ways in which governments have addressed funding issues. Lastly, by bringing in private sector expertise to public sector projects, a PPP may on several occasions benefit the ultimate customer, the end user of the service, by providing higher quality of services. Moreover, procurement of public services via private participation may in fact act as a catalyst for improvement of service delivery across other public sector entities. It is also important to note here that customising PPP structures towards creating ‘home-grown’ solutions is important; where countries develop PPP models which not only take into account the government’s needs but also the social, political and demographic environments as well as their long-term direction.

How do you think these kind of economic benefits will translate to Qatar?

Although capital is abundant in the region, this report shows that PPPs can be seen as an innovative tool for efficiently delivering infrastructure projects in Qatar and the region. The Markab report provides a high-level illustration of how such efficiency gains may translate up to US$30 billion (QR109 billion) in economic benefits for Qatar. Though this is only an illustration and the exact quantification of benefits would require more in-depth studies, it provides the reader an idea of the magnitude of gains that may be achievable. Other benefits to Qatar could include: a rapid acceleration of the pace of infrastructure development; knowledge transfer to the local economy; the promotion of greater transparency and accountability; and the encouragement of excellent service delivery in infrastructure development which is particularly important for the 2022 World Cup. In terms of the GCC, the region plans to invest about US$2 trillion (QR7 trillion) over the next 10 years alone in infrastructure, leisure and tourism developments The Markab report again provides a preliminary illustration of the financial benefits that could result from the usage of PPP models. The report illustrates that efficiency gains through PPPs in the region could be in the order of 15 to 20 percent, by avoiding time and cost overruns, and, therefore, could, on the basis of US$2 trillion (QR7 trillion) in investment, result in savings worth US$400 billion (QR1 trillion) to the region. Empirical evidence from around the world, notably the UK, Canada and Australia, suggests that PPPs provide significant advantages in terms of completion of projects on time and within budget, when compared to traditional public procurement. PPPs also bring to a project the private sector’s technical ‘knowhow’ and expertise and can become an instrument to deliver excellence in infrastructure development.

How committed do you think Qatar is to rolling out PPP type projects in the country in the future and in what sectors do you think the primary focus will be and why?

Infrastructure projects worth some US$200 billion (QR728 billion) are due to be completed in the next 10 years as part of Qatar’s National Vision 2030 development plan. US$80 billion (QR291 billion) are already underway while more than US$100 billion (QR364 billion) are expected to be started in the next three years. The pipeline of landmark Qatari projects includes the New Doha International Airport; a new Doha Port; the expansion of Education City; Msheireb, and gas developments in Ras Laffan. The 2022 World Cup will also give rise to considerable additional investment with approximately US$3 billion (QR10 billion) committed to building nine new stadiums and renovating another three. The event will also act as a catalyst to accelerate many of the US$200 billion (QR728 billion) of core infrastructure projects that were going to be carried out to realise the Qatar National Vision 2030 development plan. Estimates for the additional or accelerated government expenditure on related construction, transport and infrastructure vary between Moody’s US$57 billion (QR207 billion); Standard & Poor’s US$64 billion (QR232 billion); and Bank of America Merrill Lynch (BoAML) US$65 billion (QR236 billion). BoAML has estimated that the preparations will boost GDP growth by an additional two to three percent per annum up to 2020. Qatar’s Ministry of Business and Trade has set up a PPP Directorate to delineate the way forward for PPP in Qatar’s infrastructure projects. The Markab report also mentions that the Directorate is working with multilateral agencies and other governmental departments in developing the business case and policy framework for PPPs in Qatar and is expected to work on a PPP law once the policy framework is in place and the business case is established. The Directorate could be a starting point for setting up a Central PPP Unit as a focal point for the planning and implementation of the PPP initiative and related projects. Opportunities exist across a range of sectors in Qatar including power, water, railways, roads, education, health care and sports infrastructure for the 2022 World Cup. These are the core infrastructure projects needed to realise the National Vision 2030 and for the World Cup.

What changes if any might need to be made to regulations for PPPs to succeed?

The report highlighted that PPP can be perceived as a threat over day-to-day authority and control since it involves ceding certain responsibilities to the private sector. However, this can be addressed by taking gradual steps towards PPP implementation. Another obstacle can be an underdeveloped capital market, as large-scale PPP projects often require private sector consortiums between local and international companies. The lack of depth in regional capital markets often constrains the participation of local partners with limited financial capital. It also restricts the participation of international investors, financial investors and infrastructure funds etcetera. In this respect the QFC Authority is already working hard to develop Qatar as an asset management hub in the region and developing the presence of dedicated infrastructure funds within the QFC could play a role. Qatar is also taking steps to deepen its capital markets. In Qatar, the MoBT has set up a PPP Directorate and is developing the business case and policy framework. The MoBT is also expected to work on a PPP law and set up a Central PPP Unit for the planning and implementation of PPP initiatives. This would then need to select the most appropriate PPP model(s) for Qatar and possibly develop customised ‘home-grown’ solutions for sectors such as education and healthcare. Overall for the PPP model to be introduced more fully in Qatar there is a need to shift from PPP projects done in isolation to programmes covering a wider variety of sectors. enabling transfer of knowledge and expertise.

Power sector PPPs have already been successful in Qatar. How can they can play a role in assisting other sectors?

Ras Laffan is a prime example of this where, starting in 2001, it has been a template for expanding Qatar’s Integrated Water and Power Plant Project (IWPPP) programme and today is one of the largest IWPPs in the region. Top-tier global power development companies such as AES, Marubeni and Mitsubishi participated in building and managing these plants and today over two-thirds of Qatar’s power generation capacity is installed through PPP arrangements. Qatar has subsequently selectively undertaken projects in other sectors on a PPP basis, including water and waste management, transportation and education projects and is currently working on a pilot PPP project in the healthcare sector. All the building blocks are already present, including an extensive pipeline of infrastructure projects, resident PPP expertise, leadership support and a growth momentum. The main way the power sector experience can assist us is by utilising the resident PPP expertise built up in this sector since 2001 and transferring this know-how to other sectors. Firstly, existing core infrastructure sectors where resident expertise is already in place. Secondly, other core infrastructure sectors such as railways and roads. Typical PPP projects in railways and roads are structured to pass on the demand risk to the private sector. This may be a challenge in Qatar, given its low population, so the Build-Transfer Operate (BTO) model maybe more viable, whereby the private sector undertakes the design and build risk and transfers the asset to the government on completion. Thirdly, social infrastructure, such as education and healthcare, which offers innovation opportunities in the PPP domain; however, there are no standardised solutions within this and it largely requires customised ‘home-grown’ solutions. Lastly, sports infrastructure for the 2022 World Cup. There are global precedents of having PPP as a model for building and managing sports facilities but Qatar’s position is unique. Understanding the potential revenue models, during and after the World Cup, would be the key to deciding the appropriate structure. Qatar also has the opportunity to learn from best practices from other countries around the world and region, including which specific PPP models to adopt.

What role will the QFCA play?

The QFC Authority could play an important role in developing the PPP model in Qatar by building on the QFC’s world-class legislative framework to attract the best among infrastructure financing companies, including infrastructure funds and asset management companies. The development of Qatar as a regional hub for asset management is already being strongly supported by the QFC. For example, the QFC Regulatory Authority published revised rules to extend the QFC’s Collective Investment schemes regime. These revised rules are set out in the Collective Investment Schemes Rules (COLL) and the Private Placement Scheme Rules (PPIV). The revised rules aim to facilitate the development of the sector in the QFC in line with international best practices. QFC’s focus on captive insurance may be another area. A recent report by MEED Insight – the GCC Captive Insurance Guide – indicates that many contractors and project sponsors in the region are currently paying premiums based on global risk profiles rather than those specific to the Middle East, where there is a low catastrophe risk, litigation risk profile and generally lower construction-related risks. Potential private sector partners in infrastructure projects may therefore benefit from establishing a captive within the region. At the QFC, a new regulatory regime for captives was introduced in July 2011, comprising the Captive Insurance Business Rules 2011 (CAPI) and Insurance Mediation Business Rules 2011 (IMEB), making Qatar one of only three domiciles in the GCC with a focused captives regulatory regime.

What does this mean for potential PPPs?

It offers firms a degree of flexibility in captive structuring that was previously unavailable in the region, and increased flexibility in meeting capital and collateral requirements. Between 2006 and 2010 the insurance market in Qatar grew by an annual compound rate of 12 percent, while the rate in the GCC was 22 percent. A recent BMI report forecast that insurance premiums in Qatar will treble between 2010 and 2015. Demand for insurance – and reinsurance – services in Qatar is being driven in particular, by Qatar’s massive infrastructure growth as well as favourable macroeconomic conditions and growing consumer wealth. Qatar and the GCC markets rely heavily on international reinsurance where, for example, the aggregate GCC cession rate was 45 percent in 2011 and even higher in Qatar. The QFC Authority is strongly supporting the development of the reinsurance capacity in Qatar and this in turn would provide further support to the development of PPPs here for infrastructure development. The QFC Authority also seeks the continuous evolution of the regulatory environment to ensure the optimum conditions for financial services growth, particularly in the three key areas of asset management, reinsurance and captive insurance, as demonstrated by the recent reforms to QFC regulations.

The Markab Advisory report on PPPs in the GCC can be downloaded here.

This article first appeared in TheEDGE 4.3, March 2012.