How Project Finance works in Qatar and GCC …

Across the GCC, with the notable exception of Oman, PPP is at an embryonic stage, with little activity in historically core PPP sectors such as major transport, health and education projects.  Using PPP in Qatar is an opportunity to share risk but also reward by driving progress through this more formal mechanism. This is a real opportunity for Qatar to deliver success by capitalising on the efficiency and experience of private sector operators, whilst also spreading the risk.

Whilst the global financial system may be showing signs of a recovery, external credit markets are still in flux and the terms for developers looking to find finance are still challenging.  Project finance is highly volatile, with finance rates ranging from single-digit figures to rates in the mid-teens. As a consequence, the viability of those projects funded by project finance are still susceptible to financial market swings, or by the propensity to risk afforded by lenders.

In the GCC, “project finance” is largely viewed as short-term, direct funding to facilitate a construction project, typically three to five years. This short-term approach across the GCC would suggest project finance, and PPP, is not the saviour that it is so often lauded as being, particularly in a market such as Qatar.

Yet ironically, at a time when the availability of project finance has been significantly hindered by the tightening of global credit markets, calling its viability into question, there are factors that could see it, and the PPP, become ever more popular. In an article dated May 2012, the law firm Al Tamimi & Co predicted a rise in foreign investment by means of PPPs in Qatar.  Whilst many GCC economies have the financial resources to facilitate major schemes, they do not always have the skill base to undertake huge infrastructure projects, and may instead opt to use a PPP to harness the expertise and appetite for risk of the private sector.

Moreover, the transfer of ownership and/or operation to a third party does not always apply to a PPP, only to some variants.  For instance, a joint venture (JV) ensures that the client retains some equity stake, whilst a BOOT (Build, Own, Operate and Transfer) is essentially a concession arrangement with the asset eventually returning to the client.  In real terms, the PPP may actually provide GCC clients with a number of benefits that may not have been considered. Risk transfer is one clear bonus, but there are experienced PPP operators in the market who may also bring other operational efficiencies to the fore.

Lowest cost driven by market forces
While a project must be economically advantageous, value for money does not necessarily equate to lowest price. The appropriateness of the client’s requirements must weigh up against the scheme’s design and projected cost. The most obvious mistake is to view the cost of a project purely in terms of a fixed price established through the bidding process. The original rate of borrowing may be re-financed, and/or may change at predetermined intervals throughout the course of the borrowing. If margins at the outset are tight, then the first place to look is often the build costs, which could have ramifications in the long term.

A contractor constrained by bringing in a project on budget with tight margins might easily look for ways to cut its own costs, whereas collaboration between two parties may actually become a mutually beneficial partnership that may derive enormous long-term advantages.  With the sheer volume of infrastructure investment in Qatar, this risk-sharing, knowledge transfer-focussed model might actually be a good thing over the coming years, particularly in a relatively embryonic market like Qatar that would likely benefit from experienced partners in delivering success.

Against a backdrop of political cynicism about PPPs, if the public sector in Qatar can shake off the perception of diluting their control or ownership of state assets and embrace sharing the risk and reward with the private sector, there may still be hope for PPP in the region.

Deloitte
The opinions expressed here are the views of the author and do not necessarily reflect the views and opinions of Deloitte & Touche (M.E.). Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Deloitte is the first Arab professional services firm established in the Middle East region, with uninterrupted presence for over 85 years, providing audit, tax, consulting and financial advisory services through 26 offices in 15 countries, with over 2,500 partners, directors and staff. Source: Qatar Today

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