23% public private partnership projects are abandoned in Middle East

Photo used for illustrative purpose only

Almost one in four public private partnership (PPP) projects launched in the Middle East and North Africa (Mena) have been abandoned, according to a research by Meed.

The latest report on the region's PPP market by the Middle East business intelligence service shows that 23 per cent of the 80 PPP projects brought to market in the Mena region since 1996 failed to conclude in a deal.

The most common reason given for the failure of PPP deal to be concluded was poor deal structuring, where investors feel that they have been asked to accept structures that require them to accept high levels of risk while expected revenues are unclear.

"As a result of poorly defined deal structures, investors are forced to increase their contract bid prices in order to mitigate exposure to potential and unforeseen risk. As a consequence, the overall cost of the project rises, making it economically unviable," the Meed report said.

The latest findings come as governments across the region are turning to PPP contracts to deliver key projects in order to reduce spending in response to lower oil earnings. In preparing the report, 'PPP in the Middle East', Meed analysed more than 100 projects across the region, including 80 PPP projects that have reached the pre-qualification stage in the region since 1996.

Financial close
The results showed that about 49 per cent of all PPP projects brought to the market in the Mena region since 1996 had reached financial close while 23 per cent failed to reach financial close.

The survey shows about 28 per cent of the projects remains at different stages of development, ranging from seeking expressions of interest from developers, to having signed the PPP contract but still working towards a financial close.

In one example highlighted by Meed, Egypt's October 6 Wastewater Treatment Plant PPP, launched by Cairo in 2009, was abandoned in 2012 after studies showed higher-than-expected levels of industrial wastewater required to be treated. This required more advanced pre-treatment technology than had been anticipated, making the project prohibitively expensive.

Although PPP has become an established method for delivering government projects around the world, it has had a relatively low level of uptake in the Middle East. PPP contracts offer companies long-term concessions to run government services such as operating a hospital, a school or a water treatment plant, in return for making the necessary up-front capital investment, the Meed report said.

According to Deloitte, projects worth $2 trillion are in the pipeline in the GCC, with the market still attractive despite a forecast 17 per cent decline in contract awards in 2016.

Activity is forecast to be strongest in Saudi Arabia and the UAE, the professional services firm said in a report. "Despite the uncertainty and likely contraction in 2016, this region will continue to offer $2 trillion worth of opportunities and be an attractive market for businesses anywhere in the world," the report noted.

- issacjohn@khaleejtimes.com