Dubai: The local construction sector is lining up for the ‘Triple P’ effect in Dubai. For an industry currently in the grip of eroding profit margins and inventory overload, it won’t be a moment too soon.
“Dubai’s infrastructure projects, while state-of-the-art, have primarily been developed within the domain of the public sector,” said Masood Afridi, Partner at the law firm of Afridi & Angell.
“Bank support for the project finance sector has started to dry up”Share on facebookTweet this
“With the new Public-Private Partnerships law in place, the Government can expect a rise in private sector participation, which will not only provide greater efficiencies and transfer of technology and know-how, but will permit the Government to divert its resources to other sectors such as health care and education.
“Such policies inevitably introduce private sector style reforms in management and operational efficiency.”
Another PPP-induced benefit would be the participation of capital markets in the funding of future projects. If those funds start to flow in, it will be a relief for the construction sector now wrestling with cash flow problems and the less than lukewarm interest from the banking sector.
“Bank support for the project finance sector has started to dry up,” said Sameer Lakhani, Managing Director at Global Capital Partners, an investment firm. “This has been due to a general “risk off” approach to the sector as well as broader liquidity concerns. For the most part, appetite will remain muted for all but the most blue-ribbon of projects.”
Dubai’s PPP law, which came into effect on August 8, has set mandates on what the private sector can expect from taking a role in the emirate’s infrastructure needs.
Projects of a value not exceeding Dh200 million may be approved at the level of the director-general of the relevant government department. Those exceeding this level must be approved by the Department of Finance, while projects of Dh500 million and more need green lighting from the Supreme Fiscal Committee of the Emirate of Dubai.
“While setting out parameters for PPP projects, the new law permits participating parties to conclude terms in a manner that ensures that the overall objectives of the new law are adequately preserved,” said Afridi. “This provides a certain degree of flexibility, which is essential for such projects to succeed.
“Infrastructure devolvement is, to a large extent, synonymous with construction, and as such the new law should see a rise in large-scale construction contracts, which in turn will result in several subcontracts.”
It is the subcontractors who have faced the brunt of the slowdown the industry has experienced since the second-half of 2014.
“(Project) cost terms are being rewritten simply because developers are using the price downturn to capitalise on their terms,” said Lakhani. “Often, this is being manifested through longer repayment plans, although price write-downs are now starting to become more common.”
With payment periods pushing well past 180 days, subcontractors’ very existence are being threatened. And the only hope they hold on to is that Dubai — from early 2016 itself — will start putting out the mega projects that it will need for Expo 2020.
“The recent comments by Mohammad Al Shaibani (Director-General of H.H. The Ruler’s Court) clearly stipulate construction projects in Dubai will continue as planned,” said Lakahni. “This is encouraging as it indicates that the heightened levels of anxiety in the market are likely overdone.
“This implies that there will be elevated levels of profitability for companies that can ride out this downturn. Given that the pipeline of projects is expected to remain robust, (this) represents an opportunity for the sector as a whole.”
But Afridi counsels future PPP stakeholders to show a degree of patience for the results to show up. “The initiative is a step towards opening up the market to the private sector, and such reforms often take years to develop into seamless transactions.
“Private sector participants should attempt to achieve win-win scenarios, and in the process exercise a great deal of flexibility, patience and perseverance.”
Dubai’s Public-Private Partnerships law offers optimum flexibility
• Various structures such as BOOT (build-operate-own-transfer) are allowed, which builds in the flexibility “essential for sourcing financing from various institutions such as multilateral agencies, commercial institutions and Islamic financing vehicles,” said Masood Afridi at of Afridi & Angell. “If properly structured, the law could galvanise the scope for ‘limited recourse’ financing, which would greatly assist in the overall financial health of any sector.”
• The law outlines the qualification process and criteria for private sector participants to ensure that projects are managed on a global best-practices basis. The projects may be implemented through a variety of legal vehicles, ranging from locally incorporated joint venture limited liability companies, to entities that are not owned by the government, but are set up for the sole purpose of implementing the projects.
• The partnership contracts are to be governed by the new law and the laws of Dubai. All disputes are to be resolved by arbitration within the emirate.
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