Using Public-Private Partnerships in Qatar
01 Jan 09:25 AMSector : Construction Country : Qatar
By George Atalla and Karim Aly from Booz & Company
Qatar has an important opportunity to invest significant sums in economic development and simultaneously diversify its economic base. Thanks to years of rapid economic growth combined with ambitious development goals, Qatar now requires large-scale infrastructure investments. The 2022 FIFA World Cup, which is emblematic of Qatar’s achievements and ambitions, requires $80 billion of investment. To meet these needs, Qatar is building nine new state-of-the art stadia, four metro lines, high speed rail, a new airport and sea port, improving roads, expanding power, water and sewage utilities - and more than doubling the amount of hotel accommodation available.
Qatar is in a strong position to fund these projects because it runs large surpluses on its budget and its balance of payments. The ultimate development goal, as outlined by the National Vision 2030, is a diverse and competitive economy. Diversification will diminish economic volatility and lead to sustained expansion from new, private sector-led activities that do not depend on natural resources.
The PPP Option
The challenge for Qatar is how to use these new investments to involve the private sector and broaden the economic base. One method is to use public private partnerships (PPPs) as a means of executing some projects. PPPs are a collaborative mechanism between the public and private sector in which the two sides parcel out the risks and rewards. A PPP can allow the government to shift some of the design and financial risk onto the private sector partner.
The advantage of PPPs is that they can cover a wide range of projects, from building infrastructure to delivering services. Governments have used PPPs to get private companies to build and operate electricity generation plants. In some developed economies, PPPs deliver services, such as healthcare or even prisons.
There are also different ways to finance PPPs. The government can guarantee a volume of business. Over the lifetime of the project these fees or captive business allow the private firm to recoup its investment costs and generate a return.
Developed economies use PPPs to build infrastructure without having to raise taxes or borrow money. PPPs promote national development and bring in much-needed foreign investment.
By contrast, Qatar is approaching PPPs from a strong fiscal position. There is no urgent need to attract foreign capital and no lack of financial resources. This gives Qatar a free hand to carefully choose its PPP projects. In Qatar, PPPs can be used to increase the private sector’s share of the economy while developing critical sectors such as education, healthcare, tourism, science and technology, and delivering large infrastructure projects.
Qatar can also avoid the problems encountered elsewhere by taking a customized approach that fits with its economy’s specific features. For Qatar this means building a roadmap that starts by identifying the economic sectors most suitable for PPPs, and then proceeds to pinpoint specific PPP opportunities within each of these sectors. Using the roadmap avoids treating PPPs as a panacea. Instead, the roadmap methodology ensures that resources are channeled to the most strategic projects that provide the most value for money and build the government’s capabilities for supervising and executing PPPs.
Building the Supporting Architecture for PPPs
The first step in creating the roadmap is to examine the legal, governance, and supervisory architecture that will support PPPs. These partnerships can last decades and are legally complicated. Appropriate laws are needed. For example, PPPs can involve setting utilities rates and long-term leasing of infrastructure. In some cases, at the end of the project the private partner transfers the asset to the state, which can have significant legal ramifications.
PPP-specific legislation provides private companies with certainty and transparency when entering into a deal with the government. It also avoids the complications and costs of negotiating each PPP from scratch.
The governance aspects matter because the authorities have to monitor PPP performance. While the government has to ensure that the private company is supplying a good quality service at the agreed rates, the private partner must be treated fairly and must not be subjected to bureaucratic interference. One way to meet the public and private partners’ governance needs is through independent regulatory agencies.
The supervisory element allows the government to exercise daily oversight of PPPs. Despite being multiyear arrangements, the authorities still need to be closely engaged with the private partner.
Enhancing its legal, governance, and supervisory arrangements also assists Qatar in promoting an investment friendly atmosphere. This can attract best in class foreign companies, precisely the firms whose skills, practices, and management know-how will further strengthen the private sector and economic diversification.
Drawing Up the PPP Roadmap
The next, and critical, step is to begin the process of drafting a roadmap that covers all PPP appropriate sectors. The roadmap process is detailed and rigorous. It is a methodology that deliberately links PPPs with national development. The roadmap specifies where PPPs will work and have the most impact.
What the roadmap approach does is look at the economy from the macro to the micro level, systematically dividing it by sector, the value chain inside the sector, opportunities in the value chain, and eventually prioritizing these potential projects. The government should proceed through five stages to create its roadmap: sector selection, sector analysis, project compilation, national project prioritization, and time line development.
The first stage, Sector Selection, takes a macro view of the role the sector plays in national development and whether the public sector is willing to diminish its role. For example, hydrocarbons are probably not right for PPPs - they have no additional investment or development requirements. However, education might be selected. Qatar wants to build its skills and knowledge base and the public sector has a track record of welcoming external partners, as demonstrated by Qatar’s Education City.
The roadmap then enters Sector Analysis, looking at the value chain in each of the selected sectors to identify where a PPP is best used. The suitability of a value chain step depends on multiple factors such as whether there are potential private partners with the correct capabilities and desire to invest - and whether the government has the ability and capacity to exercise oversight of the PPP. In aviation, for example, private companies can operate the airports, while leaving airspace management, which touches on aspects of sovereignty and security, to the government.
The third stage, Project Compilation, assembles these potential projects in a national project registry. The roadmap creates this list because it has thoroughly examined the economy as a whole, the value chain steps in PPP-appropriate sectors, all the while linking this analysis to national development goals.
National Project Prioritization, the fourth roadmap stage, decides which projects take priority by looking at relative government and private sector requirements. For the government this means asking what impact a PPP might have on jobs, growth, and making Qatar more competitive. The private-sector requirements assess if there are capable private companies with experience of similar work in the region, the size of demand for the project, its urgency, its scale of difficulty of implementation, and potential revenue sources.
The fifth stage of the roadmap, Time Line Development, creates a detailed project schedule that takes into account the government’s capability to implement the PPP.
As with any journey, the map only provides direction. The government will have to follow the crafting of the roadmap with supporting inquiries as to whether a PPP is affordable, financeable, and provides value for money. For example, can the consumers afford to pay for the services that the private company will provide? Is the project’s cash flow strong enough to unlock financing? Also, will the PPP provide value for money, and so cheaper than the most realistic public sector alternative? The UK, for example, has revamped its partnerships scheme because many PPPs were not providing value for money.
As importantly, the government will have to build its capabilities to manage and implement PPPs, from the first elaboration of the project opportunity all the way to project closure. The government will also have to carefully consider how it will deal with possible liabilities from PPPs on its fiscal accounts to ensure that future generations do not inherit the bill.
By proceeding cautiously, PPP roadmap in hand, Qatar can execute its ambitious plans to transform its economy. Used properly, and with discrimination, PPPs can be powerful and effective in furthering Qatar’s national development, expanding the private sector, and building government capabilities and skills.