In Brief:
- On 1 December 2023, the long anticipated Federal PPP Law became effective. It, among other things:
- lays down a robust legal framework, addresses the necessary institutional arrangements, and articulates clear roles for the Ministry of Finance and the relevant federal entities and the functions of the project teams for each PPP project; and
- aims to make federal PPP projects commercially viable and bankable for the private sector, including through government financial guarantees and incentives for private partners to increase the attractiveness of a PPP project.
- The PPP Law only applies to federal entities, and does not apply to existing emirate-level PPP regimes in the UAE (such as those in Abu Dhabi and Dubai).
- There remain a number of aspects still to be determined when the Cabinet Resolution and the Partnership Projects Guidebook are enacted. Until then, Cabinet Decision No. 1/1/2017 On the ‘Procedures Manual for Partnership Between Federal Entities and the Private Sector’, and the ‘Federal Government PPP Procedures Manual for Local and Federal Entities’, issued by virtue of the Cabinet Resolution (#4/8) for 2019 both remain in force, to the extent that they do not conflict with the PPP Law.
Public-Private Partnerships
Public-Private Partnerships (“PPPs”), or collaborations between government entities and the private sector, allow governments to procure and deliver public infrastructure and leverage the resources and expertise of the private sector through risk-sharing arrangements.
The underlying philosophy of PPPs is to move project liability from the government to the private sector, and to create or promote efficiencies in the project. This is normally undertaken by the private sector providing technical and financial expertise, and the government entity and private entity establishing a project-specific company to undertake the project and to procure financing. It is expected that the private sponsors/developers will be the primary source of construction contractors and post construction completion operation and maintenance for the project. The government entity normally expects the private entity to provide management, control and operational skills and expertise.
Historically, pure PPP projects work on a ‘unitization model’ that dictates the price paid by the procurer - normally the government entity procuring the services from the project company. Such PPP projects are generally public sector procurement-type projects that include prisons, educational facilities, hospitals, roads, railways, metro, public transport stations, and other such infrastructure.
The unitization model PPPs have rarely been used in the UAE outside of Abu Dhabi and Dubai, possibly because the UAE public sector uses standard construction contractor procurement. In Abu Dhabi, unitization model PPPs were used in relation to Sheikh Zayed University and Sorbonne University, the Noor street lighting project and, more recently, in the Zayed City Schools PPP Project; while in Dubai there have been proposals for a range of initiatives, including bus shelters, car parks, a metro station, a cancer clinic, and, more recently, a Municipality waste-water project.
Since about 1998 there have been many Public Private Partnership arrangements in the UAE, mainly in the water and power sector. However, these project finance transactions are not based on the unitization model and rely on normal financing and security and government credit support.
The New Federal PPP Law
On 1 December 2023, the long anticipated Federal PPP Law - Federal Law No. (12) of 2023 Regulating the Partnership between the Federal Public and the Private Sectors (“PPP Law”) - became effective.
Prior to this, the operation of PPPs at the federal level was governed by Article 48 of the Cabinet Resolution No. (32) of 2014 regarding Procurement and Warehouses Management in the Federal Government, alongside the ‘Federal Government PPP Procedures Manual for Local and Federal Entities’, issued by virtue of the Cabinet Resolution (#4/8) for 2019 on (“Manual”).
The PPP Law regulates PPP projects between federal public sector and the private sector, typically for the provision of a public service or the operation of a public facility, and aims to, among other things:
- encourage the private sector to participate in development and strategic projects in the UAE;
- boost investment in projects and reduce the public debt of government;
- benefit from the financial and technical expertise in the private sector and add value to the public funds;
- provide training and qualify public sector employees to manage and operate projects.
Application and Exemptions
The PPP Law applies only to federal entities, and does not extend to existing emirate-level PPP regimes in the UAE, such as the Abu Dhabi Law No. (2) of 2019 Regulating the Public-Private Partnership or the Dubai Law No. (22) of 2015 Concerning Regulating Partnership Between the Public and the Private Sector in the Emirate of Dubai.
There are a number of exemptions from the application of the PPP Law, including:
- Partnership contracts concluded before the Federal PPP Law came into force;
- Services and projects to be specified in the Partnership Projects Guidebook (“PPG”), yet to be enacted;
- Projects for the privatisation of public assets and services;
- Procurement contracts related to national security, as specified in the PPG;
- Any other projects excluded pursuant to a Cabinet Resolution, yet to be enacted.
The water and power sector has its own discrete water and electricity privatization laws in Abu Dhabi and Dubai, but not in other emirates so it is not clear if this sector, or whether additionally the oil and gas sector will be expressly exempted, but the PPG may address sector specific exemptions.
The Ministry of Finance remains the responsible Ministry, whose extensive functions include providing an appropriate environment to attract the private sector to participate in PPPs.
PPPs remain exempted from the Federal Procurement Law (Law No. (11) of 2013 on Procurement in the Federal Government). Rather, the PPP Law stipulates the tendering methods and procedures to be adopted for PPPs at the federal level – a two stage method and a direct appointment method – with procedures for each method to be set out in the PPG.
Affected Projects and Commercial Viability
The PPP Law is comprehensive in its approach and, following its enactment, the federal PPP framework remains very broad, and continues to cater to many forms of partnerships, including: Build, Operate, Transfer (BOT); Build, Own, Operate, Transfer (BOOT); Build, Own, Operate (BOO); Financial Utilization of Assets; Build, Own, Lease, and Transfer; and Management Contracts. This list is not exhaustive, and other types of partnerships may be specified in the PPG.
The PPP Law aims to make PPP projects commercially viable and bankable for the private sector, including through government financial guarantees and incentives for private partners to increase the attractiveness of a PPP project - see, for example, Articles 12 (Budget Approval) 13 (Government Financial Guarantees) and 24 (Incentives and Exemptions). The conditions and process for obtaining such government guarantees, and the types of incentives that will be offered to private sector partners are yet be determined.
All parties will need to monitor how practical it is to obtain a government support or guarantee, and what types of incentives will be offered, as this will impact the appetite of private sector finance. Private sector sponsors and developers seeking to undertake federal PPP projects under the PPP Law will need to have the budget cost approved by the government as well as any proposed government financial guarantees, and be mindful of the current public debt laws that may impact on the government procurer entity at the time.
In the typical PPP, a government guarantee is required either at the outset, at financial close of the project, or if the government entity credit rating falls below a certain agreed level of credit score. Alternatively a government guarantee is obtained as a completion guarantee only. Whichever way it is negotiated will depend on the project and the procurer’s obligations to support the project revenues and to comfort lenders in the event of the project company defaulting on its debt repayments or the project being terminated prematurely.
Other Notable Provisions
Notably, Article 28 of the PPP Law permits foreign investors from outside of the UAE to own the entire project company, as contemplated by the Federal Decree Law No. (32) of 2021 on Commercial Companies (“Commercial Companies Law”), while Article 31 grants the UAE courts jurisdiction to hear disputes. Disputes may also be settled through the alternative dispute resolution mechanisms applicable in the UAE, including mediation, arbitration and expert determination (Article 31). We note that there is no provision requiring the project or finance agreements to be governed by UAE laws.
What Remains to be Legislated?
There remain a number of aspects still to be determined when the Cabinet Resolution and the PPG are enacted, including:
- Governance and procedures for launching PPP projects;
- Offering documents, project agreement, selection criteria, bid evaluation and similar requirements;
- Contract management and supervision, termination of PPP agreement and compensation mechanisms.
Until then, Cabinet Decision No. 1/1/2017 On the Procedures Manual for Partnership Between Federal Entities and the Private Sector, and the Manual both remain in force, to the extent that they do not conflict with the provisions of the Law.
Conclusion
The PPP Law is comprehensive in its approach to foster know-how transfer, and to encourage the private sector to undertake more government driven projects for the benefit of the UAE, and is a welcome boost for the UAE economy. If you require further information on PPPs in the UAE, please contact Natalie Scott at n.scott@hadefpartners.com or Alan Rodgers at a.rodgers@hadefpartners.com