PPP in MENA: A budget constraint remedy

Fiscal consolidation as well as the need for infrastructure development and improvement in healthcare and education across MENA means that PPP schemes are becoming more popular. MENA’s new regulatory landscapes such as Dubai's 2015 law demonstrate commitment to PPP and to meeting the demand for improved infrastructure and public services for its rapidly increasing population. Obtaining and maintaining government approvals, and compliance with licensing, employment, tender and procurement laws have historically been costly challenges to PPP investors.

The tightening of government budgets this year due to lower oil revenues, combined with the continued need for infrastructure development and improvement in healthcare and education across the MENA region means that PPP schemes are becoming more popular. PPP initiatives will help the private sector find financial solutions for their projects, reducing the pressure on public spending.  Most of the newly announced PPPs across the region are in real estate, construction and infrastructure. 

There is significant opportunity for Islamic Finance to support the development of PPP projects, given that Islamic banks have tended to fare better than their conventional counterparts in the global financial crisis. The development of suitable Islamic Finance structures is already well advanced. An exemplary case is the USD 1.2B financing of the expansion of Madinah Airport in Saudi Arabia. This was the first full PPP project in Saudi Arabia and one of the largest infrastructure developments in the Middle East in 2012. The successful completion of the Madinah Airport expansion PPP should lead to an increased use of the PPP model, particularly in the airport sector.  

Although several initiatives were implemented in favour of PPP enhancement, this type of partnership still faces various impediments, particularly improper regulatory frameworks in some MENA countries. Private sector participation in infrastructure financing in MENA remains low compared to other regions.  In some of the main countries engaged in PPP (Morocco, Tunisia, Jordan and Egypt), the lack of institutional and legal frameworks to govern PPPs is the main factor hindering investment. According to the OECD, the lack of proper legal frameworks is an obstacle in 52% of projects in Egypt, 64% in Jordan, 65% in Tunisia and 71% in Morocco.

Given the relatively early stages of PPP in the region overall, the enactment of PPP laws can be a means of demonstrating political commitment to them. However, this is not essential where the current legal framework is clear and comprehensive and has proven to work in practice, as is the case in other markets. The OECD cites political risk as a barrier in only 11% of projects in Morocco, 16% in Jordan, 24% in Egypt and 25% in Tunisia. These results suggest that PPP investment risk in the MENA region is manageable, assuming that legal and institutional barriers can continue to be addressed and reduced. Fortunately, MENA governments now feel the urgency of doing so.  

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