Dubai Law No. 22 of 2015 Regulating Partnerships between the Public and Private Sectors (PPPs) in the Emirate of Dubai was published in the Official Gazette on 20 September 2015 and will become law on 19 November 2015.
This much anticipated new Law will make the implementation of PPPs in Dubai a much more realistic prospect.
PPPs have long been discussed in the Middle East and North Africa (MENA) region but there have been very few examples of successful projects outside of the traditional power and water sectors that generally have their own sector specific legislation. In some countries such as Egypt this lack of progress has been due to wider geopolitical reasons but in others it has been due in large part to the lack of financial need: high hydrocarbon revenues have enabled governments to fund their infrastructure projects from their current budget. Now, however, with low oil prices looking like they will be around for some time to come, interest in PPPs is growing across the region.
"One of the biggest hurdles to implementing PPP schemes in Dubai up to this point has been the application of the Procurement Law"
The drivers behind the development of PPPs in Dubai are of course unique, but the Government has long been interested in securing private investment in support of its developing infrastructure. Many partnerships and management contracts have been implemented and the Dubai Roads and Transport Authority (RTA) has used a contractor funding model on projects such as Phase 1 of the new Dubai Water Canal. However, there have been no major PPP schemes along the lines of those implemented in other markets around the world and the key question now is whether the new PPP Law will act as a catalyst to generate a pipeline of PPP opportunities in Dubai.
The Dubai PPP model could potentially be applied to a wide range of different asset classes. The RTA has already announced one major transit-oriented development (TOD) that they intend to procure as a PPP: the Union Oasis scheme is a landmark mixed-use TOD to be developed around the Union Square Metro station. Further TODs are anticipated as part of the Metro extension plans related to Expo 2020 and a number of pure transport schemes are also under consideration.
PPP schemes can also be anticipated in the health sector with Dubai Health Authority having been actively engaged in the consultations on the PPP Law, and DLA Piper is already working with one government agency on the development of standard PPP contracts.
The PPP Law is drafted so as to apply both to user-pay (concession-type) projects or availability type schemes where the government entity retains usage risk and pays a service fee.
Projects can have a maximum duration of 30 years unless the Supreme Committee approves a longer period. The default position is that the maximum 30-year term runs from signature of the PPP contract—so not from construction completion—although Article 27 provides some flexibility on the specification of an alternative start date.
Institutional and procedural requirements
It is anticipated that the implementing regulations will provide further detail on the institutional and procedural requirements that will apply to government entities, but the PPP Law includes a number of specific requirements governing project approval levels with projects that have a cost to the government above AED 500 million (approximately US$ 135 million) needing to be approved by the Supreme Committee.
A PPP contract that includes payment obligations for the government entity cannot be concluded unless the payments have been appropriated in that entity’s budget. This appears to mean that in order to avoid a delay in signing, departmental budgets may have to anticipate such payments in advance of the completion of the tender process. However, once this initial hurdle is cleared, the Public Funds Administration Law (No. 35 of 2009) permits multi-year appropriations, so this should not be an impediment to implementing schemes.
Freedom to specify tender and contract terms
One of the biggest hurdles to implementing PPP schemes in Dubai up to this point has been the application of the Procurement Law (No. 6 of 1997). This contains a number of requirements concerning tender conditions, timescales and contract terms that do not sit easily with a PPP procurement process or contract. The PPP Law deals with this by disapplying the Procurement Law other than where the PPP contract contains no “clear provision” on a matter.
Articles 14 to 24 of the PPP Law contain provisions relating to the prequalification, tender and selection processes, and PPP contract terms. These provide the government entity with a high degree of flexibility to specify the tender and contract conditions on a case by case basis. The overriding award criterion is the “most financially and technically advantageous bid”, but the government entity has a discretion to specify the detail of this, including the balance between technical and financial criteria, in the tender documents.
It is worth noting that Articles 12 and 14 of the PPP Law allow private entities to make unsolicited proposals for PPP projects and allow the government entity to contract directly with the entity that makes such a proposal. There is no requirement for such proposals to be put to tender and no regulation of the intellectual property rights issues that will arise in this situation. It will be interesting to see whether the implementing regulations deal with these issues, but it may be envisaged that these Articles will generate significant interest within Dubai.
The PPP Law makes it clear that in most cases the successful bidder for a project must establish a project company to execute the project. Where a project company is to be established it must be either a sole proprietorship or a local or foreign company licensed to operate in Dubai. The project company will need to be properly licensed by the Department of Economic Development in Dubai.
In practice this will mean that in most cases, the project company will need to be an onshore Dubai entity and that free zone entities will not be suitable. This also means that the 51 per cent local ownership requirements of the UAE Companies Law (No. 2 of 2015) will apply to the project company.
The PPP Law gives the government entity the right to hold shares in the project company through an affiliate of the government entity or by a government-owned company. There are no specified levels of the interest that the government entity might hold.
Our initial view is that if the government entity does choose to become a shareholder in this project company, this would have wide ranging implications, not just for the tender and project documents, but also for the status of the project company under Dubai law and its potential treatment as a “Government Company”. These issues will need further detailed consideration if any government entity exercises this option.
The PPP Law does not deal with the funding of PPP projects in any detail. Article 36 provides that the government entity (in co-ordination with the Department of Finance) may allow the project company to enter into arrangements with “banking institutions” to finance its business and activities.
The PPP Law does not specifically address the need for government entity/funder direct agreements. Most government entities in Dubai should already have sufficiently broad powers to contract such that this is not an impediment, but it will need to be reviewed on a case by case basis.
The Dubai PPP Law is an overwhelmingly positive step forward in facilitating PPP projects in the Emirate. The key issue now is how the deal pipeline will develop.