As Gulf Cooperation Council countries advance their ambitious economic diversification strategies, public-private partnerships can help fill the investment gap between the public sector’s capabilities and development requirements.

The Role of PPPs in Infrastructure Development

Public-private partnerships involve collaboration between a government agency and a private-sector company or consortium to finance, build, and operate a large infrastructure project for which the public sector lacks the financing or the expertise and management skills. PPPs have evolved to cover a variety of models and projects. Sectors that are eligible for PPPs vary from transportation to water and waste management, to electricity and government services. The most suited projects are highways, mass transit systems, ports and airports, water treatment and sewage systems, power generation and distribution, and schools, hospitals, and public housing.

There are also different types of contracts and models of PPPs that generally allocate risk to the party that can better manage it. One example is the build-operate-transfer model used to develop a discrete asset rather than a whole network, with the public sector bearing the equity risk. This model is used in projects such as toll roads, independent water power plants, and waste and water treatment plants. Another is the build-own-operate model wherein, following construction, the private sector keeps operating the facility, relieving the public sector of the responsibility. Such projects include highways, wastewater treatment facilities, and power plants.

According to the World Bank, which has experience with PPPs across the globe, success depends on three critical factors without which companies will not risk entering into the costly process: strong political commitment, institutional and governance frameworks, and qualified and dedicated PPP technical teams.

First, in many emerging economies the very idea of private involvement in infrastructure and public services seems unfamiliar. Labor unions, left-leaning political parties, and government bureaucracy are generally suspicious of a market-determined pricing system that may increase costs to consumers and limit access to the poor. Therefore, there is a need for strong leadership to raise public awareness about the benefits of PPPs. Second, companies considering entering into a PPP require a transparent and standardized process, especially for selection procedures and contract terms and, at a later stage, the repatriation of profits. Also, approval from different branches of government needs to be streamlined, preferably limited to a single entity to limit time-consuming interaction at different levels of the bureaucracy. Third, a highly qualified and dedicated technical team from the government side is required to understand the suitability of the projects, nature of the market, potential pool of eligible bidders, etc.

Chile was a pioneer in PPPs among both emerging and developed economies. Since the early 1980s, the government has recognized the need for significant investments in infrastructure and acknowledged the lack of resources to deploy those investments into roads, highways, airports, and hospitals. A report by the World Bank referred to the PPP system Chile’s government developed as “a pioneering program of concessions and private capital investments to modernize its aging infrastructure.” The goal was to increase such investments without raising taxes.

PPPs have become an important tool for infrastructure development in other emerging economies as well. Malaysia has had success with faster delivery and better project governance. Turkey has used PPPs to fund and operate ports, airports, and health facilities. And India has used PPPs to address its infrastructure deficit, using a hybrid PPP model, blending public and private funding to optimize investment and achieve development targets. Nonetheless, there have been challenges with implementation. In Turkey, governance problems between public and private parties included fragmented legal and regulatory frameworks, weak institutional capacity, risk-sharing discrepancies, and poor value for money. In Brazil, PPPs’ effectiveness was questioned, and in some cases turned out to be costly, especially in the case of contract renegotiations, primarily due to public sector planning failures and political factors. Similarly, lack of political will and poorly designed projects were a major problem in India. These challenges, problems, and risks can help inform PPP reform recommendations for the Gulf Cooperation Council states.

Limits of Infrastructure Development in the GCC

Oman and the United Arab Emirates began turning to PPPs in the 1990s for technology-intensive projects that the governments could not run on their own, namely independent power plants and independent water and power plants. Over the years, projects developed under PPP contracts expanded to include public services in education and health, such as the Sorbonne University and Cleveland Clinic in Abu Dhabi. Nonetheless, most other PPP initiatives remain in early stages of development, either in the planning or tendering stages, with few reaching financial closure.

From 2019-23, private sector involvement allowed GCC countries to invest an estimated $1.6 trillion in infrastructure projects. Nonetheless, the shortfall in known, planned, but unawarded infrastructure projects in the region were estimated around $2 trillion by 2023, suggesting there is ample opportunity for the private sector (especially multinationals) to fill the gaps.

All GCC countries have sought to establish a legal framework for PPPs, issuing some laws and regulations. Kuwait stands out as a pioneer, issuing Law 116 in 2014 and establishing the Kuwait Authority for Partnership Projects to oversee projects from tendering to financial closure. Oman followed suit with Royal Decree No. 52/2019, initially under the aegis of the Public Authority for Privatization and Partnership, but its dissolution in 2020 transferred all responsibilities in this regard to the Ministry of Finance. Qatar’s Law No.12 of 2020 centralized oversight under the PPP Department at the Ministry of Commerce and Industry. Bahrain introduced regulations in 2022, including Edict No. 30/2022 and a PPP guide, administered by the Ministry of Finance and National Economy to provide technical and financial guidance. Saudi Arabia focused on privatization through its 2021 Private Sector Participation Law, enforced by the National Center for Privatization & PPP, targeting infrastructure and public services. Meanwhile, the UAE adopted a hybrid model: Dubai and Abu Dhabi have emirate-specific laws (No.22/2015 and No.2/2019, respectively), while federal Decree-Law No.12 of 2023 sets out the general guidelines governing partnerships between federal government entities and private enterprises, with the overarching objective of benefitting from the private sector’s financial and technical capabilities to promote public services and transfer know-how to federal agencies.

Despite differences in structure and authority, all GCC frameworks share a common goal of leveraging PPPs to diversify economies, enhance infrastructure, and foster sustainable development through private sector engagement.

At the implementation level, however, GCC countries seem to lack specialized and empowered PPP units with the needed resources and expertise to effectively implement PPP projects. With the exception of the UAE, all other GCC member countries rely on ministries, which generally lack the capacity to select, tender, and follow up on infrastructure projects. Also, Oman’s reversal with the dissolution of the Public Authority for Privatization and Partnership may have diminished investors’ confidence and bidders’ interest in the PPP programs. Indeed, a number of factors make the PPP environment in the GCC high risk for investors, particularly the lack of government transparency and dearth of information and data, outside utilities and oil and natural gas projects, and the frequent change in regulations and even in the public bodies in charge of PPPs (e.g., Oman’s dissolution of the Public Authority for Privatization and Partnership).

Meanwhile, PPP contracts in the GCC are often short term (three to five years), and about 50% of them were management contracts until 2013, before they evolved to include the injection of foreign capital to compensate for the decline in government funding due to the slump in oil prices since 2014. Also, private involvement in building and operation reduced costs and improved service delivery during the life of the contract. Despite the improvements, however, a recent study by the International Monetary Fund still found inefficiencies in such projects, including many cases of low returns on investment. Similarly, consultancy Oliver Wyman stressed that, “It is crucial that regulation achieves a proper balance between the interests of private investors and those of the public. Governments must define the revenue scheme of PPP projects to incentivize the private sector to invest, while not setting artificial limits on investors’ earnings. A sound PPP framework also requires allocating appropriate levels of risk to both parties. Risks tend to be split into commercial, legal, and political risks with the private sector usually better suited to undertake commercial risks – such as asset procurement and service delivery.”

Priority Reforms in the GCC

To capitalize on the benefits of PPPs, by reducing pressure on public finances, and improve the management of large infrastructure projects, the Gulf countries must address institutional, economic, bureaucratic, and cultural constraints through a variety of reforms, namely:

• Updating the legal framework based on the review of successful models, such as Chile and Malaysia.
• Establishing dedicated PPP units with the needed qualifications and expertise.
• Developing sector strategies to create interest in procuring entities, such as agencies responsible for public works and utilities, and a clear role for ministries, such as the Ministry of Finance and Ministry of Public Works, and enhance coordination among them.
• Improving data collection and processing at the sectorial and macroeconomic levels by strengthening and empowering national statistics centers and other specialized data aggregators.
• Cultivating a business-friendly environment and removing barriers to entry for foreign investors.

Putting the Pieces Together

To end the current fragmentation in the legal frameworks (in the UAE between local and federal entities and between GCC countries), the GCC states would benefit from agreeing on a common PPP framework, as they did in their agreement on a unified value added tax framework in 2016. Also, strong political support is needed in tandem with technical assistance from institutions with long experience in this regard, such as the Arab Monetary Fund, International Monetary Fund, and World Bank. Such assistance would support best practices and limit inefficiencies that have been prevalent in the GCC states.