(MENAFNEditorial) Kuwait Financial Centre "Markaz" recently published a strategic note on Law No. 7/2008 to govern the country's Public-Private Partnership Projects (PPP). The report evaluates possible reasons for ineffectiveness of the Law and provides an analysis of means of project financing options that can be used to effectively execute these PPP projects.
Markaz's report notes that the PPP model has gained traction in recent years. The PPP model enables governments to efficiently execute large-scale, complex projects that are capital intensive. However, the PPP Law in Kuwait has not been received well within the private sector primarily due to the overwhelming requirements, stringent rules and regulations being imposed on private players and limited project financing options, in addition to weak governance in the public sector. This has resulted in delays in a number of important projects in the country. Some of the key impediments to a successful PPP Law in Kuwait include:
•Project Financing Constraints: The PPP Law also does not allow the disposal or grant of any lien, mortgage or other real rights to the subject land, including construction on the land. There also exists restriction on granting pledges over construction during the project's term.
•Stiff regulations: The Law includes an overwhelming number of rules and regulations so as to control the project. These stringent and stiff regulations sometimes act as a hindrance instead of an alleviator for the private sector investors. For example, private sector investors must hand back the project to the government without any consideration and compensation, and Non-listed KSE companies and foreign companies will be subject to extensive prequalification process which requires to include painstaking project details, preparation of a response to an RFQ, stringent evaluation steps and approval mechanism.
•Vague project approval and bidding process: There is a complex institutional structure. Each stage of the project involves dealing with numerous entities in the public sector where governance is behindhand. The bureaucratic complexity of the process was a key factor in preventing the rollout of PPP projects.
•Vague project scope of work: Clarity of scope of work with some of the projects has been poor. Therefore, poorly written Term of References (TOR) with loosely held scope of work discourages private sector investors to participate in a PPP project and does not allocate the risk appropriately between the government and private players.
The report stresses the need to develop local Capital Market for PPP projects to ease the financing burden substantially by considerably lowering the WACC (Weighted Average Cost of Capital). To make PPP projects more attractive to local and international investors, the reports suggest the following policies:
•Improving access to Debt Market to reduce the cost of the PPP Project to the economy and make some PPP Projects economically viable.
•Restructuring financial guidelines for projects in coordination with investment professionals;
•Breaking down larger projects into smaller sizes or to be phased;
•Introducing Credit Ratings – rating of the project will attract funds from international institutions, and may require credit enhancements to be in place in order to improve the rating;
•Ensuring a mechanism for real risk sharing / transfer between public and private sectors;
•Having longer term concessions and more robust off take agreements.
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