United Arab Emirates: Towards A Clearer Framework Of Public- Private Partnerships

Last Updated: 11 December 2017
Article by The Business Year

On August 16 2017, the Lebanese Parliament voted for the bill on public-private partnership agreements (the "New Law"). The long-awaited law is now enacted and represents a step closer to the global standards and a response to the expectations of the international players.

Following restored political stability at the end of 2016, initiatives to boost the Lebanese economy are taking steps forward every month, showing the commitment of both the government and parliament to rejuvenate the country.

In efforts to achieve these goals, we are witnessing a growing recognition worldwide that synergy between public and private can add new and complementary instruments to meet service and infrastructure needs in an extensive range of areas, where development is indispensable for the economic growth. One of the main success factors for these policies is adopting the appropriate project delivery method and the relevant type; both need to be based on a clear and transparent legal framework.

WHAT IS A PPP?

By the term public private partnerships (PPP), we usually mean long-term agreements between the public and private sectors, focused on providing public services and building infrastructure by relying on the private investors' financial capabilities, know-how, as well as their management and operational skills. However, a broadly recognized definition does not yet exist.

PPPs typically do not include simple management, maintenance and operational contracts, turnkey projects, leases, or concessions given by the state to a private company. In the latter, the role of public authorities is secondary; remuneration of the private party is commonly based on a fixed fee or rate and the arrangement is for a shorter term, between two and five years. In PPPs, instead, the public sector is more involved and can establish a joint venture with the private party; remuneration is linked to performance and the length of each project is usually at least 20 years.

WHY A PPP?

In this field, the function of the private sector lies mainly in rendering services that were previously under the public control and management, more efficiently to justify the value-for-money trade-off. Moreover, facing constraints on public funding, governments are increasingly turning to private companies to access a multitude of financial schemes more easily without exacerbating public debt.

It is worth noting a number of potential advantages that the public sector can benefit from when using PPPs: ensuring open market access and competition, and therefore making the country more competitive and attractive; introducing new technology and innovation; developing local sector capabilities through joint ventures with multinational firms; and creating subcontracting opportunities for locals companies.

Successful PPPs are based on several conditions, primarily starting from an appropriate legal and institutional framework (suitable laws and their consequent enforcement), transparency regarding the related project costs, the associated risks and profits, and monitoring procedures. PPPs can take a variety of structures and contractual forms; irrespective of the type, which will be discussed according to the relevant sector and the public authorities involved, ranging from individual ministries to local municipalities, it is crucial to establish roadmaps, action plans, and standardized steps to attract investors.

CURRENT LEGISLATION IN LEBANON

Regardless of an incomplete legal framework, over the years Lebanon has pursued several private participations in infrastructure and services, implementing a number of projects through a particular form of structure financing, known as Build-Operate-Transfer (BOT). In BOT, a private company finances, designs, builds, and operates the public entity project for a fixed period of time (with no ownership) and then transfers it back to the public sector. To date, BOTs have been used as the basis for tenders for GSM services for telecommunications, waste recycling, and postal services.

The regulatory framework in force until now consisted of: the Public Accounting Law, issued by Decree No. 14969 of 1963; the Tenders Regulation issued by Decree No. 2866/1959; the so-called "Investment Law," Decree No. 360 enacted in 2001 to attract private investments in a wide range of sectors industry, agriculture, agro-processing, tourism, IT, communication, information, and other sectors; and Law No. 5 of 1967 related to projects of touristic benefit, such as hotels, restaurants, indoor sport centers, islands, and touristic ports. In 2000, a Privatization Framework Law (No. 228) entered into force setting up the general privatization framework (including PPPs) by regulating operations and defining terms and fields of implementation, and establishing the Higher Council for Privatization (HCP).

Furthermore, in 2002, two acts were enacted to regulate the privatization projects in specific sectors, namely: the Telecommunication Law, No. 431, and the Regulation of the Electricity Sector, No. 462. The latter was never implemented, yet it was updated in 2014 (Law 288/2014) and one year later the Law 54/2015 extended the term of Law No. 28 until April 30, 2018, allowing temporary licensing by the Council of Ministers until the establishment of the National Electricity Regulatory Authority (still not constituted).

THE PPP LAW

The General Assembly voted the bill on PPPs after only a month from the approval of the Finance Parliamentary Subcommittees on July 12, 2017. The new act is generally in line with current trends and expectations from the international market, applying the principle of transparency throughout the public tender process/procurement.

With 18 articles, the law on PPPs establishes the regulatory outline of the contracts that the government will use to entrust private investors to build and/or manage the equipment and the infrastructures in quite a few areas, among which electricity, telecommunications, and civil aviation are expressly included.

Interesting elements can be seen from both the public and the private sector's points of view.

The Public Party

From the public side, the action plan involves three stages: one internal, concerning the conception and preparation of projects within the institutions and the concerned authorities; a second external, regarding the selection of the private partner; and the last one operational, including implementation and monitoring.

The initiative of projects is alternatively given to the following authorities: a minister or the president of HCP or the president of the municipality/municipality federation, when the project is on a local scale. HCP's secretariat then prepares a feasibility study of the PPP to evaluate if the PPP is the most suitable means by which pursue a specific objective. These early considerations are essential in the context of public services, since the protection of public interests is at stake.

After approving the project, HCP creates a project committee presided over by a representative of its Secretary General. The committee then choses the financial, legal, and technical advisors, creating a team that also includes representatives of the concerned minister and will assist the project throughout its entire life and development.

The committee prepares a full study, analyzing all financial, economic, legal, and technical aspects, and the criteria for qualifying the private partner and the possibility of securing the necessary funds. It presents its recommendations to HCP. If the Council of Ministers (or the municipality/municipality federation) approves the project, the committee proceeds with the selection process for the partner, in respect of the principles of transparency, freedom of participation, and equal treatment of the participating entities.

The Committee compiles a motivated report about the chosen companies; if the HCP approves it the qualified entities are subsequently announced.

It should be highlighted that the above procedure is inapplicable if there are less than three candidates, while according to the current laws (art. 38 of the Tenders Regulations) when only one proposal is submitted to the Central Tenders Committee, it is accepted if the proposed price is below the estimated price. In the PPP selection, instead, the private sector is once again invited to participate in the project if less than three candidates present offers. In case of a second bid, however, after the approval of HCP, two offers are sufficient.

The Private Party

In PPP agreements, the selection of the private partner usually involves a two-step process that consists of a request for qualifications to determine qualified candidates and a request for proposals whereby bidders relay their business plans to the public authority for review and consideration.

The New Law does not specify the procedure that the HCP will follow, but there is no reference made in the criteria to the lowest bidder being preferential. On the contrary, the evaluation process will be likely based on the "best value" to the public institution for the duration of the partnership. In fact, it is provided that after the bid round is closed, technical offers are studied first, and only the matching offers will be reviewed from the financial point of view. At least two should be accepted or the project is proposed another time to insure competitiveness.

From the perspective of private investors, the New Law also contains attractive features. Consistent with the provisions of the Lebanese Code of Commerce (LCC) and the rules of the Code of Obligations and Contracts on Partnership Agreements, a joint stock company (Société Anonyme Libanaise, or SAL) must be incorporated by the private partner for the purpose of doing business with the government. Nonetheless, exceptions are made to the general rules: namely, the nationality condition of the shareholder is not applicable, neither one-third of capital must be owned by Lebanese shareholders, nor the majority of the board must be Lebanese. Finally, the foreign General Manager is not obliged to apply for a working visa.

From an accounting point of view, one auditor can be appointed instead of two; and last but not least, the SAL is not subject to the control of the Court of Auditors.

While one auditor can well serve the purpose of showing the true and fair financial activity of the company, the exemption from the control of the Court raises doubts in terms of the principle of transparency and anti-corruption policy.

In fact, by virtue of Article 223 of the Public Accountancy Act, promulgated on January 16th, 1951, the Audit Court shall supervise the management of public funds. With no control, it is difficult to determine whether public funds are properly or improperly placed.

Moreover, since the public interest must be protected, a constant control should be guaranteed about public expenditures. PPP arrangements should not be entered into merely for the sake of engaging in a PPP project. A comprehensive analysis of the costs and benefits of private sector involvement must be undertaken to ensure that specific agreements enhance the public benefit, as opposed to other alternative procurement models.

The Contract

As final points, the New Law lists the mandatory provisions of the PPP agreement that will be signed by the public and the private partners. Among those, it is noteworthy to consider that in case of non-fulfilment of obligations, penalties are envisaged for both parties, not just the private one as is custom. Furthermore, mediation proceedings are expressly mentioned together with domestic and international arbitration as conflict resolution methods that can be included in the contract.

CONCLUSIONS

This law is the most tangible action undertaken in many years to improve the efficiency of public services. It is, however, just the first piece of a broader regulatory framework that needs to be put in place. The new legislative act contains many gaps: details need to be clarified and decrees have to be issued in specific sectors. Given the long-term nature of these arrangements and the complexity associated, it is also difficult to identify at this point all possible contingencies during the project development. Nonetheless, we hope that many of these issues will be addressed when the law is fully implemented.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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