PPP and the appeal of an idea whose time has come to the Middle East
Source: BI-ME , Author: Trevor Lloyd-Jones
Posted: Tue June 24, 2008 12:00 am

INTERNATIONAL. Currie & Brown Group Chief Executive Officer Euan McEwan leads the British company in helping clients with large asset management programmes. In this interview he is joined by Mark Taylor, Regional Managing Director for Middle East & Central Asia, in discussing the renaissance of the nuclear industry and construction opportunities, best practice in project management, the changing of model of infrastructure development and how C&B is bringing the global appeal of PPP to the region.

'PPP' are three letters bound to cause controversy in the UK. They describe the concept of private public partnership which, despite enthusiasm in government and the construction industry, is not embraced so readily by other sections of society, conjuring up political issues of private management of schools and hospitals.

While the situation in Britain may be one of grudging acceptance, or downright opposition in many cases, parts of the Middle East, Latin America and Southern Europe are adopting PPP with enthusiasm. They are learning crucial lessons from Britain about how to make the process more streamlined but are adapting the basic concept to their own local needs and, in doing so, creating many new models which we in this country would do well to take on board.

PPPs of which the Private Finance Initiative (PFI) is the dominant sub-type in the UK, are now firmly entrenched as a delivery mechanism for infrastructure projects across many sectors, both in the UK, and, increasingly, in a number of European countries. Properly structured, PPPs deliver value for money to the public sector, acceleration of government investment programmes and a genuine transfer of risk to the party best able to manage it. Effective risk transfer, particularly during the construction phase, can generate significant cost savings that easily outweigh the higher funding costs of the private sector partners.

Since its inception in the mid-1990s, the PPP/PFI concept has delivered close to 700 signed projects in the UK. Many lessons have been learnt during this time, and the PFI model has been refined and adapted for the needs of a variety of different sectors, including transport, health, education, prisons, waste, social housing, defence and local authorities. In some cases, PFI has evolved into various forms of long-term, strategic, PPP partnerships. Examples of these include the NHS Local Improvement Finance Trust (LIFT) in primary health care and the Building Schools for the Future model, which is based on LIFT.

A British company Currie & Brown is in a unique position to consider the international applications of PPP as it has advised on many of the new projects under way from Athens to Mexico. In most of these cases the firm’s involvement goes well beyond the traditional scope of the QS (quantity surveyor) practice: it has found itself variously as procurement advisor, bank auditor, coordinator of technical, legal and finance teams as well as author of government tendering policy.

“Governments are becoming more sophisticated and realise that they do not necessarily need individual technical, financial or legal advisers.What they need are people who can provide them with wide-ranging procurement advice,” says Santiago Klein, the Currie & Brown Director most closely associated with spreading the firm’s PPP experience internationally.

It has been Mexico that has been most aggressive in developing a PPP strategy. There the government is embarking upon a US$9 billion PPP hospital development programme and Currie & Brown is handling the whole process for the Ministry of Health, providing concession procurement, financial and technical advise, and coordinating the whole programme.

A total of eight hospitals will be designed, built, operated and maintained under the programme. Another seven hospitals will be developed via the traditional procurement route, which the company says is important to provide a benchmark for the relative merits of each method. According to Klein, the success of the PPP healthcare programme came down to two main issues: ensuring a free flow of relevant information between all stakeholders and that projects were spread evenly across the country, not just in states held by the ruling party. This encouraged buy-in from all sides.

In Europe, Currie & Brown is helping the Greek government, which has a portfolio of over 250 projects it wants to develop under PPP. “We got the contract because, while we had the relevant experience in developing PPP projects in the UK, we also had substantial knowledge about the implementation of models in other jurisdictions and a comprehensive view on all technical, legal, financial and regulatory matters” says Klein.

According to Klein, other countries where it is working – such as Spain and Brazil - have taken the best elements of the British system and made adjustments to fit their own circumstances.

While Currie & Brown has been successful in exporting the PPP concept internationally it has also been able to adapt the British concept to local needs. This, says Klein, is vital to being able to bring projects in on time and on budget without huge legal wrangles. “There are a lot of opportunities to export PPP but you have to be careful. The reality is you cannot employ the British model off the shelf. Some things will always work wherever you are but others need careful consideration and consultation. You have to be adaptable but, if you are, the opportunities are enormous.”

PPP reaches Middle East

There are constants across the world in any PPP project. It is important, for instance, to spend a lot of time on developing the output specifications and the payment mechanisms. Elements of the UK system that either don’t work abroad, or need adaptation, are the deduction criteria, the allocation of risk and the dispute resolution system.

On the other hand, the procurement process takes less time and the bidding costs for the private sector in markets like the Middle East are far less than in Britain, encouraging many more companies to participate.

Over the last few years PPP has started to take shape across several industries in GCC countries such as Saudi Arabia, Oman and Egypt. Experts have predicted that the Middle East and North Africa region will be investing over US$60 billion in its power and water sectors between 2007 and 2011, thereby providing a substantial expansion platform for PPP in the Middle East.

According to Proleads, there are now a total of 885 active civil buildings projects in the region, each with values of more than US$10 million. The scale of new developments in all GCC countries - the UAE, Saudi Arabia,Qatar, Kuwait, Bahrain and Oman - is nothing short of impressive. The Proleads survey covered commercial and residential developments including hotels, hospitals, schools and theme parks. If infrastructure such as bridges, roads and airports were included the value of projects would be US$1.25 trillion, Proleads said.

This expansion will help create jobs in the private sector; provide quality services and facilities for citizens and stakeholders, and lift much of the burden of development from the already overloaded shoulders of the public sector.

In water and other sectors, issues of sustainability are coming to the forefront. Inappropriate cost recovery is another problem in the Middle East water utilities, mainly caused due to leakages in the existing distribution system, losses due to faulty water meters and unknown connections.  Water must be managed as a social good and supported with sound economics. A lack in an appropriate tariff to cover basic production and investment costs will lead to a huge misuse of water. Inappropriate cost recovery, limited use of targeted subsidies and lack of sound investment planning are a few issues which can be addressed through PPP projects.

In the GCC, governments seem to be actively promoting PPPs. However, some fundamental key factors are missing or unclear such as willingness to the change, policies and processes, leadership, management skills, the future road to the transitional change and so on. Moreover, while we have to recognise needs for privatisation and PPPs, nearly at all levels of public service we receive different amount of attention to each level, based on internal beliefs of precedence. Water, power, telecommunication, transportation are undoubtedly primary needs that the public sector seems increasingly unable to deliver alone.

No doubt that a desalination plant or the construction of a new highway needs all the necessary attention from public agencies, but related or correlated services do need the same level of attention. It’s wrong to believe that PPPs, or BOTs, more common to this region, need to be implemented to ensure success and maximising investment and returns only on multi-million projects.

Currie & Brown stresses its three underlying values that it delivers to clients, of innovation, partnership and adding value for clients. We asked Euan McEwan and Mark Taylor about the company’s projects in the Middle East and how it applies these principles to support clients in realising their own strategic goals.

BI-ME: How important is the Middle East for Currie & Brown?

EE: Our company is seeing a fast changing profile and we see the Middle East region bringing 50% of turnover within three years. This is due to the underlying economic shift, the oil factor and the sheer volume of projects in the Middle East.

BI-ME: In the UK you are well known for working on the whole construction value chain, from the financial close to the drawing board to the actual project. Can you describe how the company works and what you are bringing to this region?

EE: Our commitment to innovation is benefiting both government departments and private industry by freeing up key personnel to focus on their core activities, adding value and improving performance. Of course these strategic partnerships with our clients are only possible thanks to the high calibre of expertise in our company. I am pleased to say that our strength in depth at senior management level has been reinforced by some key appointments, notably in the health and higher education sectors. At Currie & Brown innovation, partnership and adding value are not just goals, they are part of our everyday reality in delivering to clients.

Despite the poor economic headlines, infrastructure development is massive in the UK at the moment. We are working on the Schools of the Future project there and across the public sector.

BI-ME: We hear a lot about project delays in the Gulf, rising costs and about the challenges of securing the necessary skills and materials which are all in high demand. What does this say about project management shortcomings in the region?

EE: The discussion about delays and cost pressures is no different here to anywhere else in the world. Only the model is changing and the projects in the Middle East are getting bigger and bigger. The whole region is impressive, that is the first thing to say, and the changes are on such a scale that they are not understood in the outside world. Whereas in the UK we might see a single US$1 billion project, there are ten or twenty here at the moment.

The procurement is fast track and things do happen fast here, which makes challenges. If we look at recent developments like the ALDAR Laing O’Rourke joint venture we can see a genuine approach to partnerships and there is a healthy ‘open book’ approach. Overall I would say that Abu Dhabi has been intelligent in learning the lessons from the past about strategic relations with consultants. We can see signs of this if we look at the names given to the masterplans, which are very authentic and well-considered, rather than each one being called ‘City’ or ‘Project’.

BI-ME: What other differences are there in managing projects in the Gulf, compared to the more mature markets like the UK and Europe? How can PPP help?

EE: In the more mature markets, governments can go out to tender and be quite undefined about the plan of works. This starts a claim at a later stage. Here in the Gulf there is more of a partnership approach, rather than confrontational. They tend to go wrong less often and they deliver in a timeframe that is better than in the West. In fact the world could learn a lot from such a partnership approach.

PPP has been a significant development in the UK that the rest of the world has learnt from. For example in a PPP project for a hospital, all the operations and maintenance, in fact everything inside the hospital, has to included in the scheme of works. So in the PPP everything has to be thought out in advance.

My argument with PPP and lifecycle management is about joining up all that value. That is what we do. We are advising a lot of clients in the Middle East about this lifecycle management issue. Traditionally there was the perception that you had to spend more on the construction to get a lower operating cost. But in a case where the owners are intending to occupy, with technology you get a large benefit from looking at the whole life of the building.

Our client mix is a mixed bag of companies. Overall what we see is that clients in Abu Dhabi are very good at giving the top line vision and they are prepared to take advice and let the private sector fill in the gaps. For example we are working with ADNOC on asset valuation services; we are working in facilities management and we look to encapsulate the whole management of a built asset. The driving force of this is cost management, up to cash flow and investor modeling of the whole project.

BI-ME: On this issue of sustainability and energy, can you go into more detail? What are the types of calculations and decisions that owners are having to make?

EE: More and more we are looking at environmental considerations. To give an example, an owner would traditionally be looking a 15-year life for a building, then a 3-year downtime for the rebuilding of the next structure on the site, during which period the client gets no income at all. But with a more flexible shell structure the asset can last 50 years, although with a higher initial cost. I will also say that it is not just about money; it is also about CSR and we will see this more and more coming to the region, as it plays its part in Europe and North America.

BI-ME: Can you put a figure on what is the accepted figure for cost saving, when the total lifecycle of a facility is taken into the equation?

EE: The evidence suggests that we can reduce the costs of any building by 20% by this joined up approach. Clients are starting to take that long-term view and this is the case with our projects in Greece, Mexico and Spain where we are delivering PPP projects and a lifecycle asset management model.

BI-ME: Regarding power projects, it seems most of the Gulf is struggling to keep up with demand and nuclear power has recently been put on the agenda. Are you hearing concerns about these power shortages, about labour shortages in the construction phase and do you see a steady stream of opportunities in the sector?

EE: Energy markets are facing difficult challenges and these technical and construction issues are fundamental around the world, if we are talking about the steel, the glass or the technology. But there are local issues. Regarding the labour issues, we say that we are only as good as the people we employ. Attracting the right calibre of people is key for us.

At the same time the industry is becoming globalised. We are very well organised at C&B and we are totally connected around the world because our clients are global. We have to face up and work with them. In terms of this local-global trend, it is the mid-market that will be squeezed rather than the global players or the local specialists. And it is easier now to have that global presence with technology. Our clients like that and we have to give them what they are looking for.

BI-ME: Given the experience in the UK energy sector, can we expect Currie & Brown to play a part in the nuclear powerplants planned for the UAE and elsewhere?

EE: Nuclear in the UK is taking off now and Currie & Brown has a nuclear group with a view to getting involved in this region when it takes off. Our group was recently awarded a contract by UKAEA [UK Atomic Energy Agency] to provide project controls personnel to their Dounreay site in Caithness, Scotland. The Dounreay site is a nuclear licensed site that is being decommissioned. This programme of work is planned to take approximately 30 years to complete, although the most significant radiological hazards will have been removed in the first 10-20 years. This contract is for a two-year duration and is extendable by a further year subject to satisfactory performance.

At present we are not sure of the scope of the nuclear projects in the UAE. Wind power is another tool in the tool box for governments to consider, especially if we consider the overall potential for wind, water and tidal. In Australia and in Spain we are working on major desalination projects. And this is an important sector for the Gulf, because the more that is built, the higher goes the demand for water. This issue of population pressure on water is a common theme around the world that I believe will increase. For now most of our projects are in residential, retail, commercial and leisure projects mainly in the UAE, but also in Qatar and Oman.

BI-ME: As project managers, is there a message you would like to give out to clients? Are there any ways in which the two sides could work better together?

MT: The market is shifting with building commodities going up in price by 20% to 25% per year. There is simply a staggering amount of work here which makes shortages. Before, the developers were setting but the pace, but now there is a shortage of consultants so they are more dictating the pace. As consultants we are being more strategic about the projects that we accept and C&B is expanding.

BI-ME: Please can you give some examples of recent projects and how you were able to bring your expertise to bear?

MT: To name just a few we are working with Motor City in Dubailand, Al Raha Town Centre and Al Raha Apartments in Abu Dhabi. We are looking at opportunities in The World islands and there are constant challenges. In Abu Dhabi we have a lot of work with ALDAR at Yas Island and the race-day hotels for the Grand Prix circuit. A lot of these projects are phased, so it takes us some years into the future, and 70% of our work is repeat business.

At the same time a lot of the developers are expanding outside the region and from this we are seeing opportunities in Morocco, Azerbaijan, Kazakhstan and there are many synergies with these new operations in North Africa and the peripheral edge of the region. We know the costs of production and we are able to use our existing expertise and relations.

BI-ME: Finally what is the presence we can expect to see for C&B in the Middle East, ten years from now?

EE: We are now in a phase of consolidating in line with our strategy. We are ensuring that we are properly executing in the market, and in such a time of rapid growth we are protecting our brand. We are consistently looking to be the consultant of choice, and we guard that very firmly. We are continuing to think out of the box and to push forward issues like the lifecycle asset management approach. It is our duty and we do sometimes have to have a difficult conversation with our clients.

Note: Dating back to its formation in Scotland in 1876, today's Currie & Brown is owned by its management and has its world headquarters in the City of London. Its international network of offices reflects the challenge of the global market within which its clients operate. It continue to extend its reach in order to provide quality service to clients in every continent. With established offices in Australia, Europe, the Middle East, Asia, the Americas and associated offices in Africa, C&B is  able to advise clients anywhere, taking account of each local business practices, customs and legislation.

Currie & Brown believes in long-term business relationships with its clients and in recruiting talented, enthusiastic staff and developing them to their full potential. Its success derives from maintaining a focused and disciplined approach, underpinned by traditional values, extraordinary staff loyalty and commitment.



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