Partnership possibilities

There are twists and turns to navigate in developing a workable public-private partnership deal.
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What do you have to look out for in PPPs?

CJ: PPPs are very complex contracts. A large part of our role is making sure the allocation of risk through the contractual matrix is an appropriate one. A tried and tested mantra is that the risk should be borne by the party best able to manage it.

On one level we’re lawyers preparing documentation, but looking at it in a purely mechanical way and assuring the risk is in the right place is an important part of our role. However, that’s only part of the story. If we have achieved that, then putting that into the right legal framework is crucial, and therein lies the regional difficulty. In some of the jurisdictions the situation may be that the insolvency law isn’t flexible enough to deal with the stresses of this sort of deal.

Over the years, in areas where PPP deals are more developed in terms of usage then that allocation is more tried and tested. I don’t think we’re in a situation in most of the GCC where that is the case. In most jurisdictions it’s not sufficient to rely on UK precedent for example. Banks here and legal regimes need some assurance that the legal regime in its jurisdiction will always behave a predictable and reliable fashion. The level of certainty by definition isn’t very evident in this region simply because it has never been tested in this way before.

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This means banks demand that the risk allocation is extremely robust. In certain projects, which have had difficulty in the financing stage, whatever the economic conditions, when you look at them it’s quite often because there was in inappropriate allocation of risk for the maturity of that market. What tends to happen in more developed market is a more detailed allocation of risk, which is perfectly logical because it reflects how the flow of negotiations would have gone between the state and private sectors. Once a few of these PPP projects get banked then those governments can start pushing back the risk towards the private sector.

How you achieve that in current market conditions may now be about gradually increasing that risk portion on the private sector incrementally as you progress, but there comes a point where conditions in financial markets may stop banks from participating simply because they can’t, or because it’s unattractive to them in financing terms.

How has the market reacted since the downturn?

Harnek Shoker: What we’re finding is that even if you have the regulatory framework in place, we are having to restructure because essentially the conditions that were acceptable in financial terms six months or a year ago, no longer are.

CJ: The goals posts have moved. This time around the banks are not prepared to absorb the same level of risk that in a very buoyant market with masses of liquidity and competition the once were. Not long ago projects in this region were getting very attractive financing and very attractive terms, and some might even say, they were getting much better terms than the risk premium justified. The financing market was overheated.

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