By James Williams
In terms of the large-scale construction projects familiar to Dubai, the building contract has received more attention than any other agreements, which include development agreements and deals to lease, the contractor’s security package, warranty documents and documents relating to the provision of finance. …
Projects don’t always go through an organized sequence of planning, approval and execution. Sometimes a project is in various stages at once. Before you know it, you can be executing the project and find that team members and stakeholders have varying levels of understanding about the purpose and status of the project. Just as a project should have a formal end-of-project meeting to signify that it is complete, it also makes sense to hold a formal kickoff meeting to start a project. …
This new event follows the success of the International Contract Users’ conference in London and was created in response to the numerous requests for a regional event.
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The Fidic form of contracts has been in the Middle East since the 1970s, yet it is far from popular. Adam Webster looks at legal issues that should be borne in mind when negotiating Fidic-based contracts.
THE legal systems of the Middle East are founded upon civil law principles (most heavily influenced by Egyptian law, which is itself based on the Napoleonic Code) and Islamic Shariah law – the latter constituting the guiding principle and source of law.
THE legal systems of the Middle East are founded upon civil law principles (most heavily influenced by Egyptian law, which is itself based on the Napoleonic Code) and Islamic Shariah law – the latter constituting the guiding principle and source of law.
The impact of Shariah law depends on the jurisdiction. For example, charging interest is prohibited under Saudi law, whereas only prohibitive interest will be unenforceable in the UAE. In the UAE and other civil law jurisdictions in the Middle East (including Bahrain, Saudi Arabia, Kuwait and Oman), legislation tends to be formulated into a number of major codes providing for general principles of law with a significant amount of subsidiary legislation. Unlike common law jurisdictions, there is little, if any, precedent and we can only surmise what decision a court may arrive at on any given point.
The Fidic forms of contract have been in use in the Middle East since the 1970s. Indeed, the abbreviation “Fidic” (Fédération Internationale des Ingénieurs-Conseils) has become synonymous with the Middle East. It is somewhat paradoxical that the majority of Middle East countries, which source their law from a mixture of civil and Shariah law, have based their conditions of contract on the Fidic form despite the fact that the Fidic conditions of contract are based largely on English common law principles.
Historically, the public sector (in Gulf countries especially) has promoted Fidic as the accepted standard and the private sector has followed suit. There is no apparent rhyme or reason for this, and although Fidic is the established form of construction contract in the region, it is far from popular. It is interesting to note that whilst Abu Dhabi has officially adopted the Fidic form for its standard government contracts, it remains to be seen whether Dubai will follow suit.
According to a recent survey conducted by Norton Rose’s Middle East offices, most developers and contractors responded that they choose to use Fidic forms largely through habit (indeed 94 per cent of respondents said that they primarily use Fidic or modified Fidic contracts, largely because it is well-established and recognised within the region). That said, many respondents also complained that Fidic is too rigid and breeds an adversarial relationship. The current downturn may give contractors and developers time to reassess their contractual models and consider other forms of contract, including Institution of Civil Engineers (ICE), New Engineering Contract (NEC) and partnering contracts. However, few respondents expected that there will be a change in approach towards contracts in the short term.
Unlike in the UK and other common law jurisdictions, countries in the Middle East do not have a specific body of construction or engineering-related laws and precedents, despite the fact that particular problems recur. Although civil codes can give some comfort and confidence to foreign developers and contractors, the uncertainty that often surrounds the interpretation of such laws should not be dismissed out of hand. While it is true that there are principles common to most legal systems, there are some quite significant differences, and often, in the context of construction and engineering projects, these have the capacity to be problematical if not addressed from the outset. As such, it is necessary to have an appreciation of and be aware of the relevant civil code articles and local law nuances which may impact on certain Fidic conditions.
Obviously, the issues vary from country to country as the local laws are not identical. That said, they are often quite similar and, as such, it is possible to highlight some of the key legal issues that should be borne in mind when negotiating Fidic-based contracts.
• In most (if not all) Gulf jurisdictions, it is not possible for contractors to contract out of liability for major structural defects, which threaten the total or partial collapse of a building for a period of not less than 10 years from the date of practical completion.
• Further, whilst it is possible for parties to ascertain and limit damages from the outset of a contract, if the actual damage sustained as a result of a breach is proven to be well in excess of any agreed cap, a court/arbitral tribunal may look beyond the cap and award damages that are quantifiably closer to the actual losses incurred.
• Contractors may also be precluded from claiming payment if payment certificates have not been issued in respect of work performed. Careful consideration should, therefore, be given to the wording of Fidic (or any other standard form or bespoke contract) to ensure that the time for late payment runs from the date on which the interim and/or final payment certificate, as opposed to the date on which the contractor’s application for payment, is made.
• The local laws of most Gulf nations permit parties to a contract to agree on the circumstances in which a contract can be terminated, including provisions that determine the contractor’s employment, but not all of the contractor’s obligations under the contract. In Bahrain, as in Qatar and Egypt, an employer may terminate a contract and stop work at any time before the completion of the works, provided he compensates the contractor for all the expenses he has incurred for the work completed and the profit he would have made if he had completed the works. The court may, however, on application of the employer reduce the compensation for loss of profit, if it sees fit. There is no such provision under the UAE law, however, and in certain circumstances, a court order may be required to terminate a contract. Drafting could be included in contracts governed by the UAE law to provide that the parties agree that they may be terminated without a court order if such termination is in accordance with the termination provisions, but it is not certain that this will be effective if challenged.
Gulf Construction
by Sachin Kerur
With global business headlines currently dominated by debt restructuring issues facing Dubai World, the Gulf region is again subject to the negative gaze of the West. Despite this, the UAE and the broader Gulf region is likely to be a fertile region for major international contractors over the coming years.
Imminent infrastructure projects in the Gulf, as well as the current one, will provide major contractors with opportunities when global pickings are slim. However, contractors are already facing, and will continue to face, an increased transfer of risk combined with compressed margins in respect of new infrastructure projects and EPC contracts. …
Contractor risk in the Gulf’s ‘new wave’ of EPC contractingRead More »
by Adrian Hughes
The capacity of an unsuccessful tenderer to challenge a contract award which breaches public procurement rules will be strengthened on 20th December with the coming into force of new Regulations implementing an EU Directive on Remedies. The new Regulations introduce a declaration of “Ineffectiveness” as a remedy for certain breaches of procurement rules and provide for a harmonised standstill period between the decision on a contract award and the contract award itself to allow the decision to be challenged. This Note summarises the effect of the new Regulations and refers to a recent case in the Technology and Construction Court relating to court challenges.
Unsuccessful tenderers have had a raw deal in terms of remedies where they have been unsuccessful in winning a contract in circumstances where there has been a breach of the public procurement rules. Once the contract has been placed with a successful bidder, the only remedy available to the tenderer in the English courts (save in relation to framework contracts) has until now been damages.
On 20 December 2009 this position will be changed with the introduction of the Public Contracts (Amendment) Regulations 2009 (SI 2009 No 2992, “the 2009 Regulations”) which amend the Public Contracts Regulations 2006 (“the 2006 Regulations”) to give effect to amendments made by the new European Remedies Directive 2007/66/EC (“the Remedies Directive”).
The principal new remedy is that of a “declaration of ineffectiveness”. In broad terms, where a contract has been entered into (a) without being properly advertised, or (b) without respecting the standstill provisions (thereby depriving a person the opportunity of challenge) or (c) without respecting the rules on mini-competition under framework agreements or dynamic purchasing agreements, a court must make such a declaration. In addition a court will be required to fine the contracting authority in such circumstances and may award damages to an economic operator who has suffered consequential loss. Where a contract has not yet been entered into, existing remedies (such as setting aside, ordering amendment or the award of damages) are preserved.
The declaration operates prospectively but not retrospectively to invalidate the contract award. In deciding what orders to make, the court must not exercise its powers in any way which is inconsistent with provisions which the parties have agreed in advance for the purpose of regulating their mutual rights and obligations in the event of a declaration being made, unless and to the extent that the court considers that those provisions are an attempt to avoid ineffectiveness “by the back-door”.
A court will have a discretion not to make such a declaration where ‘overriding reasons relating to a general interest require that the effects of the contract should be maintained’. Economic interests in the effectiveness of the contract may be considered as overriding reasons ‘if in exceptional circumstances ineffectiveness would lead to disproportionate consequences’.
There are non-extendable time limits for applying for a declaration of ineffectiveness: 30 days where a contract award has been published which justifies the decision not to hold a tender or where the tenderers have been informed of the conclusion of the contract; otherwise 6 months. The commencement of proceedings to challenge a decision to award a contract will automatically require the contracting authority not to enter into the contract.
The second main change introduced by the Remedies Directive and implemented by the new Regulations is the harmonisation of “standstill” periods. The 2006 Regulations already provided for a 10 day standstill period between the date of dispatch of the contract award notice and entry into the contract following the ECJ’s decision in Alcatel. The 2009 Regulations make further provision for standstill periods: 10 days if the decision on contract award is sent by fax or e-mail; 15 days if sent by other means. An unsuccessful tenderer is entitled to be informed of the reasons for the decision.
Procedural issues relating to challenges to contract awards were considered during two interlocutory hearings in the important case of Amaryllis Ltd V HM Treasury earlier this year; [2009] EWHC 962 (May 2009) and [2009] EWHC 1666 (July 2009). In that case, breaches were alleged to have occurred in connection with the evaluation of tenders from framework contractors for the supply, delivery and installation of all types of furniture for use by the UK Public Sector Bodies. Damages of £11 million were claimed.
The first hearing involved an application to strike out the challenge for alleged non-compliance with notification and time limit provisions in the 2006 Regulations. Although the Authority had decided in March 2008 that the claimant had failed in the pre-qualification stage for an important lot within the range of potential contracts, the Judge decided that it had failed to provide a clear explanation of the reasons sufficient to enable the claimant to consider a challenge. It was not until July that the Authority had explained the reason why the claimant had been unsuccessful (in particular because of alleged failings in its environmental management). In these circumstances, Mr Justice Coulson decided that:
1. The notice of intention to challenge was compliant; it was sufficient in the light of the limited explanation of the reasons given at that time by the Authority (despite repeated requests);
2. The grounds for bringing the proceedings first arose when the specific breach of the Regulations actually occurred. The relevant period therefore commenced in this case when the decision to exclude the tenderer was made; it was not a case where the breach complained of defective tender documents where time might have run from the date of issue of such documents.
He therefore held that proceedings were commenced both promptly (given the Authority’s failure to give timely reasons) and in any event within the statutory time limit.
The second hearing concerned the issue of how to protect commercial confidentiality whilst ensuring fair process in the respective challenges. In Amaryllis, the essential complaint was that the Authority had an unstated and unfair preference for manufacturers rather than suppliers. A fair trial required a comparison of the Claimant’s Pre Qualification Questionnaire (PQQ) with the Defendant’s evaluation of the PQQs of other tenderers and those PQQs themselves. The Judge had to consider the applicable principles of Public Interest Immunity (PII) which raised the need to balance the public interest in non-disclosure with the public interest in the proper administration of justice. He decided on the facts that PII was not justified for the public authority’s documents. In relation to the commercial interests of the other tenderers he considered that this could be resolved by a mixture of redactions and substitutions. This was the same solution as that adopted by Mr Justice McCombe, in the earlier case of Lettings [2008] EWHC 1009 (at paragraph 18), who had added a step requiring the lawyers for each party to assess materiality on a confidential basis before any issue over disclosure would be addressed.
It seems safe to conclude that the various considerations set out in the 2009 Regulations bearing on the exercise of the new remedy and the complexity of the detailed provisions relating to time limits for commencing proceedings raise the prospect of interesting court challenges in the future.
Kluwer Construction Blog
by Hew Kian Heong
Many years ago, I saw a Chinese construction contract for the first time, and there was mention of a person called a “Jian Li” in the contract. I asked myself – what strange creature is this Jian Li?
The literal meaning of Jian Li in Chinese is “project supervisor” and it refers to someone engaged by the owner to supervise the contractor on matters like construction quality, progress of works and cost control. The Jian Li’s main role is really to ensure that a project is constructed safely and to the quality standards as required under law. The appointment of a Jian Li is mandatory for certain types of construction projects in China, for example projects funded by international development agencies, infrastructure projects and public utilities projects.
The concept of a Jian Li in China originated in the 1980s, early years in China’s transition to market economy. In those days, it was common practice for employers to manage construction projects on their own without any external professional support. The obvious problem was that inexperienced employers often ended up with projects with quality problems because the contractors were not properly supervised or managed in their work. Poor quality buildings and works were a major headache for the industry. The introduction of a Jian Li was part of an effort by the government to resolve this problem. Although appointed by the employer, the Jian Li is primarily intended to play a statutory role similar to that of an independent checker of works which we see in many countries.
In the last three decades, we have seen a massive influx of foreign investors relocating their manufacturing operations to China. Factories were and continue to be put up all over the country at an amazing speed. Most of these factories were built and will continue to be built by local Chinese contractors. Foreign contractors have not been able to get a foothold in the Chinese construction market due to a variety of reasons including restrictions on market entry, the tough requirements to obtain and maintain a contractor’s license and most importantly the inability to compete with the local Chinese contractors on pricing.
However, many foreign investors who are new to China are not used to working with the local Chinese contractors. They do not know for sure if the local Chinese contractors will build their factories in China to the same standards as their factories elsewhere. They therefore often look to the foreign contractors or construction professionals that they have used elsewhere to build their factories for help in managing or supervising the construction of their projects in China.
Many foreign contractors and construction professionals have come to China with the objective of servicing the foreign investors. Many of them have in fact followed their clients to China. Most of these foreign contractors and construction professionals have chosen to set up “project consultancy” companies employing both foreign and Chinese construction professionals. The business that a project consultancy company is licensed to undertake is however fairly limited, but it is relatively easy and cheap to set up. Although not ideal, with the right contract structures, these project consultancy companies have been able to service their clients’ needs adequately. Many become involved from the very start of a project, helping their clients with site selection and due diligence, right up to the ultimate delivery of the completed project to the clients.
On many projects, one would often find the foreign owner appointing a Jian Li as well as a project consultant. The project consultant’s role is usually wider than that of the Jian Li but it would invariably also involve ensuring that the project is built to the correct standards and quality. The Jian Li is however primarily concerned with ensuring that statutory standards and quality are met andthe project consultant is concerned with ensuring that contractual standards and quality are met. Although statutory and contractual requirements often overlap, the former are often less stringent than the latter. This gives rise to a risk that the Jianli and the project consultant in performing their respective supervision duties on a project may give inconsistent messages to the contractor if they are not properly coordinated.
One would have thought that it would be more efficient for one party to perform the duties of both the Jian Li and the project consultant. Most owners would certainly prefer a single point of responsibility. It would at least avoid any inconsistency in performance of their respective duties. For a long time, this was not possible. To set up a Jian Li company, one has to be licensed by the construction authorities. Before 2007, foreigners were not allowed to set up or acquire interest in a Jian Li company.
On 26 March 2007, the Regulations on the Administration of Foreign-invested Construction Service Enterprises was introduced which allows foreigners to set up or acquire interest in Jian Li companies. This was part of China’s effort to fulfill its World Trade Organization commitment to open up the construction engineering services sector. However, despite the Regulations, the market has not seen the setting up of many foreign invested Jian Li companies. Why is this?
I can think of a few reasons. I suspect the main reason is the regulatory limitations. Similar to construction and design companies, Jian Li companies must obtain Skill Qualifications Certificates (SQCs) from the construction authority before they can carry out business. The SQCs are classified into several grades which determine the size and scope of the projects that the holder is permitted to work on. A newly set up Jian Li company is only allowed to apply for the lowest grade of SQC and has to wait for at least two years to apply for a higher grade. This is obviously not appealing to foreign investors as it will take too long before they are able to upgrade to a SQC that will allow them to undertake the bigger projects that they desire.
Local protectionism may also be a factor hindering the growth in numbers of foreign-invested Jian Li companies. One of my clients recently complained to me that his proposal to acquire a Chinese Jian Li company was rejected by the local construction authority. I asked him about the reasons for the rejection. My client said that he believed the real reason was that the authority is keen to protect the local Jian Li companies from foreign competition. The official response from the local construction authority was that the review of our client’s application could not take place because the central construction authority has not issued any detailed implementation rules for the Regulations yet. And so we wait…
Kluwer Construction Blog
by Andrew Ness
Problems with drywall imported from China during the ill-fated U.S. housing boom continue to be front and center in the southeastern U.S., as complaints continue to roll in regarding health problems allegedly caused by the tainted wallboard, as well as damage to electrical and plumbing work. Naturally enough, a significant litigation boom has followed, including attempts to bring claims against the Chinese manufacturers who supplied the drywall. In a recent development, Knauf Plasterboard (Tianjin) Co., Ltd (“KPT”), a leading defendant in the consolidated federal court lawsuit against manufacturers of Chinese drywall, has agreed to accept service of process for homeowner plaintiffs who are named in an Omnibus Class Action Complaint, and to waive its right to demand service of process through the Hague Convention (saving plaintiffs the $15,000 service fee).
According to the November 2, 2009 Order of United States District Court Judge Eldon E. Fallon, KPT’s offer was only available for a limited time to those homeowners capable of providing the required documentation. Homeowners had to sign up for the class action by December 2, 2009 and provide photographs, inspection reports, or other proof of KPT drywall in their home to Plaintiffs’ Lead Counsel. Plaintiffs also have to submit a fully completed and executed Plaintiff Profile Form to Plaintiffs’ Liaison Counsel by December 14, 2009. The offer applies only to the consolidated federal litigation. KPT has not agreed to waive its right to effectuate service through the Hague Convention in any other civil action.
Kluwer Construction Blog
by Júlio César Bueno
Continuing our last discussion on PPPs in Brazil, we should note that PPP LAW applies to government entities (including mixed-capital companies) directly or indirectly controlled by the Federal Government, States, Federal District and Municipalities. Article 2 of PPP LAW defines PPP as follows: “Public-Private Partnership is an administrative concession contract that may assume the form of either a sponsored or an administrative concession contract.” PPPs are expected to be implemented concurrently with existing concession contracts, focusing on infrastructure projects. PPP LAW provides for sponsored concession and administrative concession.
The administrative concession is defined in Article 2, paragraph 2 of PPP LAW as a “service agreement in which the government entity is the direct or indirect user, even if such agreement involves performance of works or supply and installation of assets.” This type of concession is governed by PPP LAW, by Articles 21, 23, 25 and 27 through 39, of Law No. 8987, 1995 [FED. LAW 8987], and by Article 31 of Law No. 9074, 1995 [FED. LAW 9074]. An administrative concession contract is that by which government entities delegate performance of a public service to a private company. Such private company will develop the activity for its own account and at its own risk for the period and on the conditions agreed in the respective contract. In administrative concessions, services are directly or indirectly provided to government entities. For instance, the government entity may open competitive bidding procedures for the construction and operation of hospitals and prisons.
The sponsored concession, as defined in Article 2, paragraph 1, is “the concession of public works or services as dealt with in FED. LAW 8987 when it involves, in addition to the fees charged to users, payment of a compensation from the public partner to the private partner.” A sponsored concession is actually an ordinary concession in which the State gives some type of consideration. This type of concession is governed by PPP LAW by FED. LAW 8987 and related legislation. A sponsored concession may be adopted, for instance, in the cases of railways and highways in general.
Article 2, paragraph 3, of PPP LAW expressly stipulates that “the ordinary concession, i.e. the concession of public works or services as dealt with in FED. LAW 8987, will not be considered a public-private partnership when it does not involve payment of compensation from the public partner to the private partner.” Reflecting a general concern about the manner in which PPPs are to be conducted, PPP LAW also lays down the following guidelines:
(a) Efficiency in complying with the State’s missions and in using the company’s funds (due care in the use of the public funds invested in the activity);
(b) Respect to the interests and rights of service users and of the private entities charged with performing the services;
(c) Non-transferability of regulatory and jurisdictional duties, the exercise of police power and other activities inherent to the State;
(d) Fiscal responsibility in the execution and performance of partnerships, as Article 10, I(b) of PPP LAW stipulates that the rules set out in FISCAL RESPONSIBILITY LAW must be observed;
(e) Transparency in procedures and decisions;
(f) Objective sharing of risks between the parties; and
(g) Financial sustainability and socioeconomic advantages of PPP projects.
These guidelines mirror the spirit of care the legislator wishes government entities to adopt when contracting PPPs, reminding them of certain principles and concepts already contemplated by the legislation applicable to contracting of works, services, and other items by government entities with companies of the private sector.
Generally speaking, PPPs operate as an arrangement between the public and private sectors for execution of works originally entrusted to public concerns, which lack funds and/or expertise. As far as this concept is concerned, PPPs and ordinary concessions may seem to be very similar this is not necessarily true.
Even though both PPPs and ordinary concessions are administrative contracts between the government authorities and a private entity, more specifically concession contracts in a broad sense – concession contracts, in their broad sense, comprise all those in which government entities delegate the provision or performance of services (whether or not preceded by public works) to a private entity, which will perform the activities inherent to the services and assume the business risk under the contractual conditions. Prevalence of the public interest and an assurance of the original economic and financial conditions also constitute essential characteristics of concession contracts – there is a substantial difference between them: while in ordinary concessions, regulated by FED. LAW 8987, the compensation obtained by the contracted concessionaire (private entity) always originates from the service users only, in PPPs the compensation is fully or partially paid by the public partner to the private partner. In sponsored PPPs, the compensation received by the concessionaire from service users is, in principle, supplemented by the compensation paid by the public entity to the private entity, whereas in administrative PPPs all the compensation is paid to the private partner by the contracting public entity itself – Article 2, paragraphs 1 and 2, and Article 6 of PPP LAW.
In other words, PPPs are slated for services and/or public works that do not generate sufficient compensation to the contractor (e.g. expansion and management of highways or railroads with few users) or that do not even involve payment of fees by their users (e.g. construction and management of penitentiaries or public hospitals). Therefore, in addition to dealing with cases requiring investments and/or specialization beyond the possibilities of the public entity, PPPs have another specific characteristic: the venture itself is unable to pay off. These are the basic differences between PPPs and ordinary concessions, and should serve as guiding principles in bidding procedures, analysis of proposals and, particularly, concession contracts regulating PPPs.
Unlike ordinary concession contracts, PPP contracts are subject to more extensive and complex regulations: in addition to traditional clauses such as contractual term (which is considerably longer), PPP contracts must provide for rather specific aspects difficult to be expressed in few general terms. Therefore, PPPs cannot adopt near-standard draft concession contracts, which are mostly adhesion contracts.
The methods of compensation and the guarantees tendered (guarantee fund, insurance, etc.) by the public entity to the contractor, the risk sharing between the parties, the possibility of transferring the special purpose company (a legal entity incorporated to enter into PPPs) to financiers in case of default, the definition of performance evaluation criteria in accordance with the contractual term, among others, will be a matter of concern of those involved in drafting and negotiating PPP contracts. Certainly, this will require a more active involvement of bidders in drafting the contracts, which might result in an ample and detailed document, very probably in similar terms of common law contracts. This obviously strengthens the importance – after the phase of comparative law examination – of studying in advance examples of successful PPP contracts abroad, particularly the pioneering PPP contracts in England.
Having described the fundamental differences between PPPs and ordinary concessions, it is worth dealing once again with their contractual similarities. Both are kinds of administrative concession contracts. For this reason, PPP LAW expressly provides that PPP contracts must meet the general requirements of FED. LAW 8987 for ordinary concession contracts, such as: tariff adjustment mechanisms; methods and standards for service evaluation, expansion and inspection; indemnity calculations; users’ rights and duties; and periodical rendering of accounts by the private party to the public party. As a consequence of this legal provision, the caution taken when drafting PPP contracts must be redoubled, i.e. FED. LAW 8987 must be observed, insofar as applicable, and PPP LAW must be fully observed.
Generally speaking, once this new channel of investments is opened, there are very positive prospects of its use and results. However, it is important to stress the relevant and specific features (which have only been outlined above) of PPPs vis-à-vis ordinary concessions, notably when it comes to the careful drafting of PPP contracts. Hopefully, publication of the PPP LAW will catch the spirit of such date, not only confirming the expectation for a successful future, but also contributing toward a solid and continuous growth cycle in Brazil.
Kluwer Construction Blog
by Joel Heard
Recent examples illustrate clearly that cancelling a project can be very expensive. The City of Ottawa recently paid over C$36 million to settle claims from contractors arising from the cancellation of a light rail transit project. In Montréal, the termination of a contract to build an incinerator has resulted in years of costly litigation and a large court award against the municipal defendants (which they have appealed). …
by Melanie Grimmitt
The news of the requested standstill period for Dubai World debt repayments has left those of us who advise on Public Private Partnership (PPP) projects in the region wondering what it will mean for us……
Why is it relevant for PPPs?
As most readers of this blog will be aware, PPP projects are usually largely funded by debt borrowed by a Special Purpose Vehicle (SPV). The SPV uses the money to build an asset gets paid by the public sector for the provision of services or utilities connected to that asset over the long term. The payments to the SPV come from the relevant public authority to whom the services/utilities are provided eg the schools authority, or the power offtaker.
So you can see that for the lending banks and the shareholders in the SPV (Sponsors) it is important they are comfortable that the government entity responsible for the payments necessary to repay the debt will make those repayments.
PPPs have been planned in the region for rail projects, road projects, power projects, desalination projects, wastewater projects, schools projects…..The region is looking to PPP to fund urgently needed and critical infrastructure.
Tough times already
PPP projects in the region had already been hit hard by the global economic crisis, with a number of large projects being financed on an expensive short term basis until lending conditions improved.
However, at the regional gathering of the International Project Finance Association in Abu Dhabi on Wednesday afternoon, shortly before the Dubai World story broke, and a day after the successful financial close of the USD1 billion Zayed University project by Mubadala, it was generally thought that 2010 would be the start of the upturn. What a difference a day makes…
Or will it?
Can Banks and Sponsors draw a distinction between the Dubai World story and government debt? As the media in this part of the world is emphasising, Dubai World is a government related entity and not the Dubai government. In addition, in PPP transactions in the region it is very common for banks to insist on state guarantees anyway as they very keenly aware of the financial covenant of the ultimate re-payee of their debt. Therefore, perhaps theoretically, it should be business as usual.
However, there is concern already that it might not be that straightforward. Worries about the fragility of the Dubai economy have led to worries about repayment of debt from other countries, and Abu Dhabi may suffer if it doesn’t stand behind Dubai, as it may be argued it allowed investors to believe it would.
A rethink in the air
It may be for this reason that The National, a local newspaper based in Abu Dhabi, yesterday ran a story that actually Dubai World may still pay that Sukuk…..
Kluwer Construction Blog
