The Public-Private Partnership Law Review: United Arab Emirates

Overview

PPPs are central to the policy of the government of the United Arab Emirates (UAE) for developing infrastructure.2 There is a great emphasis on growing the private sector and increasing the employment rate nationally.3 The PPP model enables the development of strategic projects and services in a cost-effective and quality-assured manner. Due to the UAE's commitment to combatting climate change, which is a central focus in the UAE Vision 2030, renewable energy is one sector in which PPP has been implemented effectively.

The year in review

The UAE, and particularly the emirates of Dubai and Abu Dhabi, have displayed positive signs of progress with respect to PPP projects. The Dubai Department of Finance allocated 272 million US dollars' worth of PPP projects in 2019; a project of note is the completion of a five-stage extension of the Dubai Metro-line – Route 2020. Similarly, the Abu Dhabi Investment Office (ADIO) announced in February 2020 that it plans to procure infrastructure schemes worth US$2.72 billion under the PPP model.4 A project of particular note is the Fujairah 3 IPP in Fujairah, which will be the largest independent thermal power plant in the UAE. The project represents critical infrastructure for ensuring security of supply of power to the UAE, and is expected to produce first power by summer 2022 and achieve full generation by summer 2023, generating enough electricity to meet the power consumption requirements of approximately 380,000 households.

General framework

i Types of public-private partnership

The flexibility of the UAE's legal framework relating to PPP is reflected in the wide variety of PPP structures available in the UAE as set out in the UAE federal government's Public Private Partnership Provisions and Procedure Manual (PPP Manual). These range from simple service or management contracts to more comprehensive structures, including (but not limited to) the following:

  1. finance and lease;
  2. build, lease and transfer;
  3. build, operate and transfer;
  4. build, own and operate;
  5. build, rehabilitate, operate and transfer;
  6. design, build, finance and operate; and
  7. modernise, own, operate and transfer.

ii The authorities

The UAE has authorities at both the federal level and within individual emirates. Federal authorities have jurisdiction over the UAE as a whole (i.e., across the seven comprising emirates). In addition, each emirate has the authority to enact its own laws and empower its authorities to implement the same within the respective emirate.

The PPP Manual provides an overarching regulatory guide on how PPP projects are procured and governed across the UAE, and sets out a high-level framework on the life cycle of the partnership with the private sector. Section 1.5(1) of the PPP Manual provides that the PPP Manual must apply if the federal government is involved in a PPP project with one or more emirate governments and the private sector. Section 1.5(2) of the PPP Manual provides that emirate governments may or may not choose to implement the PPP Manual for PPP projects conducted individually or with other emirate governments. Government entities are expected and required to perform more specialised and in-depth research and studies regarding financial, technical and legal issues, including the legislative environment, and to coordinate closely with a PPP higher committee responsible for supervising PPP contracts prior to entering into partnership contracts with the private sector.5

Federal

Pursuant to the UAE Department of Finance's PPP Guidelines, First Edition 2019 (PPP Guidelines), a 'technical bureau' (made up of financial, technical and legal advisers) sits within the Ministry of Finance to support the implementation of PPP projects throughout the UAE.6,7 The technical bureau is the first point of approval in the initiation stage of a proposed PPP project.8 Additionally, a PPP higher committee is established pursuant to a cabinet resolution and acts as the main point of contact for all federal and local PPP projects with the private sector.9

Acceptance, approval and supervision of PPP projects with a value of 200 million dirhams or less is carried out between the PPP higher committee and the Ministry of Finance.10 For projects with a value of 200 million dirhams or more, the PPP higher committee must present them to the relevant government for approval.11

Dubai

Pursuant to Article 10 of Law No. 22 of 2015 (Dubai PPP Law), government agencies in Dubai have relative flexibility in carrying out studies and analysis for proposed PPP projects. Government agencies in Dubai also have the responsibility of overseeing and ensuring that the company formed to implement the project in question (ProjectCo) carries out its obligations under a PPP project effectively. Article 11(a) of the Dubai PPP Law requires that a partnership committee must be established prior to the commencement of the feasibility study phase of a proposed PPP project. The partnership committee is responsible for supervising and monitoring the relevant PPP project.12 Where a project involves a government agency commitment between 200 million dirhams and 500 million dirhams, the technical bureau has the necessary authority to approve such projects.13 Projects above 500 million dirhams will require the technical bureau to make a recommendation for approval to the Supreme Fiscal Committee; the approval will ultimately need to be given by the Supreme Fiscal Committee.14

The Dubai PPP Law does not apply to electricity and water projects or to simple works or supply contracts, which are governed instead by Dubai Law No. 6 of 2011 and Dubai Law No. 12 of 2020, respectively.

Abu Dhabi

Abu Dhabi passed two new laws in 2019; Law No. 1 of 2019 for the establishment of the ADIO, and Law No. 2 of 2019 concerning the regulation of Public Private Partnerships in Abu Dhabi (Abu Dhabi PPP Law). The passing of the Abu Dhabi PPP Law is a positive sign and a clear signal of intent to increase the use of PPP within Abu Dhabi. The ADIO has a variety of powers to oversee and support the implementation of PPP projects in the emirate of Abu Dhabi; its responsibilities include assistance with early analysis and screening of PPP projects and potential candidates, acting as a point of contact for private entities in relation to PPP projects in Abu Dhabi, and supporting government agencies (procuring entities) in the ongoing management and supervision of PPP projects in Abu Dhabi.15 While the Abu Dhabi PPP Law does not preclude power and water projects from its scope, Law No. 2 of 1998 on the regulation of Water & Electricity Sector in Abu Dhabi specifically governs water and electricity projects in Abu Dhabi, and pursuant to Article 35 of this Law, Emirates Water and Electricity Company has the authority to select a private entity to be awarded PPP projects in this sector.

The Abu Dhabi PPP Law applies to all governmental contracts with the private sector, with the exception of partnership contracts signed before the entry of the Abu Dhabi PPP Law into force.

The other emirates within the UAE do not have their own PPP laws.

iii General requirements for PPP contracts

Under both the Dubai PPP Law and the Abu Dhabi PPP Law, PPP projects are required to be of economic, financial and social feasibility; achieve benefits to the government and public; and have a positive impact on the development goals of the relevant emirate.16

The PPP Manual (which applies to all emirates) and the Partnership Projects Guidebook published by the ADIO in July 2020 (ADIO Guidebook) (which applies to Abu Dhabi) set out requirements for PPP projects (see below), and provide guidance on the applicable legislative framework.

Federal

Pursuant to the PPP Manual, for a project to be considered a PPP project it must meet the following conditions:

  1. the value of the project must exceed 200 million dirhams (unless it is a project of strategic nature and recommended by the partnership committee and approved by the government agency);
  2. the project must be public and of an economic nature and be financed, wholly or in part, by the private sector; and
  3. the private sector must implement at least one of the construction, development, restoration, outfit, maintenance or rehabilitation and operation processes of the project. The private sector must also be responsible for all risks arising from its inability to implement the relevant process or the failure of the project.17

Dubai

Article 6 of the Dubai PPP Law provides for certain factors to be considered in the selection of a PPP project, including (but not limited to):

  1. the extent of the benefit to the government of Dubai, and of public interest;
  2. the economic feasibility of the project and its impact on the development plans of the emirate of Dubai;
  3. risks resulting from the implementation of the project and in particular to the environment; and
  4. the capital investment and technical expertise involved.

Abu Dhabi

The ADIO Guidebook outlines further factors to be considered to assist in the approval of a proposed PPP project, which include (among other factors):

  1. providing the expected basis for value-for-money with respect to the size, risk transfer to the private sector and lower total cost of ownership through private sector efficiencies;
  2. providing examples of regional precedents of similar projects procured using the PPP model;
  3. potential for revenue generation;
  4. potential for a long-term contract;
  5. strong market appetite for the project;
  6. a need for innovation in the sector; and
  7. all technical and financial data available at the time of proposal.

All projects proposed require submission of a detailed report to the ADIO for study and approval.18 Such report must include the reasons for the PPP project, expected positive effects and risks for the same, and financial, economic and other feasibility studies.

Bidding and award procedure

i Expressions of interest

Federal

To start the bidding process, the PPP higher committee issues invitations for expressions of interest to potential investors from the private sector.19 A project committee (established by the PPP higher committee),20 after considering responses to the invitation for the expression of interest, decides on whether the persons interested in the project will be invited to the pre-qualification phase. Once the pre-qualification phase is initiated and the project is announced, the pre-qualification documentation is distributed and applications for qualifications are invited.21

Dubai

Pursuant to Article 18 of the Dubai PPP Law, the relevant Dubai government agency is required to and is responsible for preparing the terms, conditions and documentation for the relevant PPP project. The government agency must obtain the competent authority's approval regarding the documentation, following which an invitation can be issued to bidders in accordance with Article 19 of the Dubai PPP Law. Article 22 of the Dubai PPP Law provides that the partnership committee must study and evaluate the submitted offers from a technical, financial and legal perspective and must comply with the conditions and specifications stated by the government agency in the bid documentation before an offer can be accepted.

Abu Dhabi

Pursuant to Article 9 of the Abu Dhabi PPP Law, the ADIO, along with the relevant Abu Dhabi government agency, is required to prepare the terms of reference for bids and evaluate bids. Expressions of interest, marketing and a pre-bid conference are optional and the project's team, which is formed and supervised by the ADIO for each PPP project (project's team),22 has discretion as to their use. Expressions of interest and invitations are made during the request for qualification phase (which may be combined with the request for proposal phase if approved by the ADIO).23 The request for qualification documentation is prepared by the project's team and sent out to potential applicants. Once responses are received, the project's team will evaluate the responses and develop a shortlist of qualified applicants.24

ii Requests for proposals and unsolicited proposals

Dubai

Following receipt of applications for qualification, the bidding and awarding committee (formed by a decision of the PPP higher committee25), assisted by the technical committee (also formed by a decision of the PPP higher committee to provide technical support throughout the PPP procurement process26), will study and assess the applications to determine the qualified bidders. Once a determination is reached, a report is submitted to the partnership committee, which includes the suggested qualified bidders.27 Following review and approval from the partnership committee, the bidding and awarding committee will notify each candidate of the results (whether positive or negative); the bidding requirements and specifications documents are then issued to the qualified bidders.28

Abu Dhabi

Subject to approval from the ADIO's Director General and the procuring entity's chairperson, a request for proposal phase requires at least three preferred bidders before it is initiated.29 Once initiated, the project's team will (among other tasks) develop and issue the request for proposal documentation to the shortlisted bidders, including a timetable for bid submissions.30

Unsolicited proposals

Unsolicited proposals are permitted pursuant to Article 12 of the Dubai PPP Law and Article 7(1) of the Abu Dhabi PPP Law. The Dubai PPP Law requires that unsolicited proposals are formally submitted to the relevant government agency or the partnership committee.31

Although there is no prescribed form of submission, there are various conditions that must be satisfied before an unsolicited proposal can be considered, both under the PPP Manual and the ADIO Guidebook. These include the proposal being commercially and technically feasible, affordable within the government's overall budget and innovative in nature to provide a unique benefit to the public community.32

iii Evaluation and grant

Dubai

Pursuant to Article 14(a) of the Dubai PPP Law, the selection of a preferred bidder process, as well as the award of the final contract, are subject to the principles of openness, transparency, freedom of competition, equal opportunity, announcement of the competition and achievement of the public interest. Further, Article 14(b) of the Dubai PPP Law also requires that the preferred bidder be selected only if it meets the approved financial, technical and other required standards for the relevant project. Generally, a joint technical and financial method of assessment is undertaken, which seeks to determine the best bid in respect of cost (cost proposal and financing plan) and technical capability of the relevant bidder to implement the relevant project. It should be noted that innovative solutions can earn the relevant bidder extra points in the assessment process.33 A legal assessment is also undertaken, which includes evaluating, among other factors, the extent of any deviations from the standard PPP documentation and the extent to which the risk is divided under the same.34

Once bid submissions have been reviewed by the Dubai government agency and the identity of the highest-ranking bidder is submitted to the partnership committee for review, that bidder is recommended (or not recommended, as the case may be) to the Dubai Department of Finance for approval. Negotiations between the Dubai government agency and the bidder will commence following such approval being granted.35

Abu Dhabi

Article 6(1) of the Abu Dhabi PPP Law also requires that the selection of a preferred bidder, and the award of the final contract, are subject to the principles of openness, transparency, freedom of competition, equal opportunity, announcement of the competition and achievement of the public interest. Additionally, Article 6(2) of the Abu Dhabi PPP Law requires that the preferred bidder be selected only if it meets the approved financial, technical and other required standards for the relevant project. Once bids are submitted, the project's team and tender evaluation committee (which is made up of representatives from the ADIO and the relevant Abu Dhabi government agency),will undertake a tender evaluation process that is largely similar to the process undertaken in Dubai (namely a technical and a financial evaluation).36 The project's team would, in the first instance, prepare a tender evaluation report to the tender evaluation committee with its findings, following which the tender evaluation committee would instruct the project's team to submit the tender evaluation report to the relevant approving authority for final sign-off.37

The contract

i Payment

There are two main sources of remuneration for a private party under PPP contracts in the UAE, as outlined in the PPP Manual:38 either a 'government pays' or 'user pays' model. In the government pays model, the private entity provides the services and collects payments from the relevant government agency. In contrast, under the user pays model, the private entity collects payment from users directly but does so in the name and on behalf of the relevant government agency. The payment model utilised is dependent upon the nature and structure of the partnership agreement entered into between the public and private entities.

The value or amount of remuneration will ultimately depend on the structure agreed between the government agency and the private party in the PPP documentation. For example, if a fixed component is agreed, the private entity is paid regularly subject to meeting certain quality and standards requirements. Alternatively, under the variable component model, the payment to the private party will depend on the production quantity or demand for the services procured. A further possible model is that of incentives and rewards where payments are made depending on the distinctiveness and efficiency of the procured services by the private entity.39

Ultimately, remuneration for PPP contracts will depend on the nature of the project. For many (for example, power and water), remuneration will be tied to capacity and output (and therefore linked to performance), but in other sectors such as transport, remuneration will have an element of a set payment (which may be increased or reduced depending on performance) combined with an element linked to usage.

ii State guarantees

The PPP Manual lists three main guarantee structures provided by the state in the UAE, which are:

  1. Service use or revenue guarantee: this is generally used in the transportation sector as the government guarantees the private party a minimum service use on a daily basis (i.e., guaranteed minimum daily revenue). In such instances where the minimum threshold is not met, the state would generally pay the difference.
  2. Minimum service fees guarantee: this type of guarantee provides that the state will pay the private party a minimum service fee, as committed to and agreed by the parties, regardless of the performance of the ProjectCo.
  3. Regulatory and legal amendment guarantee: this form of guarantee is not monetary in nature but serves to protect the private party from any future regulatory policy.40 Any risk as to a change in regulatory policy that may be enacted is borne by the government entity as the government of the territory is responsible for the prevailing regulatory policy.

For power and water PPPs in emirates other than Dubai, credit support is usually provided from the Abu Dhabi Ministry of Finance. Such credit support covers the obligation of the offtaker to purchase the project upon a termination of the underlying offtake contract. Generally, the local government will take a majority stake in the equity of the delivery vehicle.

In certain sectors (for example, education and other social infrastructure), some projects have been undertaken without any government guarantee, particularly where such projects are not project-financed.

iii Distribution of risk

Under both the PPP Guidelines41 and the ADIO Guidebook, among other factors, risk is generally allocated based on the party responsible for the work and the party best able to manage, control and mitigate such risk, and this principle is generally followed on PPPs in the UAE.42 For example, under the PPP Guidelines, a table is included that sets out the risk category (planning risk, design risk, construction risk, etc.) and how such risk is allocated under the different types of PPP contracts.

The ADIO Guidebook on the other hand sets out various factors to be considered by the project's team in developing a comprehensive risk analysis, including examining how each risk and its impact can be reduced, methods of monitoring risks and determining which party should be responsible for the same.43 Ultimately, the apportionment of risk is a commercial decision made by the parties during the course of negotiating the relevant documentation.

iv Adjustment and revision

PPP agreements are generally adjusted by way of an amendment agreement where the parties are seeking to amend the contractual terms. Where the scope of services or scope of work is to be amended, a variation mechanism contained within the relevant contract (namely the issuance of a variation order) is often utilised. The extent of what can be adjusted and by what degree will depend on the agreed terms.

A recent example of the change mechanism being utilised arose in the context of the payment regime under an operation and maintenance contract, whereby the owner was required to pay the operator a fixed fee based on the expenditure incurred in performance of the operation and maintenance obligations. The contract allowed for the fixed fee structure to be adjusted where the expenditure actually incurred was lower than the projected level; the owner had the right to trigger an assessment procedure and revise the payment mechanism having regard to the level of deviation between the actual and projected expenditures. Additional common examples relate to adjustments to implementation schedules and tariffs payable under the PPP contract upon the occurrence of various circumstances such as change in law, offtaker defaults, and political force majeure events such as war and the imposition of sanctions on the host government.

v Ownership of underlying assets

Ownership of assets will depend on the PPP model employed for a particular project. For example, in straightforward service contracts, management contracts and lease contracts the assets remain under ownership of the government entity, whereas under a concession or variations of a build, operate and transfer model, the assets may be owned by a private party or shared between the private party and the government entity.44

Asset transfer formalities are governed by the terms of the partnership agreement entered into by the government agency and the private party. Pursuant to Article 26 of the Dubai PPP Law and Article 12 of the Abu Dhabi PPP Law, the partnership agreement sets out, among other terms, how assets are to be owned and dealt with. A significant and recent development in the UAE to attract additional foreign investment is that the foreign ownership rules applicable to commercial companies in the UAE will be completely revised. Previously, foreign investors were only allowed to hold up to 49 per cent of onshore companies, with UAE nationals required to hold the remaining 51 per cent; it is this requirement that is expected to be dropped in many sectors and industries, although this may happen gradually over time in different sectors.45 Additionally, Article 32(3) of the Dubai PPP Law and Article 14(3) of the Abu Dhabi PPP Law provide that no assets may be sold by a ProjectCo without the approval of the relevant government department (for example, this would be the ADIO in the case of an Abu Dhabi PPP).

vi Early termination

Pursuant to Article 26(13) of the Dubai PPP Law and Articles 12(7) and 12(10) of the Abu Dhabi PPP Law, early termination arrangements are permissible and must be governed by and specified under the partnership agreement. Generally, termination results in the compulsory purchase of the project by the offtaker or a ProjectCo's right to require the offtaker to purchase the project, save for termination upon a ProjectCo default, in which case the offtaker has the right, but not the obligation, to purchase the project. The amount of the purchase price will depend on the cause of the termination, but will generally be sized to cover at least the project's senior debt, and (where termination occurred due to offtaker default) equity and return on equity. In particular, this is the case for power and water projects in Abu Dhabi and Dubai. It is worth noting that, in the UAE, to properly effect the termination of a contract, a court order is often required (particularly in situations such as early termination).

Finance

Project financing for PPPs in the UAE has been most successful in the context of the electricity and water sectors, with both Abu Dhabi and Dubai having a long track record of successfully implementing bankable projects. Such project finance has been sourced from a variety of lenders, including international commercial banks, regional and local banks (particularly for VAT, working capital and other forms of local currency liquidity) and export credit agencies. The UAE has recently pushed the boundaries of regional project finance, with the growing use of soft mini-perms (such as on the Fujairah F3 and Al Dhafra power projects), whereby project financings are intended to be refinanced within a number of years of commencement of commercial operations. The power and water sectors in the UAE in particular have a long and successful track record of allocating risk in a bankable way (i.e., so that project finance can be secured). Accordingly, such risk allocations may be duplicated in PPPs in other sectors in the future.

A recent example of a successful project financing is the recent Fujairah F3 IPP project, which cost approximately 4.2 billion dirhams, and which was externally funded from a consortium of international commercial banks and the export credit agency Japan Bank for International Cooperation.

Exchange risk is generally handled by way of the foreign portion of the underlying tariff being indexed to forex fluctuations. The longstanding pegging of the UAE dirham to the US dollar provides additional comfort in this regard. In other sectors, project finance has less of a track record and finance is often provided by way of equity contributions.

Recent decisions

We are not aware of any local court cases, nor any arbitrations, concerning PPP projects in the UAE or any individual emirates in the past year.

Outlook

To date, the UAE has made significant progress in diversifying its economy and remains one of the least oil-dependent economies in the GCC. This is in part due to the UAE's commitment to developing its infrastructure in key sectors, such as education, transport and renewable energy. While many ongoing projects in the UAE proceeded during 2020 notwithstanding the covid-19 pandemic, some delays were experienced early in the year in the tendering of new projects. Recently, the UAE has tendered multiple projects pursuant to its newly developed PPP laws, suggesting that 2021 will be an active year for PPP projects in the UAE. The committed budgets of the various emirates indicate a positive outlook for future PPP projects in the UAE.

Footnotes

1 Anthony Ellis is a partner, Phil Hanson and Samer Mahjoub are senior associates and Charles Oliver and Amro Al-Ahmar are associates at Herbert Smith Freehills LLP.

5 Page 6 of the PPP Manual.

6 Page 11 of Department of Finance (DOF) – PPP Guidelines ENG 2.

7 Page 11 of the PPP Manual.

8 Page 15 of DOF – PPP Guidelines ENG 1.

9 Pages 23 and 58 of the PPP Manual.

10 Page 78 of the PPP Manual.

11 Page 79 of the PPP Manual.

12 Page 17 of DOF – PPP Guidelines ENG 1.

13 Page 20 of DOF – PPP Guidelines ENG 2.

14 Page 21 of DOF – PPP Guidelines ENG 2.

15 Article 4 of Law No. 1 of 2019.

16 Article 4 of the Abu Dhabi PPP Law and Article 6 of the Dubai PPP Law.

17 Page 78 of the PPP Manual.

18 Article 8 of the Abu Dhabi PPP Law and page 23 of the ADIO Guidebook.

19 Page 151 of the PPP Manual.

20 Page 95 of the PPP Manual.

21 Pages 152 to 156 of the PPP Manual.

22 Page 14 of the ADIO Guidebook.

23 Page 41 of the ADIO Guidebook.

24 Page 43 of the ADIO Guidebook.

25 Page 150 of the PPP Manual.

26 Page 62 of the PPP Manual.

27 Page 156 of the PPP Manual.

28 Page 158 of the PPP Manual.

29 Page 44 of the ADIO Guidebook.

30 Pages 45 to 47 of the ADIO Guidebook.

31 Page 74 of the PPP Manual.

32 Page 74 of the PPP Manual and pages 85 and 86 of the ADIO Guidebook.

33 Page 175 of the PPP Manual.

34 Page 72 of DOF – PPP Guidelines ENG 1.

35 Page 74 of DOF – PPP Guidelines ENG 1.

36 Page 52 of the ADIO Guidebook.

37 Pages 52 and 53 of the ADIO Guidebook.

38 Page 133 of the PPP Manual.

39 Page 133 of the PPP Manual.

40 Page 195 of the PPP Manual.

41 Page 40 of DOF – PPP Guidelines ENG 1.

42 Page 40 of DOF – PPP Guidelines ENG 1 and page 32 of the ADIO Guidebook.

43 Page 32 of the ADIO Guidebook.

44 Page 33 of DOF – PPP Guidelines ENG 1.

45 On 23 November 2020 the UAE government announced that a new decree amending Law No. 2 of 2015 on Commercial Companies. The “New Decree” is yet to be published.

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