PPP as a tool for delivering housing in Bahrain and the MENA region

The size of the potential housing market in the MENA region is vast. Currently in Bahrain, there is a serious need for the development of more housing. Various reports set the current need for housing at around 53,000 units and this is increasing by around 4,000 units per year.

This housing shortage is not limited to Bahrain. Saudi Arabia, the most populous GCC country, needs over 1 million new homes by 2014. The situation in Egypt is more pressing. It requires over 4.5 million housing units now, with a further
340,000 annually.

The dramatic growth in population around the MENA region has, in particular, led to an increasing proportion of the population under the age of 25 with a desire for suitable, and perhaps more importantly, affordable housing. As a result, Governments need to find new housing solutions that do not rely on the public sector alone in order to address these housing needs.

The buzzwords “affordable housing” and “Public Private Partnership (PPP)” are now regularly used in the market. Can such initiatives and models adequately address the increasing need for new housing? This article will focus on the role that PPPs have to play in the delivery of housing projects and what it takes to achieve a successful PPP project.

What is a PPP?

A PPP is a collaboration between the public and private sectors, to deliver a specific product, such as housing. Generally, the public sector will provide an asset (possibly the land on which the housing will be constructed) and the private sector will contribute financing and development expertise to design, construct and maintain the housing.

PPP in the MENA region is not a new concept and has been trialled in countries such as Jordan and Egypt, for a number of years. However, PPPs have not generally been utilised to provide housing. Currently, Bahrain is awaiting the result of the bidding process on its first Social Housing PPP, which will be studied across the region as a benchmark for the delivery of housing projects in the future.

When entering into a housing PPP, the public and private sector do have different objectives. The key concerns for public bodies are that quality housing is built on time and to an appropriate standard. Thereafter it needs to be well managed and maintained. However, the private sector contractor looks for certainty as to what it is being required to deliver both in terms of works and services, and a predictable income stream.

Drivers for successful PPP projects

A well-structured PPP can deliver a long-term quality product. Key factors that contribute to successful PPP projects include the following:

• A clear specification which sets out the requirements on both partners and the project as a whole in a way that can be measured objectively. Independent sign-off of the end product will be dependent upon the PPP meeting these agreed requirements;
• The public body needs to have the ability to monitor the works enabling problems to be identified and rectified at an early stage. This should reduce resulting time and quality implications;
• The public body should consider whether it is appropriate to levy damages on its private sector partner in the event of delays and/or underperformance. This can, of course, be an unpopular consideration. Additionally, if the PPP is terminated, compensation payable to the private sector partner should be considered in order to ensure that the public body does not seek to benefit from a windfall through the termination of the PPP;
• Following completion and occupation, the focus should be on ensuring that the housing is managed and maintained to appropriate standards. If the PPP is to continue to provide management services then a service specification should be drawn up against which performance can be monitored. The public body should consider whether any failure to meet the requisite standard should result in financial deductions from its private sector partner;
• It may be appropriate for the public sector to bear the financial contribution to management services for unoccupied dwellings. It is unlikely that the private sector will wish to take the financial risk of demand not continuing for the housing;
• The role of any funders will be a relevant consideration at the start of the PPP. A failure during the operational phase may be due to delivery or solvency failings. In these circumstances, funders are likely to expect the right to step-in to preserve their interest. It is important to make sure that the basic platform for all rights necessary to provide adequate security for funders is in place from the start;
• Following construction, the public realm element of the housing development may be owned by the public body. In these circumstances the PPP will need to be given a licence to manage these areas.

Advantages of PPP

There are a number of advantages for both the public and private sectors in using a PPP model for housing projects:

• The private sector has the knowledge and expertise to deliver the services that the public sector requires. By harnessing the private sector’s knowledge and expertise housing should be delivered to programme and to specify standards;
• The risks associated with the design, construction, maintenance and financing of the housing is taken away from the public sector and falls on the private sector. It is arguable that these risks are better managed by the private sector, which reduces the overall risks and costs involved;
• From our experience, the procurement process for PPPs can be structured efficiently to save costs;
• The product produced by the PPP should have a long lifespan enabling assets and services to be costed on a whole life basis. This gives both the public and private sectors certainty;
• The PPP takes the risk for delivering the housing away from the public sector. By delegating the role of providing housing, the public sector is free to carry out its core services.
• A PPP can be suitable for large and complex projects, provided that the private sector partner has suitable knowledge and expertise. It is however vital that the PPP is structured and managed efficiently;
• The private sector can be incentivised for being innovative or particularly efficient in its delivery of housing projects;

Hurdles to achieving PPP success

The level of success attained by PPP projects in MENA region has yet to be properly established. In our experience of advising both public and private sectors involved in PPP projects a number of recurring issues do arise. Commonly, these issues relate to the performance of the private sector and its failure to deal with poor performance at an early stage. Other issues include:

• Either partner not understanding or misinterpreting the contract between them;
• Delays in the delivery of the housing;
• Changes in the requirements of both partners’ roles, responsibilities and obligations within the context of the PPP structure;
• Poor communication between the partners.

Each of these issues can be managed and resolved through efficient contract administration, ongoing performance monitoring and sustaining a partnering relationship.

The future for PPPs

PPP projects do need to be focused on what they actually deliver to the market. Meeting market needs is the priority as opposed to the value of the end product. To this extent the success of PPP projects in the future will depend on shifts in social and economic thinking by the parties involved at all levels of the housing supply chain.

Success also requires the development and implementation of finance packages which enable end-users to finance the purchase of properties. If end-users cannot afford to purchase property at a price that it is feasible for the PPP to sell then the increasing need for housing will not be met.

Notwithstanding the issues highlighted above, PPPs are likely to be a key tool in the delivery of housing projects and its related infrastructures in Bahrain and the MENA region over the coming years. With this in mind the MENA region will be eagerly anticipating the results of the Bahrain Social Housing PPP.