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…..