by Hardwick Legal | May 24, 2017 | Purpose Built (LexisNexis)
Mark Raymont, partner at Pinsent Masons LLP Dubai, and Paul Prescott, legal director at Pinsent Masons LLP Qatar, take a look at construction activity in the Middle East, including the key infrastructure projects being procured or constructed, and consider the outlook for the industry.
How is construction activity in the region?
The major economies of the Middle East have been significantly affected by the drop in oil and gas prices since 2014, due to the region’s reliance on oil and gas as its major exports and the key role of state entities in procuring major projects. The resulting economic uncertainty has, in some cases, caused governmental departments to cut existing budgets and to reduce planned spending for infrastructure development and related activities, which has in turn affected the level of construction activity over the last few years.
With these fiscal challenges in the region, alternative funding and financing structures are moving more sharply into focus, especially delivery of infrastructure using public-private partnership (PPP) and concession models which previously may have not been considered when the oil prices were significantly higher.
Moreover, the reduction in the number of projects being tendered has increased competition throughout the region. Many contractors and consultants are now looking to offer innovative commercial solutions in order to secure work (including the provision of funding), and cheaper ways to deliver solutions in order to remain competitive.
While construction activity levels have by and large reduced across the region, nevertheless, certain jurisdictions remain reasonably active. In Qatar, for example, the country is preparing for the 2022 World Cup and is in the process of building new roads, railway networks, football stadia and other infrastructure and facilities to support the World Cup Tournament and its 2030 vision.
The same is true for Dubai—with Expo 2020 coming up, the construction sector remains active with a particular focus on transportation and general infrastructure.
In Saudi Arabia, the recent 2016 Middle East Economic Digest reported that projects worth $442bn in 2017 have been earmarked for the construction sector, followed by $228bn and $170bn for the transport and power sectors respectively. It is particularly noteworthy that the power sector is expected to launch a renewable energy programme between 2017 and 2023 to produce 10 gigawatts of power requiring an investment of between $30bn to $50bn. It has also been reported that Saudi Arabia has commenced feasibility studies for two commercial nuclear reactors.
We identify below some of the key infrastructure projects being procured or constructed in the Middle East.
What is the outlook for construction?
The key issue facing the construction sector has been the general reduction in spending in the Middle East by procurement authorities as outlined above. This has caused a downturn in new work and new opportunities in the market. We have also noticed an increase in payment issues with regard to on-going projects and, unfortunately, it seems to be becoming increasingly common in the market for suppliers, contractors and consultants to experience delays/reductions in payment which in turn is causing cash-flow issues throughout the whole supply chain.
Issues that are beginning to surface as a result of the region’s market downturn include funding deficits, declining asset values and increasing sovereign debt, all of which are contributing to a general negative sovereign credit outlook among Gulf Cooperation Council (GCC) countries for 2017. It is no surprise that the market sentiment in the first quarter of 2017 has generally been fairly pessimistic among many contractors and consultants. Non-priority projects and schemes have been put on hold until further notice including the Qatar-Bahrain Causeway, Qatar’s national healthcare scheme, the ambitious Sharq Crossing Programme and the Inner Doha Re-Sewerage Implementation Strategy (IDRIS).
PPP laws
It is anticipated that the Middle East will continue to consider alternative means to finance the delivery of its vital infrastructure. Kuwait and UAE have already introduced a PPP law (Kuwait’s PPP Law is Law No 116 of 2014 Regarding Public Private Partnerships; the UAE’s PPP Law is Law No 22 of 2015 Concerning Regulating Partnership between the Public and the Private Sector in the Emirate of Dubai), and it is anticipated that Qatar will implement its proposed PPP law during the course of 2017. It was announced in March 2016 that the Qatari Ministry of Commerce would submit a draft law covering the use of PPPs. There is speculation in the market that there is a pipeline of potential projects earmarked for when the PPP law becomes effective in Qatar. The introduction of PPP laws in the region is a good indication that the governments of the Middle East are starting to look at alternative ways to deliver key infrastructure especially in the health, education and water sectors. This is a positive sign and will present various opportunities for businesses operating in the Middle East.
Elsewhere in the region, it is evident that other fundraising initiatives are being actively pursued. Saudi Arabia has recently introduced a National Centre for Privatisation which it has been reported will also be responsible for overseeing new PPP procurement options in the country. PPP is already being pursued on a number of Saudi transport, education and health sector projects. Saudi Arabia is also preparing for the IPO of a 5% share in Aramco, which is anticipated to be the world’s largest IPO and would deliver a welcome injection of funds to the state treasury.
Value Added Tax (VAT)
A law introducing VAT in the UAE is expected to be published soon with speculation that VAT in the UAE will be effective from 1 January 2018.
There still remains uncertainty in terms of which goods and services will attract VAT and which exemptions, if any, will apply under this new regime.
However, the entire supply chain in the construction sector in the UAE should consider the changes they will need to make to their businesses, including accounting systems and contracting strategies, to calculate and report VAT when the law comes into force.
It is also anticipated that VAT will be implemented in the rest of the Middle East after the UAE, and it has been reported that all six GCC countries have now signed a unified VAT agreement. This is an area which is likely to attract further interest in the upcoming months.
This article is part one of a three-part series on construction in the Middle East, which was published on LexisPSL. See also:
Construction in the Middle East—legal issues and standard forms
Construction in the Middle East—governing law and disputes
The above links require a LexisPSL Construction subscription. Click here for a free trial.
Interviewed by Jenny Rayner. The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
Source: LexisNexis Purpose Built
Construction in the Middle East—key projects and outlook
by Hardwick Legal | May 5, 2017 | Purpose Built (LexisNexis)
In ClientEarth v Secretary of State for Environment, Food and Rural Affairs, the High Court rejected the government’s application to delay publishing its draft Air Quality Plan (AQP) for consultation until after the June 2017 general election. The government had argued that consultation on its AQP would contravene the purdah restrictions ahead of the forthcoming local and general elections. In refusing the application, the court ruled that purdah was simply a convention and did not override the government’s statutory duty and legal obligations to comply with the Air Quality Directive. Furthermore, the case fell within the exceptions to the purdah rules in the Cabinet Office Guidance on account of the continued threat to public health resulting from additional delays.
This Analysis was originally published on Lexis®PSL Environment. Discover how Lexis®PSL can help you stay on top of the latest developments and find the answers you need fast: click here for a free trial to access.
What is the significance of the decision?
This decision is the latest in a series of court challenges between by ClientEarth and the government concerning the domestic implementation of the EU Ambient Air Quality Directive 2008/50/EC (the Air Quality Directive). It illustrates the role of national courts in ensuring the proper implementation of and compliance with EU law. The judgment is also an important confirmation that political convention does not necessarily entitle a public authority to fail to comply with its statutory duties or a court imposed order, particularly where such failures lead to a continued threat to public health.
The government has confirmed it will not be seeking leave to appeal the ruling. Consequently, it will have to publish its draft AQP by 9 May 2017. Developers promoting development projects with air quality implications will have to take into account the modelling used to prepare the draft AQP and any measures it contains to reduce nitrogen dioxide.
What is the legal background to the case?
ClientEarth first commenced proceedings against the government in 2011 for the failure to put a plan to the European Commission for reducing nitrogen dioxide to levels below the limit values by 1 January 2015, as required under Articles 13 and 22 of the Air Quality Directive. The court in that initial case recognised that the government was in breach of its obligations to ensure cleaner air but declined to grant any relief. A 2014 ruling by the Court of Justice of the European Union in C-404/13: The Queen, on the application of ClientEarth v The Secretary of State for the Environment, Food and Rural Affairs clarified that enforcement of the Air Quality Directive was within the jurisdiction of national courts. The Supreme Court subsequently issued both a declaration of non-compliance and a mandatory order requiring the Secretary of State to revise the AQPs to demonstrate how conformity with the nitrogen dioxide limit values would be achieved as soon as possible in R (on the application of ClientEarth) v The Secretary of State for the Environment, Food and Rural Affairs [2015] UKSC 28.
In December 2015, the government published its revised AQP. ClientEarth issued proceedings against the AQP, arguing that it failed to achieve the value limits within the shortest possible time, as required by the Air Quality Directive. On 2 November 2016, in R (ClientEarth (No. 2) v Secretary of State for Environment, Food and Rural Affairs [2016] EWHC 2740 (Admin), the High Court held that the December 2015 AQP published by the Secretary of State had failed to comply with Article 23(1) of the Air Quality Directive, and its domestic implementing instrument, Regulation 26(2) of the Air Quality Standards Regulations 2010, SI 2010/1001 (the Air Quality Regulations). The court found that on its proper construction, Article 23 of the Air Quality Directive meant that the Secretary of State ‘must aim to achieve compliance by the soonest date possible, that she must choose a route to that objective which reduces exposure as quickly as possible, and that she must take steps which mean meeting the value limits is not just possible, but likely.’ For several reasons, which included that the Secretary of State adopted too optimistic a model for future emissions, the AQP failed to comply with those requirements, so that the 2015 AQP was quashed. The court ordered that a draft modified AQP was to be published for consultation by the Secretary of State by 4pm on 24 April 2017, and a final AQP by 31 July 2017.
What is the political background to the case?
On 12 April 2017, in advance of the local elections on 4 May 2017, the Cabinet Office published its guidance on a three week ‘period of sensitivity’ (also known as purdah) in which ministers, public servants, councillors and officials are expected to refrain from making announcements or decisions with political implications. On the following day, the Department for Environment, Food and Rural Affairs (Defra) issued its application for an order to vary the court’s order and to postpone the publication of the draft AQP from 24 April 2017 to 9 May 2017.
On 18 April 2017, the Prime Minister made a surprise announcement that she intended to seek Parliament’s approval for a general election to be held on 8 June 2017. The Cabinet Office published its guidance in respect of the purdah period applying in respect of the general election on 20 April 2017 (the Guidance). It came into effect at midnight on 21 April 2017 and is applicable until the date of the general election.
On 21 April 2017, Defra prepared an urgent application to the High Court to extend the deadline for publication of the draft AQP to 30 June 2017, ie after the general election, and the final AQP by 15 September 2017. The government relied on the Cabinet Office’s Guidance, which it argued restricted it from publishing and consulting on the draft AQP.
What did the court decide?
The court allowed the first extension of time for the draft AQP to be published on 9 May 2017, the day after which the newly elected local councillors take office. However it dismissed the second application to cover the general election period.
The nature of purdah
The government had argued that the purpose of purdah is to protect the electoral process from interference, whether intentional or not, by local or central government members. As such, a consultation on an AQP during this period could risk distracting the electorate or potentially influence the final outcome. Furthermore, the government argued that if the consultation were to go ahead in advance of the general election, there was a real risk that the quality of the process would be substantially undermined because the government would be constrained in publicising it or holding stakeholder events.
The court rejected this argument. It ruled that purdah in itself is not a principle of law nor binding upon the courts. It therefore did not override the government’s duty to comply with both its statutory duty and order of the court to produce a draft plan to reduce exposure to nitrogen dioxide as quickly as possible, regardless of the degree of influence this would risk having on local and general elections.
However the court accepted that local authorities are potentially crucial consultees in the consultation of the draft AQP due to their active role in monitoring air pollution against national targets and to take action where these targets are unlikely to be met. This contrasts to the primarily receptive role of the national government after the launch of a consultation, and so the same considerations do not apply in respect of the general election. Additionally, granting the extension to take into account the local election need not threaten the publication date of the final plan.
The effect of the Cabinet Office Guidance
The court accepted that the general principles set out in the Guidance applied in the present case but noted that the Guidance also acknowledges that it remains open to the government to launch public consultations during the purdah period preceding a election if there are ‘exceptional circumstances which make that launch essential’. It rejected the government’s distinction that these ‘exceptional circumstances’ applied to the example of an unexpected public health emergency, and not the continued threat caused by nitrogen dioxide emission which the government has been long aware of.
Furthermore, the government’s failure to comply with its obligations to improve air quality compounds an already significant existing threat to public health. On this point, the court cited Defra’s own analysis that the effects of exposure to nitrogen dioxide contributes to the equivalent of 23,500 deaths annually in the UK or on average 64 deaths a day. The circumstances of the present case therefore fell within the exceptional circumstances exception provided for in the Guidance.
Condoning a continuing breach
The court emphasised that as no AQP has yet been published, the Secretary of State remains in breach of her obligations to achieve compliance by the soonest possible date under the Air Quality Directive, the Air Quality Regulations as well as the by the date specified in the court order of November 2016. By granting the extension as sought by the government, the court would serve to permit all these continuing breaches of law. Such a step by the court could only be justified in the most exceptional of cases, of which the present case was not one.
Finally, the court re-iterated the detrimental continued threat to public health caused by continued delays in complying with the Air Quality Directive and Air Quality Regulations. According to the court, ‘[t]hat alone constitutes a powerful reason for refusing to permit further delay in the process to remedy the problem’ and constitute circumstances which are ‘wholly exceptional’.
This Analysis was originally published on Lexis®PSL Environment. Discover how Lexis®PSL can help you stay on top of the latest developments and find the answers you need fast: click here for a free trial to access.
Postscript: On 5 May 2017, Defra and the Department for Transport published their draft AQP for consultation.
Source: LexisNexis Purpose Built
High Court orders publication of draft air quality plan before the general election
Mark Raymont, partner at Pinsent Masons LLP Dubai, and Paul Prescott, legal director at Pinsent Masons LLP Qatar, take a look at construction activity in the Middle East, including the key infrastructure projects being procured or constructed, and consider the outlook for the industry.
