It is sometimes said that all good things come in threes. On 1 July 2019, Royal Decrees were issued for three new laws relating to foreign and private sector participation in our market: the Foreign Capital Investment Law 50/2019 (the “FCI Law”); the Privatization Law 51/2019 (the “Privatization Law”); and the Partnership between the Public and Private Sectors Law 52/2019 (the “PPP Law”). The Privatization Law and the PPP Law are already in force, while the FCI Law came into force in January 2020. Executive regulations pertaining to all three laws are to be issued by mid-2020.
The FCI Law has attracted considerable media attention over recent months, and so in this month’s newsletter we have instead turned the spotlight on the Privatization Law and the PPP Law.
The Public Authority for Privatization and Partnership, established in July 2019 under Royal Decree 54/2019, will be the responsible authority for all projects contemplated under the Privatization Law and the PPP Law. Both laws contain their own frameworks for inviting and evaluating bids in relation to these projects, as the Tender Law 36/2008 will not apply to them.
The PPP Law describes the types of project that can be established through a public-private partnership, and regulates the terms of those partnerships. A partner bidding for a PPP project must be from the private sector, and for these purposes “private sector” excludes any entity in which the Government holds 40% or more of the share capital.
A successful bidder under the PPP Law must establish a project company, whose sole objective would be the execution of the PPP project. This project company may be 100%foreign owned. There is scope under the PPP Law for a public partner to acquire/hold an equity stake in the project company, although this would require Ministry of Finance approval. Any equity participation by the public partner would clearly be a major structuring decision.
The document regulating the public/private relationship is described in the PPP Law as a “partnership contract”. This is a contract entered into by the project company“ under which it is charged within a specific period, with the finance, establishment and preparation of infrastructure and public utility projects, management operation, utilization and maintenance thereof, and performance of their services and participation in the performance of their functions for which the project company will obtain a consideration”.
On a strict reading of the PPP Law, therefore, the project company will always be responsible for financing, establishing (i.e. building), operating and maintaining the PPP project. As the PPP Law does not specify who will be responsible for designing the PPP project, this would be open to commercial negotiation.
The PPP Law also does not mandate who will own the PPP project, and so this key issue will need to be addressed in the partnership contract. In most cases we would anticipate that the project company would own the PPP project, which generally involves the project company assuming revenue/market risk.
In those structures in which the project company owns the PPP project (which will resemble a Build-Operate-Own-Transfer, or “BOOT”, model), the public partner will need to grant a usufruct over any land required for the project. If the public partner is willing to share in project company risks/rewards, the consideration for this grant could be structured as an issue of shares in the project company – although as noted above this would require the approval of the Ministry of Finance.
We envisage that those structures in which the project company does not own the PPP project will follow a Build-Operate-Transfer, or “BOT”, model. This structure is commonly used for infrastructure projects (e.g. projects for schools/hospitals).Ownership of the land would remain with the public partner, and so instead of a usufruct the public partner would need to grant a concession to the project company. In this structure, the public partner would typically receive the project revenues and undertake to make an availability payment equal to the project company’s investment/financing costs, operation and maintenance(O&M) costs and return on investment.
Irrespective of ownership structure, under the PPP Law the assets of the PPP project will automatically vest in the State by operation of law and without payment of consideration on the expiry or earlier termination of the partnership contract(noting that the term of a partnership contract may not exceed 50 years).Although we would not usually expect the partnership contract to vary this position, the private partner should give some thought to whether any assets should be excluded from these automatic vesting provisions, and/or whether any value should be paid for them on reversion to the State.
The Privatization Law is relatively short, and applies to any public project wholly or partially owned by the Government which the Council of Ministers decides to transfer to a private person. This transfer can relate to the ownership and/or to the management of a public project.
The key features of the Privatization Law are as follows:
· a successful bidder for privatization of a public project must establish an Omani joint stock company, into which all of the project’s assets and liabilities will be transferred;
· shares in that joint stock company will need to be offered for public subscription;
· foreign ownership of the joint stock company will be unlimited; and
· the bidder will not need to hold a minimum shareholding percentage in the joint stock company.
A pre-privatization restructuring may be undertaken. This could for example involve hiving down relevant assets into a new joint stock company.
The Privatization Law also protects employee rights, by mandating that employees transferred to the joint stock company may not be dismissed during an initial five-year period.
Published in SASLO Legal Updates Newsletter (October 2019)