Sustainable Cities: PPPs and the emergence of the circular economy in the Middle East

The principles of the ‘circular economy’ (or CE) have gained increasing prominence in recent years, as the benefits in implementing such an approach have become clearer.

The circular economy encompasses a range of processes, or ‘cycles’, in which resources are repurposed, reused or recycled, thus maximizing sustainable use and eliminating waste. It is also reflected in new technical developments within the construction sector itself such as BIM, which allows the construction industry to track every widget, and closed loop manufacturing processes, giving products a second life by repurposing them.  In addition to significant environmental benefits, the circular economy has notable economic benefits, as the value of the resource is more likely to be maintained at each stage. 

As more and more countries adopt circular economy principles and as the Middle East faces the challenges posed by low oil prices and environmental issues such as water shortages, a regional shift towards the circular approach seems to be inevitable.

It is generally recognized that there is an increased appetite in the Middle East for PPP procurement. This appetite is largely driven by the factors which have encouraged governments in other parts of the world to adopt PPP procurement, including reduction in public sector capital expenditure and improved infrastructure and public utility services.

To achieve long term returns on PPP projects, developers and sponsors have been required to adopt developmental and operational efficiencies which are well documented. Furthermore, much of the appeal of the PPP model is the ability of the private sector to introduce innovation into a project – to do what it’s good at. This process naturally creates synergies with the circular economic model.

In this article, we provide some insight into how the adoption of the circular economy can be accelerated through PPP procurement, how the Middle East has an almost unique opportunity to develop strategies in order to use the benefits of PPP procurement to enhance and drive forward circular economic principles, and how the region can learn from the lessons of other jurisdictions.

There are already examples of PPPs in the Middle East which clearly support the circular economy model, including PPPs in the waste-to-energy, waste management and renewable energy sector. As the Middle East begins to fully embrace PPP procurement in the delivery of its key energy and infrastructure projects, there is a clear opportunity in the region to embrace the circular economy model in other sectors.

As the principles of the circular economy become increasingly globalized and the corresponding benefits become more apparent, governments in the region have the opportunity to combine the benefits of the circular economy with the procurement of major infrastructure and utilities through partnerships with the private sector.

However, this requires active engagement by government at the procurement level. In the absence of specific KPIs to support sustainable and regenerative development objectives, the private sector and their lenders are not generally incentivized to adopt supply chain innovations which are not previously proven and tested. Both sponsors and their lenders are likely to be wary of the increased technical risk of the project by adopting such innovations which may ultimately impact on their return on investment.

Studies have shown that ‘no overt support is extended by investors for incorporating circular economy principles unless it can be clearly demonstrated that it can lead to cost reduction and enhanced revenue streams or it is specified at the outset as contract deliverables and any perceived risk profile is appropriately priced by the debt and equity investors in the SPV’¹. Given that innovation is not an intrinsic characteristic of PPP projects, some government procurers, such as Australia and Japan, are incorporating circular economy principles into the KPI framework.

While the additional risk associated with innovative design elements may cause some procuring authorities to flinch, there are obvious benefits for governments in mandating circular economy principles into the PPP procurement process. In particular, for countries which are signatories to the UN’s Sustainable Development Goals, and the Paris Accord, incorporating sustainable principles into the procurement process is key to helping them meet their deliverables. Developing projects along CE principles will also help to manage ongoing issues around limited or depleting resources and the price volatility of raw materials. Furthermore, the construction industry is one of the largest contributors to carbon emissions, and the need to reduce these emissions is increasingly pressing.

Indeed, PPP procurement can provide an ideal contractual environment within which to embed circular economic principles in large infrastructure and utilities projects. However, governments should also be mindful that bid documentation and KPIs which encourage and reward innovation must be both pragmatic and implementable – prescribing unfamiliar new technologies, practices and materials will be likely to disproportionately increase risk and inevitably decrease sponsor and lender appetite. Governments in the region may also need to rethink their procurement practices and technical requirements which can be overly prescriptive (typical of the transition from traditional procurement models to PPP procurement) - innovation requires flexibility.

Whether such requirements have an impact on the attractiveness of certain projects in the region will depend on a range of factors and the outcome is necessarily uncertain. However we can expect that some sponsors and their lenders may find such initiatives more challenging in the Middle East than in more developed PPP markets, such as the UK, Europe, the US and Australia. It is likely, however, that strong developers with a track record of delivering on similar KPIs in other jurisdictions will be successful.

With a young population and emerging political will, the Middle East has a strategic opportunity to adopt and develop the circular economic model in the region. The nascent PPP market offers an opportunity for the region to accelerate this adoption process in the design, construction and long-term operation of large energy and infrastructure assets.

Lessons learned from other jurisdictions indicate that the shift towards more sustainable and regenerative development practices will not occur organically and that regional governments will have to incorporate specific drivers and KPIs in bid documentation and evaluation protocols.

Developers coming to the region from the EU and the UK are already alive to the issues which support the circular economy (some of which are already enshrined in EU law) and will be well placed to deliver innovation in the region and also to transfer know-how on the circular economic model to local contractors, consultants and civil servants.