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.