aecom international development industrial and commercial area development private sector investment...

AECOM International DevelopmentAECOM International DevelopmentIndustrial and Commercial Area DevelopmentIndustrial and Commercial Area Development

Private Sector Investment in Economic Zone DevelopmentsKey Mechanisms and International Trends

19-23 October 2009 ITAP – TOBB Capacity Building Program for Investment Promotion Officials of OIC Member Countries: Private Sector Operated Industrial Zones program - sponsored by the Islamic Development Bank (IDB) Group / The Union of Chambers of

Commerce and Commodity Exchanges of Turkey (TOBB)

Fari Akhlaghi

Director MENA Region

Mobile: +971 50 667 3998 I E-Mail: [email protected]

AECOM Technology Corporation

AECOM International Development

ENR MagazineTop 500 Design Firms Survey

(2008)

CATEGORY

AECOM RANK

(2007) (2008)

Top Design Firms

3

3Global Design Firms

4

4Top 100 Pure Designers

1

1Transportation

1

1Mass Transit and Rail

1

1Highways

1

3Airports

1

1General Buildings

1

1Education

1

1Government Offices

1

1Correction Facilities

1

2Sanitary/Storm Sewers

1

3

• 45,000 employees world-wide

• Currently working on more than 4,000 projects

• US$6.1 billion revenue in 2008-9

• Working in over 100 Countries

• Ranked #1 globally in many categories

AECOM - 8 Global Business Lines


1. Transportation

4. Water

7. Planning, Design & Development

8. Government

5. Environment

2. Building Engineering

3. Energy

6. Program Management

Industrial & Commercial Area Development- Program Areas


AECOM ID has undertaken over 200 SEZ related projects during the past 25 years in over 80 countries in the following areas:– Special Economic Zones

– Privatization / Private Infrastructure Provision

– Regional Integration, Area Development and Security

– Ports and Logistics


Jebel Ali Free Zone

USAID

World Bank

Asian Development Bank

IFC

MIGA

UNDP

CIDA

Government Agencies Worldwide

Private Corporate Clients

Industrial & Commercial Area Development- Main Clients

The relevance of Special Economic Zones in today’s global trading environment.

International competition and the increasing importance of logistical input in production value chains have caused firms to migrate to centers of efficiency close to their marketplace.


Industrial & Commercial Area Development- Special Economic Zones

• Representative Projects include:– Formulation of a National Industrial Parks

Strategy, Serbia

– Development of Industrial Estate Law, Mali

– Establishment of Economic Zones, Kuwait

– Dakar Integrated SEZ, Senegal

– Kakinada SEZ, India

Kuwait

Serbia

India


Industrial & Commercial Area Development- Privatization / Private Infrastructure Projects

• Representative Projects include:– Technical Assistance to Aqaba Development Corporation, Jordan

– Lesotho Industrial Estates Development and Privatization, Lesotho

– Jamaica Free Zones Privatization, Jamaica

– Howard Air Force Base, Panama

– Institutional Strengthening and Private Sector Support, Iraq

Howard Air Force Base, Panama

Converted to a Special Economic Zone for Aviation, Business Process Outsourcing,

Logistics


Industrial & Commercial Area Development- Regional Integration, Area Development and Security

• Representative Projects include:– Promoting Industrial Zones and Investment Mobilization,

Palestine

– Evaluation of the Philippine Economic Zone Program, Philippines

– Thailand Eastern Seaboard

– Cagayan-Iligan Corridor, Philippines

– Tourist Development Site for the Saudi Supreme Commission for Tourism, Saudi Arabia

– Security and Industrial Estate Development, Palestine


Industrial & Commercial Area Development- Ports and Logistics

• Representative Projects include:– Subic Bay Freeport Due Diligence,

Philippines

– Bamako-Senou Airport and Industrial Park Improvement Project, Mali

– Feasibility Study and Training Needs Assessment for the Misurata Free Zone, Libya

– Feasbility Study for the Abu Dhabi International Airport Zone, UAE

– Aqaba port, Jordan

– Pelabuhan Tanjung Pelapas Free Zone, Malaysia

– Port Klang, Malaysia

US Navy Base, Subic, Philippines

Converted to a Freeport for manufacturing, tourism and logistics

1970s Public sector development

and operation of zones Zone Authority would

develop, own, operate and regulate the zone

Zone Authority has little power over other government bodies

Zone funded by government; typically subsidized services & facilities

1970s Public sector development

and operation of zones Zone Authority would

develop, own, operate and regulate the zone

Zone Authority has little power over other government bodies

Zone funded by government; typically subsidized services & facilities

Private Sector Participation in Zones - A Clear Trend

1990s Gradual shift from ad-hoc

private-sector licensing to planned, coordinated partnership approach

Private sector involvement in zones has led to improved services, greater product differentiation and non price-based competition

1990s Gradual shift from ad-hoc

private-sector licensing to planned, coordinated partnership approach

Private sector involvement in zones has led to improved services, greater product differentiation and non price-based competition

Port Housing Tourism

Utilities Industrial Park Area

CommercialThe result is multi-market zones that can adapt to rapid change

New Framework

Private developer develops, owns and operates the zone on a cost-recovery basis

Zone Authority only regulates activities within the zone

Outsourcing of core functions to private sector

Zone enterprise designation extended to developers and service intermediaries

New Framework

Private developer develops, owns and operates the zone on a cost-recovery basis

Zone Authority only regulates activities within the zone

Outsourcing of core functions to private sector

Zone enterprise designation extended to developers and service intermediaries


Public - Private Partnership (PPP)


Public Policy – Private Project . . .

Although Zones are elements of public policy, the real estate development and operation aspect properly belongs in the private sector

It is estimated that 60% of all zones (2000+) are run by private developers/operators on commercial terms

Exceptions: Market failures in availability of land and backbone

infrastructure

High levels of risk brought about by lack of rule of law, post conflict, or economies in transition

Zones that are essentially non-commercial “pump-priming” initiatives that serve as demonstration models


Principles:

Two or more parties wish to share risks and rewards associated with Zone development

The Private sector party needs a favorable investment environment to make a return commensurate with the risk he is taking on

The Public sector party needs to achieve public policy objectives – development of common use facilities

There is a business case to begin with – the market – while avoiding direct competition with private sector within or outside of zones.

The Goal:

Ultimately, the Government and Operators should have aligned goals, and therefore work together within a national strategy to achieve them.


Public/Private Partnerships in Zones

Country Attraction to Private Sector - Benchmarking Criteria

Country 1 Country 2 Country 3 Country 4

History and Existing SEZs

Foreign Ownership Regarding Real Property and Business Enterprises (National Treatment)

Protection of Private Property: Land Access/Tenure/Transfer /Land Registration System

Zoning and Construction Building Permits

Transfer of Funds and Capital

Alternative Dispute Resolution (ADR)

Tax Regime and Incentives

Legal and Regulatory Framework Affecting /For SEZs

Customs Administration

Environmental Regulations

Administrative Regime

Available PPP Mechanism

Business Registration

Immigration

Labour


• Regulate but not implement

• Push, pull, persuade private sector

• Promote efficiencies (competition)

• Efficient resource allocations

• Efficient capital allocations

• Responsive to demands

Take risks, earn rewardsAchieve public policy priorities

Public sector establishes environment for private sector to implement public policy priorities

Healthy tension

Public Sector:Public sector’s principal roles are to regulate and facilitate economic development in the national interest.

Private Sector:Private sector’s principal roles are to invest capital and implement economic activities in its own interest.

Partnership:Partnership based on clearly defined and very different roles between two sectors.

Aligning Public and Private Interest- Private and Public Sector Roles


Best Practice SEZ Institutional and Management Framework

• Emerging “Best-Practice” SEZ principles favour public sector authorities focusing on zone regulation and administration, while private sector entities concentrate on development, operation and management activities

• SEZ regulatory authority is an inherently government function that is legally delegated by the legislative branch to the executive branch in accordance with modern constitutions

• Government function is best organized through: Semi-autonomous, independent, adequately funded, sufficiently staffed, and customer oriented “One-Stop-Shop” , often enhanced by adopting an “Accounts Executive” approach


Length of Commitment

Risk and ControlAssumed by Private Sector

Management Contracts (5-10 years)Public sector pays the private sector to manage under-performing assets under agreement, usually with some revenue sharing arrangements

Leases (10-20 years)Private sector pays for use of facilities (e.g., land with infrastructure connections) from public sector under agreement which sets out specific terms of use

Concessions (20-30 years)Private sector owns and operates under-performing assets under agreement with public sector and generally transfers assets back to public sector at end of term

Joint Ventures (open ended)Assets contributed by public sector and cash contributed by private sector into a special purpose vehicle to develop the assets

Highest Degree of Public Sector Involvement

Highest Degree of Private Sector Involvement

Models of Public - Private Partnerships


Zones Business Models


Classic Zone Business Models

Rent or sale of Land and Buildings

Land sale/lease ratio depends upon:

Market conditions (what customers want and what they will accept)

Legal environment (land sales permitted?)

Business goals of the developer (long term play – hold the assets, or short term play – flip the assets)

Availability and source of finance (project finance or balance sheet finance, rates and tenor)


Sale of Services

Real Estate related services: Maintenance and security

Common infrastructure

HR facilitation and training

Zone-specific services: Permits, badges

Registration

Customs Facilitation

External Services Utilities (water, power,

telecoms) to the local market

Developer or Developers ?

• A “best-practice” governance framework also authorizes the SEZ administering entity to select multiple developers for each zone site to take advantage of specialized expertise, maximize economic opportunities, guard against private-sector defaults, and avoid monopolistic tendencies. In scenarios in which a private sector developer/operator is granted exclusivity at a particular zone, such a privilege is generally tied to strict economic performance criteria and is further limited to a specific time frame (e.g., 10-30 years).


Sources of Finance & MDRs


What is Being Financed?

Characteristics of a Classic Zone: US$m100ha+ serviced land

Land cost (say US$10/m2) US$10m

Land servicing internal (say US$400k/ha) US$40m

External Infrastructure costs (say US$200k/ha) US$20m

Buildings for rent/common facilities (say 100,000m2 @ US$500/m2) US$50m

Startup and working capital (say US$10m) US$10m

------------

US$130m

Debt (60%) US$78m

Equity (40%) US$52m

-------------

Cost: (US$130/m2 gross or US$185/m2 net) US$130m


Sources of Finance - Governmental


Source Terms

Central Government • Meet Economic Rate of Return (ERR) requirement (usually 20% for zones)

• Fit with National Strategy• Obtain political backing• Sometimes use of a special agency or vehicle

Government Development Agency

• Quasi commercial terms• 10%-15% return• Will partner with a private developer for some or all of the development• Has remit not to “crowd out” private sector• Often provides land as equity

Public Utilities Provider • Sufficient market size to warrant investment• Will partner with the private sector through a PPP• Offtake agreement may be required

Provincial or Local Government

• Often provides land, and some level of public services to the gate of the site

• Will provide facilities on site in the Zone for municipal functions

Non-Governmental Sources of Financing- Advantages/Disadvantages of Various Sources


Source Advantages Disadvantages

Multi-lateral Development Banks

- Adds credibility to project

- Reduces perceived risks

- Higher appetite for risk

- Subject to the fluctuating investment objectives of the bank

- Greater due diligence load for environmental and social impacts

Commercial Banks

- Global pool of financial resources

- Flexible financing structures

- Low appetite for risk- Short duration of financing options

- May add to national debt burden

Private Equity and Asset Managers

- Some appetite for risk

- Product-specific financing structure

- Active involvement of an external investor in investment and, or operational decision-making

Insurer - Reduces actual risks - Cost

Grant Financing

Much public financing is in the form of a Grant Allocation of state resources in accordance with a national

plan

Funds the capital expenditure, but care needs to be taken on the ongoing maintenance/servicing costs

Can be subject to the fluctuations in the fortunes of the exchequer – an issue for multi-year programs

Grants come with conditions Environmental and social impacts

Performance of public services (schools, social amenities, provision of additional utility capacity)


Non-Grant Financing Characteristics

Debt Financing Tenor: 7-10 Years maximum Currency: home currency or USD Grace period: depending on the institution and

circumstances. 3-5 years not unusual Fees: origination fees. Can be 2% Interest rate: varies and currently not stable. Balance Sheet backing usually sought Political risk and other insurance, step-in rights

Equity Financing Minimum return on investment of 15% Usually a partnership between Government and private

equity provider. Government equity goes in first


Non-Governmental Sources of Financing - Example Political Risk Insurance Source

Many lenders and investors have turned to the Multilateral Investment Guarantee Agency (MIGA) – part of the World Bank Group - to mitigate non-commercial risks in large projects in developing countries. Coverage includes:

Currency inconvertibility and transfer restrictions

Expropriation

War, civil disturbance, terrorism, and sabotage

Breach of contract


Cross-Subsidization and Cross-Financing

Some elements of a Zone project are more profitable than others

Housing, commercial, tourism – any product that is sold directly to individual end-users

Zone developments can be bundled to cross-subsidize or cross-finance from one product to another

This is achievable through use of Minimum Development Requirements (MDRs) in any PPP agreements


Example of MDRs


Newco.

Newco.

Leveraged Expansion – An Emerging Model


Governmental Sources of Financing- Example

ZonesCorp, Abu Dhabi, UAE“Established as a government- backed higher corporation for specialized economic zones, ZonesCorp is directly responsible for the establishment, management and operation of specialized economic zones in Abu Dhabi.”

ZonesCorp was set up as a 'commercial' government entity via the investment of:

400M AED from the government Transfer of ICAD 1 (Industrial City Abu Dhabi)

from the local municipality


Mixed Sources of Financing - Zone Expansion Example

Macquarie Group manages certain investment vehicles such as the ZonesCorp Infrastructure Fund (ZIF) to offer both private and institutional investors the opportunity to access new and existing infrastructure and infrastructure-like assets.

ZonesCorp has provided 75% of the equity with Abu Dhabi Commercial Bank and Macquarie Group (a joint venture established in 2005) has provided the remaining 25%.

ZIF has interests in four projects: ICAD II and ICAD III (expansion of ICAD I); Industrial Effluent Treatment Plant concession for ICAD; and concession for Al Ain Industrial City


Conclusions


Conclusions

Times are tough – many investment decisions are on hold right now

There will be large public infrastructure programs put in place aimed at job creation. This equates to potential public investment in Zone infrastructure

Price reality is re-entering the market, and soon investors will be looking for projects

The current lull in development is a good time to plan for future expansion and do the necessary homework

There are many sources of finance, both public and private. These can be combined for effective risk management


aecom international development industrial and commercial area development private sector investment...

Documents

design development

aqaba development corporation

industrial zones program

international trends

international competition

logistics slide

program management slide

private sector support