IFC Operations & Strategy in Iraq

Ziad A. BadrIraq Country Manager

Iraq Finance 2012

Outline• IFC At a Glance• IFC Activities in Iraq

Investments Advisory Services

• Challenges Facing PPPs in Iraq• Role of IFC in supporting the development

of PPPs

IFC’s Structure• Owned by 181 member countries• IFC is the main driver of private sector

development in the World Bank Group• Collaborates with other members of the

group, including the World Bank (IBRD and IDA) and MIGA

• Global: Headquartered in Washington, D.C.• Local: More than 100 offices worldwide in 86

countries. Highly decentralized with more than half of IFC’s 3,325 staff work in field offices.

IFC Offers ClientsA Unique Role

• Emphasis on development impact World Bank affiliation• Participates only in private sector ventures. • Market discipline: has market pricing policies• Long-term partnerships; countercyclical role• Risk-taking and risk management. Shares same risks as other investors. Takes

Equity risk.• Does not accept government guarantees.

• Is profit oriented but balanced with development impact

IFC presence reassures Foreign and local investors, and Governments. It is a Catalyst for other investors and lenders

IFC Activities in Iraq

• First IFC mission after the end of the War in July 2003.• Active involvement in 2003 and 2004, then slow down due

to security and other constraints. • IFC representative stationed in Baghdad in Sept 2011.• Cultivating relations with GoI, private sector, investors, and

donors.

IFC’s Business Investment Services

• Loans and intermediary services• Equity and quasi-equity• Syndications• Structured and securitized

products• Risk management products• Trade finance• Subnational finance• Treasury operations

IFC’s committed portfolio in Iraq currently stands at US$300 million in 6 companies/projects:

• 10% equity stake in Credit Bank of Iraq in partnership with National Bank of Kuwait

• US$14 million loan for the first 5-star Greenfield hotel in Erbil – Erbil Rotana Hotel.

• US$45 million loan to Gulftainer to support their investments in ports

• US$400 million IFC-led facility for Zain Iraq

• US$50 million loan to Lafarge for the Bazian cement plant

• US$25 Million equity investment in Commercial Bank of Iraq (CBIQ)

Target investments in the range of US$ 800 m over the next 3 years

PROGRAM TO DATEBuilding long term relationships in Iraq is key.

IFC Investments in Iraq

IFC’s Business Advisory Services

Four main business lines:• Access to finance• Investment Climate• Environmental and social sustainability• PPPs and Infrastructure Advice

IFC’s Advisory Services Program in Iraq has been re-activated and funding has been secured from the multi-donor Iraq Business Advisory Fund (IBAF) – US$38 Million

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Challenges Facing PPPs in Iraq

• Legal & Regulatory framework• Designing Projects with a balanced risk allocation• Limited non-recourse financing available

Problems:• legal/regulatory framework does not preclude PPPs in most

sectors• Lack of a history with PPPs: How Iraqi regulators will enforce contract

provisions and address broader regulatory issues, creates uncertainty for investors  

Solutions: mostly to be addressed by the government 

• Develop and convey clear government objectives• Utilize PPP contracts that include provisions for regulation (and

examples of how these provisions would be enforced

• Establish a track record of PPP contracts

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Legal & Regulatory framework

Problems:• Projects in Iraq will carry higher risk • Iraq specific risk allocations need to be developed for all

projects

Solutions: 

• Well developed projects are critical (thorough due diligence is necessary)

• Adjust project risk allocation taking in consideration the risk appetite of the potential private sector partners.

The process is just as important as the project11

Designing Projects with a balanced risk allocation

Problems:• local banks are largely unable to provide long-term financing

necessary for infrastructure • foreign commercial banks uncomfortable with Iraqi country risk• few well developed projects with balanced risk allocation• few projects with sponsors who are acceptable to foreign

lenders 

Solutions: 

• Well developed projects with appropriate risk allocation will attract well qualified sponsors

• Sovereign guarantees will be critical in supporting government payment obligations.

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Limited non-recourse financing available

Technical Assistance :Indirect: support to develop appropriate regulatory/legal frameworkstraining for a local work force to support private sector projects

Direct: Providing transaction advisory services to governments to implement specific PPP transactions, including full project preparation and management of the process

Financial:Direct Financing, Syndications, and political risk insurance 

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Role of IFC in supporting the development of PPPs

IFC Advisory Mandates in MENA - Closed

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New Cairo Waste Water

$150,000,00020- year BOT concession to design,

finance, build, operate and maintain a250,000 m3/day WWTP

Winning Consortium:

Lead Advisor:

2007

Hajj Airport Terminal

$315,000,000

20- year B OT concession for the Hajj Terminal at King Abdulaziz

International Airport in Jeddah

Winning Consortium:

Lead Advisor:

2006

KAIA Desalination Project

$40,000,000

20- year BOT concession to design, finance, build , operate and maintain a new 3 0,000 m3/day desalination plant

in Jeddah

Winning Consortium:

Lead Advisor:

2006

Alexandria University Hospitals

$275,000,00020- year BOT concession contracts for

two new hospitals in Alexandria

Winning Consortium:

Lead Advisor:

2012

MadinahAirport

$1,200,000,000

25- year BOT concession for the Prince Moh ammed Bin Abdulaziz

International Airport in Madinah

Winning Consortium:

Lead Advisor:

2012

Queen Alia International Airport

$675,000,00025- year BOT concession for the Queen

Alia International Airpor t in Amman

Winning Consortium:

Lead Advisor:

2007

Thank You!

IFC Web site: www.ifc.org

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IFC Advisory Services in PPPs

• IFC is the only multilateral to offer direct advisory services to Governments for implementing private sector transactions across all sectors

Key sectors of focus include traditional and non-traditional infrastructure, including: water, waste, power, transports, and social and municipal services

• IFC focuses on the long-term sustainability of projects IFC considers all economic, environmental, social, regulatory and policy issues in

project structuring to ensure that the project is bankable and sustainable for the duration of its expected lifetime

IFC is able to provide direct financing and facilitate the mobilisation of external financing for well structured projects in emerging markets

IFC is a leading provider of PPP Infrastructure Advisory services to Governments in structuring and implementing infrastructure PPPs

Advisory is a new role that the IFC has been developing recently. IFC has made a point of advising frontier markets in the Middle East on their Independent Power Projects (IPPs), including Syria and Yemen. IFC has even made a point of advising not so frontier countries in the region – Egypt on its new IPP program, for example. IFC Advisory Services have already implemented over 150 projects across 80 countries.

 Challenge: Well Prepared Projects – Designing a balanced risk allocation Problem:Projects in Iraq will carry higher risk than projects in other countries in the region due to concerns about

legal and regulatory framework, security, etc. As a result Iraq specific risk allocations need to be developed for all projects. Models used in other countries

in the region are useful references, but will need to be adjusted to fit the specific circumstances on the ground in Iraq.

 Solutions:Well developed projects are critical. The government needs to work with advisors that can conduct the

necessary technical, legal and financial due diligence to properly prepare a project. This will require additional time, but thorough due diligence is necessary to attract qualified companies who are willing to invest time and money throughout a bidding process.

The tender process itself will also likely take longer than in other countries in the region as there needs to be significant time to consult with qualified bidders so that the project risk allocation can be adjusted to reflect the risk appetite of the potential private sector partners.

Key point – the process is just as important as the project – a clear process that allows sufficient time to address all issue is critical. As with the legal/regulatory issues, once a few pilot projects have been implemented, risks will be better understood so it will be possible to shorten timelines.

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Challenge: legal/regulatory framework:Problem:legal/regulatory framework does not preclude PPPs in most sectorsBUT lack of a history with PPPs, particularly with respect to how Iraqi regulators will enforce contract

provisions and address broader regulatory issues, creates uncertainty for investors  Solutions: several approaches, mostly to be addressed by the government Develop and convey clear government objectives – If a PPP project clearly fits within stated objectives in

terms of overall sector policy, this will provide some comfort. Interministerial cooperation is key to demonstrate commitment to a broader PPP agenda.

Utilize PPP contracts that include provisions for regulation (and examples of how these provisions would be enforced) – this way investors can rely on their contract with the government which will be less subject to interpretation and law changes than general law

Need to establish a track record of PPP contracts – ideally should start with one medium sized project per sector to demonstrate the commitment to a broader PPP program. The first project will carry a higher risk premium due to the uncertainty described above, but as the private sector sees Iraq managing contracts successfully, that risk premium will decrease for future projects.

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Challenges facing the implementation of PPPs in Iraq

Challenge: Limited non-recourse financing available Problem:few banks are willing to provide non-recourse financing to projects in Iraq. There are several reasons

local banks are largely unable to provide long-term financing necessary for infrastructure and have limited capacity to manage complex project financings

foreign commercial banks remain uncomfortable with Iraqi country riskfew well developed projects with balanced risk allocation (for example Iraqi port concession has no

termination provisions of any kind)few projects with sponsors who are acceptable to foreign lenders.

 Solutions:Well developed projects with appropriate risk allocation will attract well qualified sponsors, who in turn have

good relationships with lenders.IFIs will likely need to provide early project financing, which will mean initial projects need to be small

enough that they can be financed within the constraints of the handful of IFIs willing to lend. Once you have a few successful smaller to medium size deals, commercial lenders will become more comfortable and more able to lend to larger projects.

Sovereign guarantees will be critical in supporting government payment obligations. There are limitations on Iraq’s ability to provide such guarantees, which could constrain PPP development. Working to resolve this issue is an important step to support multiple PPPs.

  Overarching message: Pick a couple of pilot projects and take the time to do them right. Pilot projects should be clearly needed by the country, consistent with government objectives, have strong interministerial support and be less than $500 million in required investment.

 The approach to PPPs has to be programmatic. To get the benefits a PPP program can deliver you have to spend a bit more time at the beginning, but this will pay off down the road as you gain investor confidence and understanding.

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role of IFC and other DFIs in supporting the development of PPPs? Technical Assistance

IndirectProviding support to develop appropriate regulatory/legal frameworksProviding training to ensure there is a well-qualified local work force to support private sector

projectsDirect:

Providing transaction advisory services to governments to implement specific PPP transactions. This includes full project preparation and management of the process through which a private partner is selected. Project preparation is probably the biggest impediment to achieving a successful PPP in Iraq so the need to find this type of advisor has to be their first step. (IFC PPP Advisory )

Financial productsSovereign lending (World Bank) – WB loans can be used to fund public contributions to PPP projects.Private sector lending (IFC)

Infrastructure – very focused on infrastructure sectors and are looking for well developed projects in Iraq to lend on a non-recourse basis.

Other sectors – indirectly supporting private businesses in support sectors, for example construction materials (e.g. cement). This type of additional capacity will be necessary to support the development of PPP projects.

Other risk mitigation productsPartial Risk Guarantees – World Bank product – designed to mitigate the risk of non-payment of

government obligations. Syndications – IFC can bring in commercial lenders under our umbrella to facilitate lending to

PPPs Political Risk Insurance – MIGA offers insurance to private parties investing in projects in Iraq.

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What is a Public Private Partnership (PPP)?

• PPP is a generic term for the relationship formed between public bodies and the private sector with the aim of introducing private sector resources & expertise to deliver public services

• The goal of this arrangement is to provide the service more efficiently and at a lower cost to the end user

• Main role of the private sector partner in a PPP is to PROVIDE and manage the technical and financial aspects of the project

• Main role of the public sector partner in a PPP is to REGULATE the private sector partner’s activities ensuring public interest goals are met and quality of service maintained

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Criteria for Private Sector ParticipationWhat the Government needs and What the Private

Sector wantsGovernment Objectives

Private Sector Goals

Alleviation/removal of the State’s roleInjection of Private capital in public

servicesIncreased budgetary

certainty

Introducing private sector efficiencies

Public Private

PartnershipA win-win solution

Maintaining oversight to ensure quality

Attractive risk weighted returns

Government guarantees mitigate

certain risksLong-term investment

opportunitiesUpside from operational

outperformanceTo operate under a clear regulatory

framework

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Options for Private Sector Participation

Full Divestiture

Technical Assistanc

e

Service Contract

Management

Contract

Lease Contract

Concession Contract

3-5 yrs5-15 yrs

1-3 yrs

25-30 yrs

Ris

k tr

ansf

erre

d to

pri

vate

se

ctor

As the contract term increases, an increasing amount of risk can be allocated to the private sectorContract Duration

Limited risk transfer

Government control

Full risk transferNo government

control

Substantial risk transfer

Government control

Most common

PPP model

Define transactio

n structure

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An end-to-end approach to developing the Project

Agreement on IFC as

Lead AdvisorAc

tivi

ty

Selection Execution - Project Design (4/6 months) Execution - Project Implementation (8/12 months)

Completion of Project’s analysis Marketin

g to Investor

s

Implementation of selection process

Decision

Activity

Output

Legend

Transaction time line is typically 12-18 months from the kick off meetings, contingent on availability of data and responsiveness of the government decision making process

Oup

ut

Assess PPP

options

Agreement on

Project Structure

Prepara-tion of PPP

contract

Assist-ance

to Closin

g

• Mandate signing

• Mobilization of funds and team

• Project kick-off

• Technical and legal analysis

• Financial Analysis

• Stake-holder discussion

• Strategic Options Report

• Market sounding

• Risk allocation

• Payment mechanism

• Info memo

• Road show

• Data room

• Service Standards & targets

• Payment procedures & penalties

• Monitoring

• Pre-qualification

• Technical evaluation

• Financial evaluation

• Award

• Contract effectiveness & assumption of service obligations