key infrastructure challenges in mena - world...

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Key Infrastructure Challenges in MENA

Presented by: Moazzam A. Mekan

Infrastructure Advisory Services

December 7, 2009

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Multilateral

Investment

Guarantee

Agency

1988

Provides

guarantees to

foreign investors

against non-

commercial risk

International

Development

Association

1960

Provides

concessional

loans to

governments of

the poorest

countries.

International

Bank for

Reconstruction

and

Development

1945

Lends to

governments of

middle income

developing

countries.

International

Centre for

Settlement of

Investment

Disputes

1966

Settles

investment

disputes

between

foreign investors

and host

countries.

International Finance

Corporation1956

International Finance Corporation

IFC is a member of the World Bank Group promoting private sector

development

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Advisory services to Governments

to structure and implement PPPs

• IFC‟s Advisory Services in Infrastructure department specializes in

advising governments on the introduction of private sector

participation in the delivery of infrastructure services

IFC the only multilateral institution to offer direct advisory services to

governments on implementing private-sector participation transactions

Sectors include: water, waste, power, roads, airports, airlines, ports, railroads,

health, education

IFC focuses on the long-term sustainability of projects: consider all economic,

regulatory and policy issues in project structuring and ensure transparency in

the bidding & evaluation processes.

Since its inception in 1989 have implemented over 140

infrastructure advisory assignments, in about 80 countries

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IFC Infrastructure Advisory in MENA:

Project Overview

Current ProjectsCompleted Projects

Lebanon: IPPs

Pakistan: FESCO

Egypt: Cairo-Alexandria

Freeway

Saudi Arabia: Hajj

Terminal, KAIA Jeddah

Saudi Arabia: KAIA

Desalination Plant

Jordan: Queen Alia

International AirportUAE: Dana Gas

Pakistan: Lahore Water

Pakistan: Green Power

(Wind)

MENA: Maritime Sector

Study

Egypt: New Cairo

Waste Water Plant

Egypt: Highways

SWOT

Morocco: Guerdane

Irrigation PPPYemen: IPP

Jordan: Amman –

Zarqa LRS

Jordan: Amman Ring

Road

Egypt: Alexandria

Hospitals

Saudi Arabia: Madinah

Airport

Saudi Arabia: Airport

Cities

Syria: IPP

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PPPs: A model for Infrastructure Delivery

Making PPPs Work

PPPs in MENA: trends and challenges

Agenda

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Infrastructure in emerging markets: A Cycle of

Under-investment

Infrastructure

Remains

Outdated &

Unreliable

Discourages

private

investment

Hinders

economic

growth

Limits

Employment

Opportunities

Lowers individual

& government

income

Reduces

invest. funds

availability

Improvement in EfficiencyPerformance of PPPs and Traditional Procurement in UK

and Australia

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Improved Project

Delivery

Study Non PPP

Procurement

PPP

Procurement

Cost OverrunUK 73% 22%

Australia 35.3% 11.6%

Time OverrunUK 70% 24%

Australia* 25.6% 13.2%

* Value-weighted Time Overrun

UK Study: NAO Report of 2003 – UK’s National Audit Office Report on PPPs

Australia Study: Allen Consulting Group (University of Melbourne) – 2000 – 2007

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PPPs – An Improved Delivery Model?

• Faster procurement of asset

• Facilitating and incentivising on time and on budget project implementation:

No service / no pay.

Incentives to cost control

• Optimized allocation of life cycle cost/benefit optimisation: “whole life”

approach to construction/maintenance & improved management of

operational risks

• Innovations in design/service delivery and financing structures

• Risk transfer to private sector

• Off balance sheet public accounting treatment (but a „poor‟ rationale for

PPPs!)

Optimal risk allocation reduced cost of risk

Reduced cost of risk better Value for Money

But Beware the Hurdles

• Contracting burden is high: contracts are complex,

long-term, and often incomplete

• Transactions costs are significant

• Renegotiation happens in a non-competitive

environment, but is often necessary

• Government gives up some flexibility in future

decision making

• Measuring the extent of risks retained and/or

transferred is complex: risk transfer is often not

enforceable

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Making PPPs Work


Agenda

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PPP Implementation: A Balancing Act

Strategy

Transaction

Structure

Transaction

Process

Business

Opportunity

Legal framework

Institutional framework

Transparency

Market analysis

Demand projections

Investment needsFinancing

Sources

Consumers (Tariffs)

Treasury (Subsidies)

Multilaterals or Bilaterals

Commercial Lending

Equity

Government's

Objectives

Public service: increase access and

quality of service

Tariffs: Affordability, Willingness to pay

Transfer risks to private sector

Maintain control

Country risk

Limited financial obligations

Upside potential

Long-term Commitment

Investors'

Interest

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Managing Risks

Risk transfer lies at the heart of effective PPP design

• Each of the participants involved in PPPs faces risks evaluation,

allocation and management of these risks is crucial

• Risks should be borne by the party that controls them

Rationale: That party can bear the risks at the least cost

• Problems at the risk allocation stage can delay project

negotiations

• Project contracts are used as a means to mitigate these risks

• Residual risks, such as political force majeure and regulatory risks,

are mitigated through guarantees and insurance

• Risks not mitigated are borne by the consumer higher tariffs

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Key Challenges (1/3)

Economic Fundamentals have to be in place

• Economic viability is essential - a bid model should incorporate:

Affordability and willingness of the end-consumers to pay

Realistic tariffs and subsequent subsidy requirements

…has a direct correlation with public support

• Refined approach to project appraisal / selection is

required from the outset

Government Support

• Government support imperative

• Having a Project “Champion” helps lead the process internally

Government Capacity

• Creation of a dedicated PPP Unit

Enables a wider perspective on the

PPP program of the country

Helps to centralize the process Economic Fundamentals

Project Structuring and Risk Allocation

Institutional Framework: Legal +

Regulatory

Competition & Transparency

Delivery

Government support

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Key Challenges (2/3)Structuring issues

• Wide variety of PPP models – need a tailored approach to every project

• Government support by experienced advisors can help ensure best practice

• Balance needed between fast implementation and taking the appropriate time to

study all available options for structuring

• Long term partnership: appropriateness of risk sharing is fundamental

• Build in a balanced incentive-based structure - commensurate penalties/rewards

• Service quality requirements should be contractible and measurable

Supporting legal and regulatory framework

• Good governance essential

• Adequate dispute resolution mechanisms have to be in place

• Elimination of legal uncertainties and impediments to PPPs reduces risks and

therefore costs

• In the absence of dedicated laws, governance by contract emphasizes the

importance of adequate structuring procedures

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Key Challenges (3/3)Financial risks

• Constraints of local capital markets

• Long-term financing not always available – refinancing risks

• Foreign exchange risks need to be mitigated

Procurement issues

• Need for clear framework on procurement procedures

• Transparency and fair bidding procedures

• Promote competition

• Bidding structure should provide the framework to lead to the selection of the

right partner (expertise, capacity, commitment etc)

Delivery

• Concept of partnership is tested – robustness of the arrangement needs to

withstand the test of time and changing environment

• Need flexibility to adapt to changing requirements

• Capacity on both parties to manage their side of the contract required

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Where to start? Projects must be Doable,

Demonstrable, Simple

Simple, demonstrable structure

Public Sector commitment

Private Sector needs incentives

Robustness & degree of flexibility in the contract

Requirement for private risk capital, not simply private capital

only possible if risk transfer shapes incentives to motivate efficiency

gains:

• Construction and operations

• Life-cycle approach to financial management

Need to surmount the costs of:

• Transaction (project preparation, contracting, execution)

• Renegotiation

• Loss of Control on both parties

• Moral hazard of any implicit government guarantee

Making PPPs Last

Focus on long-term sustainability of PPP arrangements

• Political, financial, and social sustainability

• Local currency financing & risk insurance

• Sound regulatory arrangements and structures

• Adaptability and flexibility of contractual agreements

Attention to factors outside of contracts Public support

• Transparency and clear communication

• Visible benefits, particularly but not only on service delivery

• Avoidance of unintended externalities (community disruption, resettlement,

environmental considerations, etc…)

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Making PPPs Work


Agenda

MENA infrastructure investments remain low

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1,245 1,253

696

416 355

117

-

200

400

600

800

1,000

1,200

1,400

0

50

100

150

200

250

300

350

400

450

500

LAC EAP ECA S.Asia SSA MENA

investment (US$bil) # of projects

Investment in Infrastructure (1990-2007)

Source: World Bank and PPIAF, PPI Project Database.

$6.5 bn / yr

… but pre-financial crisis: MENA Infrastructure

investments on the rise

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• Investment grew by 7% to US$12.8 billion in 2007 (and $27b in 2008))

• MENA: 8% of the 2007 total investment commitments to developing countries

• Dominated by telecom and transport projects

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MENA – Historical Regional Challenges

• Political instability and lack of transparency

• Public good issue – unwillingness to pay commercial rates for infrastructure

services

• Low per capita incomes in some countries – inability to pay commercial rates

• Historically large public sector and reluctance to shift to a private sector

model due to unemployment

• Capital markets – mostly

under-developed

• Investment climate remains

weak – Doing Business 2010

rankings remain low for most

MENA countries

RANKING CRITERIA

Starting a Business

Dealing with Licenses

Labor Regulation

Registering Property

Getting Credit

Corporate Governance

Trading Across Borders

Enforcing Contracts

Paying Taxes

Closing a Business

Source: World Bank Group, Doing Business Database, 2010

The ease of doing business index averages economy rankings across the 10 above topics

A more enabling environment for PPPs needs to

be developed

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• Investor protection remains very low

• Legal and institutional framework still relatively undeveloped

… but reforms are underway

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Financial Crisis: Impact on PPPs

For new PPP projects :

• Delay in closure of deals

• Liquidity constraints - reduced access to

lending (particularly from foreign banks)

with shorter underwriting periods, more

stringent conditions, greater costs

• Requirements for greater sponsor equity, yet

investors cautious

For existing PPP projects :

• Increased refinancing risk for long-term concessions,

• Potential delays in refinancing with risk of cancellation and market disruption

• Partners are being forced to reevaluate risk: changed distribution of risks can

shift the cost burden between the partners

• Macro-economic issues: inflation make project finance even more difficult in

the long term

…but PPPs set to remain center stage

• Estimated that world will require over $41 trillion in infrastructure

investment by 2030 to modernize obsolescent systems and meet expanding

demand

• Middle East expected to account for ca. 2.1% ($870bn) of total investment,

including in Water ($225bn), Power ($180bn), Road and Rail ($320bn) and Air

/ Sea Ports ($145bn)

• MENA infrastructure investments required to sustain large population and

economic growth ABRAAJ Research estimate the following infrastructure

requirements in MENASA over the next 10 years: Power & Utilities: $155bn;

Water: $133bn; Healthcare: $49bn; Education: $18bn; Transportation:

$188bn; Petrochemicals: $87bn

…Countries continue to tender/award new PPP projects and/or prepare new

project pipelines

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PPPs in MENA – Looking ahead

• Considerable variation across countries in political consensus on PPPs

Rhetoric but limited action and slow decision-making

Lack of implementation capacity

More concrete actions required

• Global Financial Crisis: MENA countries not immune to liquidity constraints

Investors more cautious: Seek quality assets, political stability,

transparency, and appropriate risk sharing

Simple, more upstream transactions required – projects should be

demonstrable and replicable

• Rise of local and regional investors (banks and sovereign wealth funds)

• Limited deal flow:

Better project preparation

Replicability

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