Post on 06-Aug-2018
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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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PPPs: A model for Infrastructure Delivery
Making PPPs Work
PPPs in MENA: trends and challenges
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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PPPs: A model for Infrastructure Delivery
Making PPPs Work
PPPs in MENA: trends and challenges
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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Source: World Bank Group, Doing Business Database, 2010
• Investor protection remains very low
• Legal and institutional framework still relatively undeveloped
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