MENA Infrastructure: Opportunities and Challenges. DIFC Economics Workshop Adil Marghub December 2009

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1 MENA Infrastructure: Opportunities and Challenges DIFC Economics Workshop Adil Marghub December 2009

2 IFC: Background 2

3 IFC is a Member of the World Bank Group IBRD International Bank for Reconstruction and Development IDA International Development Association IFC International Finance Corporation MIGA Multilateral Investment and Guarantee Agency Est Est Est Est Role: To promote institutional, legal and regulatory reform To promote institutional, legal and regulatory reform To promote private sector development To reduce political investment risk Clients: Governments of member countries with per capita income between $1,025 and $6,055. Governments of poorest countries with per capita income of less than $1,025 Private companies in 182 member countries Foreign investors in member countries Products: - Technical assistance - Loans - Policy Advice - Technical assistance - Interest Free Loans - Policy Advice - Equity/Quasi-Equity - Long-term Loans - Risk Management - Advisory Services - Political Risk Insurance Shared Mission: To Promote Economic Development and Reduce Poverty 3

4 Over $30 Billion Invested in the Emerging Markets Since 2007 U.S. $ billions Total committed IFC financing: US$10.5 billion IFC's own account Syndication IFC FY09 Highlights S&P, Moody s AAA Portfolio $34.5 billion Committed $10.5 billion Syndicated $4.0 billion # of companies 1,579 # of countries 103 Finance up to 25% of project cost from own account Provide Debt, Equity and Mezzanine financing Long term Tenors for debt Variable or fixed interest rates, Loans in all major currencies and several local currencies Equity: Typically 10-15% of project company equity 4

5 Wide Coverage of Infrastructure Sectors Infrastructure Power Created in 1992 to address market need Current portfolio: US$5.3 billion Generation FY08 Distribution Commitments: US$2.5B 100+ Transmission dedicated professionals in Washington and 8 regional hubs IFC InfraVentures Early-Stage Capital Project Developer Infrastructure: Utilities Water Waste Gas Distribution Privatized Public Services Infrastructure Created in 1992 to address market need Current portfolio: US$5.5 billion FY09 Commitments: US$1.5B 100+ dedicated professionals in Washington and 8 regional hubs Transport Infrastructure Airports Roads Ports Transportation Services Logistics Shipping Airlines 5

6 Global Infrastructure Portfolio $5.5 billion By Region, in US$ Billions By Sector, in US$ Billions Southern Europe and Central Asia 12% Sub-Saharan Africa 8% Central and Eastern Europe 7% East Asia and Pacific 16% Utilities, 10% Other, 3% South Asia 17% Transport, 31% Power, 55% Middle East and North Africa 14% Latin America & Caribbean 26% 6

7 Wide Range of Financial Products Loans Loans in all major currencies Variable or fixed market interest rate Features: Tailored to cash flow Long maturities (10-15 years) Appropriate grace periods Credit Guarantees Loan and bond guarantees and standby financing Allows client to use IFC s AAA rating to secure better terms Often provides access to local currency Equity/Quasi-Equity Equity, convertible loans, subordinated loans, etc. Minority shareholder Passive investor Long-term investor Market-based returns sought Exit mechanism required Other Development/Early Stage Equity Loan Syndications loan jointly funded by IFC and participant banks Risk Management swaps, options and forwards to allow clients to hedge various risks 7

8 Infrastructure Advisory Services IFC s Advisory Services in Infrastructure department specializes in advising governments on the introduction of private sector participation in the delivery of infrastructure services Implemented over 140 infrastructure advisory assignments, in about 80 countries Sectors include: water, waste, power, roads, airports, airlines, ports, railroads, health, education Completed Projects Current Projects Saudi Arabia: Hajj Terminal, KAIA Jeddah Egypt: New Cairo Waste Water Plant Yemen: PPP Program Egypt: Alexandria Hospitals Saudi Arabia: KAIA Desalination Plant Morocco: PPP Study Yemen: IPP Egypt: MOU Jordan: Queen Alia International Airport UAE: Dana Gas Jordan: Amman Ring Road Saudi Arabia: Airport Cities Egypt: Highways SWOT MENA: Maritime Sector Study Jordan: Amman Zarqa LRS Saudi Arabia: Madinah Airport 8

9 IFC s Performance Standards: International Stamp of Approval Equator Principles adopted by 50+ of the world s leading banks and based on IFC s Performance Standards Apply to 85% of project financing worldwide 9

Selected IFC MENA Infrastructure Transactions Tunisia MENA Region TAV Tunisia A Loan:EUR130 million B Loan: EUR265 million C Loan: EUR30 million Jordan Creative Energy Resources $50,000,000 Equity

10 Selected IFC MENA Infrastructure Transactions Tunisia MENA Region TAV Tunisia A Loan:EUR130 million B Loan: EUR265 million C Loan: EUR30 million Jordan Creative Energy Resources $50,000,000 Equity April 2008 Jordan Queen Alia A Loan: US$70 million B Loan: US$160 million C Loan: US$50 million November 2007 CTI Group $31,000,000 Loan Financing December 2008 June 2006 MENA Region May 2009 Jordan EDCO $40,000,000 Loan Financing May 2009 SPDC Egypt US$20 million Loan Financing Metito $31,100,000 Equity and Loan Financing September 2007 Manah Power Oman $20,482,000 Equity and Loan Financing May 2004 January 1995 December

11 Jordan: Electricity Distribution Company US$ 40 million, 15 year Term loan financing, transaction close in May 2009 Electricity Distribution Company (EDCO) is the power utility serving the southern and western parts of Jordan. In 2008, EDCO was acquired by the Kingdom Electricity Company, a consortium of investors from Jordan and the Arabian Gulf countries. The lead investor in KEC is Jordan Dubai Capital. Funding to help upgrade the company s distribution network and improve the quality of services for customers EDCO was recently privatized and needs to rapidly demonstrate the benefits of those reforms to the public. Private sector in the provision of electricity distribution services is not common in MENA Long term lending needed to align tariff profile with underlying nature of the assets 11

12 First Sukuk Underscores IFC s Commitment to MENA IFC issued US$100 million five year, non-amortizing Sukuk on November 3, 2009 Backed by portfolio of IFC projects, structured as Islamic-compliant financial leases, with comparable disbursed value Support a pipeline of Islamic finance projects in social (health, education) and physical infrastructure IFC was first non-islamic financial institution to issue a Sukuk for term funding in the GCC IFC Sukuk rated Aaa by Moody s and listed with the Nasdaq Dubai and Bahrain stock exchanges The IFC Sukuk listing documents will provide reference documentation for other issuers from the region and internationally. 12

13 Infrastructure: Crisis and Response 13

14 Impact of the Crisis on Lending to Private Infrastructure In the first quarter of 2009, only US$5.4 billion of project financed debt was lent globally as compared to $50 billion in the same period in 2008 Impact of the Credit Freeze: Increase in debt pricing, shortening of tenor on loans, tightening of liquidity and overall deficit in available financing solutions. Project finance lending declined from a high of $285 billion in 2007 to $223 billion in 2008, with the major decline coming in the second half of the year The flight to quality is already taking place: Projects more likely to reach closure are characterized by strong economic and financial fundamentals, the backing of financially solid sponsors, and government support. More stringent with lower debt/equity ratios, higher financing spreads, and more conservative structures. New financial players emerging Local state-owned banks as well as multilateral and bilateral agencies are key finance providers Infrastructure lending from non commercial institutions ( IFI ) has increased substantially from US$5.5 billion in 2007 to US$19.5 billion in IFC Crisis Response: Pooling of debt capital from IFIs dedicated to infrastructure finance 14

15 Infrastructure Crisis Facility: Co-financing of Projects in the Developing World Infrastructure Crisis Facility Participating Government/IFI Participating Government/IFI Participating Government/IFI Participating Government/IFI Equity Fund IFC committed $300 million Debt Component Advisory Services Component Debt Pool Co-Financing Programs Debt Pool Germany and France founding members KFW: 500 million committed Co-financing DEG/Proparco/EIB 2.2 billion 15

16 ICF: Debt Pool Created to provide long-term financing in response to crisis-related needs of infrastructure projects Available to infrastructure projects originated by IFIs that cannot obtain commercial financing or re-financing of existing loans Limited partnership established in England under the PIDG umbrella Initial funding by KfW 500M (signed) and Proparco 200M (expected Jan 2010) Managed by an independent board and independent manager of the fund An Example Project Cost US200 mn (70:30 debt to equity) Sponsor s Equity of USD60 mm Senior Debt of USD140 mm IFC = USD50 mm ICF Debt Pool (matching IFC loan) = USD50 mm Proparco (as Parallel Co-Financing Program) = USD20mm ICF Debt Pool (matching Proparco loan) = USD20 mm 16

17 Infrastructure in the MENA Region 17

18 Key Drivers in Place for Growth in Infrastructure Economic Growth 3-5% GDP growth GDP: about $1.7 trillion Demographics Young population/rapid Urbanization 350 million people Strong demand for infrastructure will continue Shift to Private Sector Participation in Infrastructure Historical Underinvestment Large supply gaps 18

19 GCC Accounts for a Large Share of Private Infrastructure Investments Non GCC, $9 GCC, $39 Non GCC, 55% GCC, 45% Private Infrastructure Investment US$ billion H1 Share of GDP US$ billion (H1): GCC accounted for $39 billion in private infrastructure investment vs. $9 billion for non GCC GCC accounts for about 10% of MENA s population and 45% of GDP Source: Infrastructure Journal 19

20 Large Investment Gaps in Middle and Low Income MENA Countries Investment in Infrastructure ( ) ,245 1,253 1,400 1, , LAC EAP ECA S.Asia SSA MENA - investment (US$bil) # of projects Source: PPI World Bank 20

21 MENA Infrastructure: Three Key Development Themes Climate Change Sustainable Urbanization Water Scarcity MENA Share of Emissions Solar and Wind Resource Clean Tech Fund (CTF) MENA CSP Plan: 1,000 MW $750 mn in gap funding Power Urban Transport Water and Sanitation Most Water Scarce Investments in Supply Scale up in investments Water is the key infrastructure challenge for MENA 21

22 Water Scarcity Most water-scarce region in the world ~5% of world s population but less than 1% of world s renewable fresh water resources Renewable freshwater resources around less than 700 m 3 per capita/year MENA Renewable Water Resources (m 3 per capita/year) Renewable Water Resources by Region (1000 m 3 per capita/year) Egypt Saudi Yemen Libya Jordan Algeria Syria Oman Tunisia UAE Morocco Iraq Iran ,211 1, ,000 1,500 2,000 Source: World Development Indicators, 2009 Middle East & North Africa South Asia Western Europe East Asia and Pacific Sub-Saharan Africa Europe and Central Asia North America Latin America and the Caribbean Australia and New Zealand Source: MENA Water Flagship Report, World Bank

23 Water Use in MENA Agriculture accounts for over 85% of freshwater withdrawals Only region in the world where withdrawals exceeds renewable resources Annual Withdrawals as % of Resource Developing World MENA South Asia East Asia & Pacific Europe and Central Asia Sub-Sharan Africa Latin America & Caib. 0% 20% 40% 60% 80% 100% 120% 140% Agriculture Usage as % of Freshwater Usage Developing world South Asia Sub-Sharan Africa MENA East Asia & Pacific Latin America & Caib. Europe and Central Asia 0% 20% 40% 60% 80% 100% Source: World Development Indicators,

24 Investment has Focused on Supply GWI: $127 bn expected to be invested in MENA water sector (one third expected as private sector investment) Desalination has been the major investment area: Cumulative desalination capacity 39 million m 3 /day in 2009 projected to grow to 74 million m 3 /day by 2016 Bulk of investments in Saudi Arabia and UAE more recently North Africa Investment in wastewater reuse is increasing Cumulative water reuse capacity 5.6 million m 3 /day in 2009 projected to grow to 17 million m 3 /day by 2016 Expected focus on efficiency Level of unaccounted for water is 36% (GWI 2009) 24

25 Water Resources Group 2030 Access report at 25

26 Global Demand for Water may Outstrip Capacity Billion m 3, 154 basins/regions 1 Demand in 2005 based on inputs from IFPRI 2 Demand in 2030 based on frozen technology and no increase in water efficiency after Supply at 90% reliability and including infrastructure investments scheduled and funded through 2010; supply in 2005 is 4,081 BCM per year; supply in 2030 under projected technological and infrastructural improvements equals 4,866 BCM per year; net of environmental requirements SOURCE: 2030 Water Resources Group 26

27 Water Cost Curve 27 Source: 2030 Water Resources Group

28 Example: China Source: Water Resources Group

29 Water Security: Charting the Future Charting Our Water Future report published by 2030 Water Resources Group, led by IFC, McKinsey and Co., and other business leaders Key Conclusion: Governments can find lasting new ways to meet competing demands for scarce water by revisiting the way they allocate resources Current solution is to increase water supply through costly, energyintensive measures such as desalination Next Steps: Water Cost Curves for selected countries in MENA 29

30 Scaling up IFC s Activities: $1 billion in Annual Water Investments by 2012 INNOVATION / DIVER RSIFICATIONAXIS Create the Market Create Synergy Innovations Technology Water Demand Management Water / Energy Efficiency Delivery Performance Based Contracting Distributed Services Current Water Sector Business Finance Holding Companies; Equity IFC Water: A Corporate Initiative Infrastructure Advisory Climate Change Sub-National Finance Agriculture Industry Power Clean Technology Water Business Plan: $1bn by 2012 Create Markets IDA Countries/ Water Rights/ Water Markets Create Partners Industry ESCOs / WUSCOs / MUWFs Create Finance Water Fund Growth Opportunities Geographies MENA/China Sectors Desalination/Reuse Clients/Sponsors Emerging Markets Clients Dedicate Resources GROWTH AXIS Grow with Market 30

International Finance Corporation Olaf Schmidt Global Head - Tourism, Retail & Property Manufacturing, Agribusiness & Services Department

International Finance Corporation Olaf Schmidt Global Head - Tourism, Retail & Property Manufacturing, Agribusiness & Services Department Structured Finance Conference November 15, 2012 IFC is a Member