Financing the Transport Infrastructure Priority Projects on the Future Trans- Mediterranean Transport Network (TMT-N): A preoccupation delivered to the EU and the Union for the Mediterranean Preparation of the contribution of the EuroMed Transport Forum (May 2010) 1. Transport financing and related tasks of the WG Infra One of the mandates of the WG Infra is the identification of financing options and the coordination with donors for the development of the TMN-T. In this respect a couple of preliminary meetings have taken place in the course of 2009, but the mandate to establish a dedicated Task Force for this within the framework of the WG Infra is still to be established. In the meanwhile some relevant discussions have already taken place during the WG Infra meetings which were translated into the following adopted conclusions: In the Summit of the Union for the Mediterranean (Paris, 13 July 2008) it was envisaged to mobilize additional funding for the region, mainly through regional and sub-regional projects. Its capacity to attract more financial resources for regional projects, with a high degree of donor coordination, will constitute its added value mainly through the following sources, inter alia: private-sector participation; contributions from the EU budget and all partners; contributions from other countries, international financial institutions and regional entities; the Euro-Mediterranean Investment and Partnership Facility (FEMIP); ENPI Euro- Med envelope, Neighbourhood Investment Facility and the cross-border cooperation instrument within the ENPI, as well as the other instruments applicable to the countries covered by the initiative, for which the usual selection and procedural rules will continue to apply. The Marseille Ministerial Conference (November 3 and 4 2008) decided the setting up of the secretariat of the Union for the Mediterranean, in order to collectively seek means for the realization of priority projects adopted within the framework of the Euro Mediterranean partnership including those projects adopted in the Paris Summit. The Regional Transport Action Plan (RTAP) for the Mediterranean, which was approved by all representatives of beneficiary countries at the Euromed Transport Forum held in Brussels on 29-30 May 2007, proposed 34 actions in a number of areas including maritime transport, road transport, railway transport, civil aviation, multimodal transport and transport infrastructure networks, as well as with respect to sustainability issues. These actions are being implemented by partner governments in the framework of their national policies and strategies or at the multilateral level through cooperation and the exchange of information. The 3rd meeting of the Working Group Infrastructure & Regulatory Issues (20 November 2008, Brussels) has invited the European Commission to increase the financial participation in infrastructure projects and to explore the possibility of additional transport financing mechanisms apart from the existing ones. The 9th EuroMed Transport Forum (12 December 2008, Brussels) has decided, among other things, to facilitate the promotion and the mobilisation of the relevant financial support, notably through the secretariat of the Union for the Mediterranean. Public-Private Partnerships, the International Financial Institutions, sovereign funds and external policy financial instruments such as the NIF. Other financing sources should also be explored. It has also been appreciated the presence of the European Investment Bank and the World Bank to this Forum, emphasizing the importance of coordination with the work of the EuroMed Transport Forum and its working groups. It has been agreed on further developing, in liaison with the work of the Union for the Mediterranean, the contents and venue of a conference covering Transport Financing which should preferably take place in the near future (2009-2010). http://www.euromedtransport.org 1
Such further development shall be done by a specific task force which will report back to the next meeting of Working Group on Infrastructure and Regulatory Issues. The 4th EuroMed Transport Working Group Infrastructure & Regulatory Issues (13-14 October 2009) approved the necessity of updating and complementing the full description of all infrastructure projects featuring on the short list with a view on how to facilitate the promotion and the mobilisation of appropriate European and International financial aid notably through the Secretariat of the Union for the Mediterranean, PPP's, IFI's, sovereign funds and the financial instruments of the external policy such as the NIF. The 5th EuroMed Transport Working Group Infrastructure and Regulatory Issues (13-14 January 2010) reaffirmed the will to continue to reflect, in liaison with the work of the Union for the Mediterranean, on the contents and venue of a conference covering Transport Financing which should take place in 2010. 2. Ministerial Conference in Naples (21-22 October 2009) During the specific sessions on the Mediterranean transport cooperation, the Ministers of the Mediterranean countries have delivered the following: A strong message has been sent to the EU to establish a programme similar to the existing Trans- European Transport Network programme, including increased financial resources to develop the Trans- Transport Network, linking European and Mediterranean networks; Everyone agrees that these transportation and infrastructure policies serving these Europe- Mediterranean connections must be accompanied by more ambitious financial commitments from all the protagonists. 3. The challenge of financing transport infrastructure Mediterranean Countries are confronted with different financing prospects: from full government to total dependence on foreign aid and international financial assistance. This calls for the use of different financing options. Furthermore, it needs to be highlighted that there is a need for huge amounts of public expenditure - mainly for linear transport projects -, there is a relative absence of private sector involvement as well as the limited remaining absorption capacity of IFI loans in a number of Mediterranean neighbouring countries. Despite the expert assistance offered by the European Commission, it is clear that the general difficulties as described above hamper the development of the Trans Mediterranean Transport Network and the transport infrastructure projects on this network. 4. The role of coordination among financing institutions To reduce the impact of these difficulties it is important that the public institutions involved in the financing of transport infrastructure in the Mediterranean coordinate their activities. This process already began with the signing of a memorandum of understanding (MoU) in 2004 between the EC, the EIB and the World Bank as well as one in 2005 between the Facility for Euro-Mediterranean Investment and Partnership (FEMIP) of the EIB and twelve bilateral development finance institutions from member states. This coordination must be continued, strengthened and extended to include the World Bank, the International Finance Cooperation (IFC), the African Development Bank (AfDB) together with other funds from Arabic countries and other countries like Japan, China, etc. 5. The role of Public Private Partnerships In addition, and especially when keeping in mind the approaching maximum level of IFI s loan absorption in some Mediterranean partner countries, the private sector needs to be further involved in the financing of transport infrastructure projects. The ability to attract private sector finance in the transport sector has varied considerably across the Mediterranean but remains, on the whole, low. Some countries have opened up their system to foreign investors, who now actively participate in helping to develop the transport sector. Other countries have had very limited success to date in attracting investors in the transport sector. http://www.euromedtransport.org 2
Besides, some mode facilities, such as airports, are more attractive to private investors due to their traffic robustness and the regular cash-flow associated with this type of facility. Concrete and operational examples of transport projects related to PPP s could be well shown, for instance, by countries like Egypt, Jordan, etc., which are experiencing possible interesting transport projects related to PPP s. 6. Role of UfM and research/mobilisation of funds a. According to its mandate and the final declaration of Marseille the role of the secretariat is to give an impulse to the mobilisation and search for funding and b. work as the focal point for multi-source funding of projects in the framework of the UfM; Better integrate different sources of financing (at the level of the countries, EU/UfM) Mediterranean countries/eu/ufm must ensure consistency in funding priorities projects between EU and national levels but also with UfM, IFI's and external financial public and private partners (Japan, Kuwait and other Arabic funds, etc.). 7. Involvement of the EuroMed Transport Forum as to explore ways of financing of the transport infrastructure projects on the Trans Mediterranean Transport Network Keeping in mind the difficulties as described above with the financing of the transport infrastructure projects in the Mediterranean partner countries, the EuroMed Transport Forum has decided to prepare this note which sets out a number of recommendations and suggestions which could in the medium and long term change these general financial, legal and budgetary conditions which are now partly limiting the willingness to further integrate the EU with its Neighbours in the Mediterranean as well as the southern neighbours among themselves through an efficient transport system. The recommendations are directed to policy makers within the EU institutions, the EU Member States as well as to the co-presidencies and secretarygeneral of the Union for the Mediterranean which may consider these recommendations to be integrated into the workplan of the secretariat for the coming years. Recommendation No. 1: Approach similar to the funding of the TEN-T A first indication for this was given during the high level TEN-T meeting which took place in Naples in October 2009 during which in a dedicated seminar on the Mediterranean, the urgency of such additional EU funds for developing transport infrastructure in the Southern and Eastern Mediterranean was underlined. These additional funds for transport infrastructure can be allocated through both the bilateral as the regional cooperation structures, but also through a new more dedicated Transport Investment Fund for further channelling EU funds to infrastructure projects. Such a fund could be based on the experience of the Neighbourhood Investment Fund (NIF) and use additional mechanisms to encourage investment in the transport sector; yet a dedicated fund as also existing for the TEN-T could speed up the coordination and realisation of the transport infrastructure projects. Alternatively, the direct contributions for the transport sector in the NIF could also be increased. Recommendation No. 2: Attracting more private sector financing in the transport infrastructure sector by means of updating the legal and financial system of the Mediterranean partner countries and the creation of the regional system of guarantees It is clear that even with increased funds for ENP transport cooperation under the new financial perspectives for 2013-2020 these public funds will remain insufficient to finance all desired transport infrastructure projects in the Southern neighbourhood countries. Participation of the private sector in the financing of transport infrastructure projects is therefore essential. It is, however, widely understood - and also recognized by the EuroMed Transport Forum that such increased private participation also demands certain legal and financial changes within the partner countries themselves. http://www.euromedtransport.org 3
Within the Forum there is a willingness to work on this also with the support of the European Commission and (to the extent possible) the UfM secretariat and to make progress on these regulatory issues. The present financial crisis could also be beneficial for speeding up this process, especially when taking into account a renewed interest on perhaps less profitable, but more stable and secured, rates of return on investments in sectors of the real instead of the virtual economy, such as the transport infrastructure one. However, as to further attract long term investors (mainly from the private sector and from sovereign funds) in the transport infrastructure market, a number of changes need to be pursued in the legal and financial system of the Mediterranean partner countries. These changes should focus more precisely on enhancing the legal, economic and financial certainties and guarantees for private sector investments. This would require for example the following regulatory changes: -- more legislative and contractual stability especially for concessions and agreements; -- compatibility of the user fees level with the country economic development and the economic value of the project and the financial contribution; -- better and more efficient procedures for dispute resolution as well as enforcement of decisions. In the short-term, the least complicated way to involve the private sector in the provision of transport infrastructure and transport services is the outright private ownership and operation of the assets. Good examples exist in the port sector, airport terminals, logistics centres or some railway lines (though mainly for the transport of natural resources to port terminals). An intermediate solution for more advanced countries would be to award concessions for the operation and maintenance of existing roads or railroads. In these cases, the private sector would not have to invest large sums of money, but could test the water with limited investments. Finally it could be interesting to analyse the possibilities to combine transport private investments with private investments in other sectors with better revenues. However, for long-term investments this should also be further promoted, for instance by means of the creation of a regional system/agreement of guarantees as to further secure direct national and foreign private investment. Even though the level of private sector participation as well as the quality of the legal and financial system differs from one country to another, it would be beneficial if the guarantee system is adopted and implemented equally at the regional level covering a certain number of risks. Its creation, as well as the clear commitment of the involved countries as well as others donors to this system by means of for instance a financial contribution to the risk premiums for certain strategically important projects, would also create more confidence among private investors to rethink their involvement in the development of transport infrastructure in the region. In the end this could lead to the development of some kind of a PPP funds based upon a system of collateral guarantees. Reflexions on this are ongoing within the framework of the Union for the Mediterranean which is welcomed by the EuroMed Transport Forum. Especially for the transport infrastructure which requires long term investments, a stable and secure legal system is essential. Recommendation No 3: Maximise the involvement of the banking and financing sector of the Mediterranean partner countries in the development of transport infrastructure by creating new ways of converting capital into investments for transport infrastructure. The role of the banks in the Southern and Eastern part of the Mediterranean in general could be reinforced as to further stimulate the private sector involvement in the development of transport infrastructure. This could be done, perhaps on a regional basis and with the support of the international financing institutions, of a guaranteed obligation system as a medium and long term financial system which could facilitate investments in transport infrastructure projects. http://www.euromedtransport.org 4
The granting of such guarantees by the countries concerned, in combination with IFI's, could favour the mobilisation and transformation of financial resources which are available in the short term into funds for the medium and long term which is necessary to come across the crying need of infrastructure in the Mediterranean. This new way of converting other types of savings such as pension funds or life insurance funds but also non speculative investment funds or migrants funds - distributed through local banks is not entirely new, but can be relaunched at regional level within the framework of the Union for the Mediterranean. This re-launch could be further reinforced by means of further support to the existing national and regional private investment funds. Some of these funds have gained considerable leverage power in the region and further support, both technical as well as financial, to these initiatives by countries or IFI's, may also further direct their investments into the direction of sustainable, long term investments in transport infrastructure. Again, also in this context the EuroMed Transport Forum stresses the importance of investing stable and low risk cash flows in infrastructure projects with a reliable, long term rate of return. Especially when keeping in mind the financial crisis and the collapse of the real estate and/or tourist market in many countries, the importance of investing in projects which could serve society and economic growth as a whole need to be underlined. The favourable credit conditions prevailing before the financial crisis of 2008-2009 are in fact not expected to return. Tougher financial conditions including higher borrowing costs- are expected to continue even after the financial markets have stabilised or reached a new normal. 8. Conclusions Increase of funds for cooperation under the European Neighbourhood Policy specifically dedicated to transport infrastructure development; The set up of a dedicated Governance Facility or Funds under the European Neighbourhood Policy for the financing of transport infrastructure projects on the Trans Mediterranean Transport network, similar to the one already existing for the TEN-T; Support with the redirection of funds of sovereign funds to transport infrastructure projects in the Southern and Eastern Mediterranean; Support to the adaptation of the legal and regulatory framework as to further secure private investments, both national as foreign, with a view on increasing public-private participation in transport infrastructure projects; The set up of a regional fund of guarantees for private sector investment in transport infrastructure projects; Supporting the conversion of short term available financial resources into medium and long term investments possibilities for the transport sector; Stressing the importance for private national and regional investment funds to investment in the transport infrastructure sector. http://www.euromedtransport.org 5