aecom international development industrial and commercial area development private sector investment...
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AECOM International DevelopmentAECOM International DevelopmentIndustrial and Commercial Area DevelopmentIndustrial and Commercial Area Development
Private Sector Investment in Economic Zone DevelopmentsKey Mechanisms and International Trends
19-23 October 2009 ITAP – TOBB Capacity Building Program for Investment Promotion Officials of OIC Member Countries: Private Sector Operated Industrial Zones program - sponsored by the Islamic Development Bank (IDB) Group / The Union of Chambers of
Commerce and Commodity Exchanges of Turkey (TOBB)
Fari Akhlaghi
Director MENA Region
Mobile: +971 50 667 3998 I E-Mail: [email protected]
AECOM Technology Corporation
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• 45,000 employees world-wide
• Currently working on more than 4,000 projects
• US$6.1 billion revenue in 2008-9
• Working in over 100 Countries
• Ranked #1 globally in many categories
AECOM - 8 Global Business Lines
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1. Transportation
4. Water
7. Planning, Design & Development
8. Government
5. Environment
2. Building Engineering
3. Energy
6. Program Management
Industrial & Commercial Area Development- Program Areas
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AECOM ID has undertaken over 200 SEZ related projects during the past 25 years in over 80 countries in the following areas:– Special Economic Zones
– Privatization / Private Infrastructure Provision
– Regional Integration, Area Development and Security
– Ports and Logistics
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Jebel Ali Free Zone
USAID
World Bank
Asian Development Bank
IFC
MIGA
UNDP
CIDA
Government Agencies Worldwide
Private Corporate Clients
Industrial & Commercial Area Development- Main Clients
The relevance of Special Economic Zones in today’s global trading environment.
International competition and the increasing importance of logistical input in production value chains have caused firms to migrate to centers of efficiency close to their marketplace.
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Industrial & Commercial Area Development- Special Economic Zones
• Representative Projects include:– Formulation of a National Industrial Parks
Strategy, Serbia
– Development of Industrial Estate Law, Mali
– Establishment of Economic Zones, Kuwait
– Dakar Integrated SEZ, Senegal
– Kakinada SEZ, India
Kuwait
Serbia
India
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Industrial & Commercial Area Development- Privatization / Private Infrastructure Projects
• Representative Projects include:– Technical Assistance to Aqaba Development Corporation, Jordan
– Lesotho Industrial Estates Development and Privatization, Lesotho
– Jamaica Free Zones Privatization, Jamaica
– Howard Air Force Base, Panama
– Institutional Strengthening and Private Sector Support, Iraq
Howard Air Force Base, Panama
Converted to a Special Economic Zone for Aviation, Business Process Outsourcing,
Logistics
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Industrial & Commercial Area Development- Regional Integration, Area Development and Security
• Representative Projects include:– Promoting Industrial Zones and Investment Mobilization,
Palestine
– Evaluation of the Philippine Economic Zone Program, Philippines
– Thailand Eastern Seaboard
– Cagayan-Iligan Corridor, Philippines
– Tourist Development Site for the Saudi Supreme Commission for Tourism, Saudi Arabia
– Security and Industrial Estate Development, Palestine
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Industrial & Commercial Area Development- Ports and Logistics
• Representative Projects include:– Subic Bay Freeport Due Diligence,
Philippines
– Bamako-Senou Airport and Industrial Park Improvement Project, Mali
– Feasibility Study and Training Needs Assessment for the Misurata Free Zone, Libya
– Feasbility Study for the Abu Dhabi International Airport Zone, UAE
– Aqaba port, Jordan
– Pelabuhan Tanjung Pelapas Free Zone, Malaysia
– Port Klang, Malaysia
US Navy Base, Subic, Philippines
Converted to a Freeport for manufacturing, tourism and logistics
1970s Public sector development
and operation of zones Zone Authority would
develop, own, operate and regulate the zone
Zone Authority has little power over other government bodies
Zone funded by government; typically subsidized services & facilities
1970s Public sector development
and operation of zones Zone Authority would
develop, own, operate and regulate the zone
Zone Authority has little power over other government bodies
Zone funded by government; typically subsidized services & facilities
Private Sector Participation in Zones - A Clear Trend
1990s Gradual shift from ad-hoc
private-sector licensing to planned, coordinated partnership approach
Private sector involvement in zones has led to improved services, greater product differentiation and non price-based competition
1990s Gradual shift from ad-hoc
private-sector licensing to planned, coordinated partnership approach
Private sector involvement in zones has led to improved services, greater product differentiation and non price-based competition
Port Housing Tourism
Utilities Industrial Park Area
CommercialThe result is multi-market zones that can adapt to rapid change
New Framework
Private developer develops, owns and operates the zone on a cost-recovery basis
Zone Authority only regulates activities within the zone
Outsourcing of core functions to private sector
Zone enterprise designation extended to developers and service intermediaries
New Framework
Private developer develops, owns and operates the zone on a cost-recovery basis
Zone Authority only regulates activities within the zone
Outsourcing of core functions to private sector
Zone enterprise designation extended to developers and service intermediaries
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Public Policy – Private Project . . .
Although Zones are elements of public policy, the real estate development and operation aspect properly belongs in the private sector
It is estimated that 60% of all zones (2000+) are run by private developers/operators on commercial terms
Exceptions: Market failures in availability of land and backbone
infrastructure
High levels of risk brought about by lack of rule of law, post conflict, or economies in transition
Zones that are essentially non-commercial “pump-priming” initiatives that serve as demonstration models
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Principles:
Two or more parties wish to share risks and rewards associated with Zone development
The Private sector party needs a favorable investment environment to make a return commensurate with the risk he is taking on
The Public sector party needs to achieve public policy objectives – development of common use facilities
There is a business case to begin with – the market – while avoiding direct competition with private sector within or outside of zones.
The Goal:
Ultimately, the Government and Operators should have aligned goals, and therefore work together within a national strategy to achieve them.
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Public/Private Partnerships in Zones
Country Attraction to Private Sector - Benchmarking Criteria
Country 1 Country 2 Country 3 Country 4
History and Existing SEZs
Foreign Ownership Regarding Real Property and Business Enterprises (National Treatment)
Protection of Private Property: Land Access/Tenure/Transfer /Land Registration System
Zoning and Construction Building Permits
Transfer of Funds and Capital
Alternative Dispute Resolution (ADR)
Tax Regime and Incentives
Legal and Regulatory Framework Affecting /For SEZs
Customs Administration
Environmental Regulations
Administrative Regime
Available PPP Mechanism
Business Registration
Immigration
Labour
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• Regulate but not implement
• Push, pull, persuade private sector
• Promote efficiencies (competition)
• Efficient resource allocations
• Efficient capital allocations
• Responsive to demands
Take risks, earn rewardsAchieve public policy priorities
Public sector establishes environment for private sector to implement public policy priorities
Healthy tension
Public Sector:Public sector’s principal roles are to regulate and facilitate economic development in the national interest.
Private Sector:Private sector’s principal roles are to invest capital and implement economic activities in its own interest.
Partnership:Partnership based on clearly defined and very different roles between two sectors.
Aligning Public and Private Interest- Private and Public Sector Roles
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Best Practice SEZ Institutional and Management Framework
• Emerging “Best-Practice” SEZ principles favour public sector authorities focusing on zone regulation and administration, while private sector entities concentrate on development, operation and management activities
• SEZ regulatory authority is an inherently government function that is legally delegated by the legislative branch to the executive branch in accordance with modern constitutions
• Government function is best organized through: Semi-autonomous, independent, adequately funded, sufficiently staffed, and customer oriented “One-Stop-Shop” , often enhanced by adopting an “Accounts Executive” approach
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Length of Commitment
Risk and ControlAssumed by Private Sector
Management Contracts (5-10 years)Public sector pays the private sector to manage under-performing assets under agreement, usually with some revenue sharing arrangements
Leases (10-20 years)Private sector pays for use of facilities (e.g., land with infrastructure connections) from public sector under agreement which sets out specific terms of use
Concessions (20-30 years)Private sector owns and operates under-performing assets under agreement with public sector and generally transfers assets back to public sector at end of term
Joint Ventures (open ended)Assets contributed by public sector and cash contributed by private sector into a special purpose vehicle to develop the assets
Highest Degree of Public Sector Involvement
Highest Degree of Private Sector Involvement
Models of Public - Private Partnerships
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Classic Zone Business Models
Rent or sale of Land and Buildings
Land sale/lease ratio depends upon:
Market conditions (what customers want and what they will accept)
Legal environment (land sales permitted?)
Business goals of the developer (long term play – hold the assets, or short term play – flip the assets)
Availability and source of finance (project finance or balance sheet finance, rates and tenor)
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Sale of Services
Real Estate related services: Maintenance and security
Common infrastructure
HR facilitation and training
Zone-specific services: Permits, badges
Registration
Customs Facilitation
External Services Utilities (water, power,
telecoms) to the local market
Developer or Developers ?
• A “best-practice” governance framework also authorizes the SEZ administering entity to select multiple developers for each zone site to take advantage of specialized expertise, maximize economic opportunities, guard against private-sector defaults, and avoid monopolistic tendencies. In scenarios in which a private sector developer/operator is granted exclusivity at a particular zone, such a privilege is generally tied to strict economic performance criteria and is further limited to a specific time frame (e.g., 10-30 years).
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What is Being Financed?
Characteristics of a Classic Zone: US$m100ha+ serviced land
Land cost (say US$10/m2) US$10m
Land servicing internal (say US$400k/ha) US$40m
External Infrastructure costs (say US$200k/ha) US$20m
Buildings for rent/common facilities (say 100,000m2 @ US$500/m2) US$50m
Startup and working capital (say US$10m) US$10m
------------
US$130m
Debt (60%) US$78m
Equity (40%) US$52m
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Cost: (US$130/m2 gross or US$185/m2 net) US$130m
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Sources of Finance - Governmental
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Source Terms
Central Government • Meet Economic Rate of Return (ERR) requirement (usually 20% for zones)
• Fit with National Strategy• Obtain political backing• Sometimes use of a special agency or vehicle
Government Development Agency
• Quasi commercial terms• 10%-15% return• Will partner with a private developer for some or all of the development• Has remit not to “crowd out” private sector• Often provides land as equity
Public Utilities Provider • Sufficient market size to warrant investment• Will partner with the private sector through a PPP• Offtake agreement may be required
Provincial or Local Government
• Often provides land, and some level of public services to the gate of the site
• Will provide facilities on site in the Zone for municipal functions
Non-Governmental Sources of Financing- Advantages/Disadvantages of Various Sources
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Source Advantages Disadvantages
Multi-lateral Development Banks
- Adds credibility to project
- Reduces perceived risks
- Higher appetite for risk
- Subject to the fluctuating investment objectives of the bank
- Greater due diligence load for environmental and social impacts
Commercial Banks
- Global pool of financial resources
- Flexible financing structures
- Low appetite for risk- Short duration of financing options
- May add to national debt burden
Private Equity and Asset Managers
- Some appetite for risk
- Product-specific financing structure
- Active involvement of an external investor in investment and, or operational decision-making
Insurer - Reduces actual risks - Cost
Grant Financing
Much public financing is in the form of a Grant Allocation of state resources in accordance with a national
plan
Funds the capital expenditure, but care needs to be taken on the ongoing maintenance/servicing costs
Can be subject to the fluctuations in the fortunes of the exchequer – an issue for multi-year programs
Grants come with conditions Environmental and social impacts
Performance of public services (schools, social amenities, provision of additional utility capacity)
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Non-Grant Financing Characteristics
Debt Financing Tenor: 7-10 Years maximum Currency: home currency or USD Grace period: depending on the institution and
circumstances. 3-5 years not unusual Fees: origination fees. Can be 2% Interest rate: varies and currently not stable. Balance Sheet backing usually sought Political risk and other insurance, step-in rights
Equity Financing Minimum return on investment of 15% Usually a partnership between Government and private
equity provider. Government equity goes in first
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Non-Governmental Sources of Financing - Example Political Risk Insurance Source
Many lenders and investors have turned to the Multilateral Investment Guarantee Agency (MIGA) – part of the World Bank Group - to mitigate non-commercial risks in large projects in developing countries. Coverage includes:
Currency inconvertibility and transfer restrictions
Expropriation
War, civil disturbance, terrorism, and sabotage
Breach of contract
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Cross-Subsidization and Cross-Financing
Some elements of a Zone project are more profitable than others
Housing, commercial, tourism – any product that is sold directly to individual end-users
Zone developments can be bundled to cross-subsidize or cross-finance from one product to another
This is achievable through use of Minimum Development Requirements (MDRs) in any PPP agreements
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Governmental Sources of Financing- Example
ZonesCorp, Abu Dhabi, UAE“Established as a government- backed higher corporation for specialized economic zones, ZonesCorp is directly responsible for the establishment, management and operation of specialized economic zones in Abu Dhabi.”
ZonesCorp was set up as a 'commercial' government entity via the investment of:
400M AED from the government Transfer of ICAD 1 (Industrial City Abu Dhabi)
from the local municipality
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Mixed Sources of Financing - Zone Expansion Example
Macquarie Group manages certain investment vehicles such as the ZonesCorp Infrastructure Fund (ZIF) to offer both private and institutional investors the opportunity to access new and existing infrastructure and infrastructure-like assets.
ZonesCorp has provided 75% of the equity with Abu Dhabi Commercial Bank and Macquarie Group (a joint venture established in 2005) has provided the remaining 25%.
ZIF has interests in four projects: ICAD II and ICAD III (expansion of ICAD I); Industrial Effluent Treatment Plant concession for ICAD; and concession for Al Ain Industrial City
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Conclusions
Times are tough – many investment decisions are on hold right now
There will be large public infrastructure programs put in place aimed at job creation. This equates to potential public investment in Zone infrastructure
Price reality is re-entering the market, and soon investors will be looking for projects
The current lull in development is a good time to plan for future expansion and do the necessary homework
There are many sources of finance, both public and private. These can be combined for effective risk management
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