MENA Infrastructure: Opportunities and Challenges

DIFC Economics WorkshopAdil Marghub

December 2009

IFC: Background

2

IBRDInternational Bank for Reconstruction and Development

IDAInternational Development Association

IFCInternational

Finance Corporation

MIGAMultilateral

Investment and

Guarantee Agency

To promote institutional,

legal and regulatory

reform

To promote private

sector development

To reduce political

investment risk

Est. 1945 Est. 1960 Est. 1956 Est. 1988

Role: To promote institutional,

legal and regulatory

reform

IFC is a Member of the World Bank Group

3

reform

Governments of poorest

countries with per capita

income of less than

$1,025

- Technical assistance

- Interest Free Loans

- Policy Advice

Private companies in

182 member countries

- Equity/Quasi-Equity

- Long-term Loans

- Risk Management

- Advisory Services

Foreign investors in

member countries

- Political Risk Insurance

Clients:

Products:

reform

Governments of member

countries with per capita

income between $1,025

and $6,055.

- Technical assistance

- Loans

- Policy Advice

Shared Mission: To Promote Economic Development and Reduce Poverty

IFC FY09 Highlights

Over $30 Billion Invested in the Emerging Markets Since 2007

S&P, Moody’s AAAPortfolio $34.5 billionCommitted $10.5 billionSyndicated $4.0 billion# of companies 1,579# of countries 103

Total committed IFC financing: US$10.5 billion

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

U.S

. $ b

illions

IFC's own account Syndication

# of countries 1030.0

2005 2006 2007 2008 2009

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� 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

Wide Coverage of Infrastructure Sectors

Infrastructure:

Infrastructure

� Created in 1992 to address market need

� Current portfolio: US$5.3 billion

� FY08 Commitments: US$2.5B

Utilities•Water•Waste•Gas• Distribution• Privatized Public Services Transport

Infrastructure• Airports• Roads

Power•Generation• Distribution

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� 100+ dedicated professionals in Washington and 8 regional hubs 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

• Roads• Ports

Transportation Services

• Logistics• Shipping• Airlines

• Distribution• Transmission

IFC InfraVentures• Early-Stage Capital• Project Developer

Global Infrastructure Portfolio $5.5 billion

By Region, in US$ Billions By Sector, in US$ Billions

Utilities, 10%

Other, 3%Central and

Eastern Europe

7%East Asia and

Pacific16%

Southern Europe and Central Asia

12%

Sub-Saharan Africa

8%

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Power, 55%Transport,

31%

Latin America & Caribbean

26%Middle East and North

Africa14%

South Asia17%

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)

Equity/Quasi-Equity

� Equity, convertible loans, subordinated loans, etc.

� Minority shareholder

� Passive investor

� Long-term investor

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� Long maturities (10-15 years)

� Appropriate grace periods� Market-based returns sought

� Exit mechanism required

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

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

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

Current ProjectsCompleted Projects

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Yemen: PPP Program

Egypt: MOU

Saudi Arabia: Hajj Terminal, KAIA Jeddah

Saudi Arabia: KAIA Desalination Plant

Jordan: Queen Alia International Airport

UAE: Dana Gas

MENA: Maritime Sector Study

Egypt: New Cairo Waste Water Plant

Egypt: Highways SWOT

Morocco: PPP Study Yemen: IPP

Jordan: Amman – Zarqa LRS

Jordan: Amman Ring Road

Egypt: Alexandria Hospitals

Saudi Arabia: Madinah Airport

Saudi Arabia: Airport Cities

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

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Selected IFC MENA Infrastructure Transactions

A Loan:EUR130 millionB Loan: EUR265 millionC Loan: EUR30 million

April 2008

TAV Tunisia

Tunisia

Jordan

$31,000,000Loan Financing

Jordan

December 2008June 2006

CTI Group

$50,000,000

Equity

MENA Region

May 2009

Creative Energy Resources

Jordan

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A Loan: US$70 millionB Loan: US$160 millionC Loan: US$50 million

Queen Alia

US$20 millionLoan Financing

Egypt

SPDC

$31,100,000Equity and Loan

Financing

MENA Region

September 2007

Metito

June 2006

November 2007

$20,482,000Equity and Loan

Financing

Oman

January 1995December 1999

Manah Power

$40,000,000Loan Financing

May 2009

EDCO

May 2004

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 � 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

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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

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� 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.

Infrastructure: Crisis and Response

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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 � 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 2008.

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IFC Crisis Response: Pooling of debt capital from IFIs dedicated to infrastructure finance

Infrastructure Crisis Facility: Co-financing of Projects in the Developing World

Participating Government/IFI Participating

Government/IFI

Participating Government/IFI Participating

Government/IFI

Infrastructure CrisisFacility

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Equity Fund Debt Component

Government/IFI Government/IFI

Debt Pool

Co-Financing Programs

AdvisoryServices

Component

Debt Pool•Germany and France founding members

•KFW: €500 million committed

Co-financing•DEG/Proparco/EIB

•€ 2.2 billion

IFC committed $300 million

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

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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

Infrastructure in the MENA Region

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Economic Growth

3-5% GDP growth

GDP: about $1.7 trillion

Demographics

Young population/Rapid Urbanization

350 million people

Key Drivers in Place for Growth in Infrastructure

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Historical Underinvestment

Large supply gaps

Shift to Private Sector Participation in Infrastructure

Strong demand for infrastructure will

continue

GCC Accounts for a Large Share of Private Infrastructure Investments

GCC, $39

Non GCC, $9

GCC, 45%Non

GCC, 55%

• 2006-2009 (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

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Private Infrastructure InvestmentUS$ billion 2006-2009 H1

Share of GDPUS$ billion

Source: Infrastructure Journal

GCC, $39 55%

Large Investment Gaps in Middle and Low Income MENA Countries

1,245 1,253

1,000

1,200

1,400

400

450

500

Investment in Infrastructure Investment in Infrastructure (1990(1990--2007)2007)

20

696

416

355

117

-

200

400

600

800

1,000

0

50

100

150

200

250

300

350

LAC EAP ECA S.Asia SSA MENA

investment (US$bil) # of projects

Source: PPI World Bank

MENA Infrastructure:Three Key Development Themes

Climate ChangeClimate Change

Sustainable UrbanizationSustainable Urbanization

Water

Scarcity

Water

Scarcity

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�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

Water Scarcity

Middle East & North Africa

Renewable Water Resources by Region(1000 m3 per capita/year)

�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 m3 per capita/year

27 Egypt

MENA Renewable Water Resources(m3 per capita/year)

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0 5 10 15 20 25 30 35 40

Australia and New Zealand

Latin America and the Caribbean

North America

Europe and Central Asia

Sub-Saharan Africa

East Asia and Pacific

Western Europe

South Asia

Middle East & North Africa

Source: MENA Water Flagship Report, World Bank 2008

1,817

1,211

935

909

400

385

350

324

175

161

91

83

- 500 1,000 1,500 2,000

Iran

Iraq

Morocco

UAE

Tunisia

Oman

Syria

Algeria

Jordan

Libya

Yemen

Saudi

Source: World Development Indicators, 2009

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 ResourceDeveloping World

Agriculture Usage as % of Freshwater UsageDeveloping world

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0% 20% 40% 60% 80% 100% 120% 140%

Latin America & Caib.

Sub-Sharan Africa

Europe and Central Asia

East Asia & Pacific

South Asia

MENA

0% 20% 40% 60% 80% 100%

Europe and Central Asia

Latin America & Caib.

East Asia & Pacific

MENA

Sub-Sharan Africa

South Asia

Source: World Development Indicators, 2009

Investment has Focused on Supply

•GWI: $127 bn expected to be invested in MENA water sector 2009-2016

(one third expected as private sector investment)

•Desalination has been the major investment area:

� Cumulative desalination capacity 39 million m3/day in 2009 projected to grow to 74 million m3/day by 2016

Bulk of investments in Saudi Arabia and UAE – more recently North Africa� 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 m3/day in 2009 projected to

grow to 17 million m3/day by 2016

•Expected focus on efficiency

� Level of unaccounted for water is 36% (GWI 2009)

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Water Resources Group 2030

25Access report at www.2030waterresourcesgroup.com/water_full.

Global Demand for Water may Outstrip Capacity

Billion mBillion m33, 154 basins/regions, 154 basins/regions

SOURCE: 2030 Water Resources GroupSOURCE: 2030 Water Resources Group

11 Demand in 2005 based on inputs from IFPRIDemand in 2005 based on inputs from IFPRI22 Demand in 2030 based on frozen technology and no increase in water efficiency after 2010Demand in 2030 based on frozen technology and no increase in water efficiency after 20103 Supply at 90% reliability and including infrastructure investments scheduled and funded through 2010; supply in 2005 is 4,03 Supply at 90% reliability and including infrastructure investments scheduled and funded through 2010; supply in 2005 is 4,081 81 BCM per year; BCM per year; supply in 2030 under projected technological and infrastructural improvements equals 4,866 BCM per year; net of environmentalsupply in 2030 under projected technological and infrastructural improvements equals 4,866 BCM per year; net of environmental rerequirementsquirements

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Water Cost Curve

Source: 2030 Water Resources GroupSource: 2030 Water Resources Group2727

Example: China

Source: 2030 Water Resources GroupSource: 2030 Water Resources Group2828

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

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�Current “solution” is to increase water supply through costly, energy-intensive measures such as desalination

�Next Steps: Water Cost Curves for selected countries in MENA

InnovationsInnovations

TechnologyTechnology

Water Demand ManagementWater Demand ManagementWater / Energy EfficiencyWater / Energy Efficiency

DeliveryDelivery

Performance Based ContractingPerformance Based ContractingDistributed ServicesDistributed Services

Water Business Plan: $1bn by 2012Water Business Plan: $1bn by 2012

Create MarketsCreate Markets

IDA Countries/ Water Rights/ Water MarketsIDA Countries/ Water Rights/ Water Markets

Create PartnersCreate Partners

IndustryIndustryESCOs / WUSCOs / MUWFsESCOs / WUSCOs / MUWFs

Create FinanceCreate FinanceCre

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Scaling up IFC’s Activities: $1 billion in Annual Water Investments by 2012

FinanceFinance

Holding Companies; EquityHolding Companies; Equity

Growth OpportunitiesGrowth Opportunities

Geographies Geographies

MENA/ChinaMENA/China

Sectors Sectors

Desalination/ReuseDesalination/Reuse

Clients/SponsorsClients/Sponsors

Emerging Markets ClientsEmerging Markets Clients

Create FinanceCreate Finance

Water FundWater Fund

Grow with MarketGrow with Market

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Current Current Water Sector Water Sector

BusinessBusiness

IFC Water: A Corporate InitiativeIFC Water: A Corporate Initiative

InfrastructureInfrastructureAdvisoryAdvisory

Climate ChangeClimate ChangeSubSub--National FinanceNational FinanceAgriculture IndustryAgriculture Industry

PowerPowerClean TechnologyClean Technology

Dedicate ResourcesDedicate Resources

Cre

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Sy

ne

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Cre

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Sy

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GROWTH AXISGROWTH AXIS

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3030