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A PRIVATE-PUBLIC PARTNERSHIP
FOR GREEN DEVELOPMENT IN ARAB COUNTRIES
Green Sukuk Financing Facility
WAFIK GRAIS
Senior Adviser
OVERVIEW
A PPP GSFF: RATIONALE AND SUBSTANCE
I. Proposal for setting up a PPP GSFF to finance Green Development in Arab countries
II. Why focus on financing green development: challenging necessity
III. Why Sukuks? Growing and maturing market of Sharia compliant “Real-Asset-Based” financial Instruments for private investors
IV. Why Green Sukuks? Emerging market for Sharia and green focused investors – Lessons to date and Immediate Prospects
V. What is the PPP GSFF: An umbrella investment fund with compartments to finance green development
I. Financing Green Arab Development
CHALLENGING NECESSITY
CHALLENGES HIGHLIGHTS
INVESTMENT REQUIREMENTS
Large investment requirements to achieve green
development that MITIGATEs climate change and
ADAPTs to it
HOWEVER
Limited availability of public financing
Complex international financing set up
Private markets can be mobilized because of
return opportunities with adequate risk mitigation
LARGE FINANCING NEEDS
TO MITIGATE AND ADAPT TO CLIMATE CHANGE
WEF estimates incremental investment needs of at least $ 0.7
trn p.a. to MITIGATE, i.e. limit the global average temperature
increase to 2°C above pre-industrial levels
The IEA Blue Map scenario estimates that about $ 0.75 trn p.a.
up to 2030, and $ 1.6 trn p.a. from 2030 to 2050, will be
required to MITIGATE, i.e. halve worldwide energy-related CO2
emissions
WRI estimates p.a. cost for developing countries to ADAPT to a
world that is 2 degrees celsius warmer will be $70-100 billion
p.a. by 2050
Source: UNEP (2012), and http://www3.weforum.org/docs/WEF_GreenInvestment_Report_2013.pdf
SIZABLE ARAB COUNTRIES INVESTMENT NEEDS
ESCWA estimates cumulative total Development investment financing requirements to $3.6 trillion for the period 2015-2030, or $ 240 bn p.a.
$ 255 bn cumulative or $17 bn p.a. to meet the 75 GW estimated cumulative targets of RE by 2030
IRENA estimates of cumulative targets to increase RE to about 75 GW of installed power generation capacity by 2030 (today this is about 12, including more than 10 of hydropower
UN SG’s 2011 Sustainable Energy for All initiative seeks to ensure sustainable energy for all by 2030 through:
ensuring universal access to modern energy services;
doubling the rate of improvement in energy efficiency;
doubling the share of renewable energy in the global energy mix.
Source: IRENA (2013) Pan Arab Renewable Energy Strategy 2030 at http://www.irena.org/DocumentDownloads/Publications/IRENA_Pan-
Arab_Strategy_June%202014.pdf (International Renewable Energy Agency)
FISCAL SPACE LIMITS PUBLIC FINANCING
GENERAL GOVERNMENT FISCAL BALANCE (%GDP)
OIL EXPORTERS
OIL IMPORTERS
2014 2015 2016
Algeria -7.4 -15.1 -11.5
Bahrain -5.4 -12.1 -11.7
Iraq -4.9 -6.1 -2.2
Kuwait 21.9 11.1 10.0
Libya -43.3 -37.1 -20.5
Oman -1.4 -16.4 -12.4
Qatar 9.2 -1.5 -5.3 Saudi Arabia 1.1 -10.1 -6.3 United Arab Emirates 6.0 -3.7 -0.5
Yemen -5.4 -5.2 -4.9
2014 2015 2016
Djibouti -12.0 -14.1 -12.5
Egypt -13.6 -11.0 -8.5
Jordan -10.8 -6.5 -3.3
Lebanon -8.5 -10.3 -10.1
Mauritania -3.0 -1.1 -0.7
Morocco1 -4.9 -4.3 -3.5
Sudan -1.1 -1.6 -1.4 Syrian Arab Republic ... ... ...
Tunisia -4.3 -5.0 -3.0
Source: IMF (2015) “Regional Economic Outlook” http://www.imf.org/external/pubs/ft/reo/2015/mcd/eng/mreo0115.htm
CONSTRAINED BY DEFENSE NEEDS -- 10 OF 22
ARAB COUNTRIES SPEND MORE THAN 4% OF GDP ON DEFENSE
World military expenditure in 2014 was an estimated
$1,8 trn; equivalent to 2.3 per cent of world GDP.
Source: SIPRI http://www.sipri.org/research/armaments/milex/milex-graphs-for-data-launch-
2015/Countries%20with%20military%20burdens%20of%204-%20or%20more.png
COMPLEX WORLD GREEN FINANCING SET UP
DEVELOPED COUNTRIES FINANCING
HARD TO COME BY
Globally savings surpluses (savings exporters) are with China and Emerging Asia, Japan and Germany and Oil exporters; all others have savings deficits (savings importers)
Developed countries pledged to provide $100 bn p.a. by 2020 to help developing countries mitigate and adapt to climate change.
Over 2010-2012, they reportedly delivered around $11 bn p.a.
ARAB COUNTRIES RE FINANCING
MODEST AND PUBLIC
Investments mainly financed by governments, international development assistance, regional development banks. (e.g Ouarzazate Noor I, II, III; Egypt EBRD NBE line)
Abu Dhabi Fund for Development committed concessional financing of up to USD 350 million to renewable energy projects (source http://adfd.irena.org)
As of 2013, Algeria, Egypt, Jordan, Morocco,Tunisia created national RE and EE funds. Dubai and Saudi Arabia were considering the establishment of such funds. Morocco’s Energy Development Fund (FDE) capitalized with $ 1 billion (
governmental funds, contributions from Saudi Arabia and UAE.
Algeria’s National Renewable Energy Fund financed through a 0.5% levy on oil tax revenues.
Jordanian Renewable Energy and Energy Efficiency Fund (JREEF) was in 2013 in the early stages of capitalization, and its sources of financing are still unclear,
PRIVATE FINANCING RISK RETURN CHALLENGES
Great market potential: technical conditions and demand expectations – Exceptional sun and wind conditions, sizable developmental market opportunities,
BUT
Technology risks: Notably generation, distribution
Policies: Low electricity prices in most Arab countries continue to impede RE deployment
Improving business environments (e.g. legal certainty, institutional infrastructure) in certain countries but challenging “neighborhood” effect
New constraining banking regulation
II. Sukuks
GROWING MATURING MARKET
SHARIA COMPLIANT “REAL-ASSET-BASED”
FINANCIAL INSTRUMENTS
FOR PRIVATE INVESTORS
SUKUKS: MATURING FULL FLEDGED MARKET OF
SHARIA COMPLIANT FINANCIAL PAPER
Sukuks are Sharia compliant financial market
instruments
Market has significant size, widespread presence
Can be structured to match project funding needs
Used by a diverse universe of issuers
Increasingly attractive to investors
Diverse experienced Lead Arrangers
Increasingly competitive pricing and terms
SUKUK: SHARIA COMPLIANT FINANCIAL
MARKET INSTRUMENT
Financial market instrument with equity features:
AAOIFI Sharia Standard No.17 (Investment Sukuk) defines sukuk as
certificates of equal value representing undivided shares in the
ownership of tangible assets, usufructs and services, or in the
ownership of the assets of particular projects or special investment
activities.
A Sukuk to be tradable, must be owned by Sukuk holders, with all rights
and obligations of ownership, in real assets, whether tangible, usufructs
or services, capable of being owned and sold legally as well as in
accordance with the rules of Sharia
The point here is that a Sukuk is a financial instrument giving
its holder a right of ownership and not a claim of a debt like
a conventional bond
SIGNIFICANT SIZE MARKET
WIDESPREAD PRESENCE
In 2014, issuances are estimated to have reached $
130 bn
INCLUDING NON MUSLIM COUNTRIES AND
INTERNATIONAL CENTERS LIKE LUXEMBOURG
Issuers are Sovereigns, Quasi Sovereigns and Corporates in many jurisdictions like Malaysia, Indonesia, Turkey, GCC, UK, Germany, Luxembourg
AAA-rated Luxembourg adopted in July 2014 a bill setting up the framework for the Duchy to issue Sukuks
It allowed Luxembourg to securitize three government properties to back a €200 million sukuk enhancing the Duchy's role as a key center for Islamic finance.
By 2013, 16 sukuk with assets of some €5.5 billion were listed on the Luxembourg Stock Exchange.
CAN BE STRUCTURED TO MATCH PROJECTS
FUNDING NEEDS
Sukuk al-Ijara
Sukuk al-Wakala
Sukuk al-Salam
Sukuk al-Musharaka
Sukuk Al-Mudaraba
Sukuk al-Murabaha
Sukuk al-Istisna
Sukuk al-Istithmar
Other Sukuk Instruments E.g. Manfa’a, Muzara’a,Musaqa, Mugharasa
FEATURES OF AN AN IJARA SUKUK
Source: https://www.difc.ae/sites/default/files/attached/5712/6707/6429/islamic.pdf
FEATURES OF AN ISTISNA’ SUKUK
Source: https://www.difc.ae/sites/default/files/attached/5712/6707/6429/islamic.pdf
IJARA AND WAKALA: 77% OF INTERNATIONAL
MURABAHA: 65% OF DOMESTIC
SUKUKS ISSUERS
DOMESTIC, INTERNATIONAL, SOVEREIGN, CORPORATE
Sukuks issuers: Sovereigns, Quasi Sovereigns and
Corporates. Major Corporate issuers are in
banking/finance, real estate/construction and
energy/power, transport
January 2013- July 2014 Domestic International
USD bn (%) USD bn (%) Sovereign 119,6 72 11.8 29.4 Quasi Sovereign 5.3 3.1 13.7 34.3 Corporate 41.5 24.9 14.5 36.3 Total 166.4 100 40 100
Source: IIFM 4th edition of Sukuk report 2014 – www.iifm.net
SUKUK INVESTORS
Financial institutions continue to be the main investors in Sukuk, however, entrance of fund managers, Takaful operators, high net worth individuals, corporate investors
Banks have set up their own Sukuk Funds to offer to their private clients. The split between Sovereign and Corporate risk offers investors
and fund managers a good mix of Sovereign and Corporate risk to consider.
The choice offers fund managers opportunities to diversify credit risk and risk return profiles
Not yet regional SWF or Pension Funds, though Thomson Reuters estimates pension assets in the GCC alone in the order of US$ 180 billion or approximately 6% of GDP.
SUKUKS ARRANGERS IN EARLY 2015
BOOK RUNNER AMOUNT ISSUED
($MILLION)
MARKET SHARE NUMBER OF
ISSUES Standard Chartered PLC 256.9 12.6 3 National Bank of Abu Dhabi 236.1 11.6 2 Dubai Islamic Bank PJSC 236.1 11.6 2 HSBC Holdings PLC 236.1 11.6 2 RHB 131.9 6.5 2 National Bank of Sharjah 125 6.1 1 Noor Islamic Bank 125 6.1 1 Emirates NBD PJSC 125 6.1 1 Al Hilal Islamic Bank 125 6.1 1 NCB Capital Corp 111.1 5.4 1 Gulf International Bank 111.1 5.4 1 Natixis 111.1 5.4 1 CIMB Group Sdn Bhd 111.1 5.4 1 Source: Thomson Reuters - Zawya
MATURING MARKET WITH COMPETITIVE TERMS
Maturing market with lessons learnt from the global
financial crisis (i.e. default, moratorium and restructuring )
helping to clarify many complex legal issues
As of 2013, TENORS ten years and above form almost 20%
of the total Sukuk issued as against only 9.5% in 2009; large
expansion in 10 to 20 years tenors, helping in development
of a yield curve; Malaysia recent 30 years issue
Perpetual sukuks issued by banks to meet BaselII tier I
requirement
The price is generally determined in terms of basis points
relatively to the price of an equivalent paper producing a
reference return rate (e.g. basis points above mid-swap)
THE EMIRATES SUKUK ISSUE
Emirates Airlines has issued a $913 million sukuk issue
guaranteed by Britain's export credit agency (Rolls Royce
supplies Engines)
The final spread for the transaction is fixed at 90 basis
points over mid swaps, tighter than initial guidance for the
senior unsecured ten-year sukuk issue at around 100 bps
over mid swaps
The deal has garnered more than $3 billion in orders
Emirates has picked Citigroup, HSBC, JP Morgan and
National Bank of Abu Dhabi as the joint structuring
agents, with Abu Dhabi Islamic Bank, Dubai Islamic Bank,
Emirates NBD and Standard Chartered also acting as joint
lead managers
INCREASING LIQUIDITY
WITH SUKUK SECONDARY MARKETS
Improvement in secondary market activities that
had been often limited to just after the primary
market issuance
At end 2014, 29% of sukuks issued listed on
organized markets (S&P)
The current trend of Sukuk issuance on fixed rate
basis is also providing trading opportunities
Market indices including Dow Jones, S&P and
Thomson-Reuters provide guidance on the market
III. Green Sukuks
EMERGING MARKET
FOR SHARIA AND GREEN FOCUSED INVESTORS
LESSONS TO DATE
OVERVIEW
Green Sukuk precursors – some
lessons
Green Sukuks plans
ORASIS SUKUK
ISTISNA’ AND IJARA STRUCTURE
Source: Anouar Hassoune, Green Sukuk –From the French Experience to broader Shariah Compliant Solution, WIBC, December
2014, and http://www.sukuk-orasis.fr/informations-produit/
ORASSIS SUKUK: FEATURES AND LESSONS
FEATURES LESSONS
Contractual returns: 7% pa
Certificates in €5,425- €5,890
range (including VAT that is
eventually paid back to investors).
Investor buys as many shares as
desired, in limit of number of
shares
Returns : free of any tax for 10
years if held, and benefit from a
71% tax cut beyond 10 years.
Returns served every second
quarter. Buy‐back promise after 10
years, only on 87% of the principal
(Sharia’ ?)
POSITIVES
National French program to increase share of RE
PPA -- EDF holds obligation to buy any quantity of energy produced at a given guaranteed tariff, over a long period of time
Attractive tax treatment
NEGATIVES
Timing of issue (Financial crisis)
Liquidity of product limited
Redemption value
Certification of compliance – Green or Sharia
Source: Anouar Hassoune, Green Sukuk –From the French Experience to broader Sharia-h Compliant Solution, WIBC, December 2014, and http://www.sukuk-
orasis.fr/informations-produit/
GREEN SUKUK PLAN
FIRST IN UAE EXPECTED IN H1-2015
Dubai Electricity and Water Authority
The Dubai Clean Energy Business Council’s
Chairman, Nasser Saidi : “the council has been in
discussions with the Dubai Supreme Council of
Energy (DSCE oversees energy planning in Dubai)
about the issuance of green sukuk. DSCE’s members
include Dubai Electricity and Water Authority (Dewa).
A “Dewa sukuk would be a perfect opportunity that
would be highly supported by the global financial
market” (Mr Saidi).
Source: The National, March 11, 2015 - http://www.thenational.ae/business/economy/uae-set-to-be-the-first-to-offer-green-energy-sukuk
GREEN SUKUK PLAN
SOLAR POWER IN INDONESIA
SGI-Mitabu, joint venture of two Australian solar companies (Solar Guys International and Mitabu Australia) has plans to fund its Indonesian 250 megawatt solar project (A$550 mn) through the issue of an offshore (Labuan) domiciled A$150 mn sukuk, later in 2015
The transaction combines over the life of the project Istisna’, Ijara and Musharaka structures
Source: K&L Gates LLp http://www.jdsupra.com/legalnews/solar-sukuk-lights-the-way-to-alternativ-49613/
IV. Green Sukuk PPP Financing Facility
UMBRELLA INVESTMENT FUND
TO FINANCE ARAB GREEN DEVELOPMENT
GREEN SUKUK: CHALLENGES TO OVERCOME
Credible financial return assessments Rating of the issue by Fitch/Moody’s/S&P
Expected returns, comparable market returns
Governing tax regime
Risk profile and mitigation assessment Management profile (record and matching)
Diversification of assets (including technology)
Policy stability, Legal certainty
Presence of credit enhancement e.g. PBG à la EIB
Sharia’ observance assessment : Clarity and transparency of Sharia certification and monitoring
Harmonization
Green purpose assessment: Clarity and transparency of Green certification and monitoring
Harmonization
Size challenge: investors, arrangers, governments, effectiveness
PPP TO OVERCOME THE CHALLENGES
FOUR PILLARS APPROACH
Pillar I: Projects pipeline: Sharia, green return/risk screened
projects to ensure a healthy deal flow
Pillar II: Sharia and Green compliant Sukuk issuing Fund
With clear mission and transparent CG
Seed public-private equity resources to jump start the fund
Green Sukuk fund raising program commensurate with
pipeline of green projects
Internationally recognized center for confidence building
Pillar III: Network of Arrangers, Underwriters, Investors
Pillar IV: Credit Enhancement: A Project Sukuk Guarantee
facility for credible risk mitigation à la (EIB-PBG -or Recent
Emirates airlines Sukuk)
PILLAR I: SHARIA, GREEN, RISK/RETURN
SCREENED PROJECTS -- DEAL FLOW
Project Identification of Public and Private
sponsored projects consistent with Arab countries green development plans
Network of National Project Preparation Facilities
Regional Coordination Facility for regional projects
Projects submitted to the Fund for further screening and funding
Pillar I amounts to supplying the Deal Flow critical for mobilizing investors’ interest
PILLAR II: PPP SUKUK UMBRELLA FUND
DEDICATED COMPARTMENTS
Compartment I : Funds Renewable Energy Sharia Compliant Projects
Compartment II: Funds Energy Efficiency Sharia Compliant Projects
………………………………………………………………………………………………………..
Compartment V: Funds Carbon Reducing Sharia Compliant Transport Projects
Projects
CLEAR FUND’S MISSION AND GOVERNANCE
Mission - Objectives:
Funds projects delivering a Low-Carbon Economy
Fund’s resources, investments, operations compliant with Sharia
Compliance Screening and Monitoring: Sharia and Green advisory and certification services
Coordination with external stakeholders: national and regional green development plans
Operations and Board responsive to stakeholders, investors, abiding with SRI principles and sound management
RECOGNIZED INTERNATIONAL CENTER
INVESTORS’ CONFIDENCE
43
Reputation
• E.g., Luxembourg - 1st European investment funds domicile with EUR 2,486 bn of AUM
• It is 2nd largest investment funds center worldwide after USA
• Leading location for global cross-border distribution of investment funds
• 1st referenced domicile for structuring infrastructure funds (Prequin,Morningstar)
• Experienced service providers with qualified international workforce
Exit Options and Value Creation
•Eligible for investments by regulated institutional investors (Banks, HNI, Family Offices, Pensions, Social Security, Insurance companies)
•Easier path to partial listing or full IPO
•Easier path to Trade Sale
Credible Corporate Governance
•Monitoring of Operator
•Protection of Investors rights
•Efficient KYC and AML regulatory compliance, processes
Investors’ tax treatment
•Taxation of Sukuk transactions
•Double taxation treaty
•Favorable tax treatment adapted to risk capital investments
TRANSPARENCY
PILLAR III: IDENTIFIED NETWORK OF
ARRANGERS AND INVESTORS AT SET UP STAGE
Identify and Involve at set up experienced Sukuk Issuance Arrangers
Bankers
Private Placement agents
Tap Growing pool of green focused investors In 2012, $1 out of every $9 of US assets under professional
management was invested in some form of sustainable investment, primarily in public equities. In 2014 that number increased to $1 out of every $6 – to a total of $6.57 trillion now invested sustainably
Most institutional investors have ESG principles incorporated in their investment policies
Retail investors -- 71% of investors are interested in sustainable investments with a marked preference among Millenia investors and women
Sources: Morgan Stanley Institute of Sustainable Investing – A) Sustainable Signals – The Individual Investor Perspective -February 2015)
and B) “Sustainable Reality: Understanding the Performance of Sustainable Investment Strategies” – March 2015
http://www.morganstanley.com/sustainableinvesting/pdf/sustainable-reality.pdf
PILLAR IV: GREEN SUKUK
CREDIT ENHANCEMENT
Set up the Green Sukuk Project Initiative (GSPI) for credit enhancement to mitigate private investors’ risk perception: AFESD or IsDB or syndicate of regional Development Finance Institutions
Example of EIB Project Bond Initiative provides eligible infrastructure projects with PBCE in the form of a subordinated instrument (loan or contingent facility) to support senior project bonds issued by a project company (Senior Bonds).
The core benefit of PBCE is enhancement to the credit rating of the Senior Bonds widen access to sources of finance and minimize overall funding costs.
The EIB calculates that a EUR 230 million of EU funds, acting as a first loss piece, could enable EIB to provide around EUR 750 million of PBCE. This could leverage financing to infrastructure projects, on a portfolio of PBCE transactions, worth more than EUR 4 billion.
ANTICIPATED BENEFITS OF A GSFF
Public policy makers will have available a PPP financial facility to pursue Arab countries green development with mitigation and adaptation programs that Mobilizes private investments directly through equity
and sukuk issuances and indirectly through project specific co-financing
Be sufficiently large for effective impact
Private investors will be able to invest in a Green and Sharia compliant investment vehicle that offers: Diversification and risk mitigation
Attractive financial returns opportunities
From concept to implementation
OUTLINE OF STEPS FOR GSFF LAUNCH
PRE-REQUISITE - POLICY DECISION
WORKING GROUP MANDATE AND MEANS
Pre-requisite for initiating GSFF preparation is sponsors’ (e.g. governments) decision to back the set-up of a GSFF including: Support for setting-up GSFF with mandate e.g. to ESCWA
Allocate 100 K euros equivalent for assessing and setting up GSFF
Confirm readiness to contribute to the GSFF seed equity resources conditional on the mobilization of matching seed resources from others, notably private sources
Policy support for the setting up of a credit enhancement facility (Green Sukuks Project Initiative)
Support the appointment by e.g. ESCWA of working group to prepare the establishment of a GSFF (includes working group’s access to relevant information and key concerned agencies and persons)
WORKING GROUP MANDATE
DELIVER A GSFF BY A CERTAIN DATE Coordination of GSFF preparation: objective to set up a GSFF to
begin operations within 9 months of the team’s work start date
Projects’ pipeline preparation: objective to produce an initial deal flow by identifying and initial screening of green projects within 3 months of the working group’s work start date.
Fund structuring : objective to Produce the structure, governance and operational procedures of the umbrella fund and one compartment compatible with registration requirements in an internationally recognized center; Sharia and Green compliance and monitoring.
Credit enhancement : objective to coordinate with regional finance institutions the setting up of a Green Sukuk Project Initiative (GSPI) in the same spirit as EIB’s Project Bond Initiative that provides credit enhancement to facilitate issuance of Green Sukuks by the GSFF.
Investors’ mobilization: objective to coordinate with arrangers and investors the mobilization of matching seed equity for the GSFF and line up arrangers for the first issuance of a Green Sukuk by the GSFF.
SET A MOBILIZING TARGET DATE
At COP Paris end of year conference
Present an up and running Arab GSFF
THERE CAN BE A BRIGHT FUTURE FOR
GREEN ARAB DEVELOPMENT There is a WAY to do it
Let us have the WILL to Do it
Alhambra Gardens