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PPPs FOR INFRASTRUCTURE DEVELOPMENT & FINANCING IN
MENA REGION
Muneer FerozieRegional Manager and Head IFC - PPPs and Privatization Financial Advisory MENA Region
Webinar – 6 October 2015
TABLE OF CONTENTS
I. The PPP Approach: A Win-Win Solution for Infrastructure Development And Financing
II. PPP Trends in MENA: A Still Unrealized Potential
III. PPP Programs in MENA: Success Factors & Challenges
IV. PPP Projects in MENA: Structuring Considerations
A. A Case Study: Tafila Wind & The Renewable Energy Program – Jordan
B. A Case Study: Madinah Airport – Kingdom of Saudi Arabia
2
I. The PPP Approach: A Win-Win Solution For Infrastructure Development And Financing
OPTIONS FOR PRIVATE SECTOR PARTICIPATION
4
Full Divestiture
Technical Assistance
Service Contract
Management Contract
Lease Contract
Concession Contract
3-5 yrs
5-15 yrs
1-3 yrs
25-30 yrs
Ris
k tr
ansf
erre
d c
on
trac
tual
ly t
o p
riva
te s
ecto
r
As the contract term increases, an increasing amount of risk can be allocated to the private sector
Contract Duration
Limited risk transfer to private sectorGovernment control
Full risk transferNo government control
Substantial risk transferGovernment control
Most common PPP model
PPPs : A WIN-WIN SOLUTION FOR INFRASTRUCTURE DEVELOPMENT
5
Government Objectives
Private Sector Goals
Alleviation/removal of the Government’s role
Injection of private capital in public services
Increased budgetary certainty
Introducing private sector efficiencies
PPP
Maintaining oversight to ensure quality
Attractive risk weighted returns
Government guarantees mitigate certain risks
Long-terms investment opportunities
Upside from operational outperformance
To operate under a clear regulatory framework
PPPs : A WIN-WIN SOLUTION FOR INFRASTRUCTURE FINANCING
6
Capital and operating costs are paid for by the public sector, including costs related to cost overruns and late delivery of the infrastructure.
CostOverruns
ConstructionPhase
Operation & MaintenancePhase
O&M Cost Overruns
Estimated Investmen
t Costs
O&M Costs
100% Public Financing
Dela
ys
Costs
Time
The public sector only pays over the long term once the infrastructure has been delivered and services are being provided according to contractual requirements. The private sector finance the capital costs using equity and debt with return dependent upon the delivery of the services (including quality).
ConstructionPhase
Operation & MaintenancePhase
Payment to private sector to cover fixed and variable costs
(Incl. debt service and equity return)
PPP
Costs
Time
PPPs – KEY BENEFITS
Faster procurement of large infrastructure projects
Respond to infrastructure needs despite budget constraints
Benefit from private sector efficiencies – Whole life” approach to construction/maintenance with optimized allocation of life cycle cost and improved management of operational risks
Transfer risks to private sector – Public sector does not pay until the infrastructure has been delivered: no service / no pay
‐ Incentivise on time and on budget project implementation
‐ Incentivise cost control
‐ Incentivise innovations in design/service delivery and financing structures
7
Optimal risk allocation Reduced cost of risk / Increased efficiencies Better Value For Money
II. PPP Trends in MENA: A Still Unrealized Potential
THE BIG PICTURE: GLOBAL HISTORICAL TRENDS
2013 regarded as the recovery year post-financial crisis and after a low 2012: +51% in PF volume, +30% in PF deal count, and +53% in debt financing
2014 down 7% in PF volume and deal count on 2013 record high but up 4% in debt financing
MENA remains behind in PF volume with record high in 2013 due to big-value Saudi projects (e.g. US$20bn Sadara petrochemical complex financing) and 2014 number again driven by both Saudi Arabia and Turkey (included as part of MENA)
9Source: Dealogic Project Finance Review – Full Year 2014 / Infrastructure Journal Global Project Finance Infrastructure Review – Full Year 2013
THE BIG PICTURE: MENA HISTORICAL TRENDS (GCC EXCLUDED)
GCC excluded, the private sector map for infrastructure development and financing in MENA has been shrinking in the past 10 years
Before 2010, private sector involvement could be spotted in Morocco, Algeria, Tunisia, Egypt, Jordan, Syria and KRG in the power, water, and transportation sectors
Between 2010 and 2013, post-financial crisis and Arab Spring outbreak, the region experienced very low years with:
‐ Egypt slowly disappearing from the map and leaving Jordan (water management contract, As-Samra WWTP Phase II, conventional IPPs, Tafila Wind Farm) and in a lesser extent Morocco (coal and renewable energy IPPs) as the “last men standing”
‐ A growing focus on power to the detriment of the water and transportations sector
While 2014 can be regarded as a record year and a sign of recovery, the volume is still essentially driven by Jordan (Queen Alia International Airport Phase II, Solar IPPs as part of the Renewable Energy Program) and Morocco.(Safi IPP and Agadir desalination plant) and shows limited sector diversification
10
Source: Private Participation in Infrastructure Database
0
2
4
6
8
10
12
14
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Private participation in infrastructure: No. of projects
Electricity Gas Transport Water
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Private participation in infrastructure: Investment (US$ million)
Electricity Gas Transport Water
OUTLOOK FOR INFRASTRUCTURE IN MENA
Total of USD 3.5 trillion-worth of major infrastructure projects currently planned or under construction, covering transportation, power, water, and social infrastructure (housing/hospitals/schools)
Unprecedented investment program:
‐ Required to sustain economic growth, improve living standards, and increase job opportunities for a young and growing population (post-Arab Spring mindset)
‐ Power and transportation infrastructure are at the forefront
‐ Driven by the stable and cash-rich oil producer countries of the GCC (Saudi Arabia, UAE, Qatar, Kuwait)
‐ Effective return / emergence of other markets will depend on political developments and stability (Egypt, Iran, Iraq)
Implementation constraints:
‐ Project management expertise
‐ Construction supply chain capacity
‐ Financing – Governments alone cannot support this level of investment, especially in the current low oil prices environment, and private sector participation will be needed
11
Source: MEED Projects in HSBC Middle East Infrastructure Guide, published on 28 October 2014
PPP DEVELOPMENT IN THE MENA REGION
12
2008 – Q1 2011
Global Financial Crisis & European Sovereign Debt Crisis
2008 Kuwait passes PPP enabling legislation and creates the Partnerships Technical Bureau
Nov 2009 Mubadala completes $1bn financing for Zayed university
Feb 2010 New Cairo Waste Water PPP (Egypt) closes
May 2010 Egyptian parliament passes new PPP law
Dec 2010 PPP unit created in Morocco
Arab Spring upheaval starts
Feb 2011 $325m Muharraq waste water PPP closes in Bahrain
Feb 2011 Egypt confirms commitment to PPPs
Feb 2011 Syria announces intention to launch PPP programme
Feb 2011 Dubai PPP law set to be published
Mar 2011 Lebanon announces PPP programme
Q2 2011 – 2013
Arab Spring political turmoil and post-Arab Spring recovery
Nov 2011 Sur IPP (Oman), Qurayyah 1&2 IPP (KSA), Shuweihat 3 (UAE) close
Jun 2012 Madinah Airport PPP (KSA) closes
Nov 2013 Tafila Wind IPP (Jordan) closes
2014 – 2015
Continuous instability in some countries (e.g. ISIS)
Post-Arab Spring infrastructure investment programs in other countries vs.Decreasing oil prices & increasing military spending
Jan 2014 Az-Zour North IWPP Phase 1 (Kuwait) closes
Aug 2014 Kuwait passes new PPP law to improve PPP enabling legislation
Sep 2014 Safi IPP (Morocco) closes
Sep 2014 Seven solar photovoltaic IPPs (Jordan) close
Aug 2015 Dubai passes PPP enabling legislation
2015 onwards
PPPs are on the map to fund GCC’s infrastructure investment programs / KSA is moving forward with airport privatization program / Pakistan launched a privatization program in the power sector
Stop-and-go? If PPP acceptance goes back to 2008-2010 in the region, it has lost momentum in the midst of Arab Spring and showed progress essentially in the power sector (IPPs). MENA Governments now return to PPPs in a context of sustained infrastructure spending vs. tighter budgets – opportunities still have to materialize.
OVERVIEW OF THE MENA PPP CONTEXT
13
Growing interest in and commitment to PPPs in the past 10 years but widely varying progress reflecting a range of concerns
A number of Successful PPPs in the past 10 years, mostly in the power sector, but also in water, airport and industrial sectors
Substantial demand for all forms of infrastructure driven by growing populations, urbanization and rising expectations, while Governments alone cannot support this level of investment
Significant market interest domestically and internationally with increasing number of regional investors (banks, SWFs, PE funds) and increased interest from DFIs and Donors following the Arab Spring
Capacity and willingness of public stakeholders to deliver what is required to bring a project to the market and close deals
Underdeveloped capital markets and legislative frameworks
Legacy of the 2008-2009 financial crisis (tightened lending requirements)
Increased fiscal constraints due to low oil revenues could incentivize Governments to seek private sector participation
KSA moving forward with airport privatization program
[Ongoing Pakistan privatization program in the power sector (IMF)]
Return of political stability in Egypt?
Iran as a new horizon?
Continuous political instability and security issues in the region (ongoing post-Arab Spring recovery, emergence of ISIS, what’s next?)
For those projects where Government support is required, tighter budgets due to low oil revenues could conversely generate a new spending squeeze as well as renewed questioning around actual Value For Money of PPPs
PPPs in MENA
Strengths Weaknesses
Opportunities Threats
III. PPP Programs in MENA: Challenges & Success Factors
CHALLENGES OF IMPLEMENTING PPP PROGRAMS IN MENA
Political instability – frequent regime changes and related security issues
Slow decision making and inconsistent public policies
Lack of transparency and appetite for negotiated deals
Willingness to pay – Public unwilling to pay commercial rates for infrastructure services
Affordability – Limited ability to pay in some countries (low per capita income)
Over-sized public sectors – Reluctance to address due to unemployment concerns
Capital markets – mostly under-developed and inexperienced (e.g. short debt maturities, limited fixed rate local currency bank financing, domestic institutional sources of infrastructure equity)
Low infrastructure spending – Historic under investment in infrastructure
Institutional, legal and regulatory framework – weak or inexistent
15
KEY SUCCESS FACTORS FOR PPPs
Government Support
‐ Successful implementation requires strong Government support from the outset
Coordination with all governmental stakeholders involved (e.g. Line Ministry, MoF, regulatory bodies, etc.) to obtain timely decisions /
approvals
Subsidy requirements
‐ In the longer run, creation of a dedicated PPP Unit
If initial Government support can emerge around a specific sector, a dedicated PPP unit later helps to centralize the process and provides a
wider perspective on the PPP program of the country
Legislative Framework
‐ Establish a sound institutional, legal, and regulatory framework
Adequate dispute resolution mechanisms have to be in place
Eliminate legal uncertainties and impediments to PPPs to attract foreign investors, e.g. clarity on procurement and approval processes, equal
treatment of foreign investors, no sub-contracting restrictions, property rights on land and assets, repatriation of profits, termination rights, etc.
Eliminate legal uncertainties and impediments to project financing, e.g. possibility to provide sovereign guarantees, to grant and enforce
security interest, etc.
Appropriate Risk Mitigation
‐ Risks allocated to the party that is best able to manage them
Affordability
‐ Willingness of the end-consumers to pay but also realistic tariffs and subsidy levels
16
17
WHY ESTABLISH A PPP LAW?
A PPP Law establishes clear process that would help effective project development and implementation:
‐ PPP project selection criteria - identification and screening;
‐ Project stakeholders, committees, key players and respective approval process;
‐ Prequalification procedures and bidding criteria;
‐ Contract issuance and tendering procedures;
‐ Main provisions of contract including the value of bid bonds and performance bonds.
A PPP Law sends a clear signal to investors that the Government is committed to develop PPPs and provides clarity on:
‐ Main contract clauses allocating rights and responsibilities of the public/private sector;
‐ Types of guarantees and financial support that might be offered; and
‐ Termination procedures.
V. PPP Projects in MENA: Structuring Considerations
A. A Case Study: Tafila Wind & The Renewable Energy Program – Jordan
BACKGROUND
The Jordanian electricity sector is relatively small with installed capacity of 3,366 MW in 2011 and roughly 1,500 MW, or 40% of capacity to be added to keep up with demand which is expected to grow to 4,830 MW by 2020
It is fully unbundled and privatized, with the exception of transmission, and one government owned generation company – 99.5% of Jordan’s generation capacity is thermal
The sector, which is reliant on imported fuel, has lost access to relatively low cost Egyptian gas, and for the foreseeable future will be dependent on expensive diesel and HFO, with implied average generation costs in the range of ~16 US cents/KWh and a marginal cost of ~22 US cents/KWh
Jordan has a state-owned single buyer model, with all generation companies selling to NEPCO and NEPCO selling to the country’s three privatized discos, and to large companies
The average price of electricity purchased by NEPCO from the generation companies is significantly higher compared to the average selling price resulting in significant losses for NEPCO
Electricity Sector
Jordan has strong solar and wind energy resources, which the government is moving actively to develop
In its Master Strategy of Energy Sector in Jordan issued in December 2007 (and updated since), the Government of Jordan (“GoJ”) aims to increase the participation of renewable energy sources in generation, from the current 1% to 7% in 2015 and to 10% in 2020
This reflects both the cost-competitiveness of renewable, and the pressing need for diversification and energy security
At a cost of 12 US cents/kWh for wind and 17 US cents/kWh for solar PV, renewable energy is considerably cheaper than thermal generation and does not require subsidies unlike in many other countries
Renewable Energy
20
THE RENEWABLE ENERGY PROGRAM
Renewable Energy Law of 2010 (“RE Law”) establishes an alternative procurement process to the traditional competitive tenders – private companies with renewable energy projects can make unsolicited or direct proposal submissions to the Ministry of Energy and Mineral Resources (“MEMR”)
Objectives of the direct proposal scheme under the RE Law:
‐ Still provide common rules of procurement with competitive pressure (limited grid capacity)
‐ While acknowledging the commercial ability of developers to choose and optimize their site and technology
‐ And allowing multiple projects to proceed in parallel according to available grid capacity
Qualification of developers via the Round 1 EOI process from may 2011 to April 2012 with:
‐ MOUs signed between 34 developers and the MEMR (15 for Solar PV, 12 for wind, 5 for Solar CSP and 2 for Solar CPV)
‐ Fixed tariffs published in advance to provide a clear and uniform commercial signal to all developers
As a preparation for Round 1 execution phase, MEMR piloted the direct proposal scheme with Tafila Wind directly negotiated deal, whose treatment was broadly consistent with the direct proposal scheme, to the exception of the competitive aspect of the EOI process
21
Source: Project Finance International, The innovative seven sisters, by C. Cantelmi (IFC) and M. Wood (White & Case)
PROJECT OVERVIEW
22
Project Scope Development, construction, operation and maintenance of a 117 MW wind farm and associated facilities located in the governorate of Tafila, in Southern Jordan
Concession Type Build-Own-Operate (“BOO”)
Construction EPC contract (i.e. fixed price) with Vestas for site preparation, supply and installation of 38 3.075 MW V112 turbines, including LDs equivalent to 200 days of revenues
Operation 10-year O&M contract (+ 5-year extension option) with Vestas for operation and maintenance, including an availability warranty
Grid Connection Substation to be built by NEPCO with the wind farm to be connected to the national grid through an existing 132kV line that runs through the site
Offtake 20-year Power Purchase Agreement (“PPA”) with NEPCO at a price of JOD85/MWh (or US$120/MWh), including tariff adjustment mechanism for inflation and exchange rate variation
Offtake on take-or-pay basis, i.e. demand and grid capacity risks are taken by NEPCO
Sovereign guarantee provided by the GoJ to back-stop NEPCO’s payment obligations under the PPA
Investment Incentives Accelerated tax depreciation mechanism
10-year income tax holiday with a tax rate of 3.50% (instead of 14%)
Project Cost Total Project Cost of US$287 million:
‐ EPC fixed price of US$209 million (73% of total Project Cost)
‐ 5% contingencies
Financing Structure Financing structure based on minimum senior debt DSCR of 1.3x a debt-to-equity ratio of 76:23
‐ Equity of US$66 million
‐ Senior Debt: US$206 million
‐ Subordinated debt of US$14.4 million
STRUCTURE OVERVIEW
Investors
INFRAMED
MASDAR
EIB (EKF Gurantee)
IFC
Lenders
OFID
Grid
NEPCO
O&M Provider
Vestas
JWPC Land
GOJ
TWANA
Offtaker
NEPCO
GOJ
100%
Debt financing
EPC contractO&M contract (years 1-10)
EPC Contractor
Vestas
Equity financing
Land leases
Power Purchase Agreement
Grid Connection Agreement
Generation licenseBase tariffSupport Agreement
SovereignGuarantee
50%
31%
Private owners
B Lenders (EAB/FMO)
EPGE
23
OUTCOME
In November 2013, the 117MW Tafila Wind project became Jordan’s first renewable energy IPP and one of a small number that have been privately financed in the region, as well as the first project under the new RE Law to have a PPA signed and to reach financial close:
‐ The project was awarded the Middle East Renewables Deal of the Year 2013
‐ The project commenced operations in September 2015, within budget and on schedule
‐ The project established the viability of the Jordanian renewable energy program and was a live forum and pathfinder to advance bankable documentation that could be replicated with limited adaptation to the direct proposal scheme
‐ The transaction structure and project documents negotiated with the GoJ have served as a template for the subsequent renewable energy projects developed by MEMR as part of the Round 1 EOI process
In March 2014, MEMR signed 12 PPAs with Solar PV developers as part of the Round 1 EOI process: eight 10MW, three 20MW, and one 50MW project
Inspired by the Government’s programmatic approach, a standardized financing program led by IFC was agreed upon by 7 of the Solar PV projects and a uniform set of financing and security documents was drafted – the rationale for this coordinated approach was:
‐ Limited attractiveness of the projects for conventional lenders on a standalone basis (assortment of smaller, local or lesser-known developers, each individually pursuing small projects and lacking project finance experience and relationships)
‐ High transaction costs and long processing periods of conventional project finance lending difficult to sustain for small developers
‐ Significant similarities of all projects allowing a “one-size-fits-all” approach (20-year PPA, Sovereign Guarantee, interconnection and land lease agreements, similar PV technologies, 9 projects located side-by-side)
‐ Financial close was reached in September 201424
Source: Project Finance International, The innovative seven sisters, by C. Cantelmi (IFC) and M. Wood (White & Case)
B. A Case Study: Madinah Airport – Kingdom of Saudi Arabia
BACKGROUND
26
Significant growth in passengers in previous years:
‐ 19% CAGR over 2004-09 and recorded 3.8 million passengers in 2009, a growth of 12% over 2008.
Existing landside and airside facilities strained and insufficient to accommodate future traffic growth, and resulting in poor service quality.
Requests by existing and new airlines were being refused due to lack of appropriate infrastructure.
To address this situation, Saudi Civil Aviation sought private sector participation to refurbish and expand existing facilities, and build a new terminal and operate the airport under a long term concession.
3% 7%
75%
12%
19% CAGR
Traffic Growth (2004-2013)
Project Kick off
12%
STRUCTURE OVERVIEW
27
Concession Type 25-year Build-Transfer-Operate (“BTO”)
Operator Scope Design, Finance, Build, Operate Airside and Landside and collect corresponding revenues. The Investor will be required to finance and construct new facilities in Phase 1 including:
1. New 150,000m2 Passenger Terminal Building to accommodate a capacity of 8 MPPA;
2. Upgrading and extending the existing runway and taxiway to Code 4F;
3. Upgrade of all apron infrastructure;
4. Equipping the runway with a CAT II lighting system.
5. Ancillary facilities (eg: staff accommodation, fire & rescue, meteorology, etc.)
Existing airport facilities to be run / maintained by new operator
Strategic activities by KSA authorities (ATC, customs, immigration, security)
GACA Role Facilitation for key governmental services
Capex Triggers Phase 1 (2011-2014): 8 million passengers (new terminal, apron/taxiway expansion, runway extension)
Phase 2 (2021-2024): As per passenger demand / throughput (terminal / apron / taxiway expansion and potentially a new runway)
Design Specifications Minimum Standards set at RFP stage and providing flexibility for bidders to propose innovative concepts
Charge Structure New Airport Building Charge (“ABC”) on all international passengers, in addition to existing aeronautical charges, set at SAR80 each way (US$21) which provides investor sufficient returns whilst generating revenue for GACA
Multi-annual inflation indexation on ABC & Aeronautical Charges
Credit Enhancement MoF guarantee covering Saudia and termination payments
Other Competition clause; Shareholding stability requirements
Bid Evaluation Technical Minimum Technical Requirements + Technical Evaluation Scores
Financial: Percentage Share of Total Gross Revenues + Upfront Fee ($11m)
OUTCOME
Concession awarded to TAV led consortium late 2011 and closed June 2012 - largest infra project in 2012 regionally
Significant gross revenue share flowing to Government
First full airport PPP in GCC / second in MENA (after QAIA)
Full compliance with Equator Principles (E&S)
Targeting first Green Airport in MENA and only LEED Gold outside US (outperformed relative to standard certification contractual obligation)
Full demand / volume risk transferred to private sector
Traffic growth potential partially released prior to opening of new facility thanks to effective slot coordination regime and despite ongoing runway extension works
‐ 4.6MPPA FY12 (up 29% YoY)
‐ 4.7MPPA FY13 (up 2% YoY)
‐ 3.8MPPA (Jan-Aug 2014 = +26.1% YoY)
28
Best Transport Project 2012, MENA
Middle East & Africa Infra Deal of the Year
Best PPP Deal in the Middle East
Best Project Finance Deal of the Year, 2013
VISUALS – PROGRESSING TOWARDS FINAL DESIGN
29
DEPARTURESFlight Destination Time Status
MED 1 All Destination Jul 2015 Completed 6 months ahead of schedule
Final Design
Jul 2015 (opening)
May 2014