PPPs FOR INFRASTRUCTURE

DEVELOPMENT & FINANCING IN

MENA REGION

Muneer Ferozie
Regional 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

Limited risk transfer to private sector Substantial risk transfer Full risk transfer
Government control Government control No government control
Risk transferred contractually to private sector

Full Divestiture
Most common
PPP model

Concession Contract

25-30 yrs

Lease
Contract
Management
Contract
Technical
Service 5-15 yrs
Contract
Assistance 3-5 yrs
1-3 yrs Contract Duration
As the contract term increases, an increasing amount of risk can be allocated to the private sector

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PPPs : A WIN-WIN SOLUTION FOR INFRASTRUCTURE DEVELOPMENT

Government Private Sector

Objectives Goals

Alleviation/removal of the Attractive risk weighted

Government’s role returns

Injection of private capital Government guarantees

in public services mitigate certain risks

Increased budgetary PPP Long-terms investment

certainty opportunities

Introducing private sector Upside from operational

efficiencies outperformance

Maintaining oversight to To operate under a clear

ensure quality regulatory framework

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PPPs : A WIN-WIN SOLUTION FOR INFRASTRUCTURE FINANCING

100% Public Financing PPP

Costs Costs

Cost
Overruns

Estimated
Delays

Investment
Costs
Payment to private sector to cover fixed and
variable costs
O&M Cost Overruns
(Incl. debt service and equity return)
O&M Costs

Construction Operation & Maintenance Time Construction Operation & Maintenance Time
Phase Phase Phase Phase

Capital and operating costs are paid for by the public sector,
including costs related to cost overruns and late delivery of the
infrastructure.
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).

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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

Optimal risk allocation  Reduced cost of risk / Increased efficiencies  Better Value For Money

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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)

9
Source: 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

Private participation in infrastructure: No. of projects Private participation in infrastructure: Investment (US$ million)
14 5000
4500
12
4000
10 3500
8 3000
2500
6 2000
4 1500
1000
2
500
0 0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

10 Electricity Gas Transport Water Electricity Gas Transport Water

Source: Private Participation in Infrastructure Database

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
11 will be needed
Source: MEED Projects in HSBC Middle East Infrastructure Guide, published on 28 October 2014
 PPP DEVELOPMENT IN THE MENA REGION

 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.

2008 – Q1 2011

2008 Kuwait passes PPP enabling legislation and creates the Partnerships Technical Bureau

Nov 2009 Mubadala completes $1bn financing for Zayed university

Global Financial Crisis & European Sovereign Debt
Feb 2010 New Cairo Waste Water PPP (Egypt) closes
Crisis
May 2010 Egyptian parliament passes new PPP law

Dec 2010 PPP unit created in Morocco

Feb 2011 $325m Muharraq waste water PPP closes in Bahrain

Feb 2011 Egypt confirms commitment to PPPs

Arab Spring upheaval starts 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

Nov 2011 Sur IPP (Oman), Qurayyah 1&2 IPP (KSA), Shuweihat 3 (UAE) close
Arab Spring political turmoil and post-Arab Spring
Jun 2012 Madinah Airport PPP (KSA) closes
recovery
Nov 2013 Tafila Wind IPP (Jordan) closes

2014 – 2015

Jan 2014 Az-Zour North IWPP Phase 1 (Kuwait) closes

Continuous instability in some countries Aug 2014 Kuwait passes new PPP law to improve PPP enabling legislation
(e.g. ISIS)
Sep 2014 Safi IPP (Morocco) closes
Post-Arab Spring infrastructure investment Sep 2014 Seven solar photovoltaic IPPs (Jordan) close
programs in other countries vs.
Decreasing oil prices & increasing military Aug 2015 Dubai passes PPP enabling legislation
spending
2015 PPPs are on the map to fund GCC’s infrastructure investment programs / KSA is moving forward with airport
12 onwards privatization program / Pakistan launched a privatization program in the power sector
 OVERVIEW OF THE MENA PPP CONTEXT

 Growing interest in and commitment to PPPs in the past 10 years but widely varying progress reflecting
a range of concerns

Strengths Weaknesses

Opportunities Threats

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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

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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
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‐ Willingness of the end-consumers to pay but also realistic tariffs and subsidy levels
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.

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V. PPP Projects in MENA: Structuring Considerations
A. A Case Study: Tafila Wind & The Renewable Energy
Program – Jordan
BACKGROUND

Electricity Sector Renewable Energy

 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
 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

 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

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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

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

22
STRUCTURE OVERVIEW

Equity financing
Investors
Generation license
GOJ
50%
INFRAMED Base tariff
31%
Support Agreement
MASDAR Grid
Grid Sovereign
EPGE Connection Guarantee
NEPCO
Agreement

Lenders Offtaker
IFC NEPCO
EIB (EKF Gurantee) Debt Power
financing Purchase
OFID Agreement

B Lenders (EAB/FMO)
JWPC Land
Land
EPC contract leases GOJ
O&M contract (years 1-10)
Private owners
100%
TWANA

EPC Contractor
Vestas

O&M Provider
23 Vestas
 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 2014

24

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

 Significant growth Traffic Growth (2004-2013)

in passengers in
previous years: Project Kick off
‐ 19% CAGR over 2004-09 and recorded 3.8
million passengers in 2009, a growth of 12%
over 2008.

 Existing landside and airside facilities GR

CA
strained and insufficient to accommodate 19
% 12%

future traffic growth, and resulting in poor 12%

service quality.
75%

 Requests by existing and new airlines were

being refused due to lack of appropriate 3%
7%

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.
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 STRUCTURE OVERVIEW

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)
27
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

Middle East & Africa
Infra Deal of the Year
 First full airport PPP in GCC / second in MENA (after QAIA)

 Full compliance with Equator Principles (E&S)

Best Transport Project
2012, MENA
 Targeting first Green Airport in MENA and only LEED Gold outside
US (outperformed relative to standard certification contractual
obligation)
Best Project
Finance Deal of
 Full demand / volume risk transferred to private sector the Year, 2013

 Traffic growth potential partially released prior to opening of new

Best PPP Deal in
facility thanks to effective slot coordination regime and despite the Middle East
ongoing runway extension works
‐ 4.6MPPA FY12 (up 29% YoY)
‐ 4.7MPPA FY13 (up 2% YoY)
‐ 3.8MPPA (Jan-Aug 2014 = +26.1% YoY)

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 VISUALS – PROGRESSING TOWARDS FINAL DESIGN

Final Design May 2014

Jul 2015
(opening)

Flight Destination Time Status

DEPARTURES
MED 1 All Destination Jul 2015 Completed 6 months ahead of
schedule
29