Risk mitigation tools for enhancing private infrastructure investment in the MENA region


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Presented at the Annual Meeting of the MENA-OECD Working Group on Investment Policies and Promotion, March 2013

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  • The level of risk in Deauville Partnership countries is still high (Egypt and Jordan: 5, Libya: 7, Morocco and Tunisia: 3) if you take for examplethe Country Risk Classification developed under the OECD Export Credit Arrangement. This classification is produced for the purpose of setting minimum premium rates for transactions supported by OECD Export Credit Agencies which are bound by the OECD Export Credit Arrangement. These numbers are significantly higher than comparable developing and emerging economies and illustrate the risk perception challenge the DP countries are facing.
  • Speaking points: Let us have a look at investment facilitation instruments using the example of a transport project, such as a section of a road network:1.) The project is planned by a group of companies (sponsors) and tendered by public authorities. The sponsors create a project company to raise the financing, construct and operate the roadnetwork for a period agreed with the public authorities. 2.) The sponsors provide own funds to the project company in the form of equity and shareholder loans. The remaining financing is raised by the project company in the form of debt, traditionally in the form of a bank loan. The bank loan could be covered by aninvestmentguarantee. 3.) Instead of using traditional bank lending, the project company could raise the senior debt through project bond issues which are encouraged by the Finance Ministers Communiqué.An international financial institution (through a Project Bond Guarantee Facility) could provide a loan or guarantee to the project company in order to raise the likelihood of timely repayment of principal and interest to bond holders during the lifetime of the bonds. The IFI would therefore help reducing the risk of such bonds and, consequently, increasing their credit rating.  A project bond guarantee facility is currently piloted by the EIB in the framework of the Europe 2020 Project Bond initiative. This type of instrument does not yet exist for the Deauville countries but has been recommended by the ISMED Working Group. 4.) The project company could furthermore benefit from risk-participation or co-financing agreements between International Financial Institutions and ECAs or other blending mechanisms between international financial institutions.
  • Speaking points: Investment guarantees are not yet very widely used in all Deauville partnership countries. Exposure in Egypt and Libya however is high. The under-utilisation of investment guarantees could be linked to a lack of awareness among investors for such instruments, and under some circumstances high premium costs. Background Information:Russian Agency for Export Credit and Investment Insurance (EXIAR) is not included as the Russian Agency has only been created in October 2011. EXIAR’s insurance products are currently being designed and developed, are expected to come in 2012 .
  • Speaking points:The latest communiqué by the Deauville Partnership Finance Ministers (April 20, 2012) gives a good overview over instruments from countries and institutions in the region that facilitate investment and access to finance for the private sector in the Deauville countries. The Finance Ministers acknowledge the variety of existing instruments such as loans, grants, budget support and technical assistance. The communiqué also references: bilateral and multilateral guarantee tools and export credit instruments dedicated to the private sector and the multilateral investment framework, e.g. International Investment Agreements which improve legal investment security Next to existing instruments, which should be maintained, the Finance ministers encourage to explore new avenues of facilitating investment, for example through innovative mechanisms such as risk-sharing instruments, project bonds, guarantees or concessional credit loans.
  • Risk mitigation tools for enhancing private infrastructure investment in the MENA region

    1. 1. Risk mitigation tools for enhancing private infrastructure investment in the MENA region The Investment Security in the Mediterranean (ISMED) Support Programme Implemented by the MENA-OECD Investment Programme (with funding from the European Union)
    2. 2. MENA Regional Context Rising demand for infrastructure as private investment declines • Demand for infrastructure in the MENA region has been rising due to longstanding factors : population growth, rapid urbanization and economic expansion… … and this has been accentuated by the Arab Awakening and resulting pressure for higher living standards. • The financial crisis of 2008/09, sovereign debt concerns in Europe and the US and the political uncertainty in the MENA region contribute to a volatile risk environment for investment.
    3. 3. MENA Regional Context Rising demand for infrastructure as private investment declines • As a result, lending appetite amongst commercial banks is diminishing : • Large EU‐based banks are shrinking their balance sheets by US$ 2.6 trillion between September 2011 and December 2013 (IMF) • Negative impact on credit supply estimated between -1.7% to - 4.4% • Shrinking tenors and a rise in the cost of bank funding is the consequence, making private infrastructure investment increasingly scarce.
    4. 4. MENA Regional Context Risk classification of Deauville Partnership countries remains high Source : OECD (2012), Country Risk Classifications of the Participants to the Arrangement on Officially Supported Export Credits, OECD, Paris, as of 30/03/2012. The Country Risk Classification Method classifies countries into eight risk categories (0-7), with 0 being the lowest and 7 being the highest risk category. 0 1 2 3 4 5 6 7 Deauville Partnership CountriesColombia, Chile, Mexico, Peru BRIC G8 Country Risk Classification used by Export Credit Agencies (on a scale from 0 - 7)
    5. 5. MENA Regional Context Risk classification by OECD ECAs of MENA countries is still high Source : OECD (2010), Country Risk Classifications of the Participants to the Arrangement on Officially Supported Export Credits, OECD, Paris, as of 22/10/2010 0 1 2 3 4 5 6 7 Country risk classification for selected MENA countries
    6. 6. MENA Regional Context Demand for guarantee instruments is on the rise 0 5 10 15 20 25 1995 - 2000 2001 - 2005 2006 - 2010 2011 - … Number of projects supported by MIGA in the MENA region Source : MIGA project database • Attracting private investment involves creating improved legal and regulatory conditions – and highlighting guarantee instruments that cover residual risk factors. • Sound legal and regulatory conditions include : Strong commercial law, Intellectual property rights, Transparent licensing processes, Anti-corruption provisions, Adherence to international treaties, Access to arbitration… • Since 2011, there has been an upsurge in demand for products offered by MIGA and other investment guarantee agencies in a context of extreme risk aversion MIGA supported 20 projects throughout the MENA region (gross exposure USD 846.4m) in 2011-2012, compared with only 4 projects in 2005-2010 (gross exposure of USD 441.6m) ; The EBRD mandate was extended in 2012 to cover the southern and eastern Mediterranean (SEMED) region, with the goal to improve financing of the private sector via investments in loans and equities, while providing support and expertise through policy dialogue, capacity building and other forms of technical assistance.
    7. 7. 7 Co-financing and Risk participation agreements Loan, grants, g uarantees, tech nical assistance Credit enhancement Project Company International and local lenders and equity providers Export Credit Agency / Investment Guarantee Agency Financing Guarantees Debt capital markets Investors Issuance of project bonds Contracting Authority / Host country Multilateral Investment Framework (e.g. IIAs) Country risk evaluation Financing Tendering Project Bond Guarantee Facility International Financial Institutions A number of risk mitigation instruments are already at the disposal of investors
    8. 8. 8 Investment guarantees are increasingly used in Deauville Partnership countries 0.027 3.921 0.035 0.203 1.450 1.401 6.386 1.241 1.701 1.784 0 1 2 3 4 5 6 Tunisia Egypt Morocco Jordan Libya Exposure Investment Guarantees FDI net inflow * OPIC, PwC, COFACE, SACE, EDC, ECDG, JBICSource: OECD Exposure of G8 Investment Guaranty Agencies* / Total FDI Net Inflow all countries, 2010 (USD billion)
    9. 9. 9 The DP Finance Ministers’ Meeting Communiqué from 20 April 2012… The Deauville Partnership Financial Pillar recommends to expand existing instruments “…acknowledges existing financial instruments”: • loan, grants, budget support • multilateral investment frameworks • technical assistance • bilateral and multilateral guarantee tools and export credit instruments dedicated to the private sector “…welcomes support to explore new avenues”: • risk-sharing instruments • further guarantee mechanisms • project bonds • concessional credit loans • further technical assistance
    10. 10. The Investment Security in the Mediterranean (ISMED) Support Programme Investment Security in the Southern Mediterranean Two pillars of EU support (1/2) The ISMED Support Programme is implemented by the MENA-OECD Investment Programme with funding by the European Union. • Promoting infrastructure investment in the Southern Mediterranean through : ► Policy advice for governments on designing sustained policy frameworks for reducing the legal and regulatory risks of private investment in specific infrastructure projects ► Public-Private dialogue to help ensure that project-specific recommendations lead to broader policy reforms ► Information-sharing for private investors on available guarantee and financing instruments (via a guarantee database and quarterly newsletter)
    11. 11. ISMED Risk and Cost Sharing Toolkit of the Neighbourhood Investment Facility Investment Security in the Southern Mediterranean Two pillars of EU support (2/2) • The ISMED Risk and Cost Sharing Toolkit will provide targeted measures like support to risk-sharing mechanisms (making funds available to help private investors by reducing their exposure to risk) and guarantee schemes • €200 million in EU grants expected by the Neighbourhood Investment Facility (NIF) will underpin the toolkit, which could leverage at least €2bn from European public institutions and private investors for infrastructure projects in the Neighbourhood region
    12. 12. The ISMED Support Programme A three-pillar approach to enhancing private invesment security Policy advice for government • Assist the enhancement of legal and regulatory frameworks for selected sectors / subsectors (e.g. renewable energy) Project-specific assessments • Recommend improvements to the legal and regulatory framework of selected projects and support connection to innovative financing tools Guarantee database • Provide information to private investors on available guarantee instruments and innovative risk mitigation tools (e.g. political risk insurance) The ISMED Support Programme promotes a three-pillar approach to enhancing private investment in infrastructure projects
    13. 13. Project Life Cycle Intervention stages of the ISMED Support Programme The Investment Security in the Mediterranean (ISMED) Support Programme Policy Assistance Project identification Pre-Feasibility Pre- Qualification Provide upstream capacity support to the host government Select infrastructure projects facing legal, regulatory and guarantee related obstacles Advise on optimal legal, regulatory and guarantee -related framework for the project ISMED ISMED ISMED Tendering (RFP)
    14. 14. Prospects for short-term ISMED assistance Sample of eligible projects Recycle municipal solid waste (MSW) into energy in the form of electricity or heat, through novel incineration technologies Construction of pilot ports along Nile River to develop passenger and cargo river transport facilities in Egypt Objective : Provide a sustainable source of energy as well as an alternative way to landfills for waste disposal Objective : Reduce pressure on land transport by creating hubs to river transport from Alexandria to Upper Egypt Ministry of Transport & Egyptian River Transport Authority SHORT-TERM ASSISTANCE Nile River TransportSolid waste-to-energy Ministry of Environment & Environmental Affairs Agency (EEAA) Renewable energy infrastructure Study of optimal mix of renewable energy infrastructure incentives in the Kingdom of Jordan, based on a regional context study Objective : Provide capacity- building and technical assistance on environmental regulatory issues through training workshops with line ministries Jordanian Ministry of the Environment Legal, financial and fiscal incentives Regulatory and institutional overlap Legal and regulatory challenges
    15. 15. KEY CONTACTS: Mr. Alexander BÖHMER Head, MENA-OECD Investment Programme Alexander.Boehmer@oecd.org Mr. Carl DAWSON ISMED Support Programme Coordinator MENA-OECD Investment Programme Carl.Dawson@oecd.org For general enquiries: mena.investment@oecd.org www.oecd.org/mena/investment With the financial assistance of the European Union