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