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

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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

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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

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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

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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

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Source: MEED Projects in HSBC Middle East Infrastructure Guide, published on 28 October 2014

PPP DEVELOPMENT IN THE MENA REGION

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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

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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

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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

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

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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

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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

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Source: Project Finance International, The innovative seven sisters, by C. Cantelmi (IFC) and M. Wood (White & Case)

PROJECT OVERVIEW

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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

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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

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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

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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)

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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

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DEPARTURESFlight Destination Time Status

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

Final Design

Jul 2015 (opening)

May 2014