Excellencies, colleagues, Ladies and Gentlemen,
1. Let me welcome you all to the launch of the Arab Financing Facility for Infrastructure – a partnership between the World Bank Group and the Islamic Development Bank. I would like to thank H.E. Minister Jaffar Hassan for joining us, as well as our colleagues from different Arab League countries for being here. We are meeting during a time of historic momentum when the people have set in motion demands for change and when citizens are also seeking openness, rights, jobs and quality services.
2. If we look back briefly-- economic growth in region gained momentum over the last decade but the global financial crisis—and its associated ripple effects—resulted in the disruption of economic activity. As a result this region—which has the highest unemployment rate—experienced further job losses. So, as we think about how to address some of the deeply rooted issues in the region, we must look to diversification of sources of economic growth from oil to non-oil based growth. It will also be critical in coming years to move from capital to labor intensive growth and to also look to a diversification of energy sources (away from exclusive reliance on hydrocarbon resources) to guard against the high degree of volatility and vulnerability that characterized the region
3. Re-strategizing at national levels is inevitable to embark on a higher and more inclusive economic growth path, but sustainability of this growth will depend on how the region works collectively to share the resources, develop infrastructure connectivity and enhance labor and capital mobility. Together this will help improve competitiveness of the region and foster regional and global economic integration. At this stage however the region faces infrastructure constraints and challenges that can be effectively addressed if a concerted effort is made to promote innovative modalities and approaches, at the regional level, including public private partnership with effective support of multilateral institutions.
4. Over recent decades MENA has made good progress in developing infrastructure (1). There have been impressive achievements in oil producing countries, particularly the smaller ones and those with small populations. While a number of oil producing nations have managed to build newer infrastructure, shortages in the provision of infrastructure are significant and bound to magnify as the population grows from around 350 million or so today to above half a billion by 2025.
5. Generally, MENA has underinvested in infrastructure. Estimates indicate investments in infrastructure are around 5% of GDP in comparison to China that invested close to 15% of GDP between 1995 and 2006. China and the rest of ASEAN further accelerated investments in infrastructure after the 1997/98 financial crisis, and more recently the economic stimulus packages, in the aftermath of the 2008 global crisis, focused on further boosting investments in infrastructure to enhance economic recovery.
6. In contrast the trends in MENA have been subdued. MENA has traditionally relied on public sector for infrastructure development but it has not been able to meet growing requirements either because of fiscal constraints, political complications and uncertainties or lack of an enabling environment. Concerns relating to potential loss of control from public sector has deterred private investment in infrastructure that has been low among others because of lack of coherent policy framework. Since 2006 there has been a decline in private investment from $25 billion to $17 billion in 2009 with non-GCC belt experiencing a sharper fall. This is a major setback. Recovery was on its way in this area but recent rounds of disruption are likely to have a toll on investment flows in the sector, unless this is actively addressed.
7. The Region has to gear itself to meet a range of challenges. Aside from increasing economic needs of a growing population,, the region also has to consider how to address the urban infrastructure deficit. This issue is likely to get more pressing as urban population is set to rise to 70% of the total population by 2015—higher than the ratio for all developing countries which is about 54%. Half of MENA’s population is under severe water stress and the average availability of water per person in the region is 1200 m3/person per year, compared to the global average of of 7,000 m3/person/year. Also, the installed generation capacity is estimated to be 20 percent below the aggregate demand for electricity across countries in MENA.
8. Given the strong linkage of infrastructure spending and economic growth, MENA region would need to invest at least 10% of GDP in infrastructure per year, i.e. more than $100 billion across infrastructure of which $30bn a year is required in the power sector alone. In the region, investing more and maximizing the effectiveness of this investment is key. This can be achieved by, among others, recognizing growing gaps and inequities at regional level as well as policy level and also recognizing the necessity for more innovative infrastructure financing.
9. While infrastructure shortages do exist in the region, a good infrastructure platform (e.g. of extensive roads, airports and sea transport and in some instances, sizable rail network) has developed over the last decade or so, that can yield higher dividends by adding better networks that foster regional connectivity. In addition, MENA has been a leader in the application of nontraditional water technologies and waste water use. Renewable energy potential if exploited across region would bring a range of benefits including alternate revenue sources from trading of energy generated and mitigate climatic consequences otherwise quite severe.
10. Coordinated and swifter development of national and regional infrastructure would: (i) promote job opportunities, (ii) enhance physical connectivity in the region, (iii) promote intra-regional trade and investment; and (iv) augment international competitiveness and productivity through lower production and trade costs. Combination of these developments will help narrow the development gap among MENA economies as the region would have access to regional production networks and supply chains and regional market.
11. Accelerating infrastructure development and its integration is however hampered by (i) region’s geographical diversity and varying resource capacities, (ii) political tensions and uncertainties regarding regional infrastructure costs and benefits across participating countries; (iii) complexities of synchronization of national and sub-regional infrastructure planning and financing; and (iv) lack of innovative financing.
12. Recognizing this, as part of the Arab World Initiative (AWI), a first ever Arab Financing Facility for Infrastructure (AFFI) has been created. The Facility is a partnership between the World Bank, the International Finance Corporation and the Islamic Development Bank. It will offer a single window for tapping long term competitive funding and equity for public, private and PPP projects.
13. Drawing from lessons learnt and its rich global and regional experience, the WBG is positioning AFFI to:
- Better leverage the public and private sector’s role in infrastructure development. Neither the public nor the private sector can alone fully meet the access, quality, financing, and policy gaps for infrastructure. Deploying a range of PPP arrangements will offer greater flexibility and options, and appropriately structured transactions will help leverage private and public financing in an efficient way. Success of PPP transactions depends on effective policy, legal, regulatory and institutional frameworks – an area where the Bank is providing extensive technical support to encourage transparent and competitive contracting processes, enforceability of contracts and regulatory frameworks, among others.
- Help develop complex PPP transactions: AFFI can provide the necessary financial and legal skills to support and develop proper practices, policies and documentation for PPP projects, and guidance material including standard contracts, manuals and processes for identifying and developing PPPs.
- In addition to working on PPP frameworks, facilitate and leverage financing for PPP transactions through direct financing or blending financing structures, through specially designed Funds/facilities/or dedicated Infrastructure facilities.
- Offer credit enhancement structures, which are critical for the success of infrastructure financing. These could take form of innovative financing structures to meet requirements of complex long-term projects with government support (e.g. supplemental subsidies, minimum revenue guarantees, payment obligations under off-take agreements etc.) and effective risk mitigation mechanisms such as issuance of guarantees backed by Government’s for political, credit, regulatory and other types of risks.
- Improve creditworthiness of projects in order to increase investor confidence competition for projects, and reduce the cost of debt and equity. To quote a few examples, a project specific partial risk guarantee offered the required credit enhancement a Jordan IPP project. On a country basis, a contingent loan transaction was structured to improve credit worthiness of Indonesia Government’s sponsored Guarantee Fund. Also to mitigate foreign exchange risk the Bank can help mobilize long term local currency financing that offers local investors avenue to participate in PPP projects or support currency and interest rate swap products etc.. It is also possible to leverage carbon credits to improve cash flows or to raise concessional financing from Clean Technology Funds for projects designed to reduce carbon emissions.
14. Over the last few months, work has been underway to ensure identification, development, prioritization, and preparation of “bankable” or commercially-viable national and cross border projects. To supplement and complement this work, the Bank has launched significant economic and sector work including Maghreb and Mashreq studies to examine the potential of developing transport and trade facilitation as well as energy integration and diversification opportunities which will be eligible for financing under AFFI.
15. What is most complex is how to ensure an effective coordination mechanism among multiple stakeholders --central government, local government, the private sector, and civil society. There are multiple examples of these in different regions. For instance, the Latin American region has benefited from: the Initiative for the Integration of Regional South American Infrastructure (IIRSA) that includes dozen countries (Argentina, Bolivia, Brazil, Chile, Columbia, Ecuador, Guyana, Paraguay, Peru, Surinam, Uruguay and Venezuela) and Plan Puebla Panama (PLPP) body of Central American countries (Belize, Columbia Costa Rica, El Salvador, Guatemela, Honduras, Mexico, Nicaragua and Panama). The Inter-American Development Bank (IDB) has promoted these institutions and regional projects. In the European Union, the European Commission (EC) created the Trans-European Networks (TENs) under Maastricht Treaty of 1992 to deal primarily with infrastructure network development. By mandate EU helps establish guidelines for identifying projects of common interest; implementing measures necessary for network interoperability; supporting projects of common interest; contributing financing through a Fund; and promoting coordination among member countries. Europe has set up three additional types of infrastructure networks: the Trans European Transport Networks, the Trans-European Energy Network, and the Trans-European Telecommunications Network. At some point more deliberative forums may be required to explore what effective institutional mechanism would be c acceptable to the region.
16. In conclusion, it has to be recognized that regional cooperation and integration processes can only succeed if the countries have strong interest (and ownership)to cooperate. An external agency can serve to facilitate the process as an honest broker, offer technical expertise and global best practices and innovative finance that play a fundamental role in the success of a regional cooperation mandate. To ensure proper ownership, it makes sense to align national and regional strategies for infrastructure development to the extent required for cross border connectivity. Based on experience gained it has to be recognized that regional cooperation and integration, be it in EU, ASEAN or other regional grouping context is a slow and gradual process and setting realistic targets, building trust and confidence and patience pays off to develop win-win solutions.
(1) The connection rate to the electricity grid by households is around 90% or more; access to acceptable water and sanitation services is above 70 percent. The penetration of mobile telephony has reached the high level witnessed in industrialized countries. Paved roads represent between 60 to 70 percent of the total road network.