ppp egypt - moazzen mekan

8/8/2019 PPP Egypt - Moazzen Mekan

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PPP Egypt - Moazzen Mekan

Speaker key

IN IntroductionIV Interviewer MM Moazzen Mekan

IN We are now interviewing Moazzen Mekan who’s from the InternationalFinance Corporation. The interview is taking place as part of a series for the PPPInvestment Summit, Egypt.

IV May 2010 saw the PPP law ratification in Egypt. There’s been a lot of talk inthe market about how this is going to improve things, and I think one of the major concerns in Egypt – correct me if I’m wrong – is transparency as far as PPP isconcerned. Has this law made a difference in terms of a visible difference in howthings work?

MM The PPP law is definitely needed in the country. I think the government passing that, the parliament passing the PPP law has been the right thing in myopinion. I think there had been constraints in the past of doing PPP transactions under the existing procurement laws. The legal framework actually had two provisions to doany long term contract for the delivery of services; either it was under the

procurement law, or 89 as it’s called commonly, which was not designed for longterm relationships. It was designed for the government to buy one-off goods andservices and it was woefully inadequate to do long term contracting. The second

possibility was to do it under specific sector laws. So while the PPP law didn’t exist,there were some sector laws under which you could have done things. So for example,in electricity, IPP for example, they had their own sector law that the transactionscould have gone through.

What the new PPP law does is it actually unifies the regime to a large extent althoughit does not cancel the sector laws. What it does is it addresses the shortcomings of theexisting procurement law. To give you a specific example, the existing procurement

law, 89, for example, requires the bidders to put up a performance bond for the present value which tends to be about 5% of the value of the transaction. Now, that probably made sense when you were buying services but it doesn’t really make muchsense to ask for a 5% performance bond for a long term contract value. And if somebody has to pay that upfront then of course it becomes very cost prohibitive.What needs to be done now is for the PPP unit, under the Ministry of Finance, tocome under the Executive Regulations in order to implement the law. Myunderstanding is that the PPP unit is working on those things at the moment and oncethat is done, then we will see how we will use the law. Currently in its current form, itis waiting for those regulations to be in place.

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IV Do you have any idea how long that will take? Has the government given anindication, let’s say?

MM The law itself says that the Ministry of Finance, where the PPP unit stays, will

do these things in three months. That’s what the law says if you read it. Clearly ithasn’t been done. When I talked to the PPP unit I have been told that they’re workingon it, that it’s going to be out in a few months. I don’t know the exact date when thesethings are going to come out.

IV At least it’s something that we can keep in consideration for people. Comingto your session, you’ll be talking about the factors for PPPs to become a significantinstrument for infrastructure development. I wouldn’t want you to go into too muchdetail because that’s already where it comes in but could you tell us, in summary,about one particular factor?

MM Well, the most important factor is the deal flow. I think the deal flow is verylittle at the moment and that is related to the capacity within the ministry, lineministries, particularly where the projects originate to undertake the PPP projects, to

prepare the PPP projects, and I think that is going to be one big factor restricting themultiplication of PPP projects in the country. If you want me to detail that, let me giveyou a particular example.

Let’s take any ministry. If you’re looking for any projects coming out in the transportarea, whether it’s in roads, tunnels, underground, rail, they’re all going to come outfrom the Ministry of Transport. And of course what it really comes down to is, doesthe Ministry of Transport have the actual capacity both in terms of understanding thePublic Private Partnerships and also understanding the risk allocation between the

private and public sector and the needs of the private sector in order to prepare these particular projects? My emphasis is always on the preparation of the project. Thegovernment believes that by merely advertising the transaction that the government isinterested to do the transaction, somehow the private sector investors will comerunning, and it never happens actually.

I think the investors are still very concerned about the risk allocation between the public and private sectors. They would like to see the projects well prepared so whenthe projects hit the market they can understand what is happening in terms of, they

can understand the project itself, what is required of them and therefore you cangenerate earlier interest that the investors can go back to their boards and request budgetary allocations to prepare the projects. I think that’s one issue which is going to be really important moving forward; building the capacity within the line ministries toundertake the projects.

IV Thank you. What do you feel needs to change for PPPs to really make animpact in terms of the economic benefits; let’s say, for example, Egypt particularlywhere the Summit is being held? Obviously the law has been passed but as youmentioned there is some apprehension in the private sector. So what needs to be

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changed for them to actually have a clear dialogue with the government to actuallymake this happen?

MM The government is serious about these things but its facing constraints and theconstraint is actually the preparation of the project. That’s the constraint. It doesn’t

have the people. Because the moment you start doing PPP, you have to look at the project in a different mindset. You have to think about the delivery of the servicesitself from the private sector rather than the product. So, previously... Let’s take anexample of a hospital. The government used to bid out hospitals saying I need a 200

bed hospital for whatever purpose. Going forward, I think essentially we would like tosee a situation where the government doesn’t say that; it essentially says I have a

proposition in this particular area; they can be subject to many diseases, they need to be fixed, so what I really want to do is look at the services which can be provided tothe population which maintains their health. It’s a different way of looking at it. Thefirst one is the input approach, the other one is an output approach. And this is wherethe trick lies, how the mindset of the people needs to be developed to start thinking inthese terms .And then of course everything else I said earlier on about the risk allocation, that comes in.

The moment you start thinking about the service provisions, the private sector, privateinvestment then you say okay, what kind of risk is the private sector willing to takeand what type of risks are they not willing to take? For example, if the governmentcomes and says could you please give me a price of something ten years from now,

just to give an example, equipment replacement, x-ray machine, give me your pricewhen you are going to replace it ten years from now, that’s a very difficult thing to do

because the private sector cannot predict what is going to be the inflationary effect bythen, what is going to happen to the exchange rate. I can probably give you a number in the real terms but it would be very difficult for me to make a guess on theobsolescence of the technology, on the inflation factors, the foreign exchange factors.So I think this is where the trick is, how you structure the transaction, and then you

provide certain risks to the private sector to bear and the public sector to bear.

Now, coming back to the question which you said, what’s the benefit? For a countryas large as Egypt, or MENA in general but Egypt particularly, you have a couple of things which are happening. You know that there is a tremendous deficit of infrastructure in the country and the social infrastructure that goes with it which iseducation and health primarily. Therefore the government needs to do something very

quickly. There is not much money in any government’s budget that I know of, even inSaudi which sits on a pile of money, to provide all the services which are required. SoI think that realisation has sunk in. I have gone to many governments and nearly everygovernment at the moment is talking about Public Private Partnerships. They are atdifferent stages of development in their thinking. What needs to be done, as I said, isincrease the deal flow, increase replicability and reduce the timing to undertake the

projects. I think this is what needs to be done. We need to create model documents;we need to create model projects which then can be replicated.

So let’s take an example of another country which is not from the region which isgoing to be India and the Indian transport program, particularly when it comes to the

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roads. They have come up with standardised documentation, put them on the web,they go to the market very, very early on, they study the project, they do thefeasibility study, they hit the market and then they say here are the documents whichhave all been agreed and negotiated and accepted by the investors in the past. This iswhat we are going to offer, boom. 12 months, the deal is done.

If every transaction takes time and every transaction is stuck in the decision making of the government then the process becomes extremely slow. And I’m a strong believer that the money is less of an issue, and evidence of that is the infrastructure fundswhich are in the region. There are so many of them. Hardly any of these funds have

been exhausted simply because there are not enough projects. And I think this iswhere the Egyptian government, particularly because of the size, and other countriesin the region need to focus on. Start with something small, something which is doable,go to the market and demonstrate that the government is serious about it and that it’sgoing to maintain the transparency of the process, it will maintain the equity of the

process between the investors and that it is serious to make sure that the risks betweenthe public sector and the private sector are balanced. And that will lead to morereplicability of the project and this is where I see that you really will see a benefitcoming out of this whole approach. The one-off project probably wouldn’t have thekind of impact we’re looking to achieve.

IV Yes, I agree. It’s a very valid point. You mentioned about Egypt and then youmentioned also about a bigger economy in terms of the capital that is present, which isSaudi Arabia. You can also talk about Abu Dhabi with its sovereign wealth. Keepingthat in mind, what about foreign capital? Let’s take Egypt for example; do they needto look at local partnerships and the local private sector as opposed to a foreign

private sector? A company as large as ORASCOM, for example. It’s a massiveholding company, world known and Egyptian, and you already have other largecompanies and holding firms in Egypt itself. Is it a requirement, is it necessary or is it

just a nice to have?

MM First of all, just to comment on ORASCOM, ORASCOM is hardly Egyptian.It’s an international firm. And I say that in all seriousness because when they look atthe projects, they don’t choose the projects just simply because they’re based in Egyptany longer. They look at where the returns are, where the risk/reward is right for themand they will go there. This comes with being international. I think the answer to your question is two parts; one is the short term and one is the long term.

In the short term, I think it will vary from country to country and dependent on theability of the local market to support the transaction. It is possible that some of thesmaller transactions in Egypt – let’s take Egypt as an example – can be financedlocally. But there isn’t enough depth in the market to finance large transactions. So if it is a 200, $300 million transaction, five or six of them, probably the local market canhandle those things. The moment you go with the bigger ones, like IPP, 1,500, 2,000megawatt IPPs, you are essentially looking for foreign financing on these projects. Soin the short term I certainly think this is going to be the approach.

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In the longer term, of course what my advice would be is to focus on developing thecapital markets, local capital markets in order to correct the mismatch in the financingof the project as well as the revenues of the project because the revenues, to a largeextent, for these projects are in local currency. If you have a foreign currency debt or equity on these things then there is always going to be a mismatch. So while in the

short term you probably don’t have any other option, in the longer term, and I amtalking about long term here, really long term which is about ten years or so, thegovernment needs to start looking at the development of the capital market.

IV And I’m sure you mean this not just for Egypt but for the greater Middle Eastconsidering not all the economies are on an equal footing.

MM It probably should happen in all countries. Of course you will always havecountries which are very small and therefore – Lebanon, for example – developing thelocal capital market there is probably not an easy thing to do. On the larger ones, it’s alot easier. And then you have the GCC countries which are, to a large extent,dollarized so I think it varies from country to country. But what I am trying to leaddown to is that you need to mobilize the local asset managers, the pension funds andso forth who can actually put money in the infrastructure projects which actuallymatch with their liquidity requirements and their liability requirements also whichtend to be in the long term.

IV Could you tell us more about how the IFC is involved in terms of PPP in thisregion, in particular Egypt?

MM Sure. IFC, as part of the Royal Bank Group, has a mandate to help our member countries, which tend to be all the countries actually in the MENA regionnow, and improve their economies and focus on the private sector development. Thisis our mandate. And our mandate is also focusing more and more on the countrieswhich need us more than the countries which can attract the capital and advice fromsomewhere else. So our focus is primarily out of GCC. We do have work in GCC. Weare doing something in Saudi Arabia at the moment because Saudi Arabia also is amember of the Royal Bank Group and IFC but this is something which we do on aminority basis rather than as an objective. So our objective is going to be helping outthe countries which are poor and they need to develop.

We are engaged quite a bit in Egypt. Actually we started, became a partner to the

Egyptian government from the onset of the PPP program and the creation of the PPPunit under the Ministry of Finance. And we’ve been involved with a number of transactions with the view of setting some model transactions and then allow thegovernment then to replicate on its own or through some other advisors. So weinitially ended up getting into areas as wide as education and health on one side,

potable water, waste water, transport and many other areas. So that’s what we did inEgypt.

Currently we are involved with Egypt of course; we are involved with Morocco wherewe are looking at a solar project which is a very interesting solar project. We are alsolooking at a desalinated based irrigation project. In Syria we are looking at an IPP. In

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Jordan we did a very interesting project in the past. We are looking at the transitissues and the transit projects at the moment. In Saudi we are looking at theconcessioning of the Medina airport which is probably going to be the firstconcessioning of any airport in the GCC region. In Pakistan, which in our definitionof the world comes under MENA but probably not in the rest of the world, we are

looking at the grain silos and see how we can use better warehousing mechanisms tocome out with a, a warehousing receipt mechanism in a commodities market to helpout the farmers.

The prominent thing which came in all these projects that I have mentioned had thefollowing: one, they are new and innovative projects in difficult markets; second,where IFC is focusing on developing model projects which then can be replicated bythe government. So what we are trying to do is do the difficult part to start out thePPP program with one, two or three projects and then lead the market out to others tofollow up and then let the sources go. That’s what we’re doing.

IV This event, the PPP Investment Summit in Egypt, what kind of advice wouldyou give to the market in terms of this event’s importance? Obviously there’s a lot

being covered. We have the IFC, we have Instrata Capital; we have Gulf Capital, verysenior people from across the region and the Ministry of Investment attending and

presenting. The whole purpose of this is to educate the market in terms of, as youmentioned, also the importance of ratifying the importance of mobilising people whenit comes to PPPs. What advice would you give to the market in terms of why theyshould consider this event important?

MM Well, for a number of reasons this event is important. Egypt is one hugemarket for infrastructure. It has a population; it has the largest population in theregion which requires all kinds of services. The second reason is the government iscommitted to bring about the services and it is committed to bring out the services tothe citizens through the private sector. I think this is very important. And thatcommitment is manifested by the fact that it has actually gone ahead and is one of thefew countries in the MENA regions actually who have come out with a dedicated PPPlaw and it is now enshrining that law into a very important course in moving and

pushing, I would even use that word, the line ministry to start focusing oninfrastructure projects using PPP, new techniques. So I think this is, if privateinvestors are looking to get into the infrastructure projects from the true perspective of developers rather than the construction firms then of course Egypt is one of the

markets which is at the vanguard at this moment.

IV Okay, Mr Mekan, it was a pleasure talking to you. I look forward to actuallymeeting you in Cairo when I get there and to hear your session. I hope to welcomeyou personally. If you have anything more you’d like to share with the market, pleaselet me know and we will facilitate it.

MM Sure. Okay bye.

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ppp egypt - moazzen mekan

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