Financing Sustainable Development in the Arab Regioncss.escwa.org.lb/SDPD/3572/1-Financing.pdf ·...

Expert report for the

Arab Sustainable Development Report

Financing Sustainable Development

in the Arab Region

Expert report for the



he Arab Region

2015



Distr.

LIMITED

E/ESCWA/SDPD/2015/Technical Paper.2

17 April 2015

ORIGINAL: ENGLISH

ECONOMIC AND SOCIAL COMMISSION FOR WESTERN ASIA (ESCWA)

FINANCING SUSTAINABLE DEVELOPMENT

IN THE ARAB REGION

United Nations

New York, 2015

_____________________________

Note: This document has been reproduced in the form in which it was received, without formal editing. The opinions expressed are

those of the authors and do not necessarily reflect the views of ESCWA.

15-00234

iii

Acknowledgement

This report draws extensively on the consultancy work conducted by Ms. Sherine El-Sharkawy for the United Nations Economic and Social Commission for Western Asia (ESCWA). It was enriched by the comments and suggestions of a group of peer reviewers. In particular, valuable review and feedback were provided by Mr. Khaled Hussein, Economic Advisor, ESCWA, Ms. Monia Braham, Economic Affairs Officer, ESCWA, and Ms. Mylene Francois, Consultant at ESCWA.

iv

Contents

1. Executive Summary ........................................................................................................................ 1

2. Introduction ..................................................................................................................................... 3

3. Assessment of Financing Needs, Sources, Gaps and Opportunities in the Arab region ................. 5

4. Leveraging Opportunities in the Arab Region for Financing the SDGs Post-2015 Agenda ........ 31

5. Recommendations for Financing Sustainable Development in Arab Countries ........................... 60

6. Conclusion .................................................................................................................................... 66

Appendix I- Sustainable Development Goals ....................................................................................... 67

Appendix II- Key Infrastructure Indicators in Arab Countries ............................................................. 68

Appendix III- PPP Success Stories ....................................................................................................... 73

1. Executive Summary Financing needs for sustainable development are large. Some estimates measure it to be in the vicinity US$ 2.5 trillion annually1. It is generally believed that the current pattern of financing and investment is not effective to achieve sustainable development goals, yet that the efficient mobilization of global savings could prove sufficient to meet these needs2. To finance sustainable development, there is a general consensus on the importance of tackling all issues and challenges impeding the full utilization of all financing sources, including public, private, domestic and international resources and considering them as complementary rather than substitutes. An integrated approach encompassing different financing options complemented by regional and international support to enhance the use of these resources is essential.

A toolkit of policy recommendations covering regulatory reform, strong governance, and improved domestic, regional and international resource mobilization in addition to reliance on blended sources of finance has been put forward in this paper. Global partnership is needed to support the implementation of these policies, yet respecting national peculiarities is crucial to ensure success. Within this context, this paper aims to discuss various measures that Arab countries could use to bridge the funding gap, and that are available although they have not yet been used in an optimal manner.

First, an estimate of the financing gap for the Arab countries is provided. This paper measures the financing gap in Arab countries between US$ 80 to US$ 85 billion per annum in 2015 and 2016. The estimate is calculated using balance of payment forecasts of the International Monetary Fund (IMF) and the Economist Intelligence Unit (EIU). These forecasts do not necessarily take into account additional and changed spending patterns geared to sustainable development, nor possible synergies between various sustainable development goals. This may lead to a different estimate for the financing gap. As a result, this estimate is purely indicative and should be considered as a baseline for the finance needed to achieve sustainable development. A more accurate figure can only be achieved based on a country specific prioritization of sustainable development goals (SDGs) and the identification of possible inter-linkages between these goals.

With regards financing, all possible financing sources, private and public, domestic and international sources need to be considered. On one hand, public finance is mostly used as a short-term quick fix solution, and many Arab countries have increasingly resorted to public domestic debt, thereby crowding out the private sector which is a key development partner. A need exists to measure the efficacy of use of public debt and to explore the possibility of resorting to other means of finance which do not impose a burden on future generations. Official development assistance (ODA) has also been decreasing in the world but Arab countries are the ones most impacted. A one-sided framework for development assistance is not sustainable and mutually beneficial programs need to be developed, not only between international donors and Arab countries but also through Intra-Arab development assistance. Besides, tax reform is a cornerstone in attaining sustainable development as it represents a main source of funds, and no technical assistance will help so long as the political will is missing and the interest groups are dominating the scene.

On the other hand, private funds play an important role in development. Foreign direct investment is only attractive in the medium and long term in countries with transparent and accountable governance frameworks and where Rule of Law is applied; otherwise, it becomes a short term measure to exploit temporary opportunities, in opposition to sustainability goals. With the exception of few countries, net foreign direct investment (inflows minus outflows) is negative and efforts to enhance Arab countries’ competitiveness in the global arena are needed. Additionally, most Arab countries fare badly with

1 World Investment Report 2014, Investing in the SDGs: An Action Plan. UNCTAD, 2014. To note is that such estimates vary widely, for example, the estimates for the investment in infrastructure alone including water, agriculture, telecoms, power, transport, buildings and industrial and forestry sectors are estimated at US$ 5-US$ 7 trillion per annum globally as per the Report of the Intergovernmental Committee of Experts on Sustainable Development Financing, UN, 2014. 2 Report of the Intergovernmental Committee of Experts on Sustainable Development Financing, United Nations, August 2014.

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respect to portfolio investment and savings mobilization in comparison to world standards. Furthermore, the channelling of domestic savings through the capital market and the banking sector to support growth is also below optimal. Capacity-building and regulatory reform in these areas is therefore needed in several Arab Countries.

Blended means of finance include public-private partnerships (PPP) and Green finance (if supported by government off-take or guarantee). They are a means of cooperation between the government and the private sector to help fund various public goods which may not have been attractive otherwise in the eyes of private investors. Political support, institutional and regulatory reform, capacity-building, public acceptance, and appropriate financial structures need to be present for such complex products to be efficient. Nevertheless, there are success stories across various Arab countries in implementing PPP projects, which proves that with the relevant preparation and support, blended sources can prove useful. Green bonds and sukuk have not yet released their full potential, but they provide an opportunity to be tapped into given their feature of Islamic offering and their “green”, ethical, climate-friendly orientation.

In summary, a concerted effort has to be exerted to successfully attain SDGs in the Arab countries. Guided by national priorities, regional and international cooperation will enhance and speed up the process of reform and result in synergies to the benefit of all.

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2. Introduction Despite growing and continuous international attempts to promote development during the last decade, a serious gap in per capita income still persists, creating an urgent need to review and assess the efficacy of existing development frameworks and the effectiveness of their implementation. Within this backdrop, Arab countries are no exception. Arab countries experience a continuous gap in GDP per capita in comparison to the World and high income countries as per the below chart.

Source: World Development Indicators

Most importantly, and despite the apparent comparability of Arab per capita income with upper middle income countries, Arab countries exhibit a huge discrepancy among each other in resources and per capita income leading to varying progress and levels of development. High income countries within the Arab region -namely the members of the Gulf Cooperation Council- are doing much better than other Arab countries, especially the least developed counties (LDCs) which are lagging behind as per the below chart. In general, it is important to be mindful that most aggregate indicators for the Arab world misleadingly appear to be in line with those of upper middle income countries.

0

5000

10000

15000

20000

25000

30000

35000

2005 2006 2007 2008 2009 2010 2011 2012 2013

GDP Per Capita

(constant 2005 US$)

Arab World Upper Middle Income High Income World

4


Particularly for upper middle, lower middle income and least developed Arab countries, sustainable development is a challenging task, especially considering the fact that it is targeting several areas concurrently, including poverty, education, training, job creation, innovation, equitable rights, etc. Several Arab countries find themselves trapped below poverty levels, with only a few Arab countries displaying a positive financing position. While the concept of sustainable development may look like an enormous task to tackle, there seems to be no other option: challenges need to be faced, barriers broken down and constraints identified in order to be dealt with. When discussing development, financing becomes a main concern. How much needs to be mobilized and towards which sectors? What is the best and most effective way to mobilize the existing funds? There is a general awareness that the current modus operandi has, in most cases, not yielded the expected long-hanging fruits. Not only that, existing policies may have even deterred development and led to harmful effects on the environment. The United Nations continuously supports the process of assessing the existing financing needs, evaluating current policy frameworks and instruments, and considering alternatives with the objective of an effective sustainable development financing strategy aiming at maximizing the use of the existing resources and identifying innovative ways of finance to achieve sustainable development goals. Such a mission is pursued through interactive multi-stakeholder involvement including member countries, intergovernmental organizations, non-governmental organizations, business sector organizations, etc., in order to safeguard specific conditions relevant to each country and achieve ownership at the national level. In the age of globalization, there is a common understanding of the interrelationships between all countries - even if not within geographical proximity - and the global paralyzing impact of underdeveloped societies. International collaboration is currently underway to support national endeavours and encourage regional partnerships to re-orient development and re-invent new methods of attaining it, methods that can finally yield to a sustainable world long hoped for and dreamt of.

0

5000

10000

15000

20000

25000

30000

2005 2006 2007 2008 2009 2010 2011 2012 2013

GDP Per Capita in Arab Countries according to Income

Group

(constant 2005 US $)

High Income - Arab Upper Middle Income - Arab

Lower Middle Income - Arab Least Developed Countries - Arab

Arab World

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3. Assessment of Financing Needs, Sources, Gaps and Opportunities in the Arab region

a. The Financing Gap

The quantification of the financing needs for sustainable development is an extremely difficult task, being mindful of the inter-linkages and mutual impact between various sustainable development goals as outlined by the Working Group on Sustainable Development Goals tasked by the Rio+20. The list of Sustainable Development Goals is available in Appendix I. The sustainable development goals encompass economic, social and environmental goals. Each goal stated above has its sub-goals or objectives which yield integrated improvements within each goal. To illustrate, Goal 1 which aims to end poverty in all its forms includes sub-goals of eradicating extreme poverty by 2030 as defined by people earning less than US$ 1.25 a day, reducing at least by half those living in poverty in all its dimensions in accordance with national definitions, providing equal rights for men and women with regards to economic resources, attaining the resilience of the poor to vulnerable situations, etc. Not only is each goal multi-faceted, sometimes with challenging, as in difficult to quantify, indicators (as in the case of “promotion of a culture of peace and non-violence, global citizenship, and appreciation of cultural diversity and of culture’s contribution to sustainable development”3), yet many indicators show a cross-cutting impact with several goals. For example, if poverty levels are measured by per capita income below a certain standard (included under Goal 1), the decrease in poverty levels would have an impact on reducing hunger, improving food security and nutrition (included under Goal 2), helping to attain healthy lives (included under Goal 3), etc.

By the same token, Goal 8, which relates to full and productive employment and decent work for all, interweaves with poverty levels and education standards and quality (Goal 4). As a result, the measurement of the financing needs for sustainable development without falling in the trap of double-counting becomes an extremely complex endeavour. Whereas this provides an interesting problematic in academia opening up further areas of research, resorting to a less precise proxy in order to focus on actual steps and initiate an action plan towards sustainability becomes more imperative, especially bearing in mind the current pressing needs faced by many Arab countries.

Previous literature calculated the “financing gap” as the difference between available financing sources at a point in time and the resources needed to achieve a specific growth level4. To estimate the required investment, several models have been developed including the Harrod and Domar Model (as outlined in the 1930s and 1940s and further developed by Chenery and Strout in the 1960s) and the Balance of Payments Constrained Growth Model developed by Thirlwall and Hussain (1982)5. Both models are dependent on estimating an arbitrary target growth rate. The table below identifies some previous financing gap estimation attempts for Africa, the Arab countries, the MENA region, Islamic countries and least developed countries. As demonstrated below, because of the different goals, geographical coverage and methodologies, estimates for the financing gap vary.

3 Indeed, an accepted attribute in the Millennium Development Goals is targeting “effectiveness” and “quality” in various, the definition of which is often debatable and sometimes non-existent. 4 Assessing the Financing Gap in the Arab Region, ESCWA, New York, 2013 5 Foreign Aid, Conditionality and Ghost of the Financing Gap: A Forgotten Aspect of the AID Debate, Thilak Ranaweera, World Bank, April 2003

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Author/

Institution

Source Region Date Objective Gap

(billion US$)

World Bank Global economic prospects

Africa 2009 Cover fiscal deficit 71.8

IMF Implications of the global crisis for low-income countries

Africa 2009 Cover balance of payment deficits

51.4

M. N. Hussain/AfDB

Exorcism of the Ghost: Alternative to measure the financing gap

Africa 2000 Reach 7 percent growth in one year (1999)

152

ECON G20 Paper Africa 2009 To reach pre-crisis growth

50

ECON G20 Paper Africa 2009 To reach 7 percent growth

117

ECON GDI Input Africa 2009 Growth to reach MDGs

52

ADB/GCI GCI Paper Africa 2009 Close infrastructure gap

90

Arab Organization for Agricultural Development

LAS Social and Economic Summit 2009 (Kuwait)

Arab 2010 Arab Food Gap 27

World Bank, IsDB

Arab Financing Facility for Infrastructure

Arab 2011 Infrastructure to sustain growth

75-100 per year

World Bank, IsDB

Arab Financing Facility for Infrastructure

Arab 2011 Meet electricity demand

30 per year

United Arab Emirates

2013 Annual Meeting of Arab Financial Institutions

Arab 2013 Closing existing food gap

41 in 2010

ESCWA Paper Arab 2013 Assessing the Financing Gap (2009) using a 7% target growth rate

US$ 54.5-US$ 57.9 billion

IsDB IsDB Occasional Paper No. 16

IsDB 40 countries

2011 Poverty eradication 23.6 percent of GDP


MENA-8 2011 Poverty eradication 24.8 percent of GDP


ISDB 40 countries

2011 Poverty eradication 140-420 per year


MENA-8 2011 Poverty eradication 3.3-9.8 per year

United Nations

Prototype Global Sustainable Development Report

All least developed countries

2014 Sustainable Development

50-75 per year

Source: Assessing the Financing Gap in the Arab Region, ESCWA, New York, 2013; Prototype Global

Sustainable Development Report, 2014

Additionally, the World Bank in its “Global Development Finance 2009: Analysis and Outlook” applied the following methodology in its estimation of the financing gap. First, developing countries’ external financing needs are estimated. This is defined as the current account balance plus scheduled

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principal payments on private debt. This estimate is compared to a forecast of private capital flows, which includes new loans on private debt, net equity flows6, in addition to net unidentified capital outflows7. The difference between the calculated financing needs and the projected private capital flows is the financing gap8. This methodology was used in this paper given the fact that identifying the target growth rate needed to achieve SDGs is a challenging and debatable task.

Two scenarios were developed to estimate the financing gap. Scenario I depends on the latest forecasts provided by the World Economic Outlook Database and published by the International Monetary Fund in October 2014. It includes forecasts for the current account balance and gross domestic product for most Arab countries including least developed countries (except Palestine and Syria). Scenario II is based on the Economist Intelligence Unit forecasts as of December 2014 and January 2015, hence more accurately reflecting the impact of the recent drop in oil prices9. For the least developed countries not covered by the Economist Intelligence Unit, the IMF World Economic Outlook figures were used. The results should remain consistent considering the fact that the drop in oil prices is not expected to have a major effect on least developed countries since they are not rich in oil resources.

Since there is no forecast of principal repayments and disbursements of private debt, the historical average starting 2009 till 201310 was used. Additionally, net equity flows including portfolio and net foreign direct investment were projected as a ratio to gross domestic product based on the average for the historical period. The following table shows the estimated financing gap for the Arab countries in 2015 and 2016 for scenarios I and II.

6 In many cases, net equity flows are negative representing net outflows. 7 Unidentified capital outflows represent a balancing entry equal to a. the difference between the current account deficit and all identified capital account transactions and b. the change in reserves. A portion of this item represents private capital transactions not declared to the authorities while the other portion represents inconsistencies in the balance of payments reporting. This item was not forecasted and was assumed to be zero. 8 Global Development Finance 2009: Analysis and Outlook, 2009. 9 The IMF forecast in October 2014 was based on average oil price of US$ 99.4/barrel in 2015 and US$ 97.3/barrel in 2016. In comparison, the Economist Intelligence Unit forecast was based on an average oil price of US$ 88/barrel in 2015 and US $85.2/barrel in 2016 for country reports published during December 2014. This estimate was further decreased to an average of US $ 80.3/barrel and US $ 84/barrel in both respective years for country reports issued during January 2015. 10 In some cases, the last available year was 2012.

Current account

Principal

repayments on

private debt

Net equity flows

Disbursements

of private debt

Unidentified

outflows

Exte

rna

l Fin

an

cin

g N

ee

d

Priv

ate

So

urce

s o

f Fin

an

ce

The Financing Gap =

External Financing Need – Private Sources of Finance

8

11 Mainly using IMF forecasts dated October 2014 for current account balance and GDP except for Syria where EIU forecasts were used due to the unavailability of forecasts by the IMF. Principal repayments and disbursements of private debt were estimated in light of the historical average levels. Net investment and portfolio flows were estimated as per the historical average to GDP. 12 Mainly using Economist Intelligence Unit (EIU) forecasts dated December 2014 and January 2015 for current account balance and GDP except for Comoros, Djibouti, Mauritania, Sudan, South Sudan and Yemen forecasts where IMF forecasts were used due to the unavailability of forecasts by EIU. Principal repayments and disbursements of private debt and net private investment and portfolio flows are estimated in a similar manner to Scenario I.

Classifi-

cation Country

Scenario I11

(US$ bn)

Scenario II12

(US$ bn)

Financing

Gap/Surplus

2015

Financing

Gap/Surplus

2016

Financing

Gap/Surplus

2015

Financing

Gap/Surplus

2016

UMI Algeria -9.98 -12.12 -15.88 -17.50

HI Bahrain 2.86 2.57 1.35 0.77

LDC Comoros -0.11 -0.12 -0.11 -0.12

LDC Djibouti -0.76 -0.92 -0.76 -0.92

LMI Egypt -17.57 -21.72 -11.45 -13.64

UMI Iraq 3.14 0.40 0.66 3.18

UMI Jordan -6.34 -5.06 -4.60 -5.26

HI Kuwait 82.28 82.51 59.27 56.10

UMI Lebanon -9.91 -10.45 -12.67 -12.49

UMI Libya -12.45 -5.08 -2.49 -3.05

LDC Mauritania -3.14 -2.76 -3.14 -2.76

LMI Morocco -9.09 -8.92 -6.80 -7.30

HI Oman 5.23 3.05 -0.05 0.65

LMI Palestine NA NA NA NA

HI Qatar 58.73 50.82 17.07 17.58

HI Saudi Arabia 73.73 63.70 -5.73 0.26

LDC Somalia NA NA NA NA

LDC South Sudan 0.12 0.35 0.12 0.35

LDC Sudan -6.22 -6.29 -6.22 -6.29

LMI Syria -4.51 -4.20 -4.51 -4.20

UMI Tunisia -4.79 -4.39 -5.70 -5.74

HI UAE 51.79 50.17 28.36 19.27

LDC Yemen -0.44 -0.64 -0.44 -0.64

Scenario I Scenario II

Financing

Gap 2015

Financing

Gap 2016

Financing

Gap 2015

Financing

Gap 2016

Number of Arab Countries with Financing Gap

13 13 15 13

Total Financing Gap (US$ bn) 85.32 82.69

82.69 80.19 79.92

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The above table shows that from 13 to 15 Arab countries are expected to have a financing deficit for 2015 and 2016 and is estimated to range between US$ 80 billion and US$ 85 billion annually. The second scenario which is based on more updated projections of oil prices results in a lower financing gap, given that the funding gap is mostly experienced by Arab countries which are net oil importers and accordingly stand to benefit from a drop in oil prices.

Countries were classified according to High Income (HI), Upper Middle Income (UMI), Lower Middle Income (LMI) and Least Developed Countries (LDC) in accordance with the OECD segregation. As expected, a financing surplus is found in high income countries. However, the fact that upper middle income countries reflect a higher financing gap when compared to lower middle income countries followed by least developed countries is contrary to the common belief that least developed countries should exhibit the highest needs. The reason behind that is that the forecasting processes do not necessarily put sustainable development goals at the forefront of the countries’ spending priorities. Instead, the dominant existing modus operandi which ignores sustainable development is expected to continue. This is an important limitation of this analysis. Several key indicators listed in Appendix II confirm that least developed countries require special attention, as per the UN General Assembly Synthesis report from December 201413. The determination of the additional anticipated growth in needed finance -above the current forecasts- is to be done on a country specific non-arbitrary basis, depending on prioritized sustainable development goals to arrive at a more accurate estimate. Another limitation of the above findings is the unavailability of forecast data on Somalia and Palestine. Both factors are expected to yield a higher financing gap estimate for Arab countries.

There are other factors which may lead to a lower estimate for the financing gap. As discussed above, inter-linkages between the various sectors may result in potential synergies, since the improvement

13 The road to dignity by 2030: ending poverty, transforming all lives and protecting the planet, UN General Assembly, Sixty-ninth session, 4 December 2014

(44.00)

6.00

56.00

106.00

156.00

206.00

256.00

HI UMI LMI LDC

Financing Gap/Surplus

According to Income Group

2015 and 2016 - Scenario I

(US$ bn)

2015 2016

(44.00)

6.00

56.00

106.00

156.00

206.00

256.00

HI UMI LMI LDC

Financing Gap/Surplus

According to Income Group

2015 and 2016 - Scenario II

(US$ bn)

2015 2016

accomplished in one goal may generate positive outcomes in other goals, hence saving would be dedicated towards the achievementput in place by each country to arrive at a more concise figure through interidentification of the various synergiespurely indicative, providing an idea about the magnitude of the finance needed

b. Key Target Sectors

Bearing in mind the above mentioned caveats in relation to quantitative estimates of investment requirements including the interweaving of the various Millennium Dtheir dependence on arbitrary growth targets, the Intergovernmental Committee of Experts on Sustainable Development Financing provided the following diagram to quantify the magnitude of priority sectors on a global level, where investment should be channelled.

Orders of Magnitude of Investment Requirements

Source: Report of the Intergovernmental Committee of Experts on Sustainable Development

Financing, United Nations, A/69/315, 15 August 2014

In the above chart, it is clear thatenergy efficiency and renewable energy)Sustainable Development Report sanitation; and energy are the top three priority areas

• The funding gap in the Arab countries is estimated to reach US$80 billion to US$ 85 billion annually in 2015 and 2016, observed in the upper middle, lower middle income and least developed Arab countries. It is expected that the actual financing gap will be higher if sustainable development goals are taken into consideration in the accounting exercise.

Estimate for the Financing Gap

10

M D G S

Infra s truc ture (n on e ne rg y)

L a n d a nd a g ricu lture

E ne rg y e ff ic i e ncy

R e ne w a ble e n e rg y

U nive rs a l a c ce s s to e ne rg y

C l im a te ch a ng e a da pta tion

C l im a te c ha ng e m itig a tion

B iod ive rs ity

Fo re s ts

O c e a ns

10

accomplished in one goal may generate positive outcomes in other goals, hence saving dedicated towards the achievement of each goal isolated from one another

put in place by each country to arrive at a more concise figure through inter-sectoral dialogue and synergies between the different goals. To conclude, the above estimate is

, providing an idea about the magnitude of the finance needed.

Bearing in mind the above mentioned caveats in relation to quantitative estimates of investment including the interweaving of the various Millennium Development Goals (MDGs) and

arbitrary growth targets, the Intergovernmental Committee of Experts on Sustainable Development Financing provided the following diagram to quantify the magnitude of priority sectors on a global level, where investment should be channelled.

Orders of Magnitude of Investment Requirements for Various Sectors

Report of the Intergovernmental Committee of Experts on Sustainable Development

Financing, United Nations, A/69/315, 15 August 2014; x-axis is in logarithmic scale.

, it is clear that infrastructure, climate change mitigation and energyenergy efficiency and renewable energy) are priority investment sectors. Additionally,

eport indicates that food security and sustainable agricultureand energy are the top three priority areas identified by governments for the Sustainab

The funding gap in the Arab countries is estimated to reach US$80 billion to US$ 85 billion annually in 2015 and 2016, observed in the upper middle, lower middle income and least developed Arab countries. It is expected that the actual financing gap will be higher if sustainable development goals are taken into consideration in the accounting exercise.

Estimate for the Financing Gap

10 100 1000

A n n u a l in v e st m e n t re q u ire m e n t s (b illio n U S $ p e r y e a r )

accomplished in one goal may generate positive outcomes in other goals, hence saving resources that isolated from one another. Efforts should be

sectoral dialogue and To conclude, the above estimate is

Bearing in mind the above mentioned caveats in relation to quantitative estimates of investment evelopment Goals (MDGs) and

arbitrary growth targets, the Intergovernmental Committee of Experts on Sustainable Development Financing provided the following diagram to quantify the order of magnitude of priority sectors on a global level, where investment should be channelled.

Various Sectors

Report of the Intergovernmental Committee of Experts on Sustainable Development

axis is in logarithmic scale.

energy (with a focus on Additionally, the Prototype

indicates that food security and sustainable agriculture; water and overnments for the Sustainable

The funding gap in the Arab countries is estimated to reach US$80 billion to US$ 85 billion annually in 2015 and 2016, observed in the upper middle, lower middle income and least developed Arab countries. It is expected that the actual financing gap will be higher if sustainable development goals are taken into

10000

11

Development Goals in December 201214. This section focuses on infrastructure (roads, rail, ports, airports, water and telecommunications) and energy as key target sectors for investment, with a special focus on renewable energy given its importance for climate change mitigation. Appendix II shows in more detail key infrastructure indicators for Arab countries. A snapshot of these indicators is provided in the below chart.


Index for logistics performance which indicates the quality of trade and transport related infrastructure

was converted to a percentage score for ease of comparison

From the data available, it is confirmed that the Arab countries have similar – if not more grave – sector priorities as the ones identified globally. Data on sanitation access does not capture the quality of sanitation facilities in the Arab world and hence the fact that sanitation access is higher in Arab countries than the world average may be misleading. Furthermore, the urban-rural differential may be another source of bias. It is also worth noting that the average population access to sanitation in Arab least developed countries is about 30% in comparison to 64% in the world. By the same token, access to electricity in least developed Arab countries amounts to 30% of population in comparison to 83% in the world. Charts in Appendix II highlight this large gap prevailing in Arab least developed countries in different sectors including infrastructure, water and energy in comparison to the world and Arab standards.

The impact of infrastructure investment on economic growth cannot be underestimated, not only through its increase of the production capacity of the economy but also through raising productivity. Studies point out that increasing infrastructure investment in transport, telecommunication and utilities by 10% will lead to more output in the long term, implying an overall economic return of 17%.15 Growth in Central Africa and Latin America stands to increase by 2%-2.2% annually if their investment in infrastructure is matched to that of India, Pakistan, Turkey or Bulgaria16. Furthermore, it was found that an increase in infrastructure investment results in additional direct and indirect jobs.17

14 Prototype Global Sustainable Development Report, United Nations, July 2014 15 Infrastructure Investing: It Matters. Swiss Re and Institute of Infrastructure Finance, 2014 16 Infrastructure productivity: How to save $ 1 trillion a year, McKinsey Global Institute, McKinsey Infrastructure Practice, January 2013 17 McKinsey estimates that an increase in investment directed to infrastructure by 1% of GDP would result in additional 3.4 million direct and indirect jobs in India, 1.5 million in the USA, 1.3 million in Brazil and 0.7 million in Indonesia. Infrastructure productivity: How to save $ 1 trillion a year, McKinsey Global Institute, McKinsey Infrastructure Practice, January 2013

50 55 60 65 70 75 80 85 90 95 100

Access to Water Resources 2012 (% of Population)

Access to Sanitation Facilities 2012 (% of Population)

Access to Electricity 2010 (% of Population)

Logistics performance index 2014

Infrastructure Quality, Water and Electricity Access

(Arab World vs. Other Income Groups)

Arab World Upper Middle Income - World High Income - World World

12

While historically infrastructure investment has been impacted in periods of rising deficits, the above findings prove the importance of prioritizing this sector given its trickle down effects.

McKinsey estimates the infrastructure gap globally in two ways. The first method is based on the fact that historically, 3.8 percent of GDP were spent globally on infrastructure. The second approach is based on the ratio of the physical infrastructure stock to GDP which is measured to reflect an average asset to GDP ratio of 70 percent18. Given that there is little information on the financial value of infrastructure assets in the Arab world, and bearing in mind the limitation that infrastructure capacity in developing countries lags behind that of developed countries and that this estimate does not possibly consider the additional cost of climate change adaptation and mitigation, it is estimated that Arab countries would need to spend US$ 110 billion to US$ 150 billion each year during the coming 5 years19.

Investment in energy efficiency and renewable energy are second after infrastructure in terms of importance. The International Energy Agency Outlook for 2014 provides the following annual yearly investment estimates for Africa and the Middle East.

Source: IEA World Energy Investment Outlook, 2014

Source: IEA World Energy Investment Outlook, 2014

To avoid double counting, transport is excluded from the total spending on energy. This leads to an average annual spending of US $ 120 billion in Africa and US $105 billion in the Middle East during 2014-2020. No separate estimate for Arab countries is available; however, since many of the Arab countries fall within the Africa and Middle East category, it is not unsafe to assume that the needs of Arab countries would fall within this range.

18 Infrastructure productivity: How to save $ 1 trillion a year, McKinsey Global Institute, McKinsey Infrastructure Practice, January 2013 19 GDP forecasts of the IMF and the Economist Intelligence Unit were used.

Africa Average Annual Investments (billion, year-2012 US dollars)

2000-2013 2014-2020 2021-25 2026-30 2031-35

Energy Supply 94 138 137 147 171

Of which

Transport 17 20 14 13 14

Of which

Renewables 2 7 10 14 19

Energy Efficiency

5 8 13 17

Of which

Transport 2 5 8 11

Middle East Average Annual Investments (billion, year-2012 US dollars)

2000-2013 2014-2020 2021-25 2026-30 2031-35

Energy Supply 107 124 144 155 172

Of which

Transport 38 21 25 29 38

Of which

Renewables 1 4 6 10 14

Energy Efficiency

3 7 10 13

Of which

Transport 2 4 7 10

c. Means of Finance

Sources of funding to finance thedomestically and internationallypublic and private sources. Public sources of finance mainly include governmentthrough treasury bills and bonds) and international debt constitutand international organizations as well the sources of public funding. portfolio investment, remittances, and finance products combine both public and private sources and include other government equity/quasi-equity/risk mitigation) which are provided by

i. Public Debt

Public debt is a key source to fund the budget of public debt to GDP such as Excluding least developed countries, Iraq and Palestine, average public debt to GDP is 31.2% in 2014. This is to be compared with 26.4% for developing countries as an aggregateto GDP, the public debt has mostly been

20 Report of the Intergovernmental Committee of Experts on Sustainable Development Financing, 15 August 2014

• Financing the gap will either rely on the main public sources (government debt, official development assistance (ODA) and taxes) as well as additional private sources (foreign direct investment (FDI), portfolio investment, remittances and domestic savings). Blended sources include a hybrid of both public and private means of finance.

Means of Finance

0%

20%

40%

60%

80%

100%

120%

140%

160%

2010 2011

13

the gap include additional public and private sources bothly; furthermore, some funding sources are designed as

Public sources of finance mainly include governmentthrough treasury bills and bonds) and international debt constituted of loans from foreign governments and international organizations as well as official development assistance. Tax revenues

Private sources of finance mainly rely on foreign direct investmentremittances, and domestic savings. Hybrid sources sometimes called blend

public and private sources and include public-private partnerships and equity/debt funding as well as government guarantees (as a form of

provided by public institutions in order to leverage private finance.

Public debt is a key source to fund the budget deficit. Certain Arab countries have reached high levels Lebanon (145%), Egypt (95%), Jordan (86%) a

ountries, Iraq and Palestine, average public debt to GDP is 31.2% in 2014. o be compared with 26.4% for developing countries as an aggregate20. Furthermore, as a ratio

to GDP, the public debt has mostly been increasing as per the below table.

Report of the Intergovernmental Committee of Experts on Sustainable Development Financing, 15 August 2014

Financing the gap will either rely on the main public sources (government debt, official development assistance (ODA) and taxes) as well as additional private sources (foreign direct investment (FDI), portfolio investment, remittances and domestic savings). Blended sources include a hybrid of both public and private means of finance.

Means of Finance

2011 2012 2013 2014e

Public Debt/GDP

LebanonEgyptJordanMorroccoBahrainSyriaTunisiaUAEQatarSaudi ArabiaAlgeriaKuwaitOmanLibya

public and private sources both sourced funding sources are designed as a hybrid of

Public sources of finance mainly include government domestic debt (e.g. loans from foreign governments

Tax revenues are among foreign direct investment,

Hybrid sources sometimes called blended private partnerships and guarantees (as a form of

institutions in order to leverage private finance.

. Certain Arab countries have reached high levels Lebanon (145%), Egypt (95%), Jordan (86%) and Morocco (77%).

ountries, Iraq and Palestine, average public debt to GDP is 31.2% in 2014. . Furthermore, as a ratio

Report of the Intergovernmental Committee of Experts on Sustainable Development Financing, 15 August 2014

Financing the gap will either rely on the main public sources (government debt, official development assistance (ODA) and taxes) as well as additional private sources (foreign direct investment (FDI), portfolio investment, remittances and domestic savings). Blended sources include a hybrid of both public and

LebanonEgyptJordanMorroccoBahrain

Tunisia

Saudi ArabiaAlgeriaKuwaitOman

14

Public Debt (% of GDP)

Country 2010 2011 2012 2013 2014e

Algeria 9.20% 8.40% 8.10% 7.10% 7.5%

Bahrain- 45.90% 48.80% 53.60% 57.80% 66.50%

Comoros NA NA NA NA NA

Djibouti NA NA NA NA NA

Egypt 82.20% 84.30% 85.80% 91.60% 94.50%

Iraq NA NA NA NA NA

Jordan 61.10% 65.40% 75.50% 80.10% 85.60%

Kuwait 11.70% 8.20% 6.20% 6% 6.80%

Lebanon 140.70% 133.00% 133.40% 139.90% 145.20%

Libya 5% 10.40% 3.90% 3.30% 2.70%

Mauritania NA NA NA NA NA

Morocco 61.00% 64.80% 71.20% 73.10% 76.60%

Oman 5.00% 4.70% 4.30% 4.40% 4.80%

Palestine NA NA NA NA NA

Qatar 30.10% 34.80% 33.30% 32.20% 30.10%

Saudi Arabia 14.10% 11.20% 10.10% 9.90% 9.60%

Somalia NA NA NA NA NA

Sudan NA NA NA NA NA

Syria 22.70% 37.40% 54% 54.70% 57.30%

Tunisia 40.40% 44.40% 44.50% 46.20% 49.60%

UAE 53.20% 45.10% 44.70% 44.50% 44.20%

Yemen NA NA NA NA NA

Source: The Economist Intelligence Unit Reports

Total public debt also includes external debt which is owned by the government to foreign entities. External debt owed by Arab countries to foreign entities as a percentage of GDP has been decreasing on average from 31.5% in 2010 to 22.18% in 201421 reflecting a trend of resorting to domestic finance over foreign funding. External debt is usually considered as a second alternative by governments as it creates a foreign exchange liability and exposure.

Source: The Economist Intelligence Unit Reports

21 Calculated from The Economist Intelligence Unit Data.

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

External Debt/GDPLebanon

Qatar

Jordan

Bahrain

Tunisia

UAE

The maturity of public debt, especially domestic debt, is may be directed to long term needsfood. Accordingly, governments rely onburden on future generations arising fromoptimize its use paralleled by efforts to recommended.

Barriers, Constraints and Challenges

The pressure on solutions to finance their deficit.

Opportunities and Action Steps

Put a plan in place and identify alternative sources of financing and address the barriers of their growth in order to gradually replace public debt to to safe and acceptable levels.

Responsibility National environment


The lack of enduring effects on the areas where public debt is channelled.


• Develop KPIs to monitor the best allocation of public debt in order to achieve sustainable development rather than channel debt for short“quick fix” solutions, which should limited time period.

• Sustainable developmfinancing strategies.

• There should be a national discussion on the priority sectors in order to achieve inclusion and obtain people buy

Responsibility National assistance


The debt service constitutes a burden on future generations.


International community to consider debt subject/sovereign debt restructuring and link itrelation to the mobilization of other finance sources and progress in the development of KPIs related to the best and optimaiming at its reduction.

Responsibility International community

• There is increasing reliance on domestic public debt as a quick resort to finance government deficits of Arab countries. The ratio of public debt to GDP is higher than the world average. This measure should be used sparingly as it represents a burden on future generations and measures to monitor its efficacy and enduring development impact should be put in place.

Public Debt

15

of public debt, especially domestic debt, is predominantly of short term nature. This debt directed to long term needs such as infrastructure or to short term needs like the purchase of

. Accordingly, governments rely on rolling over their public debt. Since arising from debt service and settlement, means to

optimize its use paralleled by efforts to replace it with other funding

Suggested Reforms – Public Debt

The pressure on national governments to resort to short term “quicksolutions to finance their deficit. Put a plan in place and identify alternative sources of financing and address the barriers of their growth in order to gradually replace public debt to safe and acceptable levels.

National governments/international community to create an enabling environment and develop expertise to deploy alternative funding sources

The lack of Key Performance Indicators (KPIs) that monitor the efficacy and enduring effects on the areas where public debt is channelled.

Develop KPIs to monitor the best allocation of public debt in order to achieve sustainable development rather than channel debt for short“quick fix” solutions, which should only be tolerated for a planned and limited time period. Sustainable development to be set at the forefront when setting national financing strategies. There should be a national discussion on the priority sectors in order to achieve inclusion and obtain people buy-in on the priorities to be set.

National Governments/International community to provideassistance


International community to consider debt forgiveness/multilateral relief /sovereign debt restructuring and link it to achieving certain goals in

relation to the mobilization of other finance sources and progress in the development of KPIs related to the best and optimal use of external debaiming at its reduction.

International community

There is increasing reliance on domestic public debt as a quick resort to finance government deficits of Arab countries. The ratio of public debt to GDP is higher than the world average. This measure should be used sparingly as it represents a burden on future generations and measures to monitor its efficacy and enduring development impact should be put in place.

short term nature. This debt such as infrastructure or to short term needs like the purchase of

public debt poses a means to streamline it and

sources is strongly

governments to resort to short term “quick-fix”

Put a plan in place and identify alternative sources of financing and address the barriers of their growth in order to gradually replace public debt to return

eate an enabling and develop expertise to deploy alternative funding sources.

that monitor the efficacy and enduring effects on the areas where public debt is channelled.

Develop KPIs to monitor the best allocation of public debt in order to achieve sustainable development rather than channel debt for short-term

be tolerated for a planned and

ent to be set at the forefront when setting national

There should be a national discussion on the priority sectors in order to in on the priorities to be set.

provide needed technical


forgiveness/multilateral relief to achieving certain goals in

relation to the mobilization of other finance sources and progress in the use of external debt

There is increasing reliance on domestic public debt as a quick resort to finance government deficits of Arab countries. The ratio of public debt to GDP is higher than the world average. This measure should be used sparingly as it represents a burden on future generations and measures to monitor its efficacy and

16

ii. Official Development Assistance (ODA)

As per the World Bank’s definition, net official development assistance (ODA) represents loans and grants (net of repayments) made on a concessional basis by countries and multilateral institutions to promote economic development and welfare. It includes loans with a grant element of at least 25 percent (calculated at a rate of discount of 10 percent). Throughout the years, ODA from donors has almost never met the international target of 0.7% of donors' national income22, equalling only about 0.3% on average in 2013. Arab countries have been the most impacted, given that ODA to the Arab world over the period 2005-2012 has decreased both in total and per capita terms, though it slightly rebounded starting 2011.


Source: Calculated from OECD data

22 Integrated Implementation Framework – Tracking Support for the MDGs, http://iif.un.org/content/official-development-assistance

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

100.00

-

5,000,000,000

10,000,000,000

15,000,000,000

20,000,000,000

25,000,000,000

30,000,000,000

35,000,000,000

2005 2006 2007 2008 2009 2010 2011 2012

Net ODA received per capita

(Current US $)

Net Official Development Assistance

(Current US $)

Net ODA Received by Arab Countries

Net official development assistance received (current US$)

Net ODA received per capita (current US$)

-

50,000

100,000

150,000

200,000

250,000

300,000

2006 2007 2008 2009 2010 2011 2012

US $

Million

ODA to Arab Countries and

Non-Arab Countries

Arab Countries Non-Arab Countries

17

Out of the total ODA, Arab beneficiary countries represented 10.91% in 2012 out of the total ODA disbursed in the world down from 14.45% in 2006.

Classification

Average Net Annual

ODA Received by

Arab Countries

(2005-2012) US$ bn

CAGR

International Donors 15,000 -7.60%

Arab Donors 3,239 4.01%

Kuwait 126 5.09%

Saudi Arabia23 2,185 0.51%

UAE 618 4.09%

Development Institutions24 309 21.56%

All Donors 18,239 -6.90%


The above table shows the breakdown by source of ODA received by the Arab world. Despite maintaining the largest share (82% of the total amount of ODA), international donors’ ODA has decreased by a CAGR of 7.6% annually over the period 2005-2012, gradually replaced by Arab donors whose development assistance increased by 4.01% annually. The main Arab contributors are Saudi Arabia followed by the UAE.


23 Data used for Saudi Arabia data represents the net ODA for the Middle East which was used as a proxy since no breakdown is available for Arab Countries. 24 Data includes figures disbursed by the Islamic Development Bank

International Donors82%

Kuwait1%

Saudi Arabia12%

UAE3%

Arab Development Institutions

2%

Source of Average Net Annual ODA

Received by Arab Countries (2005-2012)

Suggested Reforms


Other countries have their national priorities countries


• Levels and priority of concessionality should consider least developed countries and lower middle income countries

• ODA should not be viewed as one directional. The identification of areas/sectors of mutual benefitreceiving country aiming at capacity building and knowincludecountry deviate from the market standard.

• Recipient countries should demonstrate the efficiency of using ODA and its mutual benefit to the donor country to encourage its continuity.

Responsibility International community, Arab countries and identify priority sectors


Political agendas deter Intra


Arab countries should realize that economic cooperation and sustainable development should be a goal to be pursued as an end income disparities and ethnic divisions have resulted in the destabilization the whole region andadjacent economies.

Responsibility Arab Governments

iii. Tax Revenue

The size of a country’s tax pool and its abone of the main sources of funding. Arab Countries in Transition to be much less than 100 percent, confirming the tax administration and collectionrevenues with a peer average (e.g. receipts that other countries with similar characteristics have achieved

25 Tax effort is an index demonstrating how well a country is doing in terms of tax

much a country should be collecting is determined by a number of factors, including its stage of economic development, the

share of trade and agriculture in economic activity. 26 Toward New Horizons: Arab Economic Transformation and Political Transitions, International Monetary Fund, 2014,

http://www.imf.org/external/pubs/ft/dp/2014/1401mcd.pdf

• ODA to the Arab World has decreased both in total and per capita terms though it rebounded slightly after the financial crisis. The share of the Arab world in comparison to other countries in total ODA has dropped and has been partially covered by Arab Donor countries and Arab and Islamic Development Institutions.

Official Development Assistance

18

Suggested Reforms – Official Development Assistance

Other countries have their national priorities which determcountries to direct their ODA.

Levels and priority of concessionality should consider least developed countries and lower middle income countries as well asODA should not be viewed as one directional. The identification of areas/sectors of mutual benefit/synergies for both the donor and the receiving country bearing in mind sustainable development aiming at capacity building and know-how transfer is a must. Examples include USAID projects which allow for the mutual benefit of the donor country producers so long as the prices of the products imported do not deviate from the market standard. Recipient countries should demonstrate the efficiency of using ODA and its mutual benefit to the donor country to encourage its continuity.

International community, Arab countries and national governments to identify priority sectors to benefit from ODA financing.

Political agendas deter Intra-Arab ODA to be a key focus area

Arab countries should realize that economic cooperation and sustainable development should be a goal to be pursued as an end in itself, given that income disparities and ethnic divisions have resulted in the destabilization the whole region and have created a wide direct and indirect impact on adjacent economies.

Arab Governments

s tax pool and its ability to efficiently collect and administer taxes one of the main sources of funding. The International Monetary Fund estimates the tax effortArab Countries in Transition to be much less than 100 percent, confirming the need

administration and collection branches. The estimate is based on comparing peer average (e.g. countries with similar per capita income) and the maximum

that other countries with similar characteristics have achieved (called the tax capacity)

is an index demonstrating how well a country is doing in terms of tax collection, relative to its potential. How

is determined by a number of factors, including its stage of economic development, the

share of trade and agriculture in economic activity.

Toward New Horizons: Arab Economic Transformation and Political Transitions, International Monetary Fund, 2014,


ODA to the Arab World has decreased both in total and per capita terms though it rebounded slightly after the financial crisis. The share of the Arab world in comparison to other countries in total ODA has dropped and has been partially covered by Arab Donor countries and Arab and Islamic Development Institutions.


determine to which

Levels and priority of concessionality should consider least developed as well as conflict areas.

ODA should not be viewed as one directional. The identification of for both the donor and the

sustainable development goals and is a must. Examples

AID projects which allow for the mutual benefit of the donor producers so long as the prices of the products imported do not

Recipient countries should demonstrate the efficiency of using ODA and its mutual benefit to the donor country to encourage its continuity.

governments to

Arab ODA to be a key focus area

Arab countries should realize that economic cooperation and sustainable itself, given that

income disparities and ethnic divisions have resulted in the destabilization of indirect impact on

ility to efficiently collect and administer taxes determines The International Monetary Fund estimates the tax effort25 in the

need for reform in the mate is based on comparing the country’s tax

with similar per capita income) and the maximum tax the tax capacity)26. The

collection, relative to its potential. How

is determined by a number of factors, including its stage of economic development, the

Toward New Horizons: Arab Economic Transformation and Political Transitions, International Monetary Fund, 2014,

ODA to the Arab World has decreased both in total and per capita terms though it rebounded slightly after the financial crisis. The share of the Arab world in comparison to other countries in total ODA has dropped and has been partially covered by Arab Donor countries and Arab and Islamic Development Institutions.

19

difference between the collected tax revenues and the tax capacity indicates both the existence of technical inefficiencies in tax collection and administration as well as voluntary policy decisions by the concerned country allowing for tax exemptions, etc.27

Classification Country Year Tax & Social

Contributions/GDP Tax Effort

HI Bahrain 2011 1.40% 0.06

HI Kuwait 2011 2.10% 0.05

HI Oman 2011 8.20% 0.2

HI Qatar* NA NA NA

HI Saudi Arabia 2011 2.80% 0.07

HI United Arab Emirates* NA NA NA

UMI Algeria 2011 16.80% 0.47

UMI Iraq* NA NA NA

UMI Jordan 2011 14.90% 0.58

UMI Lebanon 2012 16.80% 0.5

UMI Libya 2010 10.70% 0.32

UMI Yemen* NA NA NA

LMI Egypt 2011 16.70% 0.46

LMI Morocco 2012 24.30% 0.8

LMI Palestine* NA NA NA

LMI Syria* NA NA NA

LMI Tunisia 2011 25.50% 0.74

LDC Comoros* NA NA NA

LDC Djibouti* NA NA NA

LDC Mauritania* NA NA NA

LDC Somalia* NA NA NA

LDC Sudan* NA NA NA

Arab World* NA NA NA

Middle Income – World 24.10% 0.64

High Income - World

34.20% 0.76

World* NA NA NA

*Data not Available + Using Truncated Normal Heterogenous in Mean and Decay Inefficiency

Source: Ricard Fenochietto and Carola Pessino, Understanding Countries’ Tax Effort, IMF Working Paper,

November 2013

27 Ricardo Fenochietto and Carola Pessino, Understanding Countries’ Tax Effort, IMF Working Paper, November 2013

20

It is clear from the above graph that some countries like Morocco and Tunisia have a higher tax effort than other countries including Egypt, Jordan, Lebanon and Algeria. A limitation of the tax effort index is that it groups both the tax rate defficiency in comparison to other countries as well as other inefficincies in tax administration and collection. For example, other high income countries chose voluntarily to apply low tax rate policies. On the other hand, other middle income countries need reform not only with respect to the level of tax applicable but also with respect to tax collection and administration.

Some lower middle income Arab countries have increasingly attempted to improve their tax effort including Morocco and Tunisia, while upper middle countries and high income countries have done less in this area. Inefficient tax collection and administration is sometimes a reflection of high illicit cash flows and a large informal sector. The IMF estimates the informal sector to range between 25% and 45% in non-GCC Arab economies28. For example, in Egypt, experts state that the informal sector accounts for 40% of the economy; in Morocco, the sector is said to account for 44% of GDP29; in Syria before the uprisings, it was measured to absorb 25% of the labour force and in Jordan the informal sector is measured at 20% of the economic activity. Furthermore, studies by informal research groups and UN organizations confirm that the informal sector is expanding all over the Arab region30.

The low incentive to engage in the formal sector is attributed to the perceived imbalance between the high financial burdens of “formalization” in comparison to the services rendered by the State. Bureaucratic procedures, high tax burdens, restrictive labour laws coupled with the low benefits of operating in the formal economy where in many cases such benefits are constrained to the privileged and well-connected businesses, are the main disincentive. In other words, a perception of low governance and high public corruption are the main reasons for preventing or delaying the decision to join the formal sector. The following table shows the Arab countries Perception Corruption Index as

28 Prescription to reform the World of Arab Business, Financial Times, October 8, 2014 29 Masood Ahmed, Bringing the Informal Sector into the Fold, Posted on November 16, 2011 by iMFdirect, http://blog-imfdirect.imf.org/2011/11/16/bringing-the-informal-sector-into-the-fold/ 30 Ibrahim Saif, The Bloated Informal Economies in Arab Countries, Al Hayat, February 12, 2013, http://carnegie-mec.org/2013/02/12/bloated-informal-economies-in-arab-countries

00.10.20.3

0.40.50.60.70.8

Bahrain

Kuwait

Oman

Qatar*

Saudi Arabia

United Arab Emirates*

Algeria

Iraq*

Jordan

Lebanon

Libya

Yemen*

Egypt

Morocco

Palestine*

Syria*

Tunisia

Comoros*

Djibouti*

Mauritania*

Somalia*

Sudan*

Arab World*

Middle Income -World

High Income -World

World*

Tax Effort in Various Arab Countries

High Income - Arab

Upper Middle Income - Arab

Lower Middle Income - Arab

Least Developed - Arab

21

measured by Transparency International, a non-governmental organization that monitors global corruption, evidencing a high corruption rank for many Arab countries with a large informal sector.

Country

Corruption

Perceptions Index

(2014)

Algeria 100

Bahrain 55

Comoros 142

Djibouti 107

Egypt 94

Iraq 170

Jordan 55

Kuwait 67

Lebanon 136

Libya 166

Mauritania 124

Morocco 80

Oman 64

Palestine NA

Qatar 26

Saudi Arabia 55

Somalia 174

Sudan 173

Syria 159

Tunisia 79

UAE 25

Yemen 161

Source: Transparency International

The increasing informal sector does not only impact the tax pool, it also creates political instability as a result of a disconnect felt by the people employed by the informal sector, who due to a lack of formal employment opportunities resort to jobs in the informal sector with low wages, unacceptable working conditions, no social and health protection and meagre opportunities for skill advancement. This is in clear contradiction with inclusive growth or sustainable development. Optimal tax policies have to take into account a number of factors including tax elasiticity and the respective volatility of the sectors being taxed. Above all, political will is needed in order to ensure that tax systems are fair, equitable, efficient and transparent as well as to implement strong governance in tax administration and collection. To conclude, the public sector stands to raise significant revenue through tax system reform, fighting tax evasion and combating corrutpion31.


Suggested Reforms


Weak and regressive tax income equality


• A stronger tax administration to enhance collection efforts not only through the attraction of hightechnological case of corruption.

• Stronger penalties for tax avoidance tax administration

• Increase progressivity of the tax system collecting taxes on dividends, interest income and capital gains and by applying higher taxes on luxury products and real estate assets.

• Reduce tax exemptions and deductions except for those aimed at protecting the poor

• Streamlining procedures and simplifying tax codes will enhance collection efficiency

• Ensure tax revenues are spent wisely by rationalizing subsidies and ensuring they are channelled to the poor.


Under invoicing,


• Making valuation databases available as guidance clearance officers to confivalues;

• Replacing complicated • Implementing measures to reduce the need for physical examination and

minimize clearance periods• On-going efforts to be complemented by clear KPIs

collection efficiency

Responsibility National

32 ECFIN Economic Brief, Economic Analysis from European Commission’s Directorate general for Economic

Financial Affairs, Issue 38, December 201433 Arab Countries in Transition: Economic Outlook and Key Challenges, International Monetary Fund, October 9, 2014,

http://www.imf.org/external/np/pp/eng/2014/100914.pdf34 ECFIN Economic Brief, Economic Analysi

Financial Affairs, Issue 38, December 201435 Toward new Horizons: Arab Economic Transformation Amid Political Transitions, International Monetary Fund, 2014,


• Many Arab countries present a low tax effort signifying the need to improve tax administration and collection efficiency. The existence of a high informal sector also impacts the resultant tax funds. Additionally, many countries resort to tax breaks, tax reductions and tax exemptions, policies which need to be streamlined.

Taxes

22

Suggested Reforms – Tax Revenue

Weak and regressive tax systems that collect meagre taxes and do not foster income equality32.

A stronger tax administration to enhance collection efforts not only through the attraction of high-quality staff and the provision of technological support but also through instilling strong punishments in case of corruption. Stronger penalties for tax avoidance and evasion and more resources tax administration dedicated to large corporate taxpayersIncrease progressivity of the tax system through a rate schedule and by collecting taxes on dividends, interest income and capital gains and by applying higher taxes on luxury products and real estate assets.Reduce tax exemptions and deductions except for those aimed at protecting the poor34.

eamlining procedures and simplifying tax codes will enhance collection efficiency. Ensure tax revenues are spent wisely by rationalizing subsidies and ensuring they are channelled to the poor.

Under invoicing, bundling and other forms of customs avoidance

Making valuation databases available as guidance for field declaration clearance officers to confirm the reasonableness of declared customsvalues; Replacing complicated customs codes with simpler codesImplementing measures to reduce the need for physical examination and minimize clearance periods35.

going efforts to be complemented by clear KPIs indicating customs collection efficiency to assess the advancement in these areas.

National governments with technical assistance support.

ECFIN Economic Brief, Economic Analysis from European Commission’s Directorate general for Economic

Financial Affairs, Issue 38, December 2014

Arab Countries in Transition: Economic Outlook and Key Challenges, International Monetary Fund, October 9, 2014,

http://www.imf.org/external/np/pp/eng/2014/100914.pdf

ECFIN Economic Brief, Economic Analysis from European Commission’s Directorate general for Economic and

Financial Affairs, Issue 38, December 2014

Toward new Horizons: Arab Economic Transformation Amid Political Transitions, International Monetary Fund, 2014,

/ft/dp/2014/1401mcd.pdf

Many Arab countries present a low tax effort signifying the need to improve tax administration and collection efficiency. The existence of a high informal sector also impacts the resultant tax funds. Additionally, many countries resort to tax breaks, tax reductions and tax exemptions, policies which need to be

systems that collect meagre taxes and do not foster

A stronger tax administration to enhance collection efforts not only quality staff and the provision of

support but also through instilling strong punishments in

more resources at the taxpayers33.

rate schedule and by collecting taxes on dividends, interest income and capital gains and by applying higher taxes on luxury products and real estate assets. Reduce tax exemptions and deductions except for those aimed at

eamlining procedures and simplifying tax codes will enhance collection

Ensure tax revenues are spent wisely by rationalizing subsidies and

bundling and other forms of customs avoidance.

field declaration ness of declared customs’

customs codes with simpler codes. Implementing measures to reduce the need for physical examination and

indicating customs to assess the advancement in these areas.

ECFIN Economic Brief, Economic Analysis from European Commission’s Directorate general for Economic and

Arab Countries in Transition: Economic Outlook and Key Challenges, International Monetary Fund, October 9, 2014,

s from European Commission’s Directorate general for Economic and

Toward new Horizons: Arab Economic Transformation Amid Political Transitions, International Monetary Fund, 2014,

Many Arab countries present a low tax effort signifying the need to improve tax administration and collection efficiency. The existence of a high informal sector also impacts the resultant tax funds. Additionally, many countries resort to tax breaks, tax reductions and tax exemptions, policies which need to be

23

Suggested Reforms – Tax Revenue


The existence illicit financial flows in addition to a sizable informal sector represent a source of lost revenues.


• Curbing illicit financial flows through a strong supervisory system, fighting corruption and governmental and judicial cooperation at the international level.

• Mechanisms to increase the benefits of entering the formal economy should include offering to develop the skills of the informal sector workers, provide companies with access to credit and promote and provide needed skilled manpower and resources.

• Implementing a simplified legal framework, establishing more reasonable labour regulations, reducing costs and burdens (for licensing, registration, etc.) and providing equitable access to government support and infrastructure.

• The above reform measures should be put in place with a combination of strong penalties for those persisting to operate in the informal sector.

• On-going efforts to be done in tandem with clear KPIs to assess the advancement of the informal sector reform and its reduction.

Responsibility National governments with technical assistance support.

iv. Foreign Direct Investment (FDI)

Moving on to analyse private sources of finance, foreign direct investment is viewed as one the main pillars supporting the growth of the economy. Furthermore, it is argued that FDI promotes job creation36 in the receiving countries which in turn reduces poverty.


FDI as a proportion of GDP in the Arab world became lower than the world average after the revolutions took place in several Arab countries and the subsequent unrest paralleling the transition.

36 Assessing the Financing Gap in the Arab Region, ESCWA, 2013

0.0%

2.0%

4.0%

6.0%

FDI (% of GDP)

World Arab Countries

24

The table below depicts the value of foreign investment inflows to various countries in the Arab world.

Country Name FDI/GDP37

FDI (US$)38

Ease of Doing

Business

UAE* 2.50% 10,487,950,987 22

Saudi Arabia 1.25% 9,297,693,333 49

Egypt 2.04% 5,553,000,000 112

Morocco 3.22% 3,358,449,825 71

Kuwait* 1.57% 2,872,588,962 86

Iraq 1.28% 2,852,000,000 156

Lebanon 6.39% 2,832,720,000 104

Libya 6.39% 2,832,720,000 188

Sudan 3.27% 2,179,116,544 160

Jordan 5.34% 1,798,450,704 117

Algeria 0.80% 1,691,000,000 154

Oman 2.02% 1,625,877,491 66

Mauritania 27.73% 1,154,133,000 176

Tunisia 2.32% 1,095,613,852 60

Bahrain 3.02% 988,829,787 53

Djibouti 19.64% 286,000,000 155

Palestine* 1.75% 177,200,000 143

Somalia NA 107,110,000 NA

Comoros 2.12% 13,935,399 159

Yemen -0.37% - 133,570,896 137

Qatar -0.42% -840,384,615 50

South Sudan NA NA 186

Syria NA NA 175

Source: World Development Indicators, Doing Business 2015 - The World Bank Group

Tax and other incentives which were put forward to attract foreign direct investment should be viewed with caution as some countries have used them to attract FDI at the expense of generating public revenue sources. The overall cost-benefit analysis of such policies should be analysed and a consistent policy towards investment should be instituted in order to create a climate of stability. Other factors providing an incentive to invest should be given priority, since those have a long-lasting effect and do not involve forgoing revenue on the part of the governments. These factors include fighting corruption, facilitating the establishment of businesses and creating a friendly regulatory and even-handed judicial environment allowing for prompt legal measures.

Whereas net investment inflow can become negative as in the case of Egypt during 2011 where net investment inflow reached a negative US$482 million as a result of disinvestment of foreign companies, the net foreign direct investment which nets out inflows from foreign investors against

37 Data for 2013 except where it was not available, 2012 was used and the country name was denoted with an (*) 38 Data for 2013 except where it was not available, 2012 was used and the country name was denoted with an (*)

FDI by the reporting economy to the res2006/2007 prompting the need for vis the rest of the world, in order to retain domestic capital

Looking at the distribution of the FDI directed to Arab concentrated in three sectors: oil, real estate and construction. Given the concentration in these sectors, the degree to which FDtransfer is debatable39. Local governments should adopt policies to encourage FDI in sectors where employment creation and technology transfer are high.


-10,000,000,000

-8,000,000,000

-6,000,000,000

-4,000,000,000

-2,000,000,000

-

2,000,000,000

4,000,000,000

6,000,000,000

8,000,000,000

US$

Net FDI in Various Arab Countries (2012)

• Foreign direct investment as a proportion of GDP has decreased consistently after the Arab Spring. Net foreign direct investment in most Arab countries is negative. Increase in competitiveness, transparency, governance and combatting corruption should be a priority to attract foreign direct investment over fiscal incentives which have a rather short

Foreign Direct Investment

25

onomy to the rest of the world is negative for most Arab for immediate action to improve the countries’ competitiveness vis

orld, in order to retain domestic capital inside the region.


Looking at the distribution of the FDI directed to Arab countries by sector, it is found to be mostly concentrated in three sectors: oil, real estate and construction. Given the concentration in these sectors, the degree to which FDI contributes to employment generation, know-

Local governments should adopt policies to encourage FDI in sectors where employment creation and technology transfer are high.

Assessing the Financing Gap in the Arab Region, ESCWA, 2013


Foreign direct investment as a proportion of GDP has decreased consistently after the Arab Spring. Net foreign direct investment in most Arab countries is negative. Increase in competitiveness, transparency, governance and combatting corruption should be a priority to attract foreign direct investment over fiscal incentives which have a rather short-term impact.

Foreign Direct Investment

t of the world is negative for most Arab economies since action to improve the countries’ competitiveness vis-à-

ountries by sector, it is found to be mostly concentrated in three sectors: oil, real estate and construction. Given the concentration in these

-how and technology Local governments should adopt policies to encourage FDI in sectors where


Foreign direct investment as a proportion of GDP has decreased consistently after the Arab Spring. Net foreign direct investment in most Arab countries is negative. Increase in competitiveness, transparency, governance and combatting corruption should be a priority to attract foreign direct investment over fiscal incentives

26

Suggested Reforms – Foreign Direct Investment


Governments were encouraged to use tax exemptions, energy subsidies and other incentives as a quick fix solution to attract foreign investors, a measure which eventually reduces the countries’ sources of revenue.


• The overall cost-benefit analysis of such policies should be carefully evaluated, and should lead to a planned country-wide strategy to improve the investment climate in a “sustainable” way. Sustainable policies for investors include fighting corruption and creating a friendly regulatory and strong impartial judicial environment. Clear KPIs with time limits should be set.

• Governments should review the global competitiveness landscape and determine their countries’ positioning in the global arena. Clear steps to enhance each country’s competitiveness in each sector should be identified alongside the identification of priority sectors. Corruption needs to be addressed and the business climate improved.

Responsibility National governments with technical assistance support.


From the private investor’s perspective, the focus tends to be on the most profitable investments, without taking long-lasting sustainability into consideration. At the same time, governments have yet to establish a clear plan on the sectors of focus and to assess how much will be needed to achieve the expected results in terms of sustainable development.


• A comprehensive policy assessment for the economic sectors where FDI is needed bearing in mind sustainability goals (job creation, know-how transfer, improvement in productivity, etc.) should be put in place at the country level and the relevant incentives and policies which should be regularly monitored to assess advancement in sustainability indicators. A transparent discussion will allow for the inclusion of the public and will help accepting the delay in reforms in other sectors as long as KPIs in the sectors of focus are being achieved.

• Encouraging research and development and the incubation of new and innovative ideas should be intrinsic to the government policies by providing incentives to the private sector to invest in these areas (e.g. tax benefits can be granted in a targeted manner, specific to investment in innovation or research and development).

• Promote the application of Corporate Social Responsibility (CSR) and Environment, Social and Governance (ESG) guidelines on the corporate level.

Responsibility National governments


Low political stability and uncertainty is a major disincentive to investment


Political - Not within the scope of this paper

Responsibility Political - Not within the scope of this paper

v. Portfolio Investment

Portfolio investment covers investing in and debt. Portfolio investment is found to contribute to development, tinvestments are connected to the rea

Portfolio investment in the Arab countries hasArab Spring as reflected below.

Despite the fact that most Arab cSudan and Yemen) have stock markets, portGDP in most Arab countries. The role performed by the stock market investors and entrepreneurs is yet to reach its improving the efficiency and transparency financial inclusiveness as well as

40 Assessing the Financing gap in the Arab Region, United Nations, 2013

-

10,000,000,000

20,000,000,000

30,000,000,000

40,000,000,000

50,000,000,000

60,000,000,000

70,000,000,000

2005

US$

Net Portfolio Investment in Arab Countries

• Portfolio investment currently accounts for less than 1% of GDP in the Arab World. Using the stock market as an intermediary between investors and businesses in Arab countries is yet to reach its full potential. Increase in efficiency, transparency and governance in financial markets in addition to increasing awareness among retail investors about stock market opportunities in the Arab countries is the only way to maximize the benefits which portfolio investment can bring to the region.

Portfolio Investment

27

investing in financial instruments through the capital marketPortfolio investment is found to contribute to development, to the extentare connected to the real economy40.

in the Arab countries has been severely impacted by the financial crisis and the


countries (except for Comoros, Djibouti, Mauritania, Somalia, South Sudan and Yemen) have stock markets, portfolio investment currently constitutes less than 1% of

. The role performed by the stock market as an intermediary between investors and entrepreneurs is yet to reach its full potential in the Arab world. This is to be attained by

and transparency of financial markets in the region and byfinancial inclusiveness as well as by expanding the depth of stock markets in the region.

Assessing the Financing gap in the Arab Region, United Nations, 2013

2006 2007 2008 2009 2010

Net Portfolio Investment in Arab Countries

Portfolio investment currently accounts for less than 1% of GDP in the Arab World. Using the stock market as an intermediary between investors and businesses in Arab countries is yet to reach its full potential. Increase in efficiency, transparency and governance in financial markets in addition to increasing awareness among retail investors about stock market opportunities in the Arab countries is the only way to maximize the benefits which portfolio investment can bring to the region.

Portfolio Investment

through the capital market like equity extent portfolio

the financial crisis and the

ountries (except for Comoros, Djibouti, Mauritania, Somalia, South constitutes less than 1% of an intermediary between

This is to be attained by by promoting higher

in the region.

2011 2012

Portfolio investment currently accounts for less than 1% of

efficiency, transparency and governance in financial markets in addition to increasing awareness among retail investors about stock market opportunities in the Arab countries is the only way to maximize the benefits which portfolio investment can

28

Suggested Reforms – Portfolio Investment


Lack of awareness among the public of the method and the benefits of investing through the stock market.


Create more awareness among the public and set up policies to encourage financial inclusion.

Responsibility National governments with technical assistance.


Low of transparency and governance is one of the disincentives for the public to invest in the stock market.


• Develop regulations related to the financial market, put in place policies to enhance transparency and governance and penalize insider trading.

• Encourage reporting on the implementation of Environment, Social and Governance (ESD) guidelines as a means to widen investor access.

Responsibility National governments with technical assistance.

vi. Remittances

Remittances are linked to the level of migration of the receiving country and are therefore mostly impacted by external factors such as the need for labour and skilled professionals in other countries. Remittances are directed to satisfy various needs including education, health, etc. and are considered to be a contributor to poverty alleviation and to the development of human capital. Whereas the receiving country has little influence over the level of remittances, it was found that the level of the financial sector development may have a positive impact on remittances41. The same suggested reform for portfolio investment will maximize the benefits of remittances by channelling any excesses beyond private needs through the stock market to the real economy.



47%

17%

16%

6%

5%2%

1%1%

5%

Country Share of

Private Remittances

(2012) Egypt

Lebanon

MoroccoTunisia

PalestineQatar

Sudan

-

10

20

30

40

50

2005 2006 2007 2008 2009 2010 2011 2012

$ B

illion

Remittances to the Arab

World

29

d. Horizontal Solidarity in the Arab Region

The importance of horizontal solidarity for development cannot be underestimated. Disparities in resources and incomes among Arab countries should be viewed as an opportunity for complementarity. While the total financing gap of Arab countries with budget deficits was estimated to range between US$ 80 billion to US$ 85 billion annually in 2015 and 2016, aggregating the financing gap of all Arab countries reveals a surplus of US$ 193 billion in 2015 and US$ 171 billion in 2016 (Scenario I). Even with the recent drop in oil prices taken into account under Scenario II, an aggregate surplus of US$ 27 billion in 2015 and US$ 18 billion in 2016 would take place42.

Whilst aggregating the financing gap across countries and income levels is only done for the purpose of this exercise, it sheds light on the importance of potential benefits of intra-Arab cooperation. The drop in oil prices will impact the available downwards but Arab countries on the aggregate will still have an overall surplus.

As discussed above, ODA from Arab donors to other Arab countries has increased on average by 4% annually during the period 2005-2012. Intra-Arab ODA currently accounts for 18% of the total ODA to the Arab region. Arab foreign direct investment has mainly focussed on real estate and construction. Sovereign wealth funds in rich oil countries are looking to diversify their income away from oil related businesses and invest in profitable non-oil related sectors which create sustainable income for future generations. It is recommended after setting the national sectoral policy in light of sustainable development goals to have a discussion on how to integrate this policy and successfully implement it within an Arab context and proceed with aggressive “door-knock” campaigns within Arab countries.

This does not mean confining cooperation to intra-Arab cooperation, especially in the age of globalization where interrelationships always result in mutual benefits. Instead, it sheds light on the fact that there is a lot of room for improvement regarding intra-Arab cooperation, especially in light of the geographical proximity and the similarities in culture. Achieving sustainable development, an extremely enormous task, will not only require Arab support but also international support.

42 Scenarios I and II are defined under section 3a entitled “The Financing Gap”. 43 No data is available on Somalia and Palestine.

Scenario I Scenario II

Financing

Gap/Surplus

2015

Financing

Gap/Surplus

2016

Financing

Gap/Surplus

2015

Financing

Gap/Surplus

2016

Number of Arab Countries with Financing Gap43

13 13 15 13

Total Financing Gap (US$ bn)

85.32 82.69

82.69 80.19 79.92

Number of Arab Countries with Financing Surplus

8 8 6 8

Total Financing Surplus (US$ bn)

277.88 82.69

253.57 106.84 98.16

Aggregate Surplus / (Gap)

across all Arab Countries

(US $ bn)

192.56 82.69

170.88 26.65 18.23

Suggested Reforms


ODA is viewed as one directional andThis coupled with the nonresults in Arab FDI being confined to traditional sectors like construction and real estate.


• ODA should consider the income and upper middle income countries.

• An improvement in the investment climate and competitiveness of Arab countries is needed in order to re

• “Door



Arab countries operate in silos. National goals need to be discussed at the regional level.


The integration of national sectoral policin the buysectors across countries


• Aggregating the budgets of Arab countries after accounting for the drop in oil prices reveals a forecasted surplus for 2015 and 2016 of US$ 27 and US $ 18 billion respectively, which confirms that Arab states can benefit significantly from intracooperation.

Horizontal Solidarity in the Arab Region

30

Suggested Reforms – Arab Horizontal Solidarity

ODA is viewed as one directional and, accordingly, will always be limited. This coupled with the non-identification of priority sectors in each country results in Arab FDI being confined to traditional sectors like construction and real estate.

ODA should consider the countries with the highest need including low income and upper middle income countries. An improvement in the investment climate and competitiveness of Arab countries is needed in order to re-channel funds into Arab “Door-knock” campaigns needed to market FDI in non

National governments and regional structures

Arab countries operate in silos. National goals need to be discussed at the regional level. The integration of national sectoral policies within the Arab region will

buy-in from the Arab public and may create synergies in various sectors across countries

National governments and regional structures

the budgets of Arab countries after accounting for the drop in oil prices reveals a forecasted surplus for 2015 and 2016 of US$ 27 and US $ 18 billion respectively, which confirms that Arab states can benefit significantly from intra-Arab regional

Horizontal Solidarity in the Arab Region

will always be limited. identification of priority sectors in each country

results in Arab FDI being confined to traditional sectors like construction and

countries with the highest need including low

An improvement in the investment climate and competitiveness of Arab channel funds into Arab countries. to market FDI in non-traditional sectors

Arab countries operate in silos. National goals need to be discussed at the

within the Arab region will result in from the Arab public and may create synergies in various

the budgets of Arab countries after accounting for the drop in oil prices reveals a forecasted surplus for 2015 and 2016 of US$ 27 and US $ 18 billion respectively, which confirms

Arab regional

31

4. Leveraging Opportunities in the Arab Region for Financing the SDGs Post-2015 Agenda

a. Mobilizing Domestic Savings in the Financial Sector

A well-functioning financial sector is critical to directing the savings of households, firms and governments to the highest value uses. The average savings as a percentage of Gross National Income (GNI) in the Arab world appears to be high in comparison to the world standard as well as to the average of high income and upper middle income countries. However, the exclusion of Qatar, Saudi Arabia and Bahrain results in a gross savings average for Arab countries of 27.92%, ten percentage points below the world average of 37.5%. Another point to note is that the sample data available (after excluding high income countries), is dominated by upper middle income countries like Iraq (31.4%) and Algeria (47.6%). Other countries have a level well below the world average of 27.92% including Tunisia (17.9%), Egypt (13.4%), Jordan (10.7%), Lebanon (15.8%), Sudan (2.7%) and Palestine (-7.7%). It is also important to note that the banks’ figures do not capture the impact of the Rotating Savings and Credit Associations where the poor pool their savings and rotate them to the ones in need. This is a well-known saving method in a country like Egypt.

*Data Not Available Source: World Development Indicators

-20

-10

0

10

20

30

40

50

60

70

Adjusted Savings: Gross Savings (% of GNI)

(2012)

High Income - Arab




32


Furthermore, the average number of depositors in Arab countries with commercial banks (per 1,000 adults) was 597.2 in 2012, below the world average of 731.6. ATMs per 100,000 adults are only 23.2 versus 34.2 for the world, 68.2 for high income countries and 43.6 for upper middle income countries. This is an indication that the mobilization of savings by the banking sector has not yet reached its full potential.

Not only is there a shortfall in attracting savers, but the channelling of available funds is not maximized. Average domestic credit provided by the Arab financial sector in 2012 is 35.15% of GDP compared with 167.11% in the world, 198.4% in high income countries and 115.28% of GDP in upper middle income countries. The number of borrowers from commercial banks per 1000 adults is 134.10 in the Arab countries on average in comparison to 225.79 in the world44. Evidence shows that small, medium and micro enterprises still face difficulties in obtaining finance.45


44 As per the World Development Indicators, The World Bank. The last available year is 2012 45 Report of the Intergovernmental Committee of Experts on Sustainable Development Financing, 15 August, 2014

0.0100.0200.0300.0400.0500.0600.0700.0800.0900.01000.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

Algeria

Comoros

Djibouti

Egypt

Iraq

Jordan

Lebanon

Libya

Kuwait

Mauritania

Morocco

Oman

Palestine

Qatar

Saudi Arabia

South Sudan

Sudan

Tunisia


Yemen

Arab World

World

High Income

Upper Middle …

Dep

osito

rs p

er 1

000 A

dults

ATM

per

100,0

00 a

dults

ATMs and Depositors with Commercial Banks (2012)

Automated teller machines (ATMs) (per 100,000 adults)

Depositors with commercial banks (per 1,000 adults)

-100.00

0.00

100.00

200.00

300.00

0.00

100.00

200.00

300.00

400.00

Dom

estic

cred

it (%

of G

DP)

Borr

ow

ers per

1000 A

dults

Arab Countries Borrowings Indicators (2012)

Borrowers from commercial banks (per 1,000 adults) Domestic credit provided by financial sector (% of GDP)

33

Loan to Deposit Ratio

Classification Country 2007 2008 2009 2010 2011 2012 2007-

2012

HI Bahrain 81.9 90.1 94.5 89 95.2 99.8 91.8

HI Kuwait 100.7 106.1 98.1 99.1 97.1 97 99.7

HI Oman 102.3 113.7 121.2 121 121.8 123.5 117.3

HI Qatar 83 86.1 93.1 80.9 77.3 73.8 82.4

HI Saudi Arabia 79.6 86.3 79.7 79.3 77 79.2 80.2

HI United Arab Emirates

98.8 110.6 115.8 108.3 102.3 102.4 106.3

UMI Algeria 29 27.6 32 33.6 32.7 33 31.3

UMI Iraq 22.8 24.4 23.1 24.2 24.9 31.8 25.2

UMI Jordan 84 85.1 78 74.5 74.7 74.9 78.5

UMI Lebanon 31.6 33.4 32.6 34.6 37.2 38.8 34.7

UMI Libya 30.4 23.6 23.8 25 23.6 22.4 24.8

UMI Tunisia 119.4 115.5 115.9 120.2 129.7 131.5 122

LMI Egypt 56.4 55.5 53.1 50.7 49.5 48.9 52.4

LMI Morocco 65 70.9 73.8 76.4 79.9 81.1 74.5

LMI Palestine* NA NA NA NA NA NA NA

LMI Syria 32.6 33.6 36 39.8 44.4 NA 37.3

LDC Comoros* NA NA NA NA NA NA NA

LDC Djibouti* NA NA NA NA NA NA NA

LDC Mauritania 134.4 136.7 142.6 134.5 121.1 115.2 130.7

LDC Somalia* NA NA NA NA NA NA NA

LDC Sudan 82.1 79.2 76.4 71.8 67.6 63.6 73.4

LDC Yemen 35.4 38.9 33.1 31.5 29.6 23.2 31.9

Average 71.3 74 74.4 72.6 72 73.6 71.6

*Data not available

Source: Simon Gray, Philippe Karam and Rima Turk, Are Banks Really Lazy? Evidence from Middle East and

North Africa, IMF Working Paper, 2014

34

High Income - Arab




With the exception of Tunisia and Mauritania, upper middle, lower middle and least developed Arab countries could benefit from higher credit to borrowers through the banking system, with some countries displaying low loan to deposit ratios during 2007-2012 like Libya (24.8%), Iraq (25.2%), Algeria (31.3%), Yemen (31.9%), Lebanon (34.7%), Syria (37.3%) and Egypt (52.4%). Furthermore, some countries have experienced decreasing loan to deposit ratios over the same period like Qatar, Jordan, Libya, Egypt, Mauritania, Sudan and Yemen. This could be attributed to a low recovery post the financial crisis as well as the unstable transition period experienced by Arab-Spring countries.

In many cases, the purchase of treasury bills crowds out the utilization of local savings by the private sector, and hence limits the latter’s role in growth and employment creation. The crowding out effect is demonstrated by the share of gross claims on government to domestic claims. The highest figures are found in Iraq (63.9%), Yemen (54.1%), Egypt (54.0%), Lebanon (49.9%) and Syria (48.3%) over the period 2007-2012. Several countries also experience an increasing crowding out effect over time like Bahrain, Qatar, Jordan, Egypt and Yemen. Policies to improve financial inclusiveness in Arab countries are warranted as it is the most demarcating characteristic of a developed financial sector. Noticeable examples include the savings mobilization through the launch of a national project like the Suez Canal, where EGP 64 billion of savings were gathered including EGP 27 billion attracted from outside the financial system. This occurred as a result of the public buy-in for the project in addition to the attractive high interest rate granted to individual savers matching the rate of Treasury bonds. Treasury bonds, as an investment instrument, are not accessible to individuals as a consequence of a minimum threshold not attainable to small investors as well as a lack of awareness of capital market products. Mobilizing savings through the national post offices should also be put as a priority.

Yet another route to channel domestic savings is the encouragement of Non-Governmental Organizations (NGO)s and the empowerment of civil society organizations to operate on the ground, in accordance to the government’s sustainable development plans as well as with the cooperation of other NGOs. Increasingly, NGOs have an increased awareness of the importance in engaging in sustainable development finance through the provision of microfinance and educational loans etc. The NGOs’ ability to attract private funds in Islamic and Arab societies from individuals practicing

0

20

40

60

80

100

120

140

Percentage

Bank Loan to Deposit Ratio (2012)

35

their annual zakat giveaways is to be maximized as a means of social solidarity and achieving sustainable development. In Egypt, this realization has to the inclusion of NGOs as one of the entities to practice microfinance under the new microfinance law to be issued shortly. The role of civil society in general should be accentuated to allow them t to act as a key contributor to change, transformation and development46.

Evolution of the Share of Gross Claims on Government to Domestic Claims

Classification Country 2007 2008 2009 2010 2011 2012 2007-

2012

HI Bahrain 11.9 10.8 14 17.8 21 22 16.2

HI Kuwait 10 8.3 7.9 7.2 6.9 6.4 7.8

HI Oman 3.1 2 2.2 2.5 3.3 3.9 2.9

HI Qatar 12.5 11.1 19.9 27.4 37 37 24.1

HI Saudi Arabia 23.8 24.8 21.4 21.3 21.7 18.7 21.9

HI United Arab Emirates 12 10.4 11.4 13 12.3 14.2 12.4

UMI Algeria 56.4 38.4 32.3 36 39 42 40.7

UMI Iraq 79.9 67 59.2 62.8 60.9 53.8 63.9

UMI Jordan 15.4 19.6 25.5 26.9 28.6 33.3 24.9

UMI Lebanon 54.4 53.1 52.7 49.8 45.6 43.8 49.9

UMI Libya 6.7 3.6 1.5 0 0 0 2

UMI Tunisia 9.6 7.8 7.6 7 6.3 6.3 7.5

LMI Egypt 48.4 46.8 52.6 53.6 59.3 63 54

LMI Morocco 26.5 22.3 18.8 16 15.5 18.4 19.6

LMI Palestine* NA NA NA NA NA NA NA

LMI Syria 59.4 52.7 47.9 42.1 39.2 NA 48.3

LDC Comoros* NA NA NA NA NA NA NA

LDC Djibouti* NA NA NA NA NA NA NA

LDC Mauritania 15.6 17.4 12.4 15.2 15.1 11.5 14.5

LDC Somalia* NA NA NA NA NA NA NA

LDC Sudan 27 30.6 37.3 40.6 45.1 44.7 37.6

LDC Yemen 42.7 41.6 56.6 54.9 60.2 68.6 54.1

Average 28.6 26 26.7 27.5 28.8 28.7 27.9

*Data not available

Source: Simon Gray, Philippe Karam and Rima Turk, Are Banks Really Lazy? Evidence from Middle East and

North Africa, IMF Working Paper, 2014


*Data not available

01020304050607080

Percentage

Share of Gross Claims on Government to Domestic Claims

• Arab countries are characterized by a low level of savings as a percentage of their gross national income. Furthermore, these savings are not well channelled through the financial sector, considering the low loan to GDP ratios in comparison to the world average. The government is in many cases crowding out the private sector by using the financial system to fund its deficit rather than to support the growth of the private sector through the provision of credit.

Mobilizing Domestic Savings

36


(2012)

Arab countries are characterized by a low level of savings as a percentage of their gross national income. Furthermore, these savings are not well channelled through the financial sector, considering the low loan to GDP ratios in comparison to the world average. The government is in many cases crowding out the private sector by using the financial system to fund its deficit rather than to support the growth of the private sector through the provision of credit.

Mobilizing Domestic Savings


Arab countries are characterized by a low level of savings as a percentage of their gross national income. Furthermore, these savings are not well channelled through the financial sector, considering the low loan to GDP ratios in comparison to the world average. The government is in many cases crowding out the private sector by using the financial system to fund its deficit rather than to support the growth of the private sector through the

37

Suggested Reforms – The Financial Sector


The role of the financial sector (including the national post offices) as an intermediary in order to increase savings and route them effectively to fund sustainable goals, shows abundant signs of underperformance.


• Encourage the use of information, telecommunication and technology to allow a wide access to financial services through branchless and mobile banking and enhance financial literacy.

• Capacity-building in underserved segments like microfinance and SMEs is essential.

• Educating the players in the financial sector on funding novel areas to address the lack of expertise (e.g. renewable energy, waste water treatment) and setting up the relevant policy platform.

• Policies to be put in place to serve as a platform in order to regulate and encourage growth in underserved economic segments which are key to sustainability are essential.

• Incentives to be carried out to support the financing of key sectors as identified by a nationwide plan, e.g. lower reserve requirements enabling more favourable interest rates to SMEs. Average pricing to SMEs versus large clients should be subject to reporting and discussion.

• New products need to be introduced in the financial sector in order to drive sustainability such as educational loans for example. A relevant platform to support those products needs to be launched.

• Regulatory and judicial system to speed up the process of conflict resolution in business and banking.

Responsibility National governments with technical cooperation


NGOs have been largely excluded from operating freely for fear of political instability


Political - Outside the scope of this paper

Responsibility Political - Outside the scope of this paper

b. Potential of Public-Private Partnerships (PPP)

i. Current status

Public-private partnerships allow the financing by the private sector of what is traditionally government sponsored projects, thereby enabling risk sharing as well as benefiting from the private sector’s management skills, expertise, innovation and efficiency. Under a PPP structure, efficiency gains could arise as a result of competitive pressure on procurement, operation and maintenance costs when undertaken by private operators.

Financing sustainable development includes to a large extent the provision of public services and their related infrastructure. Investment in infrastructure is a tool to support economic growth, create jobs, increase the country’s economic competitiveness, facilitate development of small and medium enterprises, and attract domestic and foreign direct investment.47 Additionally, the improvement in the

47 Public-Private Partnerships For Infrastructure Development in the Arab Region, Economic and Social Commission for Western Asia (ESCWA), 19 September 2013

38

quality of public services should help achieve an equitable distribution of developmental gains and spur social development48.

Infrastructure is termed as either economic infrastructure or social infrastructure. Economic infrastructure refers to the facilities directly supporting productive activities, such as roads and highways, airports, naval transport, electricity and gas networks, water distribution, sanitation networks and irrigation plants in addition to information and communication technology (ICT) infrastructure. Social infrastructure refers to facilities aimed at increasing social comfort, such as schools, hospitals, sport structures, green areas, etc.49

Appendix II provides selected infrastructure indicators in Arab countries with the analysis of country relevant data, aggregating data according to income group in addition to comparing such indicators with other income groups and regions. A comparison for urban-rural differential is also presented.

As discussed above, comparing aggregate indicators of Arab countries with the World could be misleading as it may suggest that Arab countries are doing better is many cases than the world standard. A closer look reveals that least income and lower middle income countries are doing much worse than the world average and that the aggregate indicators are skewed as a result of the inclusion of high income Arab countries in the data. Furthermore, indicators for rural and urban access to services reveal a strong bias towards the urban population again more accentuated in least developed Arab countries. Nonetheless, this need is largely ignored by private sector investors, whose meagre participation in infrastructure projects is demonstrated below. The data below focus mostly on developing countries in the Arab world including upper middle income, lower middle income and least developed countries while excluding high income Arab countries. Data for high income Arab countries are not available on the Private sector Participation in Infrastructure Advisory Facility (PPIAF) database and other GCC sources do not provide the equivalent data with the same segregation for a comparable period. The focus on developing Arab countries and the comparison between them and other developing countries in various regions is well justified, since they are the ones facing the highest challenges with respect to private sector participation.

Source: PPIAF, World Bank, World Development Indicators

48 Ibid 49 Ibid

-200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000

-

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

East Asia and

Pacific

Europe, Central

& Western Asia

Latin America &

the Caribbean

Arab Countries South Asia Africa

(excluding

African Arab Countries)

Num

ber

of Pro

ject

s

Valu

e of Pro

ject

s ($

million)

Private Sector Participation in Infrastructure in Developing

Countries by Region (1990-2013)

39

Source: PPIAF, World Bank, World Development Indicators

*Cumulative GDP for the period 1990-2013 was used

Out of a world total of US$ 2.2 trillion, private participation in infrastructure in developing Arab countries50 reached only US$ 100 billion during 1990-2013. This has to be borne in mind when comparing with other developing countries in Africa (US$ 145 billion), South Asia (US$ 374 billion), East Asia and Pacific (US$ 383 billion), Europe, Central and Western Asia (US$ 354 billion) and a whopping US$ 845 billion for Latin America. Furthermore, as a percentage of GDP, developing Arab countries have one of the lowest levels for private participation in infrastructure, surpassing only East Asia and the Pacific, but scoring lower than the developing countries’ average.

As far as sector allocation is concerned, developing Arab countries’ data reveal a certain bias - in comparison to the world norm - towards certain less strategic and less regulated sectors which are more profitable for the private sector thereby enabling the application of market or close-to-market rates, as in the case of telecommunications, followed by the energy sector, another rewarding industry from private investors’ perspective. Investment in transportation is low in Arab countries in

50 Excludes high income countries such as Bahrain, UAE, Saudi Arabia, Qatar, Kuwait and Oman

East Asia and

Pacific

Europe, Central

& Western Asia

Latin America &

the Caribbean

Arab Countries South Asia Africa (excluding

African Arab

Countries)

Total

Private Participation in Infrastructure to GDP in Developing

Countries (1990-2013)

Energy

31%

Teleco

m

38%

Transp

ort

28%

Water

&

Sewag

e

3%

Value Distribution of

Projects with Private

Sector Participation by

Sector in the Developing

World 1990-2013

comparison to the developing countriessewage sectors. As expected, least developed Arab countries have one of the lowest private sector participation in infrastructure in comparisoncountries.

Source: PPIAF, World Bank

Telecom

14%

Transport

25%

Water &

Sewage

14%

Number Distribution of Projects

with Private Sector Participation by

Sector in Developing Arab Countries

1990-2013

0

5000

10000

15000

20000

25000

Valu

e of Pro

ject

s ($

million)

Private Participation in Infrastructure in

Selected Arab Countries (1990

40

comparison to the developing countries’ average and is almost equally limitedsewage sectors. As expected, least developed Arab countries have one of the lowest private sector participation in infrastructure in comparison to upper middle and lower middle income Arab




Energy

47%

Number Distribution of Projects

with Private Sector Participation by


Telecom

63%

Transport

7%

Water &

Sewage

4%

Value Distribution of Projects with

Private Sector Participation by


1990-2013

Private Participation in Infrastructure in

Selected Arab Countries (1990-2013)

ly limited in the water and sewage sectors. As expected, least developed Arab countries have one of the lowest private sector

to upper middle and lower middle income Arab


Energy

26%

Value Distribution of Projects with

Private Sector Participation by


2013

41

In US$ Million (1990-2013)

Country Energy Telecom Transport

Water &

Sewage Total

In

Operation

Cancelled/

Distressed

UMI Algeria 5,932 6,494 286 2,082 14,794 11,541 0

UMI Iraq 1,720 7,384 500 0 9,604 8,960 0

UMI Jordan 2,441 3,151 1,562 1,312 8,466 5,594 4

UMI Lebanon 0 674 153 0 827 3 824

UMI Libya 0 0 0 0 0 0 0

UMI Tunisia 948 5,055 840 95 6,938 6,843 0

LMI Egypt 2,096 18,860 2,315 475 23,746 22,545 0

LMI Morocco 12,717 13,117 400 0 26,234 22,084 0

LMI Palestine 150 1,322 0 0 1,472 1,332 0

LMI Syria 0 1,245 82 0 1,327 1,327 0

LDC Comoros 0 0 1 0 1 1 0

LDC Djibouti 0 0 576 0 576 576 0

LDC Mauritania 0 459 0 0 459 459 0

LDC Somalia 0 13 10 0 23 23 0

LDC South Sudan 0 103 0 0 103 103 0

LDC Sudan 0 3,925 30 121 4,076 3,951 0

LDC Yemen 16 1,218 410 0 1,644 1,199 410

Total 26,020 63,020 7,165 4,085 100,290 86,542 1,273


The Arab countries with the largest private participation in operational infrastructure projects (excluding high income Arab countries) include Egypt and Morocco, followed by Algeria, Iraq, Tunisia and Jordan. This is important to take into consideration when drawing on the lessons learnt for PPPs.

As demonstrated above, despite the strong need for public private partnerships as a financing tool for development, Arab countries have been lagging behind in most indicators in comparison to other regions.

The main pillars that hamper the spread of publicregulatory and institutional in addition to capacity, summarized below.

ii. Barriers and Constraints for the Success of PPPs

• Political Environment

ability to launch attractive PPP projects. The low during the transitional period

• Political Will - In many cases, special measures strong political will need to be taken by the government to incentivize the private sectorlegal exemptions, additional subsidies

Tunisia

• In the access to basic services, Arab countries developed countries income and upper middle income countries. Various indicators for rural-urban disparity also reveal a higher inequality in distribution. The share of Arab countries in private sector participation is the lowest when compared to other regions and one of the lowest when compared to GDP. In the Arab world, private investors are more biased towards profitable telecommunications and energyexpense of investment in the transportation sector.

Public Private Partnerships (PPP)

42

The main pillars that hamper the spread of public-private partnerships are grouped as regulatory and institutional in addition to capacity, funding and public opinion related issues as

for the Success of PPPs

Political Environment - Fragile political environments and security concerns impede the ability to launch attractive PPP projects. The low level of PPP deals in Arabduring the transitional period is a testimony to that.

In many cases, special measures of financial or legal nature need to be taken by the government to improve project terms and

incentivize the private sector. Such measures include tax exemptions, custom duty breaks, legal exemptions, additional subsidies, etc. At the same time, political agenda

Egypt

26%

Morocc

o

26%

Algeria

13%

Iraq

10%

Tunisia

8%

Jordan

6%

Sudan

5%

Palestin

e

2%

Syria

2%

Yemen

1%Other

1%

Private Sector

Participation in

Operational Projects in

Selected Arab Countries

by Value

In the access to basic services, Arab countries - especially least developed countries - are doing worse when compared to the high income and upper middle income countries. Various indicators for

urban disparity also reveal a higher inequality in distribution. The share of Arab countries in private sector participation is the lowest when compared to other regions and one of the lowest when compared to GDP. In the Arab world, private investors are more biased towards profitable telecommunications and energy-related investments at the expense of investment in the transportation sector.

Public Private Partnerships (PPP)

grouped as political, funding and public opinion related issues as

security concerns impede the level of PPP deals in Arab Spring countries

of financial or legal nature emanating from a improve project terms and

tax exemptions, custom duty breaks, the same time, political agendas should not

especially least are doing worse when compared to the high

income and upper middle income countries. Various indicators for

distribution. The share of Arab countries in private sector participation is the lowest when compared to other regions and one of the lowest when compared to GDP. In the Arab world,

related investments at the

preclude from imposing PPP projects will eventually result in non

• Regulatory - The lack of predictability with respect to regulatory and economic policies, the non-existence of a developed regulatory framework to support PPPs aclarity with respect to dispute resolution mechanisms, addition to other transparency and governance related matters which exist in many Arab countries discourage private invemessage pertaining to the rule of law with respect to the protection of property and contractual rights is imperative.

• Institutional - An undefined institutional framework as evidenced in a nonresponsible and empowered entity for the implementation of PPP projects with an unclear division of authority between PPP projects elongates the process and subjects it to failureArab countries. In many countries, projects are carried out by relevant ministry employees, who have no experience in practical matters related to PPP project execution including balancing interests of diverse parties (governments, advisors, ministriinstitutions, public sector, export credit agencies, suppliers and offcompetition between various bidders and adhering to set time frames.

• Capacity-Building – We notice a lits prioritization, design Integrating PPPs into the financing plan government and relevant agencies is ability to balance the needs of the government and those of private investors distinguish between projects bankable in their own right given a reliable revenue stream.

• Funding Capacity – The existence of alternative investment vehicles that are more safe and profitable, hence rendering the risk/reward profile of PPP projects attracting funds away from financing infrastructurebanking sector when banks cholast few years, a feature that is characteriby competing for the available fundssector for lending despite low loan to deposit ratios in the vicinity of 50%.

Acceptance

Institutional

43

preclude from imposing financial and technical assessments, since the launch of unbankable PPP projects will eventually result in non-closure.

lack of predictability with respect to regulatory and economic policies, the existence of a developed regulatory framework to support PPPs a

clarity with respect to dispute resolution mechanisms, constraints related to the labour laws in addition to other transparency and governance related matters which exist

countries discourage private investment. Additionally, relaying a strong message pertaining to the rule of law with respect to the protection of property and contractual

An undefined institutional framework as evidenced in a nonand empowered entity for the implementation of PPP projects with an unclear

division of authority between various government ministries regarding the implementation of PPP projects elongates the process and subjects it to failure is a prevailing symptom inArab countries. In many countries, projects are carried out by relevant ministry employees, who have no experience in practical matters related to PPP project execution including balancing interests of diverse parties (governments, advisors, ministries, lenders, financial institutions, public sector, export credit agencies, suppliers and offcompetition between various bidders and adhering to set time frames.

We notice a low capacity for the assessment of infrastructure needs and its prioritization, design and structuring, execution and monitoring in the Arab regionIntegrating PPPs into the financing plan of a comprehensive investment program set

evant agencies is also essential. Additionally, it is important to value balance the needs of the government and those of private investors

projects that require a sovereign guarantee from projects that bankable in their own right given a reliable revenue stream.

The existence of alternative investment vehicles that are more safe and profitable, hence rendering the risk/reward profile of PPP projects unattractive

unds away from financing infrastructure. This was the case in the Egyptianbanks chose to purchase government treasury bills and bonds

, a feature that is characteristic when the governments crowd out private plby competing for the available funds. This resulted in lower liquidity available in the banking sector for lending despite low loan to deposit ratios in the vicinity of 50%.

PPP

Pillars

Political

Regulatory

Human

Capacity

Funding

Capacity

Public

Acceptance

Institutional

ssessments, since the launch of unbankable

lack of predictability with respect to regulatory and economic policies, the existence of a developed regulatory framework to support PPPs as well as a lack of

related to the labour laws in addition to other transparency and governance related matters which exist in varying degrees

stment. Additionally, relaying a strong message pertaining to the rule of law with respect to the protection of property and contractual

An undefined institutional framework as evidenced in a non-unified

and empowered entity for the implementation of PPP projects with an unclear the implementation of

a prevailing symptom in some Arab countries. In many countries, projects are carried out by relevant ministry employees, who have no experience in practical matters related to PPP project execution including

es, lenders, financial institutions, public sector, export credit agencies, suppliers and off-takers), creating

ow capacity for the assessment of infrastructure needs and in the Arab region.

investment program set by the it is important to value the

balance the needs of the government and those of private investors as well as to require a sovereign guarantee from projects that are

The existence of alternative investment vehicles that are more safe and unattractive results in

the case in the Egyptian se to purchase government treasury bills and bonds during the

crowd out private players This resulted in lower liquidity available in the banking

sector for lending despite low loan to deposit ratios in the vicinity of 50%.

44

• Public Acceptance – There is a clear lack of or low public consensus on the appeal of PPPs, partly emanating from the fact that local administrative units at the governorate levels have little ability to propose PPP projects tailored to their specific local needs and capable of creating public acceptance.

iii. Success Stories in Arab Countries and Lessons Learnt

“Emerging Partnerships” is a publication which recognizes impressive public-private partnerships with significant development impact from all over the world. The award is attributed based on the research of IFC, Public Private Infrastructure Advisory Facility (PPIAF) and Infrastructure Journal as well as judging panels comprising well-known industry experts. Projects are ranked by the judging panel based on indicators such as financial innovation, technological innovation, developmental vision, replicability, and impact. The Gold Award for the Middle East & North Africa (2013) was granted to Queen Alia International Airport, Jordan and the Bronze Award (2013) was granted to New Cairo Wastewater, Egypt.

• Queen Alia International Airport

Queen Alia International Airport is a US$ 900 million project entailing the rehabilitation of the airport, construction of a new 900,000 square foot terminal with a capacity of 12 million passengers per year and operation of the airport. Despite the challenges of being the first full airport concession in the Middle East, the first PPP Shari’a finance deal, in addition to the present foreign exchange risk resulting for the different currency of funding and revenues, such challenges were surmounted by a well prepared, clever structure. Allowing for a project finance mechanism, asset security granted to all lenders through inter-creditor agreement, pre-set formula for revenue adjustment in case of foreign exchange devaluation were the main pillars of success. The project achieved the highest revenue sharing percentage compared to similar projects in the world resulting in an increase in passenger traffic by 42% in 2011 in comparison to 2007 and the creation of additional jobs.

In addition to the PPP Gold Award, Queen Alia International Airport was also granted the Deal of the Year 2007 Award by Euromoney Project Finance Magazine and Airport Finance Deal of the Year 2007 (Middle East) Award by Jane’s and Deal of the Year 2007 Award by Project Finance International.

The above reflects the importance of having flexible structuring ability in order to balance the interests of bidders, lenders and the government. As a result of this public-private partnership deal, the government was saved from the financial burden and benefited from better private sector management. In exchange, it had to bear the risk of foreign currency devaluation and forgo 50% of the revenues to the project sponsors and lenders. Further details are available in Appendix III.

The selection for the award and the criteria of “success” are both based among others on financial innovation, completion and impact. However, the final determinant of value creation is a detailed cost-benefit analysis assessing the costs and the benefits had the government undertaken the project alone51 versus its revenues and costs under the PPP structure, bearing in mind the efficiency gains and increase in passengers on the one hand, and the costs relative to the partial coverage of the foreign exchange risk of the project as well as all incurred transaction costs on the other hand. Such details are not available in the public domain.

• New Cairo Waste Water

The New Cairo Wastewater Project was to construct a 250,000 cubic meters wastewater treatment plant to serve the new Cairo settlement which is estimated to increase from 550,000 to 3 million inhabitants by 2029. The main strength of the US$ 200 million project is its ability to replicate itself

51 In many cases the project would not be possible due to the unavailability of government funding. In such case, the analysis would be based on the costs of funding previous similar projects.

45

in other locations, especially for similar small size projects with a major impact on the quality of basic services. The size enabled local players’ sponsorship allowing for local currency financing avoiding the need to mitigate foreign exchange devaluation risk faced by foreign lenders. The winning bidder was selected based on the lowest net present value of the sewage treatment charge and electricity costs. The availability of the Ministry of Finance Guarantee mitigated the risk of the offtake New Urban Communities Authority underlining the importance of well structuring the deal to achieve success.

The project received the longest loan tenor to date of 15 years and succeeded in recycling water thereby preserving valuable water resources. Additionally the government was relieved from operating the facility and benefit from private sector operational efficiency during the 20 year period, after which the project will be handed over to the government.

The New Cairo Wastewater Project earned the Best Water Project Award, Middle East and Africa by World Finance in 2013 and Water Deal of the Year by Global Water Intelligence 2010. Further details on the project are available in Appendix III.

• Ouarzazate Solar Power Project

The Ouarzazate Solar Power Project is considered to be one of the world’s largest solar energy projects. It involves the design, construction, operation, maintenance and financing a solar complex for the generation of 160 MW estimated to cost Euro 1 billion to be extended to 500MW. Challenges faced include the fact that the energy storage component of the concentrated solar power technology (CSP) is yet to be demonstrated, that CSP needs scale to be commercially viable and that alternative fossil fuels are more attractive in light of existing fuel subsidies, which need a careful medium term phase out plan for social reasons. These challenges were mainly overcome by the willingness of the Government of Morocco and other multilateral agencies to shoulder the responsibility of bridging the development of a more commercially-sustainable CSP market and their awareness of their fundamental role in supporting the first phase of a CSP portfolio designed in the MENA region.

The success of the project lies in demonstrating how PPPs can help develop projects which may not be commercially viable in their initial stages but allow for scaling up of benefits in the future. The additional future capacity may allow to export electricity to Europe at market prices to minimize the subsidy burden or alternatively lower Morocco’s dependence on imported fuel and increase its reliance on renewable energy sources. The competition between bidders resulted in achieving favourable electricity cost in line with other renewable energy projects. Additionally, the project will contribute to lower CO2 emissions and create additional direct and indirect jobs and the construction and operational risk was shifted to the private developer. Final economic benefits will be determined after the mobilization of the whole program and the realization of the perceived benefits. Detailed analysis of the project structure, its challenges and success factors is available in Appendix III.

iv. Measures to Accelerate PPP Programs in Arab countries

• Political Will - A fast track PPP Growth Acceleration Program - Arab governments should create a fast track regime for the award of public contracts similar to the Brazilian Growth Acceleration Programme. It is a countrywide programme which consists of investments in infrastructure and institutional measures to support those measures. The first feature of the programme encompasses logistics, energy and social and urban development. The institutional measures are geared towards the relief and the improvement of the tax system, encouraging credit and financing, with a special emphasis on the enhancement of the investment environment combined with long-term fiscal measures”52. The Brazilian acceleration program helped in creating a “paradigm shift for private sector involvement (...) with private operators gradually

52 Simplified version of the General Government Accounts of the Republic – Year 2009, http://portal2.tcu.gov.br/portal/pls/portal/docs/2056550.PDF

46

buying into the model and resulting in improved services at lower cost to the central government”53.

It is important to point out that the integration of the PPP projects with a special focus on sustainable infrastructure projects into the government’s investment and development plan, is a key factor of success. However, political backing and support should not overrule technical and financial feasibility since these are the ultimate determinants of success.

• Regulatory and Institutional Reforms - Various Arab countries should continue implementing structural reforms in their legal and institutional frameworks in order to create an environment conducive to private investment including the creation of special governmental agencies for the promotion of private investment. Additionally, having a unified PPP law and a central PPP unit to serve as the backbone for PPP projects is essential for the progress of PPPs. Central PPP units will be responsible to establish a standardized bidding process that allows for dialogue and negotiation during the process, to address sector specificities as well as to determine simplified processes in relation to dispute resolution – which are in some countries complex under the existing laws – thereby providing adequate protection to investors. This is to be followed by PPP units at the ministerial level since these will be responsible for the overview and monitoring of the projects after financial closure54. Tax laws in various Arab countries should also recognize the opportunity of using finance debtor accounting which allows accounting profits to match project cash flows more closely, thereby linking tax payments with generated cash flows rather than accounting profits55.

• Capacity-building– Technical support especially for countries with a low experience of PPPs is needed. These countries need the assistance from various developmental agencies for the launch of the first projects covering different sectors, where project specific advice should address specific challenges and issues. Even well-established PPP units such as the Egyptian PPP unit would require additional resources in order to hire employees needed for the launch of their ambitious PPP plans. Additionally, a standard analytical and evaluation framework to determine the feasibility of PPP projects and allow for their prioritization is missing in many Arab countries. The feasibility assessment should take into account the public sector comparator and assess the value creation of the PPP project through the creation of a shadow bid model56. Capacity needs to be developed in this regard in most Arab countries. The critical role of project preparation for the ultimate success of PPP projects cannot be understated.

• Funding Capacity - Successful fund raising needs an awareness of how to align private incentives with public goals. Initiatives and policies to attract capital including reduced prices, guaranteed feedstock supply agreements, reduced income tax rates and/or favourable tax payment terms that allow for spreading the tax payments over the concession contracts, exemption from taxes on repatriation of profits and duty free import of project materials may be considered for the short term. Yet, above all, an environment that is conducive to attracting private capital in the long-term including the rule of law, transparency, corporate governance and anticorruption measures are the only cornerstone for the mobilization of private funds for the medium and long-term. Such measures should allow for increased and sustained access to finance and encourage the growth of capital markets and infrastructure funds, and attract pension funds and insurance companies. Infrastructure funds managed to outperform the benchmark indices in Latin America57.

53 Overcoming constraints to the financing of infrastructure: Success Stories and Lessons Learned, January 2014, The World Bank Group 54 Interview with Mr. Atter Hannoura, Head of the PPP Central Unit, Egypt, 29 December 2014. 55 FEMIP Study on PPP Legal & Financial Frameworks in the Mediterranean Partner Countries – Volume 2- Country Analysis, European Investment Bank, May 2011 56 Interview with Mr. Atter Hannoura, Head of the PPP Central Unit, Egypt, 29 December 2014. 57 Overcoming constraints to the financing of infrastructure: Success Stories and Lessons Learned, January 2014, The World Bank Group

47

Additionally, linking PPP projects’ revenues to an inflation index or benchmark may result in availing long term fixed project finance from the banking sector. It is also recommended to focus on medium size social projects which are less complex and may pose less foreign exchange issues given the ability of the local banking sector to provide local currency funding, unlike for larger projects, hence not requiring the government to bear the responsibility for a foreign exchange risk.

• Public Acceptance – The empowerment of the local authorities at the governorate and municipal levels to identify and structure projects suiting local needs is important, as it will enable public buy-in for the tariffs to be borne by the end user. In addition, it will ensure that projects are best suited to local requirements.

Whereas various Arab countries have attained varying degrees of reform in the above areas, more is still needed in order to reap the full benefits from PPPs as a means of finance. In addition to the above key areas of reform, intra-Arab cooperation is needed in the three areas below:

Intra-Arab PPP Initiatives

A Regional Platform

A regional platform to enhance capacity in the initiation, closure and

monitoring of PPP projects and serve as a PPP regional network

supported by specialist centres in different areas to attract cross

border PPP Cooperation

• Many Arab countries could benefit from other regional experiences. A real time portal supported by specialist regional centres in various sectors (e.g. renewable energy etc...)58, which provides details on the available opportunities in PPP and is accessible to all stakeholders in the public and private sectors (investors, contractors and operators etc..) to enhance information-sharing.

• The platform could also serve as a means to mobilize regional investments.

• Additionally, cross border infrastructure projects (in energy generation and distribution, transportation as well as other sectors) could be mobilized benefiting several countries simultaneously and allowing for cheaper Kilowatt per hour rates across borders.59

58 ESCWA Experts Group Meeting On Infrastructure Investments and Public-Private Partnerships, Rabat, Morocco, 17-18 April 2013 59 Public-Private Partnerships For Infrastructure Development in the Arab Region, Economic and Social Commission for Western Asia (ESCWA), 19 September 2013

48

A Standardized Cost Benefit Analysis

Development of a standardized cost-benefit analysis approach in the

assessment of PPP projects on an ex-ante and ex-post basis Whereas many projects are judged to be successful by their mere ability to reach financial closure, an analysis of whether a specific project has created value through the public-private partnership framework, in comparison to being implemented by the government alone needs to be developed in most countries. This framework should take into account any costs related to government off-take and other contingent obligations (guarantees, foreign exchange related payments, etc.), possible cost overruns, maintenance, operation and replacement costs in line with private sector standards, costs of financing, etc. Positive value creation needs to be demonstrated when comparing the "public sector comparator" to the "shadow bid model"60. This information is usually not available in the public domain and should be made available in a transparent manner to allow for public debate and assessment in addition to policy modification if needed.

Regional Infrastructure Funds

The Development of Arab Infrastructure Investment Companies

Following attempts in India, an Arab infrastructure finance company can be created to invest in PPP projects that have been operational for one or more years, thereby providing an attractive vehicle for investors with lower risk appetite61 who are unwilling to bear construction and early-stage operational risk and enabling an early exit for project financial sponsors. Since few projects may exist on a country level, a diverse portfolio can be obtained through the pooling of projects among several Arab countries. Many sovereign wealth, pension funds and insurance companies would be interested in investing in infrastructure, especially if early-stage risk is mitigated, given the long duration of infrastructure investment matching the investment period these funds.

c. Green bonds, Islamic Finance and Green sukuk

i. Green bonds

Green bonds are becoming increasingly popular in capital markets around the world. Green bonds are capital market debt instruments aimed at raising capital in order to fund clean energy and clean power projects including those aimed at carbon reduction thereby reducing climate change risk. Eligible projects include wind farms, solar parks, renewable transmission and infrastructure projects, energy efficient technologies, smart grid installations, electric vehicles and infrastructure, LEED green building systems, etc. The green bonds market is currently estimated at US$40 billion in 201462. Green bonds issued in 2014 alone are about double as much as those issued during the whole period 2007-2013, signifying increasing awareness and interest from the part of investors. The green bonds market is expected to reach US$100 billion in 2015.

60 The description of the public sector comparator analysis was provided by Mr. Atter Hannoura, Head of the PPP Central Unit, Egypt, in an interview dated 29 December 2014 61 Overcoming constraints to the financing of infrastructure: Success Stories and Lessons Learned, January 2014, The World Bank Group 62 Climate Bonds Initiative

49

Source: Climate Bonds Initiative

Source: Green Financing Dialogue - Assessing Green Sukuk, Global Islamic Finance Forum, Kuala Lumpur, 3

September 2014

The advantages of green bonds is that they enable the “ring-fencing” of revenues related to particular “green” assets to be channelled to the bondholders, while at the same time allowing the investor to benefit from the overall rating of the issuer. For example, green bonds issued by the World Bank to fund projects in renewable energy benefit from the segregation of funds to finance only those “green” assets that are specified in the issue. In addition, they require the allocation of the relevant cash flows arising from such projects to settle the bonds. At the same time, the investor is protected by the overall rating of the issuer, in this case the World Bank. Other bond structures are also possible including the creation of Special Purpose Vehicles (SPV) for example, for specific power projects and the securitization of an existing green portfolio (e.g. the securitization of car loans provided to electric and hybrid car buyers as in the case of Toyota’s green bond issued in March 2014). An additional feature that is important to reassure investors is the availability of verifiers who would attest to the compliance of the issuer with green bonds standards.

0.8 0.4 0.9 4.0 1.2 3.111.0

40.0

100.0

0.0

20.0

40.0

60.0

80.0

100.0

120.0

2007 2008 2009 2010 2011 2012 2013 2014 e 2015 f

US$ b

illion

Development in the Green Bonds Labelled

Market

Transport76%

Energy12%

Finance9%

Building & Industry2%

Agriculture1%

Waste & Pollution0%

Sector Breakdown of Green Bonds (2013)

With the advancement of green and climate bondmultilateral development banks in 2007 and 2008 (including EIB, World Bank, IFC, EBRDcorporate entities started venturing into the market in 2013 France and GDF Suez whose USfund projects in renewable energy and smart metering. In addition, cities and municipalities have also tapped this booming market, as for examplesolar energy water heaters to produce 22 GWissues being significantly oversubscribed with issuances from GDF Suez covered three times (3x), Électricité de France (2x), UnibailHera (3x). Increasing awareness is also evidenced by retail investors starting to tap this market following steps taken by pension funds, fixed income managers and insurance companies.

Despite this huge interest in Ethical and Socially Responsible Investing (SRI), investorto accept lower returns. They demand similar returns for green bonds which have comparable risk profiles as non-green bonds. However, in case of similar risk/preferred by the investors over other conventional issuessince they provide a reputational boost.

In October 2013, the African Development Bank issued green bonds whose proused to fund two projects in Arab countries (Tunisissued to date in the Arab world.that there are over US$45 trillion of assets under management in the responsible investment and over Environment, Social and Corporate demonstrates this enormous yet unexploited opportunity complement public sources with private funds.

ii. Islamic Finance

Islamic finance embodies profitwhether the existing financial instruments various forms of equity participation or profitinvestment in certain industries related to alcohol, pornography, gambling, arms, drugsappealing to investors that comply with the prescriptions of the Islamic faith.

Islamic finance assets hit US$1.8 trillion in 2013 and are expected to surpass USThe Islamic banking industry grew at a compound annual growth rate (CAGR) of 17.04% in the 63 Climate Bonds Initiative 64 Climate Bonds Initiative

• Green bonds are capital market instruments aimed at raising funding for clean energy or "green" projects. Issuance in 2014 has surpassed those during the whole period 2007strong interest worldwide. Their main advantage is the "ringfencing" of the financed assets and the relevant cash flows through accounting measures among others and the investor's protection arising from the issuer's overall rating. Verifiers provide assurance to investors regarding the claimed climatefriendly nature of the financing. Green bonds represent an untapped opportunity for Arab countries.

Green Bonds

50

With the advancement of green and climate bonds initially issued by sovereign entities and multilateral development banks in 2007 and 2008 (including EIB, World Bank, IFC, EBRDcorporate entities started venturing into the market in 2013 like Bank of America, Électricité de

US$3.4 billion issue represents the largest corporate issue to date to fund projects in renewable energy and smart metering. In addition, cities and municipalities have also

, as for example the city of Johannesburg (US$140solar energy water heaters to produce 22 GW.h per year). Huge demand results in green labelled bond issues being significantly oversubscribed with issuances from GDF Suez covered three times (3x), Électricité de France (2x), Unibail-Rodamco (3.4x), Korea Export Import Bank (3x) and Italian utility Hera (3x). Increasing awareness is also evidenced by retail investors starting to tap this market following steps taken by pension funds, fixed income managers and insurance companies.

this huge interest in Ethical and Socially Responsible Investing (SRI), investordemand similar returns for green bonds which have comparable risk

green bonds. However, in case of similar risk/reward offering, green bonds will be preferred by the investors over other conventional issues63. Green bonds are also preferred by issuers since they provide a reputational boost.

African Development Bank issued green bonds whose proused to fund two projects in Arab countries (Tunisia and Egypt). However, no green bonds have been

orld. The fact that the global bond market is estimated at $45 trillion of assets under management in the world supporting principles for

responsible investment and over US$13 trillion of assets under management incorporating orporate Governance (ESG) guidelines in their selection criteriaunexploited opportunity for Arab countries which could

complement public sources with private funds.

Islamic finance embodies profit-sharing as one of its core principles, despite onwhether the existing financial instruments actually reflect this principle. Its instruments include various forms of equity participation or profit-sharing sukuk (Shari’ah compliant bonds). It forbids investment in certain industries related to alcohol, pornography, gambling, arms, drugsappealing to investors that comply with the prescriptions of the Islamic faith.

$1.8 trillion in 2013 and are expected to surpass USThe Islamic banking industry grew at a compound annual growth rate (CAGR) of 17.04% in the

Green bonds are capital market instruments aimed at raising funding for clean energy or "green" projects. Issuance in 2014 has surpassed those during the whole period 2007-2013 signifying strong interest worldwide. Their main advantage is the "ringfencing" of the financed assets and the relevant cash flows through accounting measures among others and the investor's protection arising from the issuer's overall rating. Verifiers provide assurance to investors regarding the claimed climatefriendly nature of the financing. Green bonds represent an untapped opportunity for Arab countries.

s initially issued by sovereign entities and multilateral development banks in 2007 and 2008 (including EIB, World Bank, IFC, EBRD, etc.),

Bank of America, Électricité de n issue represents the largest corporate issue to date to

fund projects in renewable energy and smart metering. In addition, cities and municipalities have also $140 million to finance

h per year). Huge demand results in green labelled bond issues being significantly oversubscribed with issuances from GDF Suez covered three times (3x),

amco (3.4x), Korea Export Import Bank (3x) and Italian utility Hera (3x). Increasing awareness is also evidenced by retail investors starting to tap this market following steps taken by pension funds, fixed income managers and insurance companies.

this huge interest in Ethical and Socially Responsible Investing (SRI), investors are unwilling demand similar returns for green bonds which have comparable risk

reward offering, green bonds will be . Green bonds are also preferred by issuers

African Development Bank issued green bonds whose proceeds were partially However, no green bonds have been

bond market is estimated at US$100 trillion, orld supporting principles for

$13 trillion of assets under management incorporating overnance (ESG) guidelines in their selection criteria64,

Arab countries which could allow them to

sharing as one of its core principles, despite on-going debate as to reflect this principle. Its instruments include ukuk (Shari’ah compliant bonds). It forbids

investment in certain industries related to alcohol, pornography, gambling, arms, drugs, etc., hence

$1.8 trillion in 2013 and are expected to surpass US$2 trillion in 2014. The Islamic banking industry grew at a compound annual growth rate (CAGR) of 17.04% in the

Green bonds are capital market instruments aimed at raising funding for clean energy or "green" projects. Issuance in 2014 has

2013 signifying strong interest worldwide. Their main advantage is the "ring-fencing" of the financed assets and the relevant cash flows through accounting measures among others and the investor's protection arising from the issuer's overall rating. Verifiers provide assurance to investors regarding the claimed climate-friendly nature of the financing. Green bonds represent an

period 2009- 2013. Despite being dominated by countries have experienced a sizable growth rateMorocco. The largest Arab countries in terms of Islamic banking assets in 2011 are Saudi Arabia (19%), UAE (7%), Kuwait (6%), Qatarand deposits post-2009 averaged above 20%growing at double or triple the growth rate of conventional banks

The growth of Islamic finance industry stems from itsIslamic finance products have in placeacceptable from a Socially Responsible Investing (offer competitive returns to traditional equity and fixed income investments and have developed structures that provide downside risk protection and are also applauded for their link to an undtheir avoidance of speculation, being avoiding the drawbacks of financial engineering and synthetic products which were the main driverof the financial crisis. Islamic products are demand driven, with in deposits, unmet by investment opportunities matching

iii. Green sukuk

Green sukuk (or Shari’ah compliant bonds) Green sukuk are an amalgamation of the positive features of Green bonds with their ethical climate friendly orientation and secondary market transferability on the one hand and the attractive featuIslamic finance, with its asset-structure. Moreover, Green sukukprovide a window for “impact-expected to pull both domestic retail savings given their Islamic feature as well as institutional funds since Islamic banks tend to use different purposes68. Not only that, Islamic investment products are window of opportunity to channel Islamic deposits

65 Islamic Financial Services Industry Stability Report 2014, published by the Islamic Financial Servic66 Gerald Hayes, Islamic finance

http://www.globalcapital.com/article/jbxq453k6b0t/islamic67 Gerald Hayes, Islamic finance

http://www.globalcapital.com/article/jbxq453k6b0t/islamic68 Islamic Financial Services Industry Stability Report 2014, published by the Islamic Financial Services Board69 Gerald Hayes, Islamic finance

http://www.globalcapital.com/article/jbxq453k6b0t/islamic

• Islamic finance has grown over the last 5 to 10 years due to its appeal to the followers of the Islamic faith, its profitnature, its socially responsible plea, its linkages with underlying economic activities and its avoidance of speculation. The inherent due diligence on the beneficiaries of Islamic finance to ensure conformity with Islamic principles provides comfort to investors.

Islamic Finance

51

2013. Despite being dominated by the GCC and Malaysia, some other new entry a sizable growth rate in 2013 such as Jordan, Yemen, Tunisia, Libya and

The largest Arab countries in terms of Islamic banking assets in 2011 are Saudi Arabia (19%), UAE (7%), Kuwait (6%), Qatar (4%), Bahrain (2%), and Sudan (1%). Growth in financing

2009 averaged above 20%65. It is estimated that, in every market, Islamic banks are growing at double or triple the growth rate of conventional banks66.

industry stems from its underlying “socially responsible appeal”. The Islamic finance products have in place selection criteria that exclude certain industries

Socially Responsible Investing (SRI) perspective. The Islamic baoffer competitive returns to traditional equity and fixed income investments and have developed structures that provide downside risk protection and exhibit lower risk correlation. Islamic products are also applauded for their link to an underlying economic activity, their assettheir avoidance of speculation, being associated with real, tangible assets and services, thereby avoiding the drawbacks of financial engineering and synthetic products which were the main driver

products are demand driven, with Islamic banks experiencin deposits, unmet by investment opportunities matching their orientation67.

hari’ah compliant bonds) represent an untapped means of finance in Arab countries. an amalgamation of the positive features of Green bonds with their ethical climate

friendly orientation and secondary market transferability on the one hand and the attractive featu-backed attributes, retail demand-driven feature and profitukuk address Shari’ah’s concern for preserving the environment, -investing”, a common goal with Green bonds.

expected to pull both domestic retail savings given their Islamic feature as well as institutional funds different sukuk structures for liquidity management and capitalization

. Not only that, Islamic investment products are also short of supplyto channel Islamic deposits into Green sukuk69.

Islamic Financial Services Industry Stability Report 2014, published by the Islamic Financial Servic

Gerald Hayes, Islamic finance – the original SRI?, 30 Sep 2013,

http://www.globalcapital.com/article/jbxq453k6b0t/islamic-finance-the-original-sri


icle/jbxq453k6b0t/islamic-finance-the-original-sri

Islamic Financial Services Industry Stability Report 2014, published by the Islamic Financial Services Board


/article/jbxq453k6b0t/islamic-finance-the-original-sri

Islamic finance has grown over the last 5 to 10 years due to its appeal to the followers of the Islamic faith, its profit-sharing nature, its socially responsible plea, its linkages with underlying economic activities and its avoidance of speculation. The inherent due diligence on the beneficiaries of Islamic finance to ensure conformity with Islamic principles provides comfort to

sia, some other new entry Jordan, Yemen, Tunisia, Libya and

The largest Arab countries in terms of Islamic banking assets in 2011 are Saudi Arabia (4%), Bahrain (2%), and Sudan (1%). Growth in financing

n every market, Islamic banks are

“socially responsible appeal”. The that exclude certain industries which are not perspective. The Islamic banking products

offer competitive returns to traditional equity and fixed income investments and have developed lower risk correlation. Islamic products

erlying economic activity, their asset-backed nature and real, tangible assets and services, thereby

avoiding the drawbacks of financial engineering and synthetic products which were the main drivers banks experiencing a growth

means of finance in Arab countries. an amalgamation of the positive features of Green bonds with their ethical climate

friendly orientation and secondary market transferability on the one hand and the attractive features of driven feature and profit-sharing

address Shari’ah’s concern for preserving the environment, and onds. Green sukuk are

expected to pull both domestic retail savings given their Islamic feature as well as institutional funds ukuk structures for liquidity management and capitalization

short of supply, which presents a


the original SRI?, 30 Sep 2013,




Islamic finance has grown over the last 5 to 10 years due to its sharing

nature, its socially responsible plea, its linkages with underlying economic activities and its avoidance of speculation. The inherent due diligence on the beneficiaries of Islamic finance to ensure conformity with Islamic principles provides comfort to

The global outstanding sukuk market is estimated at a 15.9% year-on-year growth since of 2013 was about US$245 billion with regions respectively. The sukuk market finance with an annual growth rate of 41.6%issuances reached US$120 billion in 2013

Source: Green Financing Dialogue

September 2014

Green sukuk represent a great opportunity to fund climate friendly projects especially in the field of renewable energy generation. In various Arab countries, power demand has risen annually over the last 10 years. In 2020, electricity demand is expected to be 84% higher than 2010 levels, which would require the installation of an additional 135 GW of generation capacity, costing approximately US$450 billion72

70 Source: Green Financing Dialogue - Assessing Green Sukuk, Global Islamic Finance Forum, Kuala Lumpur, 3 September

2014 71 Islamic Financial Services Industry Stability Report 2014, published by the Is72 Pan-Arab Renewable Energy Strategy 2030

Agency, League of Arab States, 2014

• Green sukuk represent a blend between Green bonds and Islamic Finance. Similar to Green bonds, they fund climate friendly projects and are available on the secondary market. Similar to Islamic finance products, they entail a profitare asset backed. Both have in common an ethical nature and require due diligence checks to comfort investors.

Green sukuk -

Killing Two Birds with One Stone

24%

Sector Breakdown of Sukuk Issuance

52

ukuk market is estimated at US$272.96 billion as of the first growth since the first quarter of 201370. Total sukuk outstanding in 245 billion with US$74.9 billion and US$1.2 billion in the GCC and

ukuk market has been the second fastest growing segment of Islamic finance with an annual growth rate of 41.6% on average between 2005 and 2012. Annual

120 billion in 201371.

Source: Green Financing Dialogue - Assessing Green Sukuk, Global Islamic Finance Forum, Kuala Lumpur, 3

represent a great opportunity to fund climate friendly projects especially in the field of renewable energy generation. In various Arab countries, power demand has risen

. In 2020, electricity demand is expected to be 84% higher than 2010 levels, which would require the installation of an additional 135 GW of generation capacity, costing

72. At the same time, with increasing scarcity in fossil fuels and the

Assessing Green Sukuk, Global Islamic Finance Forum, Kuala Lumpur, 3 September


Arab Renewable Energy Strategy 2030- Roadmap of Actions for Implementation, International Renewable Energy

Green sukuk represent a blend between Green bonds and Islamic Finance. Similar to Green bonds, they fund climate friendly projects and are available on the secondary market. Similar to Islamic finance products, they entail a profit-sharing feature and are asset backed. Both have in common an ethical nature and require due diligence checks to comfort investors.

Killing Two Birds with One Stone

59%24%

9%

5%

2%

1%0.3% 0.2%

Sector Breakdown of Sukuk Issuance

(1Q 2014)

Government

Fianncial Services

Power & Utilities

Real Estate

Transport

Agriculture

Telecom

Healthcare

the first quarter of 2014, ukuk outstanding in the first half

the GCC and MENA the second fastest growing segment of Islamic

between 2005 and 2012. Annual sukuk

amic Finance Forum, Kuala Lumpur, 3

represent a great opportunity to fund climate friendly projects especially in the field of renewable energy generation. In various Arab countries, power demand has risen by about 6%

. In 2020, electricity demand is expected to be 84% higher than 2010 levels, which would require the installation of an additional 135 GW of generation capacity, costing

scarcity in fossil fuels and the

Assessing Green Sukuk, Global Islamic Finance Forum, Kuala Lumpur, 3 September

lamic Financial Services Board

Roadmap of Actions for Implementation, International Renewable Energy

Green sukuk represent a blend between Green bonds and Islamic Finance. Similar to Green bonds, they fund climate friendly projects and are available on the secondary market. Similar to

sharing feature and are asset backed. Both have in common an ethical nature and

Government

Fianncial Services

Power & Utilities

53

availability of climatic comparative advantages favouring wind and solar power generation73, Arab countries are targeting to increase renewable energy generation from 12 GW in 2013 (representing only 6% of power generation) to about 75 GW by 2030 in order to meet their energy gap74.

Renewable Energy % of Installed Capacity

Country Current Under Construction

Algeria 0.25% 0.13%

Bahrain 0.14% 0.08%

Comoros 0.00% NA

Djibouti 1.19% NA

Egypt 2.00% 1.09%

Iraq 0.02% 0.00%

Jordan 0.29% 0.00%

Kuwait 0.01% 0.00%

Lebanon 0.04% 0.00%

Libya 0.06% 0.84%

Mauritania 7.71% 13.64%

Morocco 4.85% 20.74%

Oman 0.01% NA

Palestine 0.98% 0.96%

Qatar 0.47% NA

Saudi Arabia 0.01% 0.02%

Somalia 0.00% NA

Sudan 0.00% 0.00%

Syria 0.01% 0.00%

Tunisia 4.35% 2.08%

UAE 0.49% 0.00%

Yemen 0.10% 0.03%

Source: Pan-Arab Renewable Energy Strategy 2030- Roadmap of Actions for Implementation, International

Renewable Energy Agency, League of Arab States, 2014

73 According to the International Energy Agency, Concentrated Solar Power technologies could generate 100 times more electricity in the Middle East and North Africa than all the electricity consumption of the Arab region and Europe. Furthermore, according to the Pan-Arab Renewable Energy Strategy 2030, Photo Voltaic radiation is in the range of 1920 KWh/m2/year in Lebanon, 2450 KWh/m2/year in Egypt which are some of the highest in the world. According to OECD, the Red Sea costs have the potential for large wind farms, given that the wind speed in this area frequently exceeds 6.9 m/s which is the economic feasibility threshold 74 If hydropower is excluded, renewable energy generation will only represent 1% of total power generation

54

The deployment of Green sukuk cannot be done in isolation from the legal and regulatory set-up as well as the supportive technological and human capacity needed to develop the underlying projects. Gaps identified for the renewable energy deployment in Arab countries include: (1) political, legal, regulatory and institutional; (2) financial, market and economic; and (3) technological infrastructure and human capacity75. Additionally, the infrastructure for Green sukuk as a financing instrument, require a whole set of strategic supporting factors, above all the availability of a countrywide and region wide strategy for encouraging green investments.

In this respect, many Arab countries are taking steps to formulate their renewable energy strategy and policies by creating dedicated agencies for renewable energy, setting feed-in tariffs (like in Algeria, Jordan, Palestine, Syria and Egypt), allowing for net metering and competitive bidding. Some have a renewable energy law or part of their electricity law dedicated to renewable energy (Algeria, Jordan, Morocco, Palestine, Syria, Tunisia and Egypt). However, the major bottleneck to date is that renewable power generation remains more costly than conventional power plants76, which is further exacerbated by the subsidized electricity prices making renewable energy even less attractive. Algeria, Iraq, Libya and Syria are the highest electricity subsidizing Arab countries while Jordan, Morocco and Palestine display the lowest subsidy levels. The rest of the Arab countries such as Egypt, Lebanon, Sudan, Tunisia and Yemen have moderate subsidy levels77. The unattractiveness of renewables is further increased by the recent fall oil prices reaching US$53-US$60 per barrel.

Despite those hurdles, almost half of the new electricity capacity installed in the world comes from renewables while technological advancement is continuously driving costs down78. Furthermore, the acute need for electricity generation faced by developing countries in the Arab region and energy shortages in many of the non-oil exporting countries is driving them to gradually start reducing their energy subsidies.

75 Pan-Arab Renewable Energy Strategy 2030- Roadmap of Actions for Implementation, International Renewable Energy Agency, League of Arab States, 2014 76 Renewable Power Generation Costs in 2012: An overview, International Renewable Energy Agency 77 Pan-Arab Renewable Energy Strategy 2030- Roadmap of Actions for Implementation, International Renewable Energy Agency, League of Arab States, 2014 78 Pan-Arab Renewable Energy Strategy 2030- Roadmap of Actions for Implementation, International Renewable Energy Agency, League of Arab States, 2014

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%Algeria

Bahrain

Comoros

Djibouti

Egypt

Iraq

Jordan

Kuwait

Lebanon

Libya

Mauritania

Morocco

Oman

Palestine

Qatar

Saudi Arabia

Somalia

Sudan

Syria

Tunisia

UAE

Yemen

Renewable Energy Projects (% of Total Capacity)

Current vs. Under Construction

Current Under Construction

Below is a list of recommendations to develop the Green bonds/sukuk market in Arab countries. first three recommendations indicate the potential offor Green bonds/sukuk79. Those areinfrastructure, as well as other discussed as a means to attain synergies and benefit from common experiences and unified projects that could serve multiple countries

• Energy policies should be geared to

infrastructure and highest yielding renewable energy sources where each c

have a comparable advantage.

energy policies need to be based on a countrywide strategy which identifies the advantages in each renewable energy segment (aftoptimizes the mix between various renewable energy sources. For example, biomass, hydropower and geothermal electricity followed by wind at good sites aregenerate electricity, yet electricity generated from them is low. On the other hand, Solar Photovoltaic (PV) and Concentrated Solar Plants (CSP) have the advantage of abundant resource availability, and their costs are renewable energy projects which areyet this should be balanced to be filled. A mix of different energy sources may also be considered.

• Projects for off-grid and rural areas

should give priority to renewable energy.

method for new grid supply and swift grid extension as well as offgovernments should embark on projectfrom lower access to electricity development and will reduce the load on existing power supply capacity

• The relevant legal, institutional, capacity and technological infrastructure for

energy projects need to be

underlying assets, governments need to prepare the needed frameworks and policies to support renewable energy including renewable energy laws, feed

79 Some effort has already been exerted to create enabling conditions for renewable energy projects in Arab countries. For

an overview of existing conditions, please refer to Pan

Implementation, International Renewable Energy Agency, League of Arab States, 2014.80 Renewable Power Generation Costs in 2012: An overview, International Renewable Energy Agency81 Renewable Power Generation Costs in 2012: An overview, Internat

• Being the underlying asset of Green bonds/sukuk, it is important to note the related opportunities and challenges regarding the deployment of renewable energy. Arab countries are increasingly targeting renewable energy generation given the shortage in fossil fuels and the climatic advantages it can bring. Some steps have already been taken in various countries to create supportive frameworks and policies, yet, more efforts need to be done. Also, supportive conditions are needed for Green bonds/sukuk to thrive as financing instruments.

Renewable Energy Projects

The Underlying Asset

55

Below is a list of recommendations to develop the Green bonds/sukuk market in Arab countries. indicate the potential of renewable energy projects

Those are followed by recommendations related to the Green infrastructure, as well as other possible financing instruments. Intra-Arab cooperation is also discussed as a means to attain synergies and benefit from common experiences and unified projects

ies.

Energy policies should be geared towards the selection of the most economic

highest yielding renewable energy sources where each c

a comparable advantage. Alongside the economic and financial feasibility energy policies need to be based on a countrywide strategy which identifies the advantages in each renewable energy segment (after conducting thorough surveys) andoptimizes the mix between various renewable energy sources. For example, biomass, hydropower and geothermal electricity followed by wind at good sites are generate electricity, yet electricity generated from them is low. On the other hand, Solar Photovoltaic (PV) and Concentrated Solar Plants (CSP) have the advantage of abundant resource availability, and their costs are dropping with time80. Arab countries may want to start with renewable energy projects which are more feasible, in order to minimize their financi

against the existing energy gap and the speed at which to be filled. A mix of different energy sources may also be considered.

grid and rural areas which are suffering from low access to electricity

should give priority to renewable energy. Given that renewables are the most costmethod for new grid supply and swift grid extension as well as off-grid power supply

embark on projects that would speed up rural development which sufferfrom lower access to electricity compared to urban areas. This will help spur development and will reduce the load on existing power supply capacity.

The relevant legal, institutional, capacity and technological infrastructure for

need to be implemented. Given that renewable energy projects represent the , governments need to prepare the needed frameworks and policies to support

renewable energy including renewable energy laws, feed-in tariffs, renewable energy units

Some effort has already been exerted to create enabling conditions for renewable energy projects in Arab countries. For

an overview of existing conditions, please refer to Pan-Arab Renewable Energy Strategy 2030-

Implementation, International Renewable Energy Agency, League of Arab States, 2014.

Renewable Power Generation Costs in 2012: An overview, International Renewable Energy Agency


Being the underlying asset of Green bonds/sukuk, it is important to note the related opportunities and challenges regarding the deployment of renewable energy. Arab countries are increasingly targeting renewable energy generation given the shortage in fossil fuels and the climatic advantages it can bring. Some steps have already been taken in various countries to create supportive frameworks and policies, yet, more efforts need to be done. Also, supportive conditions are needed for Green bonds/sukuk to thrive as financing instruments.

Renewable Energy Projects -

The Underlying Asset

Below is a list of recommendations to develop the Green bonds/sukuk market in Arab countries. The renewable energy projects as underlying assets

followed by recommendations related to the Green bonds/sukuk Arab cooperation is also

discussed as a means to attain synergies and benefit from common experiences and unified projects

the selection of the most economic sustainable

highest yielding renewable energy sources where each country would

the economic and financial feasibility assessment, energy policies need to be based on a countrywide strategy which identifies the comparative

er conducting thorough surveys) and which optimizes the mix between various renewable energy sources. For example, biomass,

the cheapest way to generate electricity, yet electricity generated from them is low. On the other hand, Solar Photovoltaic (PV) and Concentrated Solar Plants (CSP) have the advantage of abundant resource

. Arab countries may want to start with more feasible, in order to minimize their financial burden,

the existing energy gap and the speed at which this gap needs

which are suffering from low access to electricity

Given that renewables are the most cost-competitive grid power supply81,

that would speed up rural development which suffers . This will help spur equitable

The relevant legal, institutional, capacity and technological infrastructure for renewable

energy projects represent the , governments need to prepare the needed frameworks and policies to support

in tariffs, renewable energy units, etc.

Some effort has already been exerted to create enabling conditions for renewable energy projects in Arab countries. For

Roadmap of Actions for


ional Renewable Energy Agency

Being the underlying asset of Green bonds/sukuk, it is important to note the related opportunities and challenges regarding the deployment of renewable energy. Arab countries are increasingly targeting renewable energy generation given the shortage in fossil fuels and the climatic advantages it can bring. Some steps have already been taken in various countries to create supportive frameworks and policies, yet, more efforts need to be done. Also, supportive conditions are needed for Green bonds/sukuk to

56

Such factors have been addressed in detail in the Pan-Arab Renewable Energy Strategy 2030 prepared by the International Renewable Energy Agency and the League of Arab States in 2014.

• Government off-take, guarantees and incentives to be used to encourage investors until

structural market inefficiencies are addressed and enhanced feasibility assessment for

renewable projects is attained. Private funding will be a condition for the long-term off-take by governments to assure investors of the commercial feasibility of their investment and mitigate their currency exposure. The PPP projects in Morocco, UAE and Egypt demonstrate that with the government off-take and the proper structuring it may be possible to encourage private financing in renewable energy. Though the usual fiscal support mechanisms are not recommended, targeted forms of fiscal support (e.g. custom duty and tax exemptions or reductions, tax credits) may be needed in the renewable energy field in the initial stage. About 14 Arab countries do not have such fiscal advantages at the moment82. Other forms of funding including grant, soft loans and microcredit could prove useful. For example, Egypt is about to embark on a subsidized loan scheme for home owners to encourage the installation of solar rooftops83, a measure which can be replicated in other countries. The gradual decrease in electricity subsidies, as well as other possible tax levies which could be considered (e.g. a tax on oil revenues as implemented in Algeria) may be used to support such fiscal measures.

Those fiscal measures should not only be directed to renewable energy generation projects, but also to supportive manufacturing related industries, in order to trigger extensive social and economic benefits. Furthermore, governments can provide incentives through the banking system rather than to resort to direct measures, for example, through lower capital requirements for financial institutions which provide funding to businesses that reduce the environmental footprint (CO2, water, waste, etc.)

84. The idea can be extended to reducing reserve requirements by the Central Banks on such activities similar to the reduction in reserve requirements on SME loans. Additionally, tax deductive returns can be introduced for retail investors in Green bonds/sukuk as well as for infrastructure equity funds.

• Green bonds and Green sukuk in addition to being used on a project basis should be used

as a mechanism to fund a portfolio of projects. Green bonds and Green sukuk have several advantages over other private funding sources. First, they represent a tradable capital market instrument, hence allowing for transferability and ease of exit, thus transforming an otherwise illiquid instrument into a liquid one85. The second advantage is that green bonds may be based on a pool of portfolio projects, which generally entails risk diversification resulting in a low required return threshold. This may be a way to address the current economic feasibility challenges in renewable energy deployment. Furthermore, certain projects by virtue of their size (e.g. the establishment of solar water heaters in residences or energy efficiency for buildings) can only be funded on a portfolio basis, which can be made available through Green bonds/sukuk. Governments and International Financial Institutions may resort initially to sovereign guarantees as a credit enhancement mechanism until such precedents become less risky. Another way to reach critical mass could be to exploit the potential of the pooling of regional renewable energy projects which will diversify away risk.

• The creation of national renewable energy equity funds86

and the mobilization of financing

sources will complement the Green bond/sukuk offering with equity funding. Algeria, Egypt, Jordan, Morocco and Tunisia have created national renewable energy funds to invest in renewable energy projects. Yet, many other Arab countries are still lagging behind. Plus, not all

82 About 14 Arab countries do not have such fiscal advantages, according to the Pan-Arab Renewable Energy Strategy 2030. 83 Interview with Mr. Atter Hannoura, Head of the PPP Central Unit, Egypt, 29 December 2014. 84 Green Financing Dialogue, Global Islamic Finance Forum – 2014, Hussam Sultan, Manager – HSBC Amanah Malaysia Bhd 85 Naturally, liquidity is increased with time as in the initial stage, fund and investors of a buy and hold nature will tap the market first. 86 Another variation is the Green Investment Bank, established in 2012 and fully owned by the British government to invest in various green projects across the United Kingdom.

57

of these funds are fully operational as of today, due to sources of funding not yet determined, disbursement procedures not yet identified, or managers not yet selected87. These funds are to be either financed by public budgetary sources (including tax levies) and foreign donations or have yet failed to identify the possible sources of funding.

Another option could be to provide a small portion of public/grant direct financing, for example 20%, while the rest would be raised from the public against government risk cover and/or full/partial/selective guarantees from international financial institutions88, which would convert the direct financing to a contingent one. Whereas contingent obligations still carry their cost, it may resolve the problem of unavailable public funds and bridge the gap till investment in renewable energy funds becomes less risky. Both Green sukuk and renewable energy equity funds provide a capital market, tradable instrument and have the advantage of diversifying away risk (direct and contingent) over numerous projects.

• The relevant legal, institutional, capacity and technological infrastructure for capital

markets need to be in place. Challenges with respect to the mobilization of capital market funds which amount to less than 1% of GDP for Arab countries, including transparency, governance and rule of law as discussed in the section on portfolio investment still apply.

Regarding Green bonds and sukuk more specifically, clear definitions of investments that will be accepted as green, along with a verification and supervisory system to comfort investors and regulators about the “green” claims of corporate bond issuers is a must. In this respect, the Green Sukuk and Working Party (GSWP) was established in 2012 by the Clean Energy Business Council (CEBC), the Climate Bonds Initiative and the Gulf Bond and Sukuk Association (GBSA) to promote and develop Shari’ah compliant financial products to invest in climate friendly projects. “GSWP is a collaboration of experts in project development, environmental standards, capital markets, actuarial compliance and Islamic Finance”89. Discussions are underway and a consultative process is taking place to design the Green sukuk guidelines and architecture, promote the concept and recommend best practices to facilitate the issuance of the first Green bond/sukuk in the Middle East90. Speeding up the Green sukuk guidelines by building upon the SRI Sukuk Framework issued in Malaysia in September 201491 and the Green Bonds Standards issued by the Climate Bonds Initiative also in September 2014 is essential to move things forward.

• Intra-Arab cooperation is important for the formulation of energy policies and for the

provision of funding and grants taking into account national security considerations. Electricity trade among Arab countries has been minimal, accounting for less than 2% of total capacity in the Arab region. As far as development assistance and grants are concerned, currently, Jordan, Mauritania and Morocco have received grants from the Gulf countries to support renewable energy deployment92. Sovereign wealth funds may incorporate in their existing policies a minimum threshold to encourage renewable energy in the Arab region as part of their investment strategy to save future generations.

A possible funding vehicle to be considered is an Arab Green Climate Fund similar to the Green Climate Fund (GCF) established in December 2011 within the framework of the United Nations Framework Convention on Climate Change (UNFCCC). The fund had gathered US$ 10.19

87 Including Egypt and Jordan. Pan-Arab Renewable Energy Strategy 2030- Roadmap of Actions for Implementation, International Renewable Energy Agency, League of Arab States, 2014 88 Partial guarantees refer to the absorption of the first tranche of losses. Selective guarantees can cover the risk of cost overruns etc… Source: Imtiaz Ahmed and Sean Kidney, A climate Change Fix, Trading Carbon magazine. http://www.climatebonds.net/projects/facilitation/climate-funds-v20. The same guarantees can also be used for green bonds, though it is expected that bond holders will have lower risk appetite. 89 Climate Bonds Initiative 90 Climate Bonds Initiative 91 Malaysia introduces SRI Sukuk Framework, Saudi Gazette, Monday 1 September 2014 92 Pan-Arab Renewable Energy Strategy 2030- Roadmap of Actions for Implementation, International Renewable Energy Agency, League of Arab States, 2014

58

billion as of 31 December 2014 with the main purpose of advancing sustainable development by assisting developing countries in adaptation and mitigation efforts to combat climate change. An Arab Green Climate Fund would be a tool to redistribute money from high income Arab countries to middle income and least developed Arab countries. The GCF also created a Private Sector Facility (PSF), which aims at raising money from pension funds and institutional investors. Obtaining funding from private sources along with that received from governments – and possibly sovereign wealth funds – represents another form of public-private collaboration and could be applied in a regional Arab framework.

In addition to development assistance and finance, experience-sharing and cooperation in the structuring and implementation of new projects is highly recommended given the common challenges faced by Arab countries.

Policy Recommendations for Green bonds/Green sukuk

Measures to Encourage Renewable Energy Deployment

• Comprehensive countrywide renewable energy policies should be put in place to determine the highest economic yielding sustainable infrastructure and renewable energy sources including biomass, hydropower, geothermal electricity, wind, Solar Photovoltaic (PV) and Concentrated Solar Plants (CSP) and applying an optimal mix of all sources.

• Renewable energy is ideal for the off-grid and rural areas and should be considered in remote areas to promote sustainable development and equitable access to government services.

• The supportive legal, institutional, capacity and technological frameworks should be put in place benefiting from the experience of other countries and with the technical support of donor organizations.

Measures to Encourage Green bonds/sukuk and other Complementary Forms of Finance for Renewable Energy

• Proper financing structuring should consider government off-take, guarantees and incentives to encourage investors and enhance the feasibility of renewable energy projects (if needed).

• Green bonds/sukuk should not only be utilized to fund on a project by project basis, but also as a means to fund portfolios of projects, especially the small scale ones (e.g. the installation of electricity water heaters in a specific city).

• Renewable energy equity funds will complement the debt offering of the Green bonds/sukuk with an equity offering. This allows for the same risk diversification feature as Green Bonds when it is used for a portfolio of projects.

• The Green Sukuk Guidelines in addition to other supportive legal, institutional, capacity and technological frameworks should be put in place benefiting from the experience of other countries and with the technical support of donor organizations.

93 http://news.gcfund.org/wp-content/uploads/2015/02/pledges_GCF_dec14.pdf

59

Intra-Arab Cooperation

• Intra-Arab cooperation should allow for a coordinated effort in setting national energy priorities bearing in mind national security considerations.

• Electricity trade should be further increased to benefit from regional integration and Green bonds/sukuk should be considered as a possible funding source.

• Arab development assistance, Arab grants and Arab Sovereign Wealth Funds should have an increasing focus on renewable energy and on cooperation in the implementation of new projects as well as the development of the needed infrastructure for financing.

• An Arab Green Climate Fund could be established to help in combatting climate change and reducing green-house gas emissions and channelling funds from high income Arab countries to middle income and least developed countries.

60

5. Recommendations for Financing Sustainable Development in Arab Countries

This section presents a summary of recommendations for mobilizing financing for sustainable development in the Arab countries. This tool-kit is by no means intended to be exhaustive, yet it captures the findings of this paper, based on analysing the general challenges faced by most Arab countries. Its recommendations should be considered as a special focus for Arab countries within the general basket of more than 100 policy options, put forward by the Intergovernmental Committee of Experts on Sustainable Development Financing in August 2014. For the recommendations that are applicable at the national level, policy-makers need to be mindful of country relevant issues and peculiarities and take them into account when considering these recommendations.

At the regional level, horizontal solidarity should be considered and optimized and regional cross-country resources should be mobilized, giving priority to support Arab least developed and lower middle income countries and promoting risk diversification across the region. Recommendations for Intra-Arab cooperation are summarised below and should be based on a regional partnership with a sustainable development agenda. This regional partnership should act in close coordination with international initiatives such as the Deauville Partnership which was launched in May 2011 to support the transformation of Arab countries in transition (Egypt, Tunisia, Morocco, Jordan, Libya and Yemen) and to create an enabling environment and provide an economic framework for sustainable and inclusive development. This is particularly important in light of the commonality between the goals of the Deauville partnership and the ICE’s sustainable development goals including promoting inclusive economic growth, facilitating access to capital markets, encouraging SMEs, supporting job creation, increasing economic opportunities for youth and women and fighting corruption. Under this partnership, the European Bank for Reconstruction and Development dedicated EUR 2.5 billion to loans for projects with a transition impact.

In an Arab context, vehicles and initiatives such as the SME Mentoring initiative which was established under the Deauville Partnership to share knowledge and expertise among SMEs94 and provide technical and vocational training could be mirrored. Additionally, the MENA Transition Fund which was set up in 2012 to advance public institutional reform through the provision of grants for technical support could be one of the vehicles to support the public sector capacity-building reform. About US$ 100 million worth of projects have already been approved by the Transition Fund95.

In this respect, ESCWA, in the fulfilment of its global mission, is always ready to cooperate in every possible manner including through the provision of policy advice, support to reform, enhancement of the available capacity and technical assistance in various areas as well as through advocating and supporting international financial backing in light of strategic objectives related to sustainable development.

94 The SME mentoring scheme will match at least 250 SME entrepreneurs with mentors from leading corporates. Source: Deauville Partnership Pamphlet, https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/183533/DP_pamphlet_FS__SOS___CH_signoff.pdf 95 For details on the initiatives and progress of the Deauville Partnership, please refer to The Deauville Partnership with Arab Countries in Transition, Progress Report 2013, https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/248907/130925_DP_progress_rpt.pdf.

•Sustainable development to be placed at the forefront when setting national financing and budgeting strategies.

•Initiate national dialogue on the priority sectors in order to achieve inclusion and obtain people buy

•Strong governance, rule of law and fighting corruption are irreplaceablefor sustainable, inclusive and equitable development.

•Key sectors include infrastructure and transport, energy efficiency and renewable energy.

General Recommendations

61

Sustainable development to be placed at the forefront when setting national financing and budgeting strategies.

Initiate national dialogue on the priority sectors in order to achieve inclusion and obtain people buy-in on the priorities to be adopted.

Strong governance, rule of law and fighting corruption are irreplaceablefor sustainable, inclusive and equitable development.

Key sectors include infrastructure and transport, energy efficiency and

General Recommendations

Sustainable development to be placed at the forefront when setting national

Initiate national dialogue on the priority sectors in order to achieve inclusion

Strong governance, rule of law and fighting corruption are irreplaceable tools

Key sectors include infrastructure and transport, energy efficiency and

•Evaluate alternative sources of financing and address the barriers of their growth in order to gradually replace public debt in order to reduce the burden on future generations.

•Put in place Key Performance Indicators (KPIs) that monitor the effective management of public debt and its enduring effects on the sectors where it is channelled.

•International community to consider debt forgiveness/multilateral relief/sovereign debt restructuring subject to achieving KPIs in relation to the mobilization of other financing sources and the reduction of the public debt.

Public Debt

•Levels and priority of concessionality should consider least developed countries and lower middle income countries as well as other countries facing development challenges (including those facing conflict).

• ODA should not be one directional. The identification of areas/sectors of mutual benefit for both the donor and the receiving country focussing on sustainable development is essential.

•Recipient countries should demonstrate the efficiency of using ODA and its mutual benefit to the donor country to encourage its continuity.

•Intra-Arab ODA should not be deterred because of political agendas since the lack thereof can lead to a destabilization effect in the whole region.

Official Development Assistance (ODA)

•Implement stronger tax and customs administration relying on highstaff and technology coupled with strong punishments in case of corruption.

•Put in place stronger penalties to fight tax avoidance and evasion.

•Increase the progressivity of the tax system and reduce tax exemptions and deductions except for those aimed at protecting the poor.

•Replace complicated customs codes with simpler codes and streamline tax procedures.

•Curb illicit financial flows through a strong supervisory system, fighting corruption and governmental and judicial cooperation at the international level.

•Reduce the informal sector through increasing benefits/reducing costs of joining the formal

•Ensure tax revenues are spent wisely by rationalizing subsidies and using it to address inequity

•Exert on-going efforts coupled with clear KPIs indicating improvement in tax and customs collection and contraction in the informal sector.

Tax Revenue

Public Funding Sources – Key Recommendations

62

Evaluate alternative sources of financing and address the barriers of their growth in order to gradually replace public debt in order to reduce the burden on future generations.

Put in place Key Performance Indicators (KPIs) that monitor the effective management of public debt and its enduring effects on the sectors where it

International community to consider debt forgiveness/multilateral relief/sovereign debt restructuring subject to achieving KPIs in relation to the mobilization of other financing sources and the reduction of the public

Public Debt

Levels and priority of concessionality should consider least developed countries and lower middle income countries as well as other countries facing development challenges (including those facing conflict).

ODA should not be one directional. The identification of areas/sectors of mutual benefit for both the donor and the receiving country focussing on sustainable development is essential.


Arab ODA should not be deterred because of political agendas since the lack thereof can lead to a destabilization effect in the whole region.


Implement stronger tax and customs administration relying on highstaff and technology coupled with strong punishments in case of corruption.

Put in place stronger penalties to fight tax avoidance and evasion.

Increase the progressivity of the tax system and reduce tax exemptions and deductions except for those aimed at protecting the poor.

Replace complicated customs codes with simpler codes and streamline tax

Curb illicit financial flows through a strong supervisory system, fighting corruption and governmental and judicial cooperation at the international

Reduce the informal sector through increasing benefits/reducing costs of joining the formal sector, coupled with strong penalties.

Ensure tax revenues are spent wisely by rationalizing subsidies and using it inequity and achieve social protection.

going efforts coupled with clear KPIs indicating improvement in tax and customs collection and contraction in the informal sector.

Tax Revenue

Evaluate alternative sources of financing and address the barriers of their growth in order to gradually replace public debt in order to reduce the

Put in place Key Performance Indicators (KPIs) that monitor the effective management of public debt and its enduring effects on the sectors where it

International community to consider debt forgiveness/multilateral relief/sovereign debt restructuring subject to achieving KPIs in relation to the mobilization of other financing sources and the reduction of the public

Levels and priority of concessionality should consider least developed countries and lower middle income countries as well as other countries facing development challenges (including those facing conflict).

ODA should not be one directional. The identification of areas/sectors of mutual benefit for both the donor and the receiving country focussing on


Arab ODA should not be deterred because of political agendas since the lack thereof can lead to a destabilization effect in the whole region.

Implement stronger tax and customs administration relying on high-quality staff and technology coupled with strong punishments in case of corruption.

Put in place stronger penalties to fight tax avoidance and evasion.

Increase the progressivity of the tax system and reduce tax exemptions and

Replace complicated customs codes with simpler codes and streamline tax

Curb illicit financial flows through a strong supervisory system, fighting corruption and governmental and judicial cooperation at the international

Reduce the informal sector through increasing benefits/reducing costs of

Ensure tax revenues are spent wisely by rationalizing subsidies and using it

going efforts coupled with clear KPIs indicating improvement in tax and customs collection and contraction in the informal sector.

•Give priority to policies that would result in attracting FDI in the long term including improving the investment climate, fighting corruption and creating a fair regulatory and judicial environment.

•Use tax exemptions and energy subsidies and other incentives sparingly.

•Review the global competiveness landscape and determine the positioning of the country along with identifying priority sectors (job creation, knowhow transfer, productivity improvement, etc.) through public debate bearing in mind sustainability goals.

•Put policies in place that encourage research and development and incubation of new ideas while promoting the application of Corporate Social Responsibility (CSR) and Environment, Social and Governance (ESG) guidelines at the corporate level.

•Set KPIs to measure success in mobilizing FDIs in key sectors especially those that have a strong impact on achieving sustainable development goals.

Foreign Direct Investment (FDI)

•Increase awareness and financial inclusion policies to mobilize portfolio investment.

•Develop regulations related to financial markets, enhance transparency and governance and penalize insider trading.

•Encourage reporting on the implementation of Environment, Social and Governance (ESG) guidelines as a means to enhance access to investors.

Portfolio Investment & Remittances

•Encourage the use of information, telecommunications and technology to allow a wide access to financial services through branchless and mobile banking and enhance awareness of the available financial products.

•Enhance capacitymicroenterprises and SMEs.

•Enhance capacity in new areas related to sustainable development finance including renewable energy, waste water treatment, etc.

•Set policies and incentives linked to the nationwide plan of encouraging underserved segments.

•Encourage new products and innovation in the financial sector e.g. educational loans.

•Regulatory and judicial systems to speed up the process of dispute resolution in business and banking.

•Engage NGOs and empower civil society organizations as key players for private deployment of funding.

Domestic Savings

Private Funding Sources – Key Recommendations

63

Give priority to policies that would result in attracting FDI in the long term including improving the investment climate, fighting corruption and creating a fair regulatory and judicial environment.

Use tax exemptions and energy subsidies and other incentives sparingly.

Review the global competiveness landscape and determine the positioning of the country along with identifying priority sectors (job creation, knowhow transfer, productivity improvement, etc.) through public debate bearing in mind sustainability goals.

Put policies in place that encourage research and development and incubation of new ideas while promoting the application of Corporate Social Responsibility (CSR) and Environment, Social and Governance (ESG) guidelines at the corporate level.

Set KPIs to measure success in mobilizing FDIs in key sectors especially those that have a strong impact on achieving sustainable development

Foreign Direct Investment (FDI)

Increase awareness and financial inclusion policies to mobilize portfolio

Develop regulations related to financial markets, enhance transparency and governance and penalize insider trading.

Encourage reporting on the implementation of Environment, Social and Governance (ESG) guidelines as a means to enhance access to investors.

Portfolio Investment & Remittances

Encourage the use of information, telecommunications and technology to allow a wide access to financial services through branchless and mobile banking and enhance awareness of the available financial products.

Enhance capacity-building to channel savings to underserved segments like microenterprises and SMEs.

Enhance capacity in new areas related to sustainable development finance including renewable energy, waste water treatment, etc.

Set policies and incentives linked to the nationwide plan of encouraging underserved segments.

Encourage new products and innovation in the financial sector e.g. educational loans.

Regulatory and judicial systems to speed up the process of dispute resolution in business and banking.

Engage NGOs and empower civil society organizations as key players for private deployment of funding.

Domestic Savings

Give priority to policies that would result in attracting FDI in the long term including improving the investment climate, fighting corruption and

Use tax exemptions and energy subsidies and other incentives sparingly.

Review the global competiveness landscape and determine the positioning of the country along with identifying priority sectors (job creation, know-how transfer, productivity improvement, etc.) through public debate

Put policies in place that encourage research and development and incubation of new ideas while promoting the application of Corporate Social Responsibility (CSR) and Environment, Social and Governance

Set KPIs to measure success in mobilizing FDIs in key sectors especially those that have a strong impact on achieving sustainable development

Increase awareness and financial inclusion policies to mobilize portfolio

Develop regulations related to financial markets, enhance transparency and

Encourage reporting on the implementation of Environment, Social and Governance (ESG) guidelines as a means to enhance access to investors.

Encourage the use of information, telecommunications and technology to allow a wide access to financial services through branchless and mobile banking and enhance awareness of the available financial products.

building to channel savings to underserved segments like

Enhance capacity in new areas related to sustainable development finance

Set policies and incentives linked to the nationwide plan of encouraging

Encourage new products and innovation in the financial sector e.g.

Regulatory and judicial systems to speed up the process of dispute

Engage NGOs and empower civil society organizations as key players for

•Put in place a PPP Growth Acceleration Program and link it to a nationwide program based on sustainability goals that supports the general investment climate combined with long term fiscal measures.

•Support and develop the central PPP units in order to benefit from standardized processes and encourage the establishment of PPP units at the Ministerial level for follow

•Enhance capacityprioritization and negotiation of contracts of PPP projects.

•Attract private funds through implementing regulatory reform, ensuring rule of law, transparency and governance and putting in place anticorruption measures coupled with intelligent structures that mitigate risks faced by the private sector.

•Foster public acceptance by involving local authorities, governorates and municipalities in project identification and implementation.

Public-Private Partnerhsips (PPP)

•Put in place nationwide energy policies geared to select the best economic mix and highest yielding renewable energy sources taking into account each country's comparative advantage while giving priority to offin order to narrow the rural

•Implement legal, institutional, capacity and technological infrastructure.

•Provide government offgreen finance while gradually phasing out fossil fuel subsidies. Incentives to be directed to both renewable energy generation projects as well as supportive manufacturing industries.

•Utilize green finance (bonds and sukuk) as tradable capital market instruments and maximize their use by pooling portfolios of small projects to reach sufficient scale (e.g. for the installation of solar water heaters in private residences).

•Complement green bonds and sukuk offering by creating equity funds and mitigate the risk for private investors by offering guarantees/other risk mitigation strategies.

Green Bonds & Green Sukuk

Blended Funding & Other Sources – Key Recommendations

64

Put in place a PPP Growth Acceleration Program and link it to a nationwide program based on sustainability goals that supports the general investment climate combined with long term fiscal measures.

Support and develop the central PPP units in order to benefit from standardized processes and encourage the establishment of PPP units at the Ministerial level for follow-up and monitoring.

Enhance capacity-building in structuring, feasibility assessment, prioritization and negotiation of contracts of PPP projects.

Attract private funds through implementing regulatory reform, ensuring rule of law, transparency and governance and putting in place anticorruption measures coupled with intelligent structures that mitigate risks faced by the private sector.

Foster public acceptance by involving local authorities, governorates and municipalities in project identification and implementation.

Private Partnerhsips (PPP)

Put in place nationwide energy policies geared to select the best economic mix and highest yielding renewable energy sources taking into account each country's comparative advantage while giving priority to off-grid projects in order to narrow the rural-urban differential in electricity access.

Implement legal, institutional, capacity and technological infrastructure.

Provide government off-take, guarantees and fiscal incentives to encourage green finance while gradually phasing out fossil fuel subsidies. Incentives to be directed to both renewable energy generation projects as well as supportive manufacturing industries.

Utilize green finance (bonds and sukuk) as tradable capital market instruments and maximize their use by pooling portfolios of small projects to reach sufficient scale (e.g. for the installation of solar water heaters in private residences).

Complement green bonds and sukuk offering by creating equity funds and mitigate the risk for private investors by offering guarantees/other risk mitigation strategies.

Green Bonds & Green Sukuk

Put in place a PPP Growth Acceleration Program and link it to a nation-wide program based on sustainability goals that supports the general

Support and develop the central PPP units in order to benefit from standardized processes and encourage the establishment of PPP units at the

building in structuring, feasibility assessment,

Attract private funds through implementing regulatory reform, ensuring rule of law, transparency and governance and putting in place anti-corruption measures coupled with intelligent structures that mitigate risks

Foster public acceptance by involving local authorities, governorates and

Put in place nationwide energy policies geared to select the best economic mix and highest yielding renewable energy sources taking into account each

grid projects urban differential in electricity access.

Implement legal, institutional, capacity and technological infrastructure.

take, guarantees and fiscal incentives to encourage green finance while gradually phasing out fossil fuel subsidies. Incentives to be directed to both renewable energy generation projects as well as

Utilize green finance (bonds and sukuk) as tradable capital market instruments and maximize their use by pooling portfolios of small projects to reach sufficient scale (e.g. for the installation of solar water heaters in

Complement green bonds and sukuk offering by creating equity funds and mitigate the risk for private investors by offering guarantees/other risk

•Give special focus to renewable energy projects and climate change initiatives which are in line with sustainable development goals.

•Direct the largest support to and give priority to the countries with the highest development challenges in order to minimize disparity among the Arab countries.

Arab ODA and Arab Grants

•Improve the investment climate and competitiveness of Arab countries to direct Arab private and sovereign wealth funds inside the Arab region which currently seek investment opportunities outside the region.

•Initiate "Door-Knock" campaigns to market FDI in nonsectors which speed up sustainable development.

•Discuss national goals at the regional level to identify how national sectoral policies can be integrated to achieve synergies across Arab countries.

•Create public acceptance by involving local authorities, governorates and municipalities in project identification and implementation.

Arab Foreign Direct Investment

•Establish a regional platform to enhance capacity and knowledgein implementing and monitoring PPP projects.

•Use the regional platform as a regional network to attract crossPPP cooperation and investment accessible to various stakeholders

•Study and implement joint cross border infrastructure projects in energy generation, distribution and transportation.

•Develop a standardized costPPP projects through comparing the "public sector comparator" to the "shadow bid model".

•Share information regarding projects' feasibility in the public domain to achieve transparency and obtain public support.

•Develop regional infrastructure investment companies to invest in PPP projects after passing the initial project start

Public-Private Partnerships

•Exert coordinated efforts in encouraging investment in sustainable infrastructure and setting national renewable energy priorities while considering regional synergies.

•Consider green sukuk/bonds to fund regional sustainable infrastructure and renewable energy projects.

•Study the possiblity of establishing an Arab Green Climate Fund, which could be a vehicle to channel funds from high income Arab countries to middle income and least developed countries.

Green finance

Intra-Arab Regional Cooperation – Key Recommendations

65

Give special focus to renewable energy projects and climate change initiatives which are in line with sustainable development goals.

Direct the largest support to and give priority to the countries with the highest development challenges in order to minimize disparity among the Arab

Arab ODA and Arab Grants

Improve the investment climate and competitiveness of Arab countries to direct Arab private and sovereign wealth funds inside the Arab region which currently seek investment opportunities outside the region.

Knock" campaigns to market FDI in non-traditional sectors which speed up sustainable development.

Discuss national goals at the regional level to identify how national sectoral policies can be integrated to achieve synergies across Arab

Create public acceptance by involving local authorities, governorates and municipalities in project identification and implementation.

Arab Foreign Direct Investment

Establish a regional platform to enhance capacity and knowledgein implementing and monitoring PPP projects.

Use the regional platform as a regional network to attract crossPPP cooperation and investment accessible to various stakeholders

Study and implement joint cross border infrastructure projects in energy generation, distribution and transportation.

Develop a standardized cost-benefit analysis approach in the assessment of PPP projects through comparing the "public sector comparator" to the "shadow bid model".

Share information regarding projects' feasibility in the public domain to achieve transparency and obtain public support.

Develop regional infrastructure investment companies to invest in PPP projects after passing the initial project start-up phase.

Private Partnerships

Exert coordinated efforts in encouraging investment in sustainable infrastructure and setting national renewable energy priorities while considering regional synergies.

Consider green sukuk/bonds to fund regional sustainable infrastructure and renewable energy projects.

Study the possiblity of establishing an Arab Green Climate Fund, which could be a vehicle to channel funds from high income Arab countries to middle income and least developed countries.

Green finance

Give special focus to renewable energy projects and climate change initiatives

Direct the largest support to and give priority to the countries with the highest development challenges in order to minimize disparity among the Arab

Improve the investment climate and competitiveness of Arab countries to direct Arab private and sovereign wealth funds inside the Arab region which currently seek investment opportunities outside the region.

traditional

Discuss national goals at the regional level to identify how national sectoral policies can be integrated to achieve synergies across Arab

Create public acceptance by involving local authorities, governorates and

Establish a regional platform to enhance capacity and knowledge-sharing

Use the regional platform as a regional network to attract cross-border PPP cooperation and investment accessible to various stakeholders

Study and implement joint cross border infrastructure projects in energy

benefit analysis approach in the assessment of PPP projects through comparing the "public sector comparator" to the

Share information regarding projects' feasibility in the public domain to

Develop regional infrastructure investment companies to invest in PPP

Exert coordinated efforts in encouraging investment in sustainable infrastructure and setting national renewable energy priorities while

Consider green sukuk/bonds to fund regional sustainable infrastructure

Study the possiblity of establishing an Arab Green Climate Fund, which could be a vehicle to channel funds from high income Arab countries to

66

6. Conclusion

Country-specific Sustainable Development Goals (with their economic, environmental and social aspects) need to constitute an integral part of the government’s national policies. This is especially important for least developed countries, middle income countries and landlocked countries whose fiscal pressures may result in overlooking SDGs. To finance those sustainable development goals, Arab countries need to assess the efficacy of each available funding source (public or private), their optimal use and their impact on sustainable development. History has proven that no fiscal measures alone or quick fix solutions can help achieving sustainable development. Instead, serious efforts and hard work to fight corruption, curb illicit cash flows, create accountable public institutions, instil governance and rule of law and establish the needed institutional, legal and capacity frameworks have to be secured.

Besides, no development can take place with a disengaged public and non-inclusive systems that will inevitably lead to paralyzing development efforts. Public engagement and discourse is needed in order to transparently evaluate the impact and implications of various strategies including key policy measures and sectors of focus for development in order to get public acceptance and buy-in. Civil society organizations and NGOs need to be viewed as key participants in tackling sustainability issues. Sustainability needs to have a higher order of magnitude for corporate private players, through policies that encourage ESG (Environmental, Social and Governance) guidelines and Corporate Social Responsibility. Shared responsibility, accountability and commitment at the national level are essential to achieve success in this sense.

At the international and regional levels, development assistance should be used as a win-win tool benefiting both the donor and the recipient country depending on their respective areas of strength. Sustainability can only be achieved through a multi-stakeholder approach involving global and regional partnerships. Intra-Arab cooperation is a mine to unearth where mutual cooperation and knowledge-sharing can help develop regional solutions building on the vast experience and strengths within the region. With a political will that is mindful of the best interest of the public, common regional challenges can be addressed jointly and synergies in various areas can be explored, as long as a win-win approach is taken.

67

Appendix I- Sustainable Development Goals

Goal 1 End poverty in all its forms everywhere

Goal 2 End hunger, achieve food security and improved nutrition and promote sustainable agriculture

Goal 3 Ensure healthy lives and promote well-being for all at all ages

Goal 4 Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all

Goal 5 Achieve gender equality and empower all women and girls

Goal 6 Ensure availability and sustainable management of water and sanitation for all

Goal 7 Ensure access to affordable, reliable, sustainable and modern energy for all

Goal 8 Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all

Goal 9 Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation

Goal 10 Reduce inequality within and among countries

Goal 11 Make cities and human settlements inclusive, safe, resilient and sustainable

Goal 12 Ensure sustainable consumption and production patterns

Goal 13 Take urgent action to combat climate change and its impacts

Goal 14 Conserve and sustainably use the oceans, seas and marine resources for sustainable development

Goal 15 Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat desertification, and halt and reverse land degradation and halt biodiversity loss

Goal 16 Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels

Goal 17 Strengthen the means of implementation and revitalize the global partnership for sustainable development

68

0

20

40

60

80

100

120

Bahrain

Kuwait

Oman

Qatar

Saudi Arabia


Algeria

Iraq

Jordan

Lebanon

Libya

Tunisia

Egypt

Morocco

Palestine

Syria

Comoros

Djibouti

Mauritania

Somalia

South Sudan

Sudan

Yem

en

Arab W

orld

Upper M

iddle Income …

High Income -World

World

Access to Electricity (2010)

(% of Population)

High Income - Arab




Appendix II- Key Infrastructure Indicators in Arab Countries

Quality of trade and transport-related infrastructure (1=low to 5=high)

Source: World Development Indicators *Data not available

00.51

1.52

2.53

3.54

4.55

Logistics Performance Index (2014)

High Income - Arab




69

0

20

40

60

80

100

120

High

Income -

Arab

Upper

Middle

Income -Arab

Lower

Middle

Income

Access to Electricity According to Income

0.0

10.0

20.0

30.0

40.0

50.0

Urban-Rural Differential in Access to Electricity (2010)

Source: Calculated from World Development Indicators * Data Unavailable

-2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000

Electricity Generation Per Capita (2011) (KWh)

70

0

20

40

60

80

100

120

High

Income -

Arab

Upper

Middle

Income -Arab

Lower

Middle

Income -Arab

Least

Developed

Countries - Arab

Arab

World

Upper

Middle

Income -World

High

Income -

World

World

Access to Sanitation Facilities According

to Income (2012)

(% of Population)

0

10

20

30

40

50

60

Urban-Rural Differential in Access to Improved

Sanitation Facilities (2012) (% of Population)

High Income - Arab




Source: Calculated from World Development Indicators * Data Unavailable

0

20

40

60

80

100

120

Access to Sanitation Facilities (2012)

(% of Population)

0

20

40

60

80

100

120

High

Income -

Arab

Upper

Middle

Income -Arab

Access to Water According to Income (2012)

0

20

40

60

80

100

120

Access to Water Sources (2012)


0

20

40

60

80

100

120

Access to Improved Water Source (2012)

(% of Population, Urban & Rural)

71

Lower

Middle

Income -Arab

Least

Developed

Countries -Arab

Arab World Upper

Middle

Income -World

High

Income -

World

Access to Water According to Income (2012)

(% of Population)

Access to Water Sources (2012)

(% of Population)

Source: World Development Indicators * Data Unavailable

Access to Improved Water Source (2012)

(% of Population, Urban & Rural)

World

* Data Unavailable

Urban

Rural

00.51

1.52

2.53

3.54

Source: Calculated from World Development Indicators

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

High Income -

Arab

Hospital Beds According to Income (2012)

72

Hospital Beds (2012)

(per 1000 people)

World Development Indicators * Data Unavailable

Upper Middle

Income - Arab

Lower Middle

Income - Arab

Least Developed

Countries - Arab

Arab World

Hospital Beds According to Income (2012)

(per 1000 people)

* Data Unavailable

Arab World

73

Appendix III- PPP Success Stories

Queen Alia International Airport (Jordan)

Fact Sheet - Queen Alia International Airport (Jordan)96

Project Scope Rehabilitation, expansion and operation of the airport. The expansion will entail the construction of a new 900,000 square foot terminal with a capacity of 12 million passengers per year.

Initial Investment US$900 million

Year of Launch 2006

Year of Closure 2007

Client Ministry of Transport - Jordan

Equity Sponsors

Airport International Group (AIG) consortium composed of

• Abu Dhabi Investment Company (United Arab Emirates) • Noor Financial Investment Company (Kuwait) • EDGO Investment Holdings (Jordan) • Aéroports de Paris Management (France) • J&P-AVAX (Greece) • Joannou &Parakevaides Overseas Limited (United Kingdom & Cyprus)

Lenders

• Islamic Development Bank • International Finance Corporation • Crédit Agricole • Nataxis • Europe Arab Bank • Crédit Industriel et Commercial • Alpha Bank • Piraeus Bank

Advisers to Authority

• International Finance Corporation (lead). • White & Case (legal) • Dajani & Associates (legal) • NACO (technical)

Advisers to Sponsors

• Ernst & Young (financial) • Ashurst (legal) • Arup (technical)

Advisers to Lenders Norton Rose (legal)

96 Emerging Partnerships, top 40 public-private partnerships (PPPs) in emerging markets, Infrastructure Journal, Public Private Infrastructure Advisory Facility (PPIAF) and International Finance Corporation (IFC), 2013 and http://www.ifc.org/wps/wcm/connect/AS_EXT_Content/What+We+Do/IFC+and+PPPs/Publications/

•First Middle East full airport concession with no previous track record of PPP projects in Jordan except for one smaller wastewater project, implying a higher risk premium and enticing banks to require multilateral funding in order to minimize risk.

•Lenders were offering a funding tenor up to ten years, which was insufficient for a project of this nature where the investment recovery extends over most of the 25year concession period.

•First PPP to use Shari'ah finance.

•The project revenues were mainly in Jordanian dinar and the debt in USD, subjecting lenders and project sponsors to foreign exchange risk.

Challenges

•Appointment of legal, technical and financial advisors from the onset to structure the transaction in mid-2006 and manage the bidding, preprocesses until financial closure.

•Flexibility to restructure the bid terms from an onproject finance mechanism in light of discussions with various bidders.

•IFC and Islamic Development Bank were involved as multilateral institutions to minimize the risk for private lenders.

•IFC extended its loan tenor to 18 years to match the project cash flows.

•The Islamic Development Bank was granted security over the airport assets, and other banks’ security rights were ensured through an interallow all lenders pari-passu status.

•The foreign exchange risk was mitigated by including a clause under which the government concession fees would fall if the dinar was devalued by over 10 percent.

Success Factors

•The winning bidder offered the government a 54.58% revenue share over the 25concession. This is the highest revenue sharing percentage for similar projects in other parts of the world. It is nearly double the level available to the government when it was considering a sole source award.

•Since the winning bidder took over operations in November 2007, traffic has increased from 3.86 million to 5.47 million passengers in 2011 possibly an indication of better operation and service quality standards.

•The new terminal will increase capacity to nine million initially then to twelve million following a second phase expansion. Before the project, the airport was not able to meet the continuous growth in air traffic reaching 7% per year since 2000.

•The new airport is estimated to create 23,000 jobs and will enhance Jordan’s importance as a touristic destination.

•The government was saved from the burden of subsidizing the airport and is now earning concession fees, which reached USD 71.7 million in 2011.

Outcome

74

First Middle East full airport concession with no previous track record of PPP projects in Jordan except for one smaller wastewater project, implying a higher risk premium and enticing banks to require multilateral funding in order to minimize risk.

Lenders were offering a funding tenor up to ten years, which was insufficient for a project of this nature where the investment recovery extends over most of the 25year concession period.

First PPP to use Shari'ah finance.

The project revenues were mainly in Jordanian dinar and the debt in USD, subjecting lenders and project sponsors to foreign exchange risk.

Appointment of legal, technical and financial advisors from the onset to structure the 2006 and manage the bidding, pre-qualification and negotiation

processes until financial closure.

Flexibility to restructure the bid terms from an on-balance sheet mechanism to a project finance mechanism in light of discussions with various bidders.

IFC and Islamic Development Bank were involved as multilateral institutions to minimize the risk for private lenders.

IFC extended its loan tenor to 18 years to match the project cash flows.

The Islamic Development Bank was granted security over the airport assets, and other banks’ security rights were ensured through an inter-creditor agreement to

passu status.

The foreign exchange risk was mitigated by including a clause under which the government concession fees would fall if the dinar was devalued by over 10 percent.

The winning bidder offered the government a 54.58% revenue share over the 25concession. This is the highest revenue sharing percentage for similar projects in other parts of the world. It is nearly double the level available to the government when it was considering a sole source award.

Since the winning bidder took over operations in November 2007, traffic has increased from 3.86 million to 5.47 million passengers in 2011 possibly an indication of better operation and service quality standards.

The new terminal will increase capacity to nine million initially then to twelve million following a second phase expansion. Before the project, the airport was not able to meet the continuous growth in air traffic reaching 7% per year since 2000.

The new airport is estimated to create 23,000 jobs and will enhance Jordan’s importance as a touristic destination.

The government was saved from the burden of subsidizing the airport and is now earning concession fees, which reached USD 71.7 million in 2011.

First Middle East full airport concession with no previous track record of PPP projects in Jordan except for one smaller wastewater project, implying a higher risk premium and enticing banks to require multilateral funding in order to minimize risk.

Lenders were offering a funding tenor up to ten years, which was insufficient for a project of this nature where the investment recovery extends over most of the 25-

The project revenues were mainly in Jordanian dinar and the debt in USD, subjecting

Appointment of legal, technical and financial advisors from the onset to structure the qualification and negotiation

balance sheet mechanism to a

IFC and Islamic Development Bank were involved as multilateral institutions to

IFC extended its loan tenor to 18 years to match the project cash flows.

The Islamic Development Bank was granted security over the airport assets, and creditor agreement to

The foreign exchange risk was mitigated by including a clause under which the government concession fees would fall if the dinar was devalued by over 10 percent.

The winning bidder offered the government a 54.58% revenue share over the 25-year concession. This is the highest revenue sharing percentage for similar projects in other parts of the world. It is nearly double the level available to the government

Since the winning bidder took over operations in November 2007, traffic has increased from 3.86 million to 5.47 million passengers in 2011 possibly an indication

The new terminal will increase capacity to nine million initially then to twelve million following a second phase expansion. Before the project, the airport was not able to meet the continuous growth in air traffic reaching 7% per year since 2000.

The new airport is estimated to create 23,000 jobs and will enhance Jordan’s

The government was saved from the burden of subsidizing the airport and is now

75

New Cairo Waste Water (Egypt)

Fact Sheet – New Cairo Waste Water (Egypt)97

Project Scope Build, operate and transfer a 250,000 cubic meters a day wastewater treatment plant in New Cairo Settlement

Initial Investment US$200 million

Year of Launch 2008


Client New Urban Communities Authority

Equity Sponsors

Orasqualia consortium composed of

• Orascom Construction Industries • Aqualia Industrial (FCC Group)

Lenders

• National Société Générale Bank • Commercial International Bank • Arab African International Bank • Ahli United Bank


• International Finance Corporation (lead). • Gide Loyrette Nouel (legal) • Parsons Brinckerhoff (technical)

Advisers to Sponsors • Baker & McKenzie (legal) • DLA Piper (legal)

Advisers to Lenders • Zulficar & Partners (legal) • Environmental Civil Engineering Consulting Center (technical)

97 Emerging Partnerships, top 40 public-private partnerships (PPPs) in emerging markets, Infrastructure Journal, Public Private Infrastructure Advisory Facility (PPIAF) and International Finance Corporation (IFC), 2013 and http://www.ifc.org/wps/wcm/connect/AS_EXT_Content/What+We+Do/IFC+and+PPPs/Publications/

•The government which suffered from the devaluation of the local currency in previous power purchase contracts, requested loans being provided in local currency in order to avoid foreign exchange risk.

Challenges

•Appointment of legal, technical, environmental and financial advisors from the onset to structure the transaction in midand negotiation processes until financial closure.

•Local currency loans were provided from local commercial banks rather than resorting to international financial institutions with a record loan tenor of 15 years, the first of its kind.

•The balancing of the government and private sector requisites, whereby the government will pay a sewage treatment charge which will include a fixed portion to allow the investor to recover its fixed costs (including debt service and return on investment) and a variable portion based on the actual volume of the treated sewage, to cover the project's variable costs. Additionally, electricity costs will be passed through to the New Urban Communities Authority. The obligations of the New Urban Commuinties Authority were guaranteed by the Ministry of Finance. Since the electricity costs are a pass through item, the bidders were asked to quote their projected consumption of electricity to ensure energy efficiency.

Success Factors

•Improving sanitation services in new Cairo with the treatment of 250,000 cubic meters per day which is about 2.3 percent of national wastewater capacity in 2008, rather than dumping it in the desert and losing valuable water resources.

•The government is better able to address the infrastructure needs of New Cairo estimated to increase from 550,000 to about 3 million by 2029.

•The government was relieved from operating the facility and efficient private sector operations will take charge for a 20

Outcome

76

The government which suffered from the devaluation of the local currency in previous power purchase contracts, requested loans being provided in local currency in order to avoid foreign exchange risk.

Appointment of legal, technical, environmental and financial advisors from the onset to structure the transaction in mid-2006 and manage the bidding, pre-qualification and negotiation processes until financial closure.

Local currency loans were provided from local commercial banks rather than resorting to international financial institutions with a record loan tenor of 15 years,

The balancing of the government and private sector requisites, whereby the government will pay a sewage treatment charge which will include a fixed portion to allow the investor to recover its fixed costs (including debt service and return on investment) and a variable portion based on the actual volume of the treated sewage, to cover the project's variable costs. Additionally, electricity costs will be passed through to the New Urban Communities Authority. The obligations of the New Urban Commuinties Authority were guaranteed by the Ministry of Finance. Since the electricity costs are a pass through item, the bidders were asked to quote their projected consumption of electricity to ensure energy efficiency.

Improving sanitation services in new Cairo with the treatment of 250,000 cubic meters per day which is about 2.3 percent of national wastewater capacity in 2008, rather than dumping it in the desert and losing valuable water resources.

The government is better able to address the infrastructure needs of New Cairo estimated to increase from 550,000 to about 3 million by 2029.

The government was relieved from operating the facility and efficient private sector operations will take charge for a 20-year concession period.

The government which suffered from the devaluation of the local currency in previous power purchase contracts, requested loans being provided in local currency

Appointment of legal, technical, environmental and financial advisors from the onset qualification

Local currency loans were provided from local commercial banks rather than resorting to international financial institutions with a record loan tenor of 15 years,

The balancing of the government and private sector requisites, whereby the government will pay a sewage treatment charge which will include a fixed portion to allow the investor to recover its fixed costs (including debt service and return on investment) and a variable portion based on the actual volume of the treated sewage, to cover the project's variable costs. Additionally, electricity costs will be passed through to the New Urban Communities Authority. The obligations of the New Urban Commuinties Authority were guaranteed by the Ministry of Finance. Since the electricity costs are a pass through item, the bidders were asked to quote their

Improving sanitation services in new Cairo with the treatment of 250,000 cubic meters per day which is about 2.3 percent of national wastewater capacity in 2008,

The government is better able to address the infrastructure needs of New Cairo

The government was relieved from operating the facility and efficient private sector

77

Ouarzazate Solar Power Project (Morocco)

Fact Sheet – Ouarazazte Solar Power Project98

Project Scope Design, construction, operation, maintenance and financing the Ouarzazate Solar Complex is for the generation of 160MW99.

Initial Investment

€1 billion Euros out of which 58% (€607 Million) are in foreign currency and is scheduled for completion in 2015. The local component will be funded by The Moroccan Agency for Solar energy (MASEN) and Office Nationale de l’Electricite et de l’Eau (ONEE) comprising construction of facilities located outside the power stations project sites (access roads, water supply, and connecting lines to the ONEE Power Grid)

Year of Launch 2010


Client Moroccan Agency for Solar Energy (MASEN)

Equity Sponsors

ACWA Power Ouarzazate consortium composed of

• International Company for Water and Power (ACWA Power) (Saudi) • MASEN (Morrocco) • Aries Ingenieria y Sistemas (Spain) • TSK-Electronica y Electricidad (Spain)

Lenders

• African Development Bank • European Commission • European Investment Bank • French Agency for Development • International Bank for Reconstruction and Development • Kreditanstalt fur Wiederbau • Federal Environment Ministry (BMU) • Clean Technology Fund


• Norton Rose (legal) • Citigroup (financial) • Deloitte (tax) • KPMG (accounting) • WorleyParsons (technical) • Burgeap-Phenixa (Environmental and Social Impact Assessment) • Vaylans (PM office)

Advisers to Sponsors • Ashurst (legal)

98 San Giorgio Group Case Study: Ouarzazate I CSP, Climate Policy Initiative, August 2012, World Bank, IFC, African Development Bank websites. 99 This represents the first one of the first phase comprising of five planned solar power stations, including both photovoltaic (PV) and concentrated solar power technology (CSP) for a total capacity of 500 MW.

•Concentrated Solar Power (CSP) technology is yet to prove its reliability as a renewable source of energy. Whereas the basic technology is proven, yet the energy storage components still need further demonstration.

•CSP projects need economies of scale to prove their commercial viability.

•With the existence of fossil fuel subsidies in Morocco, renewable energy including solar generation is rendered even more unattractive.

Challenges

•The creation of MASEN in March 2010 by Law No. 57/09 to implement the integrated solar plan and develop all aspects of solar energy. The project is accordingly linked to the overall country strategy and objectives being part of a nationcommissioning of five solar power generation plants between 2015 and 2020, for a total capacity of 2000 MW, hence benefiting from utmost political support.

• The government of Morocco and other multilateral agencies were willing to shoulder the responsibility of bridging the development of a more commerciallyfunding the needed capital investment with the awareness of their key role in supporting the first phase of a CSP portfolio designed in the MENA region..

•Direct funding was provided from the government of Morocco in terms of 25% of the project's equity, but also by bearing costs for the needed facilities outside the power station site including water supply, access roads, connecting lines to the electric power grid etc...

• The reversal of the negative financial viability is foreseen to be attained through exporting to Europe at market prices and achieving economies of scale after having completed the portfolio of CSP projects.

•An offtake agreement by MASON guaranteed by the government was provided to mitigate the revenue risk for the project sponsors in exchange for the project sponsors bearing the construction completion risk and being responsible for the operation and maintenance. The Moroccan government was also willing to bear the burden of the foreign exchange related risk.

•The government was willing to cover the difference between the subsidized electricity cost to citizens and the off-take price. This difference is estimated at USD 40 to 60 million per year.

• IFI's provided necessary institutional and technical support given their previous engagements in other similar projects elsewhere including the United States, India and South Africa in order to reduce costs and increase efficiencies.

•Early coordination with donors allowed to identify the cost at which capital would be offered. This together with the creation of competitive tension between the bidders allowed for the provision of a competitive electricity price.

•The loans were structured over a long maturity of 20 years with a grace period of 5 years matching the project duration.

•Acceptance from local community and provincial environmental officials was created through early discussions and close alignment.

Success Factors

•As a result of the early deployment of capital from the lenders as well as the creation of competition amongst the bidders, the electricity cost was kept in line with other, less risky renewable energy projects. Electricity will be produced for $0.189711/KW.h versus $0.2442 KW.h for the second and third bids.

•The project will contribute to Morocco's solar energy plans of aiming to generate about 42% of its energy needs from renewable energy by the year 2020 with the hope of potentially exporting the surplus to Europe. Morocco currently imports 97% of its primary energy sources consisting of coal and fuel oil.

•Construction and operational risk was shifted to the private developer.

•The first phase of the project NOOR I is estimated to create about 850 direct jobs. For the second phase NOOR II and NOOR III (to complete the 500 MW capacity), these are expected to generate approximately 2000 to 2500 direct jobs and thousands of indirect jobs.

• The project will contribute to reducing CO

•The project will reduce the isolation of various regions and rural communities, as well as enhance security by improving street lighting and contribute to spreading development.

•Other socio-economic benefits include the training and transfer of solar energy technology as well as building related local manufacturing facilities, crucial to the attainment of Morocco’s ambitious targets in the domain of solar energy.

•The project will also demonstrate the use of storage technology in CSP plants and will create a strong precedent for the use of the PPP business model to develop CSP power plants in Morocco and elsewhere.

Outcome

78

Concentrated Solar Power (CSP) technology is yet to prove its reliability as a renewable source of energy. Whereas the basic technology is proven, yet the energy storage components still need

CSP projects need economies of scale to prove their commercial viability.

With the existence of fossil fuel subsidies in Morocco, renewable energy including solar generation is rendered even more unattractive.

The creation of MASEN in March 2010 by Law No. 57/09 to implement the integrated solar plan and develop all aspects of solar energy. The project is accordingly linked to the overall country strategy and objectives being part of a nation-wide US$ 9 billion solar plan which calls for the commissioning of five solar power generation plants between 2015 and 2020, for a total capacity of 2000 MW, hence benefiting from utmost political support.

The government of Morocco and other multilateral agencies were willing to shoulder the responsibility of bridging the development of a more commercially-sustainable CSP market by funding the needed capital investment with the awareness of their key role in supporting the first phase of a CSP portfolio designed in the MENA region..

Direct funding was provided from the government of Morocco in terms of 25% of the project's equity, but also by bearing costs for the needed facilities outside the power station site including water supply, access roads, connecting lines to the electric power grid etc...

The reversal of the negative financial viability is foreseen to be attained through exporting to Europe at market prices and achieving economies of scale after having completed the portfolio of

An offtake agreement by MASON guaranteed by the government was provided to mitigate the revenue risk for the project sponsors in exchange for the project sponsors bearing the construction completion risk and being responsible for the operation and maintenance. The Moroccan government was also willing to bear the burden of the foreign exchange related risk.

The government was willing to cover the difference between the subsidized electricity cost to take price. This difference is estimated at USD 40 to 60 million per year.

IFI's provided necessary institutional and technical support given their previous engagements in other similar projects elsewhere including the United States, India and South Africa in order to reduce costs and increase efficiencies.

Early coordination with donors allowed to identify the cost at which capital would be offered. This together with the creation of competitive tension between the bidders allowed for the provision of a competitive electricity price.

The loans were structured over a long maturity of 20 years with a grace period of 5 years matching the project duration.

Acceptance from local community and provincial environmental officials was created through early discussions and close alignment.

As a result of the early deployment of capital from the lenders as well as the creation of competition amongst the bidders, the electricity cost was kept in line with other, less risky renewable energy projects. Electricity will be produced for $0.189711/KW.h versus $0.2442 KW.h for the second and third bids.

The project will contribute to Morocco's solar energy plans of aiming to generate about 42% of its energy needs from renewable energy by the year 2020 with the hope of potentially exporting the surplus to Europe. Morocco currently imports 97% of its primary energy sources consisting of

Construction and operational risk was shifted to the private developer.

The first phase of the project NOOR I is estimated to create about 850 direct jobs. For the second phase NOOR II and NOOR III (to complete the 500 MW capacity), these are expected to generate approximately 2000 to 2500 direct jobs and thousands of indirect jobs.

The project will contribute to reducing CO2

gas emissions by 240,000 per year starting 2015.

The project will reduce the isolation of various regions and rural communities, as well as enhance security by improving street lighting and contribute to spreading development.

economic benefits include the training and transfer of solar energy technology as well as building related local manufacturing facilities, crucial to the attainment of Morocco’s ambitious targets in the domain of solar energy.

The project will also demonstrate the use of storage technology in CSP plants and will create a strong precedent for the use of the PPP business model to develop CSP power plants in Morocco

Concentrated Solar Power (CSP) technology is yet to prove its reliability as a renewable source of energy. Whereas the basic technology is proven, yet the energy storage components still need

With the existence of fossil fuel subsidies in Morocco, renewable energy including solar

The creation of MASEN in March 2010 by Law No. 57/09 to implement the integrated solar plan and develop all aspects of solar energy. The project is accordingly linked to the overall country

wide US$ 9 billion solar plan which calls for the commissioning of five solar power generation plants between 2015 and 2020, for a total capacity

The government of Morocco and other multilateral agencies were willing to shoulder the sustainable CSP market by

funding the needed capital investment with the awareness of their key role in supporting the first

Direct funding was provided from the government of Morocco in terms of 25% of the project's equity, but also by bearing costs for the needed facilities outside the power station site including

The reversal of the negative financial viability is foreseen to be attained through exporting to Europe at market prices and achieving economies of scale after having completed the portfolio of

An offtake agreement by MASON guaranteed by the government was provided to mitigate the revenue risk for the project sponsors in exchange for the project sponsors bearing the construction completion risk and being responsible for the operation and maintenance. The Moroccan government was also willing to bear the burden of the foreign exchange related risk.

The government was willing to cover the difference between the subsidized electricity cost to take price. This difference is estimated at USD 40 to 60 million per year.

IFI's provided necessary institutional and technical support given their previous engagements in other similar projects elsewhere including the United States, India and South Africa in order to

Early coordination with donors allowed to identify the cost at which capital would be offered. This together with the creation of competitive tension between the bidders allowed for the

The loans were structured over a long maturity of 20 years with a grace period of 5 years

Acceptance from local community and provincial environmental officials was created through

As a result of the early deployment of capital from the lenders as well as the creation of competition amongst the bidders, the electricity cost was kept in line with other, less risky renewable energy projects. Electricity will be produced for $0.189711/KW.h versus $0.2442

The project will contribute to Morocco's solar energy plans of aiming to generate about 42% of its energy needs from renewable energy by the year 2020 with the hope of potentially exporting the surplus to Europe. Morocco currently imports 97% of its primary energy sources consisting of

The first phase of the project NOOR I is estimated to create about 850 direct jobs. For the second phase NOOR II and NOOR III (to complete the 500 MW capacity), these are expected to generate

gas emissions by 240,000 per year starting 2015.

The project will reduce the isolation of various regions and rural communities, as well as enhance

economic benefits include the training and transfer of solar energy technology as well as building related local manufacturing facilities, crucial to the attainment of Morocco’s ambitious

The project will also demonstrate the use of storage technology in CSP plants and will create a strong precedent for the use of the PPP business model to develop CSP power plants in Morocco

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