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PPP’s: Challenges of Long Term Financing The Egyptian Experience

PPP’s: Challenges of Long Term Financing The Egyptian Experience. Atter Hannoura Tendering and Contract Compliance Manager PPP Central Unit Ministry Of Finance- EGYPT PPP DAYS 2010 Manila – Philippines March 22 th -24 th , 2010. PPP Drivers in Egypt.

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PPP’s: Challenges of Long Term Financing The Egyptian Experience

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  1. PPP’s: Challenges of Long Term FinancingThe Egyptian Experience Atter Hannoura Tendering and Contract Compliance Manager PPP Central Unit Ministry Of Finance- EGYPT PPP DAYS 2010 Manila – Philippines March 22th -24th, 2010

  2. PPP Drivers in Egypt • According to World Bank recommendations Egypt should allocate between 5.5-7% (approx. US$ 13 billion) of its annual GDP to cover infrastructure needs to sustain growth prospects around 7-8% for the future • Key challenge is to bridge the financial gap by accelerating the mobilization of private capital as per international experience which illustrates that 10-30% of infrastructure capital needs could come from the private sector through PPP’s • Egypt can realistically target the mobilization of 10-15% (approx US$ 2 billion) of infrastructure needs annually through PPP’s

  3. Egypt PPP Initiative Creation of an enabling Investment & Business Environment • Priority item on Reform Agenda • Steady fast pace growth path with GDP 7.2% (FY 2007/2008), 6.9% (FY 2008/2009) & 4% (target 2009/2010) • Structural reforms in Fiscal & Monetary Sectors • Tax & Customs reforms • Ease of Trade Flows • Expansion of Banking & Insurance Products • New foreign Investment Regulations / One Stop Shops

  4. Egyptian PPP Pipeline Projects- 5 years Plan – 2009/2013 Approx Value USD in Billion Social Infrastructure 5.00 • Education Sector 2.50 • Health Sector 2.50 • Utilities Sector 3.00 • Transportation Sector 7.00 Total Current PPP Projects (18) 15.00

  5. Key Challenges and Issues Establishment of modern PPP Policy & Legal Framework Coordination with Relevant Stakeholders A realistic pipeline of viable PPP projects Public perception of PPP's as privatization Resistance to change / Project ownership issues Capacity of Central & Satellite PPP Units Financial local markets / funding Bankability of projects Affordability by Government

  6. Financial & Funding Market Development 2006 – 2007 (PPP Launch) • Lack of local long term financing: • Mismatch situation (lending & deposits) • LT tenors do not exceed 7 years • Floating interest rates beyond 1 year • Lack of LT hedging instruments for EGP • Underwriting Limitations due to single obligor issues • Bond market not developed • Capacity to appraise & price long term risks unavailable

  7. GOE Strategy for Development of Local Funding & BankablePPP Transactions • GOE major off taker in all pilot PPP transactions (minimize demand risk) • MoF guarantees Availability payment • Direct Agreements • Step in rights for lenders • 100% of Senior & Subordinated debts settled on Early Termination • Interest Rate Indexation every 3 years by GOE • Creative solutions to leverage local funding capacity • Stapled financing – non exclusive financing • Club Deals • Partially committed finance bids Result: • High appetite from Egyptian Banks for stable, strong credit & long terms assets such as PPP Debt

  8. Financial & Funding Market Development 2009 – ( Pilot Project Financial Closure) • Available Local long term financing • Extension of deposit tenors to bridge mismatch • LT tenors for debt extended to 15 years • Interest Rate on EGP fixed for 3 years • Debt to equity ratio 70/30 • Legislative framework for Bond market developed • Highly liquid market – deposit driven nature • Project financing credit assessment enhanced through capacity building

  9. Way Forward Developing Infrastructure Finance Facility Co. (IFFC) • Creation of Infrastructure Financing Fund Company (IFFC) to develop a long term local currency financial facility to enable Funders & Project developers to hedge against exchange rate & convertibility risks – funds will be a combination of GOE, IFI/ Donors and Equity funds • IFFC will refinance Banks financing PPP’s – resolving some of the liability mismatch of Banks & improves liquidity • In the short term IFFC underwrites bonds issued by banks to support PPP projects • In the medium long term IFFC will finance PPP projects (senior debt, mezzanine debt, equity)

  10. PPPs & The Current Financial Crisis • Financing for new PPPs will be affected primarily on the debt side • Private developers will be more selective, demanding higher quality, more “bankable” PPPs, with clearer forms of public support & risk-sharing • Infrastructure, as an asset class will be preferred by many investors, compared to other investments • Donors & MLOs should be prepared to play an increased role in providing & facilitating financing for PPPs • Future PPPs in emerging markets will likely see an increase both in small-scale contracts (using local contractors) & in “PFI-type” investment • Long terms fundamentals still remain: demand for infra in emerging markets is large and growing & the financial & implementation capacity of Governments is inadequate • Reluctance of funding institutions to take projects with demand risk involved

  11. Thank You Contact Details: PPP Central Unit Ministry of Finance Tel: +202 23421283 +202 23421284 Fax: +202 23421203 +202 23421303 e-mail:pppcentralunit@mof.gov.eg Web:www.pppcentralunit.mof.gov.eg

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