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Investment Security in the Mediterranean Region (ISMED)

Investment Security in the Mediterranean Region (ISMED). Meeting of the MENA-OECD Renewable Energy Task Force, 9 March 2012. 1. Context.

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Investment Security in the Mediterranean Region (ISMED)

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  1. Investment Security in the Mediterranean Region (ISMED) Meeting of the MENA-OECD Renewable Energy Task Force, 9 March 2012

  2. 1. Context • The ISMED Working Group was launched by the EC, OECD and MIGA in 2010. It is open-ended and focuses on large-scale non-oil and gas infrastructure projects. The renewable energy sector was highlighted since the beginning as a key sector to work on. • Investor demand for investment guarantee coverage in the MENA region has intensified in the wake of recent events due to rising risk perception. This includes now also Political Risk Insurance. • Expert consultations underlined that the current publicly-supported investment guarantee offering is fragmented and could benefit from enhanced cooperation (strengthen mediation function and expand risk-sharing initiatives). • Also, new emphasis has been put on the need for legal investment security following the real (and perceived) challenging investment climate in some MENA countries.

  3. 2. ISMED Working Group Participants Original Members Participants from International and European Financial Institutions European Bank for Reconstruction and Development International Finance Cooperation Islamic Development Bank European Investment Bank German Development Bank Agence Française de Développement Union for the Mediterranean Expert Network • EC/ECFIN and DEVCO • PWC HERMES • SACE • ANIMA Network • Caisse des Dépôts/INFRAMED • Shearman & Sterling LLP • Lloyd's Syndicat Liberty Mutual

  4. 3. Structure of the ISMED Working Group The ISMED Working Group works in two Subgroups : Legal, regulatory and institutional risk • Political and economic risks ISMED Subgroup I on legal investment protection (OECD-led) ISMED Subgroup II on guarantees and insurance schemes investors (MIGA-led) The ISMED process is coordinated with the Union for the Mediterranean’s labelling procedure for larger regional infrastructure projects, but remains open to other project selection processes

  5. 4. Outputs of the ISMED Working Group Output 1: Joint EC-OECD Support Programme on legal security assistance Long-term investments ledby host states and project sponsors Output 4: EC/ NIF window for lowering guarantee premium costs Output 3: EC/EIB risk-sharing enhancement Output 2: MIGA or alternate qualified operator’s role as facilitator in the guarantee market

  6. Output 1: EC-OECD ISMED Legal Protection Support Programme Findings • Strong emphasis on legal protection for private investors and public agencies (e.g. access to international arbitration) for credit enhancement. Recommendations • The ISMED Legal Protection Support Programme aims to assess the legal, institutional and regulatory investment framework with a view to supporting specific infrastructure projects. • Assessment and assistance missions will be conducted upon request within a short time frame (3-4 months). • Assessments are intended to provide assistance to host governments and concrete solutions for stakeholders involved in the projects. • Project-specific assessments will be based on the “Checklist for Investment Protection and Security in the Mediterranean Region” developed by the ISMED Working Group.

  7. 5. Next steps Output 1: Launch of the EC-OECD ISMED Legal Protection Support Programme in June 2012; Output 2: Presentation ofa project proposal by MIGA on how to envisage a facilitation role in the guarantee market for MIGA or for a similarly qualified alternate operator in early 2012; Output 3: A study to assess possible new financial mechanisms for the Mediterranean Region (funded by the UfM Secretariat and the FEMIP Trust Fund managed by the EIB) and work on a Mediterranean project bond initiative has started; Output 4: The Neighbourhood Investment Facility’s (NIF) premium cost-sharing mechanism should be operational soon.

  8. “Innovative” Guarantee coverage for feed-in tariffs • Under the risk category “breach of contract” Political Risk Insurance can protect investors against a government’s change in the feed-in tariff that the investor has relied upon to structure its project; • The breach of a power purchase agreement by the host government can also be covered under PRI; • PRI is offered by national ECAs, export-import banks, export credit guarantee agencies and investment insurance entities or Multilateral PRI providers, but not all of them cover breach of contract risk; • Examples for PRI providers with breach of contract coverage are: MIGA, EDC, Euler Hermes PWC, OPIC. • Independently from the breach of contract coverage, OPIC is developing an insurance product specifically tailored to the investor’s project and the specific feed-in tariff scheme which will protect investors against a government’s change in the feed-in tariff that the investor has relied upon to structure its project. Compensation will be based upon the investor’s lost business income due to the change in tariff.

  9. Annexes

  10. Output 2: Role as facilitator in the guarantee market Findings • Overall recourse to guarantee instruments, public and private, remains below capacity even as the risk levels have increased; • In practical terms, investors are looking for easier-to-use instruments, faster procedures, larger guarantee and insurance coverage and, possibly, more attractive conditions. Recommendations • Need for a Facilitator to identify the investment guarantee instruments most adapted to the nature, size, duration and location of a particular infrastructure project and to coordinate their deployment and use; • This Facilitator could act as a facilitator for the entire needs of the project; • It could provide technical assistance to investors and sponsors on specific issues such as environmental and social aspects or refer them to qualified expertise; • Ideally, the Facilitator should provide technical assistance to Southern and Eastern Mediterranean countries’ ECAs for their investment guarantee programmes.

  11. Output 3: EC/EIB risk-sharing enhancement (1/2) • Innovative EU Finance Instruments could potentially be adapted to the Deauville countries: • Since 2007, the EC and the EIB have jointly developed instruments to strengthen the financial profile of promoters and projects and to improve access to debt financing for key infrastructure projects within the EU: • Risk-Sharing Finance Facility (RSFF) • Loan Guarantee Facility for TEN-Transport (LGTT) • The Joint EC communication from 19 October 2011 proposes implementation under the 2007-2013 financial framework of a EU Project Bond Initiative: • EC Vice-President Tajani mentioned extending project bonds to the Mediterranean neighbour countries at the 8th ministerial meeting (11-12 May 2011, Malta) • A potential Mediterranean-wide risk-sharing and project bond initiative would finance • infrastructure in the Deauville countries with a partial coverage of risks by the EU and a • mitigation of project risks by other financiers like European bilateral development • banks and Regional and International Finance Institutions involved in the G8 Deauville • Partnership countries.

  12. Output 3: EC/EIB risk-sharing enhancement (2/2) Loan Guarantee Instrument for TENs Transport (LGTT) Risk-Sharing Finance Facility (RSFF)

  13. Output 4: Creating an EC/NIF window for lowering guarantee premium costs Findings • High premiums can be a significant barrier to increased recourse to guarantee instruments; • A guarantee cost-sharing instrument supported by the EC Neighbourhood Investment Facility (NIF) could make a project more bankable, and more attractive to the partner country; • Official investment guarantee instruments show that marketable premium rates (e.g. PwC/HERMES: starting at 0,5% per year for the region) can create a strong demand for guarantees. Recommendations • The EC/NIF grant support would be applicable to premiums paid by foreign investors and lenders and by local investors and banks; • It would be provided within defined ceilings (in percentage, value, timeframe) depending on factors such as the nature, size, and location of the projects.

  14. Contact Information Mr. Alexander Böhmer Head of Unit MENA-OECD Investment Programme OECD Private Sector Development Division 2 rue André-Pascal, 75016 Paris, France Tel: +33-1 45 24 1912 Fax: +33-1 44 30 6135 Email: alexander.boehmer@oecd.org

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