IFC Operations & Strategy in Iraq Ziad A. Badr Iraq Country Manager Iraq Finance 2012

1. IFC Operations & Strategy in IraqZiad A. BadrIraq Country ManagerIraq Finance 2012

2. Outline IFC At a Glance IFC Activities in Iraq Investments Advisory Services Challenges Facing PPPs in Iraq Role of IFC in supporting the development of PPPs

3. IFC’s Structure • Owned by 181 member countries • IFC is the main driver of private sector development in the World Bank Group • Collaborates with other members of the group, including the World Bank (IBRD and IDA) and MIGA • Global: Headquartered in Washington, D.C. • Local: More than 100 offices worldwide in 86 countries. Highly decentralized with more than half of IFC’s 3,325 staff work in field offices.

4. IFC Offers ClientsA Unique Role • Emphasis on development impact World Bank affiliation • Participates only in private sector ventures. • Market discipline: has market pricing policies • Long-term partnerships; countercyclical role • Risk-taking and risk management. Shares same risks as other investors. Takes Equity risk. • Does not accept government guarantees. • Is profit oriented but balanced with development impact IFC presence reassures Foreign and local investors, and Governments. It is a Catalyst for other investors and lenders

5. First IFC mission after the end of the War in July 2003. • Active involvement in 2003 and 2004, then slow down due to security and other constraints. • IFC representative stationed in Baghdad in Sept 2011. • Cultivating relations with GoI, private sector, investors, and donors. IFC Activities in Iraq

6. IFC’s Business Investment Services • Loans and intermediary services • Equity and quasi-equity • Syndications • Structured and securitized products • Risk management products • Trade finance • Subnational finance • Treasury operations

7. IFC Investments in Iraq Building long term relationships in Iraq is key. PROGRAM TO DATE IFC’s committed portfolio in Iraq currently stands at US$300 million in 6 companies/projects: • 10% equity stake in Credit Bank of Iraq in partnership with National Bank of Kuwait • US$14 million loan for the first 5-star Greenfield hotel in Erbil – Erbil Rotana Hotel. • US$45 million loan to Gulftainer to support their investments in ports • US$400 million IFC-led facility for Zain Iraq • US$50 million loan to Lafarge for the Bazian cement plant • US$25 Million equity investment in Commercial Bank of Iraq (CBIQ) Target investments in the range of US$ 800 m over the next 3 years

8. IFC’s Business Advisory Services Four main business lines: • Access to finance • Investment Climate • Environmental and social sustainability • PPPs and Infrastructure Advice IFC’s Advisory Services Program in Iraq has been re-activated and funding has been secured from the multi-donor Iraq Business Advisory Fund (IBAF) – US$38 Million

9. Challenges Facing PPPs in Iraq • Legal & Regulatory framework • Designing Projects with a balanced risk allocation • Limited non-recourse financing available

10. Legal & Regulatory framework Problems: • legal/regulatory framework does not preclude PPPs in most sectors • Lack of a history with PPPs: How Iraqi regulators will enforce contract provisions and address broader regulatory issues, creates uncertainty for investors Solutions: mostly to be addressed by the government • Develop and convey clear government objectives • Utilize PPP contracts that include provisions for regulation (and examples of how these provisions would be enforced • Establish a track record of PPP contracts

11. Designing Projects with a balanced risk allocation Problems: • Projects in Iraq will carry higher risk • Iraq specific risk allocations need to be developed for all projects Solutions: • Well developed projects are critical (thorough due diligence is necessary) • Adjust project risk allocation taking in consideration the risk appetite of the potential private sector partners. The process is just as important as the project

12. Limited non-recourse financing available Problems: • local banks are largely unable to provide long-term financing necessary for infrastructure • foreign commercial banks uncomfortable with Iraqi country risk • few well developed projects with balanced risk allocation • few projects with sponsors who are acceptable to foreign lenders Solutions: • Well developed projects with appropriate risk allocation will attract well qualified sponsors • Sovereign guarantees will be critical in supporting government payment obligations.

13. Role of IFC in supporting the development of PPPs Technical Assistance : Indirect: support to develop appropriate regulatory/legal frameworks training for a local work force to support private sector projects Direct: Providing transaction advisory services to governments to implement specific PPP transactions, including full project preparation and management of the process Financial: Direct Financing, Syndications, and political risk insurance

14. Madinah Airport Queen Alia International Ai rport Alexandria University Hospitals $1,200,000,000 $675,000,000 $275,000,000 25 - year BOT concession for the Prince 25 - year BOT concession for the Queen 20 - year BOT concession contracts for Moh ammed Bin Abdulaziz Alia International Airpor t in Amman two new hospitals in Alexandria International Airport in Madinah Winning Consortium: Winning Consortium: Winning Consortium: Lead Advisor: Lead Advisor: Lead Advisor: 2012 2012 2007 KAIA Desalination Project Hajj Airport Terminal Ne w Cairo Waste Water $40,000,000 $315,000,000 $150,000,000 20 - year BOT concession to design, 20 - year B OT concession for the Hajj 20 - year BOT concession to design, finance, build , operate and maintain a Terminal at King Abdulaziz finance, build, operate and maintain a new 3 0,000 m3/day desalination plant International Airport in Jeddah 250,000 m3/day WWTP in Jeddah Winning Consortium: Winning Consortium: Winning Consortium : Lead Advisor: Lead Advisor: Lead Advisor: 2007 2006 2006 IFC Advisory Mandates in MENA - Closed

15. Thank You! IFC Web site: www.ifc.org

16. IFC Advisory Services in PPPs IFC is a leading provider of PPP Infrastructure Advisory services to Governments in structuring and implementing infrastructure PPPs • IFC is the only multilateral to offer direct advisory services to Governments for implementing private sector transactions across all sectors • Key sectors of focus include traditional and non-traditional infrastructure, including: water, waste, power, transports, and social and municipal services • IFC focuses on the long-term sustainability of projects • IFC considers all economic, environmental, social, regulatory and policy issues in projectstructuringto ensure that the project is bankable and sustainable for the duration of its expected lifetime • IFC is able to provide direct financing and facilitate the mobilisation of external financing for well structured projects in emerging markets Advisory is a new role that the IFC has been developing recently. IFC has made a point of advising frontier markets in the Middle East on their Independent Power Projects (IPPs), including Syria and Yemen. IFC has even made a point of advising not so frontier countries in the region – Egypt on its new IPP program, for example. IFC Advisory Services have already implemented over 150 projects across 80 countries.

17. Challenge: Well Prepared Projects – Designing a balanced risk allocation Problem: Projects in Iraq will carry higher risk than projects in other countries in the region due to concerns about legal and regulatory framework, security, etc. As a result Iraq specific risk allocations need to be developed for all projects. Models used in other countries in the region are useful references, but will need to be adjusted to fit the specific circumstances on the ground in Iraq. Solutions: Well developed projects are critical. The government needs to work with advisors that can conduct the necessary technical, legal and financial due diligence to properly prepare a project. This will require additional time, but thorough due diligence is necessary to attract qualified companies who are willing to invest time and money throughout a bidding process. The tender process itself will also likely take longer than in other countries in the region as there needs to be significant time to consult with qualified bidders so that the project risk allocation can be adjusted to reflect the risk appetite of the potential private sector partners. Key point – the process is just as important as the project – a clear process that allows sufficient time to address all issue is critical. As with the legal/regulatory issues, once a few pilot projects have been implemented, risks will be better understood so it will be possible to shorten timelines.

18. Challenges facing the implementation of PPPs in Iraq Challenge: legal/regulatory framework: Problem: legal/regulatory framework does not preclude PPPs in most sectors BUT lack of a history with PPPs, particularly with respect to how Iraqi regulators will enforce contract provisions and address broader regulatory issues, creates uncertainty for investors Solutions: several approaches, mostly to be addressed by the government Develop and convey clear government objectives – If a PPP project clearly fits within stated objectives in terms of overall sector policy, this will provide some comfort. Interministerial cooperation is key to demonstrate commitment to a broader PPP agenda. Utilize PPP contracts that include provisions for regulation (and examples of how these provisions would be enforced) – this way investors can rely on their contract with the government which will be less subject to interpretation and law changes than general law Need to establish a track record of PPP contracts – ideally should start with one medium sized project per sector to demonstrate the commitment to a broader PPP program. The first project will carry a higher risk premium due to the uncertainty described above, but as the private sector sees Iraq managing contracts successfully, that risk premium will decrease for future projects.

19. Challenge: Limited non-recourse financing available  Problem: few banks are willing to provide non-recourse financing to projects in Iraq. There are several reasons local banks are largely unable to provide long-term financing necessary for infrastructure and have limited capacity to manage complex project financings foreign commercial banks remain uncomfortable with Iraqi country risk few well developed projects with balanced risk allocation (for example Iraqi port concession has no termination provisions of any kind) few projects with sponsors who are acceptable to foreign lenders. Solutions: Well developed projects with appropriate risk allocation will attract well qualified sponsors, who in turn have good relationships with lenders. IFIs will likely need to provide early project financing, which will mean initial projects need to be small enough that they can be financed within the constraints of the handful of IFIs willing to lend. Once you have a few successful smaller to medium size deals, commercial lenders will become more comfortable and more able to lend to larger projects. Sovereign guarantees will be critical in supporting government payment obligations. There are limitations on Iraq’s ability to provide such guarantees, which could constrain PPP development. Working to resolve this issue is an important step to support multiple PPPs. Overarching message: Pick a couple of pilot projects and take the time to do them right. Pilot projects should be clearly needed by the country, consistent with government objectives, have strong interministerial support and be less than $500 million in required investment.  The approach to PPPs has to be programmatic. To get the benefits a PPP program can deliver you have to spend a bit more time at the beginning, but this will pay off down the road as you gain investor confidence and understanding.

20. role of IFC and other DFIs in supporting the development of PPPs?  Technical Assistance Indirect Providing support to develop appropriate regulatory/legal frameworks Providing training to ensure there is a well-qualified local work force to support private sector projects Direct: Providing transaction advisory services to governments to implement specific PPP transactions. This includes full project preparation and management of the process through which a private partner is selected. Project preparation is probably the biggest impediment to achieving a successful PPP in Iraq so the need to find this type of advisor has to be their first step. (IFC PPP Advisory ) Financial products Sovereign lending (World Bank) – WB loans can be used to fund public contributions to PPP projects. Private sector lending (IFC) Infrastructure – very focused on infrastructure sectors and are looking for well developed projects in Iraq to lend on a non-recourse basis. Other sectors – indirectly supporting private businesses in support sectors, for example construction materials (e.g. cement). This type of additional capacity will be necessary to support the development of PPP projects. Other risk mitigation products Partial Risk Guarantees – World Bank product – designed to mitigate the risk of non-payment of government obligations. Syndications – IFC can bring in commercial lenders under our umbrella to facilitate lending to PPPs Political Risk Insurance – MIGA offers insurance to private parties investing in projects in Iraq.

21. What is a Public Private Partnership (PPP)? • PPP is a generic term for the relationship formed between public bodies and the private sector with the aim of introducing private sector resources & expertise to deliver public services • The goal of this arrangement is to provide the service more efficiently and at a lower cost to the end user • Main role of the private sector partner in a PPP is to PROVIDE and manage the technical and financial aspects of the project • Main role of the public sector partner in a PPP is to REGULATE the private sector partner’s activities ensuring public interest goals are met and quality of service maintained

22. Criteria for Private Sector ParticipationWhat the Government needs and What the Private Sector wants Government Objectives Private Sector Goals Alleviation/removal of the State’s role Attractive risk weighted returns Injection of Private capital in public services Government guarantees mitigate certain risks Public Private Partnership A win-win solution Increased budgetary certainty Long-term investment opportunities Introducing private sector efficiencies Upside from operational outperformance Maintaining oversight to ensure quality To operate under a clear regulatory framework

23. Options for Private Sector Participation Limited risk transfer Government control Substantial risk transfer Government control Full risk transfer No government control Full Divestiture Most common PPP model Concession Contract 25-30 yrs Risk transferred to private sector Lease Contract Management Contract Service Contract 5-15 yrs Technical Assistance 3-5 yrs Contract Duration 1-3 yrs As the contract term increases, an increasing amount of risk can be allocated to the private sector

24. An end-to-end approach to developing the Project Transaction time line is typically 12-18 months from the kick off meetings, contingent on availability of data and responsiveness of the government decision making process Marketing to Investors Implementation of selection process Prepara-tion of PPP contract Agreement on IFC as LeadAdvisor Agreement on Project Structure Completion of Project’s analysis Assist-ance to Closing Activity Define transaction structure Assess PPP options • Technical and legal analysis • Financial Analysis • Stake-holder discussion • Market sounding • Risk allocation • Payment mechanism • Pre-qualification • Technical evaluation • Financial evaluation • Award • Strategic Options Report • Info memo • Road show • Data room • Service Standards & targets • Payment procedures & penalties • Monitoring • Contract effectiveness & assumption of service obligations • Mandate signing • Mobilization of funds and team • Project kick-off Legend Ouput Decision Activity Output Selection Execution - Project Design (4/6 months) Execution - Project Implementation (8/12 months)