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

Investment Security in the Mediterranean Region (ISMED)

Meeting of the MENA-OECD Renewable Energy Task Force 9 March 2012

1 Context

bull 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

bull 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

bull 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)

bull 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

2

2 ISMED Working Group Participants

Original Members

Participants from International and European Financial Institutions

Expert Network

Union for the Mediterranean

Islamic Development

BankGerman

Development BankAgence Franccedilaise

de DeacuteveloppementEuropean

Investment Bank

European Bank for Reconstruction and

Development

International Finance Cooperation

4

Political and economic risks

ISMED Subgroup II on guarantees and insurance schemes

investors (MIGA-led)

Legal regulatory and institutional risk

3 Structure of the ISMED Working Group

The ISMED Working Group works in two Subgroups

ISMED Subgroup I on legal investment protection

(OECD-led)

The ISMED process is coordinated with the Union for the Mediterraneanrsquos labelling procedure for larger regional infrastructure projects but remains open to other project selection processes

5

4 Outputs of the ISMED Working Group

Output 4 EC NIF window for lowering guarantee

premium costs

Long-term investments

led by host states and project

sponsors

Output 1 Joint EC-OECD Support Programme on legal security

assistance

Output 2 MIGA or alternate qualified operatorrsquos role as facilitator in the guarantee

market

Output 3ECEIB risk-sharing

enhancement

Output 1 EC-OECD ISMED Legal Protection Support Programme

Findingsbull Strong emphasis on legal protection for private investors and public

agencies (eg access to international arbitration) for credit enhancement

Recommendationsbull The ISMED Legal Protection Support Programme aims to assess the legal

institutional and regulatory investment framework with a view to supporting specific infrastructure projects

bull Assessment and assistance missions will be conducted upon request within a short time frame (3-4 months)

bull Assessments are intended to provide assistance to host governments and concrete solutions for stakeholders involved in the projects

bull Project-specific assessments will be based on the ldquoChecklist for Investment Protection and Security in the Mediterranean Regionrdquo developed by the ISMED Working Group

6

5 Next steps

7

Output 1 Launch of the EC-OECD ISMED Legal Protection Support Programme in June 2012

Output 2 Presentation of a 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 Facilityrsquos (NIF) premium cost-sharing mechanism should be operational soon

ldquoInnovativerdquo Guarantee coverage for feed-in tariffs

bull Under the risk category ldquobreach of contractrdquo Political Risk Insurance can protect investors against a governmentrsquos change in the feed-in tariff that the investor has relied upon to structure its project

bull The breach of a power purchase agreement by the host government can also be covered under PRI

bull 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

bull Examples for PRI providers with breach of contract coverage are MIGA EDC Euler Hermes PWC OPIC

bull Independently from the breach of contract coverage OPIC is developing an insurance product specifically tailored to the investorrsquos project and the specific feed-in tariff scheme which will protect investors against a governmentrsquos change in the feed-in tariff that the investor has relied upon to structure its project Compensation will be based upon the investorrsquos lost business income due to the change in tariff

Annexes

9

Output 2 Role as facilitator in the guarantee market

Findingsbull Overall recourse to guarantee instruments public and private remains below

capacity even as the risk levels have increasedbull In practical terms investors are looking for easier-to-use instruments faster

procedures larger guarantee and insurance coverage and possibly more attractive conditions

Recommendationsbull 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

bull This Facilitator could act as a facilitator for the entire needs of the projectbull It could provide technical assistance to investors and sponsors on specific issues

such as environmental and social aspects or refer them to qualified expertisebull Ideally the Facilitator should provide technical assistance to Southern and Eastern

Mediterranean countriesrsquo ECAs for their investment guarantee programmes

10

Output 3 ECEIB risk-sharing enhancement (12)

11

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)

bull 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

Output 3 ECEIB risk-sharing enhancement (22)

12

Loan Guarantee Instrument for TENs Transport (LGTT)

Risk-Sharing Finance Facility (RSFF)

Output 4 Creating an ECNIF window for lowering guarantee premium costs

Findingsbull High premiums can be a significant barrier to increased recourse to

guarantee instrumentsbull 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

bull Official investment guarantee instruments show that marketable premium rates (eg PwCHERMES starting at 05 per year for the region) can create a strong demand for guarantees

Recommendationsbull The ECNIF grant support would be applicable to premiums paid by foreign

investors and lenders and by local investors and banks bull It would be provided within defined ceilings (in percentage value

timeframe) depending on factors such as the nature size and location of the projects

13

Contact Information

Mr Alexander BoumlhmerHead of Unit

MENA-OECD Investment ProgrammeOECD Private Sector Development Division

2 rue Andreacute-Pascal 75016 Paris FranceTel +33-1 45 24 1912Fax +33-1 44 30 6135

Email alexanderboehmeroecdorg