IFC steps up counter-cyclical investment

10 March 2016

Conflict and oil prices drive demand for development bank support

The US-based International Finance Corporation’s (IFC) counter-cyclical mandate means the development bank is stepping up its activities in the Middle East and North Africa (Mena) region. It aims to contribute $1.5bn to support the private sector in the region between June 2015 and June 2016, from independent power projects (IPP) in Iraq to small and medium enterprise (SME) credit lines in Egypt.

“The role of the IFC and other DFIs [development finance institutions] is more important than ever,” says Mouayed Makhlouf, regional director at the IFC, Mena, part of the World Bank group. “There is very low sentiment on the back of low oil prices. This is having a severe impact on the economic picture of the region, as well as conflict and the refugee crisis.”

Although the fiscal balance of oil importing countries, where the IFC tends to lend, should be improved by falling energy import bills, there are downsides. For decades, oil exporters have supported their neighbours with investments and grants, but lower incomes and liquidity have cut into this contribution.

“The investment we used to see from the GCC to the rest of the Arab world is not going anymore,” says Makhlouf. “We are sending signals to the market that we are still investing, mobilising capital in these countries, and bringing confidence.”

This is behind some of the falls in tourism revenue and foreign direct investment (FDI) that Mena is suffering from.

Advisory work

While the IFC does not lend in the GCC, saving its funds for low and middle-income countries, it does offer advisory services. It works with governments to expand the role of the private sector, in countries where the economy is driven by public sector spending. The IFC public-private partnership (PPP) advisory unit has been busy across the region.

“The GCC needs to diversify its economy and bring in the private sector and investment activity,” says Makhlouf. “We have advised Saudi Arabia on PPP in airports such as Taif and Medina

A tender for the contract to build, transfer and operate Taif International Airport in Mecca is expected in 2016. The airport will have the capacity to handle 5 million passengers annually.

The $1.2bn Prince Mohammed bin Abdulaziz airport in Medina was commissioned in June 2015 by Tibah, which comprises Turkey’s TAV Airports and local contracting firms Saudi Oger and Al-Rajhi Holdings. It was the first PPP airport in the kingdom.

While PPP has been considered before by GCC governments, the complexities and costs means it has never got off the ground.

But the IFC believes that with oil prices around $40 a barrel, change is coming.

“Things are different now in the GCC – the liquidity is not there and they are facing budget deficits,” says Makhlouf. “Governments have realised that unless they reform and bring the private sector into investment, they won’t be able to sustain spending at these oil prices.”

PPP infrastructure and social infrastructure projects will need the support of international financiers. Despite recent downgrades and negative outlooks from ratings agencies, the GCC is still widely seen as investment grade. Even projects in countries which are no longer A-rated, such as Oman and Bahrain, are very bankable when the government is the offtaker or guarantor.

Legal framework – or not?

The next step is to get feasible PPP projects off the ground. Kuwait has opted for a PPP unit, the Kuwait Authority for Partnership Projects (KAPP), similar to Egypt’s PPP Central Unit.

Others are pushing ahead on a more ad hoc basis.

“PPP doesn’t need a lot of infrastructure – it can work as long as there is a will behind it,” says Makhlouf. “Investors prefer to have a PPP law and a PPP unit within ministries that speaks the same language, but as long as you have a good private sector and advisers you can successfully close very large transactions.”

This was the case with the expansion of Queen Alia airport in Jordan to a capacity of 9 million passengers a year, completed in 2013. A similar plan for New Aqaba Port broke down, but learning experiences can be carried forward.

“The best thing to do to initiate PPP is to start with a transaction, invite bids and see the reaction,” says Makhlouf. “A meaningful transaction can set the stage, practically set the law. If you do it once and agree a certain framework between the private and the public, this can be a successful model that the government can follow and support in subsequent transactions.”

Aside from PPP, the IFC also looks at concessions and tariffs as ways to boost the role of the private sector.


Jordan pioneered renewables feed-in tariffs starting from 2011, and 12 solar projects reached a financial close in mid-2015. The IFC arranged financing for seven of the projects, bringing in commercial lenders such as Bahrain’s Arab Bank on B-lending.

“As DFIs, we try to stretch the limit,” says Makhlouf. “Commercial banks typically don’t feel comfortable on the longer maturities that some transactions require – they don’t have the means. They come in at the shorter end of the financing plans and between us and them we complete the picture.”

The idea was to make commercial banks comfortable enough to finance the second round of projects, which are now signing PPAs. The results of this strategy will become apparent as the four projects work towards financial close.

“We will keep encouraging commercial banks, but we are not seeing the uptake that we hoped [for], it’s still a difficult market,” says Makhlouf. “A few will come but not all the projects will be supported by the private sector.”

Difficult markets

The financing challenge is even greater in Egypt. Its feed-in tariff scheme is much larger and a shortage of foreign currency is discouraging developers and putting off commercial lenders.

However, the involvement of private equity investors is encouraging, and DFIs expect the currency issue to be short not long term.

If Egypt is a difficult market, Iraq is even more so due to political instability. The IFC is focused on building up the power sector in the Kurdish autonomous region in the north of Iraq and reducing electricity shortages.

Sulaymaniyah IPP, developed by local/Jordanian Mass Global Energy, reached a financial close in February 2016 with a $250m contribution from the IFC, half equity and half debt. The 1,000MW power plant is being converted to a 1,500MW combined cycle plant.

It is also arranging finance for the $578m first phase of Zakho IPP, with a capacity of 560MW. Belgium’s Unit and Turkish Polteks are the developers. The IFC hopes to lend $100m of its own money and arrange $305m from other lenders. It also plans to support the 280MW second phase, costing $204m.

“The biggest challenge is to mobilise commercial investors with us and give comfort to them,” says Makhlouf. “These are large sums and there are very few willing investors. But we do have investors coming in and there are serious potential returns; it is high risk and high returns.”

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