Eng. Hani Salem Sonbol (at the rostrum) delivers his speech in one of the sessions during the 40th Islamic Development Bank Board of Governors annual meeting held in Maputo, Mozambique
JEDDAH — Cohesive partnership between the government and the private sector is indispensable to put the necessary infrastructure in place for a sustainable economic growth, Eng. Hani Salem Sonbol, Acting CEO of the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC), said in his speech in one of the sessions during the 40th Islamic Development Bank Board of Governors annual meeting held in Maputo, Mozambique last month. Highlighting the critical role of infrastructure in the economic development, he said that in a situation where the governments face budgetary constraints in carrying out the required basic physical and organizational structures and facilities needed for operation, “delivering public sector goods and services through the inclusion of private sector is a very useful approach to support sustainable growth. It is not only important, but is the way forward.” Building infrastructure is costly both in terms of time and money, making it difficult to close the wide infrastructure gap that already exists in most countries, Sonbol noted. According to estimates by McKinsey Global Institute, he said the current global annual basic infrastructure spending is about $2.7 trillion, when it ought to be $3.7 trillion, a shortfall of nearly 30%, therefore an additional $57 trillion is required in the next 15 years. To support growth, existing infrastructure – roads, utilities, ports, railways, airports, telecoms, etc. – need to be repaired or upgraded, and new ones need to be constructed to sustain future growth. He said the Islamic Development Bank Group member countries' infrastructure deficit is a case in point. Africa, for instance, requires at least $93 billion in additional infrastructure funding per year, he said citing a recent study by the World Bank. This level of infrastructure gap cannot be supported by the public sector alone, especially at a time when many developing countries are still reeling from the effects of the financial crises, and declining oil revenues are signaling budgetary constraints for many oil-exporting countries, Sonbol remarked. “Experience suggests that the private sector, with the right incentives and protection to their investment, can deliver reliable and efficient public goods in a sustainable manner, which is also more cost effective. A number of developed and developing countries are adopting this model, setting the required enabling environment, incentives and protection to be able to get the best private developers to their countries,” he said. Sonbol explained “the rationale for a public-private partnership (PPP) approach rests on the fact that the private sector is more capable of handling certain tasks and that some risks, inherent in all projects, are best borne by parties other than the public sector.” The PPP model essentially seeks to allocate each risk in a project to the entity best positioned to manage it. In addition, the PPP model, very importantly, mobilizes private sector resources, such as those of commercial banks and wealth funds, in developing public infrastructure, and ultimately reducing the burden on government budgets, he pointed out. Sonbol further said one more advantage of the PPP approach is that it brings about improvement in planning, evaluation and supervision, which fosters optimal use of scarce resources by ensuring that projects are delivered on time, on budget, and on specification. “PPP is therefore, both more effective and efficient,” he added. Moreover, the partnership allows the state to benefit from transfer of technologies and skills and ensures delivery of improved service. “In the final analysis, there is no question that PPP is a useful and necessary tool for both physical and social infrastructure development.” The “equitable” allocation of responsibilities under PPP requires that country-related risks are allocated to the public sector and not the private sector. The regulatory framework, institutional strength, and economic and political stability play a role in determining the extent of these risks. In particular, governments must put in place a legal framework that is capable of protecting property rights, enforcing contracts, and not allowing arbitrary changes to regulation and policies. Statistics showed that projects implemented under PPP have a higher level of quality and lower level of costs and are much more durable, when compared to government financed and built infrastructure, the Acting CEO of ICIEC revealed. “In a typical PPP arrangement, construction-related risks remain with the sponsors or the private sector. However, once the project is completed to specification and operates at a contractual-defined performance standard and delivery, the government will make rental payments,” he noted. In addition to sponsors, commercial banks, insurance companies, and Engineering, Procurement, Construction (EPC) contractors, two other stakeholders that have featured prominently in PPP-financed infrastructure projects are Export Credit Agencies (ECAs) and Multilateral Development Banks (MDBs), Sonbol further said. Typically, political risk insurance (PRI) is sought for PPP projects especially those located in developing countries. In recent years, the share of FDI covered by PRI is higher for flows into developing economies where the ratio of FDI to PRI stood at 14.2% for developing economies compared to nearly 5% in 1997. “Thus, confirming that multinational enterprises and international financial institutions are prominently recognizing the importance of investment insurance when penetrating new markets, particularly in the emerging markets,” he noted. The Acting CEO of ICIEC disclosed that last year, ICIEC facilitated business of over $4 billion in investment and export credit insurance and over $28 billion since inception in 1994. Significant part of this insurance is for country and political risks, covering equity investments and project financing transactions. This kind of cover insulates the private sector from risks that are beyond the ability of the host government, Sonbol said, adding that a lot of businesses in this regard has been facilitated by top reinsurers and by others in the Lloyds market. On the other hand, MDBs contribute to infrastructure development by “anchoring” projects or acting as primary lenders and catalysts. Due to their high (AAA) credit ratings and the close working relationship with the host countries, the presence of MDBs gives an additional layer of comfort that typically increases the appetite of other lenders, as they offer credit enhancement. With respect to IDB Group, economic and social infrastructure is key pillar in the bank's strategy, as it has accounted for 55% of the portfolio on average in the last decade. In addition, through its PPP operation, the IDB has been working alongside private sector participants for more than a decade to help reduce infrastructure deficits in IDBG member countries. Under the PPP arrangement, IDB has been able to impact diverse sectors in its member countries by providing the private sector with access to long-term capital to undertake investment in large-scale projects, Sonbol averred. As of the first quarter of this year, IDB has provided almost $3.5 billion through its PPP Division to 35 infrastructure projects spread across 14 countries in Central, South and Southeast Asia; Sub-Saharan Africa; and the MENA region. Also, IDB is offering a conduit to Islamic finance resources for PPP projects in MCs, the Acting CEO of ICIEC said. — SG
