54847 On-line at http://www.worldbank.org/infra INFRA Update provides information about the World Bank's Infrastructure Recovery and Assets (INFRA) platform. INFRA was launched during the Spring Meetings in April 2009 to scale up the World Bank's infrastructure lending during the financial crisis, coordinate the response among international financial institutions and donors to bridge gaps in infrastructure financing and capacity, and create cross learning opportunities regarding crisis response in infrastructure. As part of efforts to assess the impacts of the financial crisis on infrastructure sectors, infrastructure diagnostics have been undertaken in more than 20 countries under INFRA. This e-newsletter provides information about the findings of the Energy Sector Management Assistance Program (ESMAP) supported power sector vulnerability assessments undertaken in four countries in Middle East and North Africa. For more information and to access INFRA publications, please visit http://www.worldbank.org/infra Overview The global economic crisis has contributed towards Figure 1 - Exports (% Change) reducing, exports, remittances, tourism receipts, Foreign Direct Investment (FDI) and economic growth in Middle East and North Africa (MENA) (Figure 1 and 2). In the power sector, all major sources of project financing such as the international banks, local banks, export credit agencies (ECAs) and international financial institutions (IFIs) are still active; very few power projects have fallen through because of the crisis. However, the costs and terms of the funding have become more challenging. Interest margins have more than doubled since the beginning of the crisis, as a combination of (i) increased liquidity cost for the banks, and (ii) reassessed risk premiums. More generally, all deal parameters have tightened, with greater equity requirements, reduced tenors, higher up-front fees, tighter coverage ratios, stricter covenants, and request for reinforced support from host governments. Figure 2 - Worker Remittances ($ Billion) In this context, the Bank has a unique role to play in supporting the development of the power sector in the region. The World Bank can not only provide financing for power projects, but also technical know-how and advice for undertaking challenging sector reforms, and risk mitigation support for implementing a shift to low carbon energy options. Egypt The global economic crisis has had an adverse impact on Egypt. Earnings from tourism have fallen as has foreign investment. GDP growth declined to 4.7 percent in FY09 and unemployment increased to 9.4 percent. Private sector financing has become more constrained, with loan tenor becoming shorter and lending margins higher. The power sector is estimated to require a Figure 3 - Egypt's Electricity Demand Forecast substantially large investment of over $20 billion in the Estimated Power Generation Capacity (MW) next seven years (Figure 3 and 4). Raising this amount will 45,000 be challenging. More than 90% of the investment is initially 40,000 995 expected to come from the public company Egyptian 995 35,000 2,048 Electricity Holding Company (EEHC), which will leave the 995 2,048 company highly leveraged. At the same time, with the 30,000 795 exception of wind power, a framework for private 25,000 425 2,048 35,053 32,143 investment is incomplete for the power sector and the 305 2,048 27,547 20,000 2,048 situation in the credit market is tight. 20,693 22,793 17,388 While there have been no cancellation of power sector 15,000 2007/08 2009/10 2011/12 2013/14 2015/16 2017/18 projects as a result of the crisis to date, the financing of (actual) new projects is likely to be more difficult and projects others wind & solar hydro 3 BOOTs EEHC thermal (net) could be delayed.. The government has responded by Source: EEHC announcing an economic stimulus package, with a significant infrastructure component. However, more support is required. Bold measures on the policy front will Figure 4 ­ EEHC Net Capital Investment and Overall be required to help bring about a successful investment Power Sector­ Actual and Estimated program in the power sector, including interrelated EEHC Power Sector policies for creating a commercial framework for private investment in the sector; electricity tariffs; and public 25,000 utilities' capital structure and investment program. Million Egyptian Pounds 20,000 The Bank approved the $259.6 million El-Tebbin project in February 2006 and the $600 million Ain Sokhna 15,000 project in January 2009 and is also appraising the Giza 10,000 North project. The International Finance Corporation (IFC) is keen to support the next private power investment in 5,000 Egypt, and has participated in the dialogue with the 0 Government of Egypt on re-engaging the private sector in 20 5 20 6 20 7 20 8 20 9 20 0 20 1 20 2 20 3 20 4 5 /0 /0 /0 /0 /0 /1 /1 /1 /1 /1 /1 power generation. Going forward, Egypt's power sector 04 05 06 07 08 09 10 11 12 13 14 20 will require more financing for public generation projects Source: World Bank Estimates while technical assistance to help the government re- engage with the private sector in power generation will also be necessary. Full Report Figure 5 - Jordan Forecast Peak Load Jordan Forecast Peak Load (MW) Economic growth has slowed in Jordan in the aftermath of the crisis. FDI has declined and the 4,000 government's fiscal situation has worsened. However, 3,462 3,500 3,247 financial stability has been maintained and no major 3,045 3,000 2,856 capital flight has occurred from the financial sector. There 2,678 2,512 have been limited immediate impacts on Jordan's power 2,500 2,260 sector with financing constraints causing no major project cancellations to date. In the crisis environment, many 2,000 2008 2010 2012 2014 projects have benefited from the support of development (actual) financial institutions. While the lending margin for power projects has increased substantially, the lower benchmark Low Medium High interest rates (e.g. the US$ LIBOR) have compensated for Source: NEPCO Forecasts the higher margin, resulting in a commercially-viable cost to borrowers. Although the growth in power demand has slowed either cancelled or delayed, power demand is likely to following the crisis, Jordan still requires 1,300 MW of keep growing rapidly (by about 5 to 6 percent ) in the next incremental generation capacity with financing needs of several years (Figure 6). Investment requirement of $500 $3.0 billion in the next five years (See Figure 5 for Jordan's million per year to 2016 is estimated in the power sector. Forecast Peak Load). Of this amount, private investment is No major financing problem is expected for planned estimated at $2.2 billion and public is $0.8 billion. power projects, although the cost of the loans was Financing of large projects will be challenging, and is likely expected to increase with higher margins, shorter tenors, to require more participation of local financiers and risk higher fees, and stricter covenants. Public sector projects mitigation support from the government, IFIs and the typically financed through IFIs, bilateral donors, ECAs and insurance market. Planned investments are spread out local banks are not expected to run into financing over time and the estimated required financing is not very constraints. Despite the difficulties in international large; therefore, a large financing gap is unlikely. financial markets and syndication markets, even private The Bank has provided support for financing power projects are assessed as having prospects of attracting projects such as Amman East Independent Power Producer finance. However, both public and private projects are (IPP) in Jordan, including through partial risk guarantees. likely to face higher costs Towards helping channel resources to renewable energy In response to the crisis, the government has and energy efficiency, the Bank has provided technical implemented a stimulus that increases public investment assistance to facilitate the passage of the renewable by 20 percent and directs spending of about $1 billion energy promotion law and establish the Jordan Renewable towards infrastructure projects. Going forward, access to Energy and Energy Efficiency Fund. Likewise, the Bank is reasonably priced co-financing as well as instruments such involved in helping Jordan access financing for as Partial Risk Guarantee from the WB and other concentrated solar power from the Clean Technology Fund multilateral institutions will be important to prevent and in promoting regional integration of energy markets. increases in electricity tariffs. This is especially true for new Going forward apart from risk mitigation support, some IPP projects, as significant co-financing would contribute to commercial lenders may need liquidity support, especially keep Power Purchase Agreement (PPA) price conditions for longer-tenor project financing. reasonable. Likewise, support will be required for financing renewable energy projects in the current climate. The Tunisia MENA solar scale-up program would be one component of The current global economic climate, especially the this effort, but other initiatives may be necessary. In slowdown in European Union, has had a negative impact parallel, support for reforms, sector strategy, regulation, on Tunisia mainly. As exports to Europe have declined, tariff policy as well for preparing proposal relating to Clean Tunisia's real GDP growth is estimated to have fallen to Technology Fund is required. around 3 percent in 2009 and 4.6 percent in 2008, from 6.3 percent in 2007. Although several large real-estate projects announced by investors from the Gulf are likely to be Figure 6 - Tunisia GDP and Power Growth Source: Ministry of Energy, IMF, WB Morocco generation by industrial users. Despite constraints in While Morocco has not been spared from the effects international financial markets, no funding gap is expected of the global financial crisis, it has been able to manage its for ONE's projects in the next few years. New investment effects well and has preserved a reasonable growth in the power sector is not at risk, as a variety of local and performance. Remittances, tourism earnings, and exports international funds are available. However, as in Jordan, the cost of the loans is expected to be high and have have decreased and the budget has shifted into deficit. But GDP growth held up at 5.2 percent in 2009 compared with stricter conditions, with higher margins, shorter tenors, 5.6 percent in 2008 and 2.7 percent in 2007.The higher fees, harsher covenants. movements in prices and spreads of loans have been less In this context, direct support from the Bank and other pronounced than those in most other countries, reflecting multilateral institutions in the form of complementary funds to commercial loans and ECAs, security offerings sound macroeconomic management. In the power sector, no projects have, so far, been such as IBRD Partial Risk Guarantee, and assistance in the cancelled due to the crisis, although some have renewable energy sector, mostly wind and CSP could help experienced delays.Power demand is expected to continue mitigate the effects of the spike in financing costs. to grow rapidly over the next several years (Figure 7). Meanwhile, the Bank is continuing to provide technical Investment requirements of Morocco's power sector assistance and undertake policy dialogue regarding tariff amount to around $10 billion for 2009-2015, of which $4.2 reform, restructuring power contractual arrangements and billion is to be spent by the national energy utility ONE, general regulation in the sector through the Energy Development Policy Loan. $4.1billion by IPPs and remaining for renewable self Figure 7 - Morocco Power Sector Balance Source: ONE and Ministry of Energy Note: To access full assessments, please go to www.worldbank.org/infra