Infrastructure and Natural Resources Department Promoting Integration and

Infrastructure and Natural Resources Department Promoting Integration and Economic Development in Southeast Europe 23 November 2012 Istanbul, Turkey Martin Spicer, Manager

The World Bank Group IBRD IDA International Bank for Reconstruction and Development International Development Association Est. 1945 IFC MIGA International Finance Corporation Multilateral Investment and Guarantee Agency Est. 1956 Est. 1988 Est. 1960 Role: To promote institutional, legal and regulatory reform To promote private sector development To reduce political investment risk Client: Governments of member countries with per capita income between $1, 025 and $6, 055. Governments of poorest countries with per capita income of less than $1, 025 Private companies in member countries Foreign investors in member countries - Technical assistance - Loans - Policy Advice - Technical assistance - Interest Free Loans - Policy Advice - - Political Risk Insurance Product: Equity/Quasi-Equity Long-term Loans Risk Management Advisory Services Shared Mission: To Promote Economic Development and Reduce Poverty 2

IFC’s Three Businesses IFC Investment Services IFC Advisory Services q Loans q Advice q Equity q Problem-solving q Other forms of financing IFC Asset Management Company q Wholly owned subsidiary of IFC q Private equity fund manager q Training q Invests third-party capital alongside IFC q Resource Mobilization $56. 5 b $200 m $4. 5 b portfolio per year under mngt 3

IFC’s Global Reach to 104 country and regional offices worldwide 3, 763 staff of which 56% are outside of Washington Moscow Almaty Washington Istanbul New Dehli Cairo Mexico City Hong Kong Santo Domingo Dakar Bogota Nairobi Johannesburg São Paulo Buenos Aires IFC HQ/Regional Hub IFC Hub Offices IFC Regional Operations Center IFC Country Offices World Bank Group Hub Office 4 Singapore

IFC in Europe Middle East and North Africa Barents Sea North Sea London Brussels Moscow Minsk Warsaw Kiev Frankfurt Paris Zagreb Aral Sea Belgrade Baku Algiers Rabat Mediterranean Sea Jerusalem Cairo a Se Yerevan ian Tbilisi sp Tirana Bucharest Black Sea Sofia Istanbul Ca ATLANTIC OCEAN Bishkek Tashkent Almaty Dushanbe Kabul Islamabad Beirut Amman d Re Dubai Karachi a Se Sana’a IFC has gone through a structural change in 2010, moving its EMENA management team to Istanbul from Washington DC. Istanbul is the Operating Center for EMENA region. 5

IFC Infrastructure Strategy in Southeastern Europe • Improve basic infrastructure, which is necessary for sustained economic growth • Promote good management of infrastructure § Preference for private ownership § Will finance good municipalities for their urban infrastructure • Promote integration of economies • Support regional companies • We deliver this strategy with our significant presence in the region § Operations Center in Istanbul, Turkey (team of 20 infrastructure investment professionals) § Regional Hub in Belgrade, Serbia (team of 15 PPP Advisory professionals) § IFC offices in Sofia, Bucharest, Croatia, Tirana, Skopje, Sarajevo, Pristina • And leveraging our global experience with staff based in Washington, DC and around the world. 6

IFC’s Infrastructure Investment Franchise v IFC is the largest provider of financing among the development financial institutions v Over the last 10 years, IFC has provided US$20 billion in debt and equity financing for infrastructure projects v IFC has relationships with more than 300 global, regional and local clients in the infrastructure space v IFC has invested $2. 5 billion in equity in about 170 infrastructure companies in the last ten years 7

Investment transactions in the region TTS (Romania) - Podgorica (Montenegro) - Arabesque (Romania) - River shipping Roads Logistics • Podgorica is the capital and largest city of Montenegro with an estimated population of 187, 000. • Arabesque is the largest wholesaler and distributor of construction materials in Romania through 19 distribution centers serving 12 cities. Arabesque also operates in Moldova, Bulgaria and Ukraine. • TTS is a privately held Romanian integrated logistics and freight services company. Its business includes freight forwarding, Danube river shipping, grain storage and terminal operation. • IFC funded the company’s expansion in river shipping, storage and terminal operations, through three investments: Ø € 14 mn A-Loan in 2005 (10 -year maturity); Total project size: € 31 mn Ø € 10 mn C-Loan in 2008 (10 -year maturity) • Two projects with the city including IFC’s co-financing of road investments, refinancing of existing debt as well as helping the city to improve its road management practices: Ø € 10 mn A-Loan in 2010 (12 -year maturity); Total project size: € 13. 2 mn Ø € 25 mn A-Loan in 2012 (12 -year maturity, € 10. 7 mn committed); Total project size: € 47. 8 mn • IFC supported capex program through a general purpose corporate loan and provided a guarantee in the context of a shares acquisition in Budmax, a Ukrainian subsidiary: Ø € 28 mn in A-loan (9. 5 maturity) Ø € 28 mn in B-loan (9. 5 maturity) Ø € 12 mn C-Loan in 2012 (Equity); Ø $10. 5 mn as IFC guarantee Ø C-Loans supporting capex of € 30 mn Ø Total project size: € 100 mn

PPP Transaction Advisory Services • Long, successful global track record § Over 165 projects in more than 60 countries since 1989 § Mobilized more than $8 billion in capital since 1995 • Specializes in infrastructure sectors § Water & sewerage, transport, telecoms, electricity and health • Adds considerable value to the PPP transaction § Identifies and markets projects to qualified investors § Brings transparency and credibility to the bidding process § Signals country’s commitment to improve its economy through private sector participation (PSP) § Focus on creating balanced deals through financially, economically, politically sustainable structures 9

IFC PPP Transaction Advisory in Southeastern Europe • Albania: Milot-Morine Motorway § Advisor to the Go. A on the structuring and tendering of an O&M concession of the Milot -Morine Motorway (running from Tirana to Kosovo) and expansion of the first section of the road from 2 to 4 lanes; § Bid submission date - December 20, 2012 • Macedonia: Corridor 8 § Advisor to the Go. M on tendering a greenfield construction of a 41 km section of the motorway and O&M of an existing 74 km section of the Corridor 8 between Skopje and Kicevo § Tender Structuring Underway • Other PPP Advisory Mandates in Southeastern Europe: Albania Ashta HPP(completed); Kosovo Electricity Distribution Company (completed Oct 2012); Bulgaria Water (ongoing); HPPs Albania and Macedonia (ongoing) 10

Delivering Transport Projects in Southeastern Europe 11

Let the Record Show – Historical Overview • Almost every government in SEE has attempted a road PPP project § Albania: Milot-Morine Motorway (tender ongoing) § Bosnia & Herzegovina: Doboj-Vukosavlje Motorway (tender ongoing) § Bulgaria: Trakia Motorway § Croatia: Istrian Y Motorway, Zagreb-Macelj Motorway, Zagreb-Gorican Motorway § Macedonia: Corridor 8 Motorway § Montenegro: Bar-Boljare Motorway § Romania: Pitesti-Bucharest-Constanza Motorway, Comarnic-Brasov Motorway § Serbia: Belgrade-Novi Sad Motorway, Horgos-Pozega Motorway • However, to date only 2 road PPP projects in SEE have reached financial closing, have been built and are operating (Istrian Y Motorway, Zagreb. Macelj Motorway) • Clearly, something is not working well § Globally, about 50% of projects conceived as PPPs reach financial closing § Success rate for road PPP projects in SEE is on the order of 15% 12

Constraints within the SEE Region • All countries in SEE share a few common, objective constraints which make development of road PPPs more challenging § Ageing and in many instances non-existing road infrastructure which urgently needs ‘wholesale’ improvement (frequently, the entire national road network) § Low vehicle ownership rates and low traffic + low willingness to pay by road users = most PPP projects require considerable subsidies by the public sector § Small national economies + limited discretionary fiscal room = considerable limitations on the amount of public resources which can be dedicated to road infrastructure § Low credit ratings + absence of mature capital markets = dearth of financing options (limited to IFIs and selected commercial banks) 13

Additional Challenges • Getting the Balance Right between the Public sector and the Private sector • Getting the Size of the Projects right, tendency is to start too big • Getting long-term funding, made more difficult as a result of Western European Bank de-leveraging 14

Shared Responsibility • Structuring sustainable agreements – – • Financial Support Attention to downside – • Transparency – • IFC “Balanced deals” Financially, economically, politically sustainable structures Financing – – In-kind contributions – Capital – Funding – – • Assets Subsidy Local currency facilities; guarantees and structured financial products Infrastructure Project Political support – Legal and regulatory frameworks nt e rnm e ov • G • P riv Se ate cto r Financing • Management Expertise • 15 • Technical Expertise

PPP: Key Factors What is Needed to Succeed Making PPPs Last • Public support is critical for a PPP to be sustainable. A transaction process must include: § Tariff affordability and acceptability § Transparency and clear communication § Visible benefits, particularly on service delivery § Credible sharing of risks, costs and benefits § Avoidance and mitigation of unintended downsides (e. g. , community disruption, resettlement). • Understanding of public interests and ability to balance public/private issues • Capacity building of governments to increase their expertise in structuring and managing PPPs • Transparency and Communication • Oriented towards development objectives • Knowledge of investors’ market and confidence of investors • Leverage international experience elsewhere • Public dissemination and PR campaigns 16

“Delivering” a Project • Reasonable size… § Particularly, if this is the first transport PPP for the country § Large scale projects are rarely closed • Sustainable project economics… • Transparent tender and award of concession • Fair allocation of risks between public and private sectors… § If too much risk shifted to private sector then it will seek higher returns… § and will have difficulty raising debt financing • Result: § less money for the public sector, in case of concession payments, or § more money from public sector, in case of capital subsidy / availability payments • “Good” treatment of lenders upon termination… • Granting authority should engage good advisers: § Experience and credentials will more than compensate for higher costs… 17

Transport: Key Factors Transport projects - important characteristics: • Long-term: to give private sector incentives for investment • Tariff adjustment mechanism and financial equilibrium concept • Termination provisions Key Success Factors Key Failure Factors • Competent Sponsors (operations and commercial aspects) • Unrealized market expectations: § ramp up period § gaining market share § changing traffic flows • Government commitment • Over-supply leading to declining rates • Robust financial structure • Financially weak sponsors • Sponsors’ financial resources • Labour unions unrest • Realistic market expectations • Construction cost control • Political events • Government interference • Bad Management 18

Thank you! Martin Spicer Manager, Southern Europe Infrastructure and Natural Resources – Transport Buyukdere Caddesi 185 Kanyon Ofis Blogu, Kat 19 34394 Istanbul Turkey Tel: +90 212 385 3027 E-mail: mspicer@ifc. org 19

Annex: IFC Products & Process

Over $97 Billion Invested Since 1956 • Largest multilateral source of loan/equity financing for the emerging markets private sector • Founded in 1956 with 184 member countries • AAA-rated by S&P and Moody’s • Equity, quasi-equity, loans, risk management and local currency products • Takes market risk with no sovereign guarantees • Promoter of environmental, social, and corporate governance standards • Resources and know-how of a global development bank with the flexibility of a merchant bank FY 2012 Investments by region FY 2012 highlights Portfolio* $56. 5 billion Committed $15. 5 billion Mobilized # of Companies # of Countries *IFC’s account only. 21 $4. 9 billion 1, 825 127

IFC Investment Services: Infrastructure & Natural Resources § Current portfolio: $12. 5 bn, $2. 6 bn of which is equity investments § FY 12 investments: $4. 3 bn, including $2. 1 bn in mobilizations § Infrastructure practice group established in early 1990 s § Dedicated team of 136 investment professionals; 12 technical and regulatory experts and 4 economists located in 35 country offices and in Washington. In-house environmental, social and legal experts. Power • Generation, thermal and renewable • Transmission • Distribution Utilities Transport Infrastructure Transport Services Natural Resources Telecom, Media, Tech • Water, Waste • Airports • Logistics • Oil & Gas • Broadband • Privatized Public Services • Ports • Shipping • Mobile • Roads • Airlines • Gas Distribution • Railroads • Rolling Stock • Mining • Pipelines • Integrated Utilities • LNG 22 • Data Centers • E-banking

IFC’s Investment Parameters • Commercially Sound • IFC invests exclusively in for-profit projects and charges market rates for its products and services • Market Catalyst • IFC generally finances no more than 25 -50% of total project cost • Never the largest shareholder, typical stake up to 20% • Typical ticket size $20 -50 m, but can go to $100 m + • Able to mobilize additional debt (B loan program) and equity funds (AMC) • Long-term Horizon • IFC invests for the medium-to-long term • Environmentally & Socially Responsible • Each investment assessed for E&S risks by in-house team of experts, and action plan put in place to mitigate risks • Increasingly relevant for clients, namely land acquisition, carbon footprint, community buy-in • Facilitates debt raising (Equator Principles) • Corporate Governance • Detailed corporate governance assessment carried out (dedicated internal resources) • Work on governance issues with companies pre-IPO and those already listed • Roster of quality independent directors • Facilitates exit, especially in public markets 23

IFC Offers a Wide Range of Financial Products Equity • Corporate • Typically 5 -15% shareholding. Cannot exceed 20% of total equity. • Long-term investor, typically 6 -8 year holding period, though no formal tenor constraints • Primary share issuance $2. 3 bn committed in FY 12 Mezzanine / Quasi-Equity $13. 2 bn committed in FY 12 Senior Debts & Equivalents • • Subordinated loans Income participating loans Convertibles Other hybrid instruments • • Senior Debt (corporate finance, project finance) Fixed/floating rates, US$, Euro and local currencies available Commercial rates, repayment tailored to project/company needs Long maturities: 7 -15 years, appropriate grace periods tailored to cash flow needs • Mobilization of funds from other lenders and investors, through financings, syndications (IFC “B” Loan structure), and guarantees 24

IFC works together with banks and investors to mobilize additional resources for projects Debt Syndication • IFC leverages its balance sheet by mobilizing additional capital from the market • Total mobilization, including equity (Asset Management Company) and debt (syndication + parallel loan) was nearly US$5 billion in FY 12 Equity Mobilization IFC Asset Management Company Shared due diligence, structuring, negotiation Loan Agreement Borrower n tio t a ip en ic em rt e Pa gr A A + B Loans B Participants Parallel Loan Sponsor Lender 2 Lender 3 Max 40% share Lender 4 Project SPV L n oa Lender 5 Lender 6 26 • A loan is for IFC’s own account • B loan is for the account of participant commercial banks • Only one loan agreement signed by the borrower and IFC • IFC is the lender of record for the entire loan (A+B) • Structure allows participants to benefit from IFC privileges and immunities • Better pricing/tenors than otherwise available; preferred creditor access to foreign exchange IFC as Arranger and/or Administrative Agent Borrower

IFC’s Project Cycle Early Review Client needs determined Assessment of project’s impacts and development contributions Management committee approval Mandate letter Due Diligence • Negotiation Disclosure Assessment of business opportunities and risks Disclosure of environmental and social information Analysis of environmental and social opportunities and risks Opportunity for public comment Commitment and Disbursement Monitoring Negotiation and agreement of principal terms Annual review of project performance Board approval Signing of legal documents Disbursement Appraisal Credit committee approval We agree on a specific timeline to meet client’s needs 27

How We Finance Projects • IFC Investment • Project Type • Greenfield, total cost less than $50 million • Up to 35% of project cost for IFC’s account • Greenfield, total cost more than $50 million • Up to 25% of project cost for IFC’s account • Expansion or rehabilitation • Up to 50% of project cost • Umbrella for participants in IFC’s syndication program: IFC lender of record, immunity from taxation and provisioning requirements. • IFC’s total financing (for its own account) must be less than 25% of total company capitalization 28

Key Characteristics for a Bankable Concession § Lenders’ step-in-rights and cure periods: • in case of default by concessionaire under the concession contract • enabling Lenders to nominate a substitute operator (subject to the granting authority’s acceptance) • • § … do not make it a multi layer approval process as this takes away the mitigation character of the step-ins Cure periods should be of reasonable length to have a chance to resolve problems Provisions enabling an appropriate security package for Lenders’ debt financing, including, in favour of Lenders: • Mortgage on concessionaire’s assets • Pledge of shareholders’ shares in concessionaire • Assignment of termination compensation under concession • Assignment of insurance proceeds 29

Key Characteristics for a Bankable Concession § Termination compensation in case of early termination due to: • government default - termination compensation should be sufficient to cover: • Lenders’ debt outstanding • Shareholders’ equity contributed, and • Return on equity to shareholders • concessionaire default - termination compensation should be sufficient to cover Lenders’ debt outstanding • force majeure - termination compensation should typically be sufficient to cover: • Lenders’ debt outstanding, and • Shareholders’ equity contributed Do not leave this to general legal concepts present in national laws… Concept of “Unjust Enrichment” – no lender wants to test this in a court system of the country 30

Annex: PPP Advisory

PPP Advisory - Approach • IFC’s approach: § Work closely with the Government to ensure the transaction is designed to meet the Government’s objectives; § Design transaction process to maximize transparency and ensure investor confidence and public support; § Market the transaction widely to all potential strategic investors; § Ensure that: • Social and labor benefits are maximized; • Environmental issues have been addressed; • The transaction is structured to provide sustainable benefits to consumers

PPP Advisory - Offering § Objectivity and transparency • Independent advice, no links to potential investors • Separation between advisors and investors within IFC (“Chinese Wall”) • Precise procedure and rules, based on best practices and experience § Orientation towards development and results • Importance attached to social and developmental objectives of client country • Transactions structured to be sustainable and bankable for all parties • Staying the course with our clients § Knowledge of investors’ market • Broad expertise covering private sector transactions • Regular contacts with leading companies • Essential marketing role on behalf of our clients, lends confidence to investors § Integrated approach and synergies within the World Bank Group • Access to experts; coordination of institutional reforms and resources • Search for public financing and guarantees, when needed 33

PPP Transaction Advisory Services § Lead advisor, mostly to governments • Strategy definition for private sector participation / PPPs • Coordination with World Bank and other multilaterals, on sector policy, institutional reforms and needed resources • Transaction due diligence: legal, technical, other • Preparation of tender documentation • Marketing of business opportunities to selected investors • Transparent international competitive bidding • Post-transaction assistance, as needed § Fee based services • Modest retainer paid by Clients (according to milestones) • Largest portion of remuneration to be paid as success fee at closing of transactions (by winning bidder) 34