Private Sector Investment in Economic Zone Developments
Key Mechanisms and International Trends
19-23 October 2009 ITAP – TOBB Capacity Building Program for Investment Promotion
Officials of OIC Member Countries: Private Sector Operated Industrial Zones program sponsored by the Islamic Development Bank (IDB) Group / The Union of Chambers of
Commerce and Commodity Exchanges of Turkey (TOBB)
Fari Akhlaghi
Director MENA Region
Mobile: +971 50 667 3998 I E-Mail: fari.akhlaghi@aecom.com
AECOM International Development
Industrial and Commercial Area Development
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1. Transportation
2. Building Engineering
3. Energy
4. Water
5. Environment
6. Program Management
7. Planning, Design & Development
8. Government
AECOM International Development
Industrial & Commercial Area Development
- Program Areas
AECOM ID has undertaken over 200 SEZ related projects
during the past 25 years in over 80 countries in the
following areas:
– Special Economic Zones
– Privatization / Private Infrastructure Provision
– Regional Integration, Area Development and Security
– Ports and Logistics
AECOM International Development
Industrial & Commercial Area Development
- Main Clients
Jebel Ali Free Zone
USAID
World Bank
Asian Development Bank
IFC
The relevance of Special Economic Zones in today’s
global trading environment.
International competition and the increasing
importance of logistical input in production value
chains have caused firms to migrate to centers of
efficiency close to their marketplace.
MIGA
UNDP
CIDA
Government Agencies Worldwide
Private Corporate Clients
AECOM International Development
Industrial & Commercial Area Development
- Special Economic Zones
• Representative Projects include:
– Formulation of a National Industrial Parks
Strategy, Serbia
– Development of Industrial Estate Law, Mali
– Establishment of Economic Zones, Kuwait
– Dakar Integrated SEZ, Senegal
– Kakinada SEZ, India
Serbia
Kuwait
AECOM International Development
India
Industrial & Commercial Area Development
- Privatization / Private Infrastructure Projects
• Representative Projects include:
–
–
–
–
–
Technical Assistance to Aqaba Development Corporation, Jordan
Lesotho Industrial Estates Development and Privatization, Lesotho
Jamaica Free Zones Privatization, Jamaica
Howard Air Force Base, Panama
Institutional Strengthening and Private Sector Support, Iraq
Howard Air Force Base, Panama
Converted to a Special Economic Zone for
Aviation, Business Process Outsourcing,
Logistics
AECOM International Development
Industrial & Commercial Area Development
- Regional Integration, Area Development and Security
• Representative Projects include:
– Promoting Industrial Zones and Investment Mobilization,
Palestine
– Evaluation of the Philippine Economic Zone Program,
Philippines
– Thailand Eastern Seaboard
– Cagayan-Iligan Corridor, Philippines
– Tourist Development Site for the Saudi Supreme Commission for
Tourism, Saudi Arabia
– Security and Industrial Estate Development, Palestine
AECOM International Development
Industrial & Commercial Area Development
- Ports and Logistics
• Representative Projects
include:
– Subic Bay Freeport Due Diligence,
Philippines
– Bamako-Senou Airport and Industrial
Park Improvement Project, Mali
– Feasibility Study and Training Needs
Assessment for the Misurata Free
Zone, Libya
– Feasbility Study for the Abu Dhabi
International Airport Zone, UAE
– Aqaba port, Jordan
– Pelabuhan Tanjung Pelapas Free
Zone, Malaysia
– Port Klang, Malaysia
AECOM International Development
US Navy Base, Subic, Philippines
Converted to a Freeport for
manufacturing, tourism and logistics
Private Sector Participation in Zones
- A Clear Trend




1970s
Public sector development
and operation of zones
Zone Authority would
develop, own, operate and
regulate the zone
Zone Authority has little
power over other government
bodies
Zone funded by government;
typically subsidized services
& facilities
Port
Housing
Utilities
Industrial
Park Area
1990s
 Gradual shift from ad-hoc
private-sector licensing to
planned, coordinated
partnership approach
 Private sector involvement
in zones has led to
improved services, greater
product differentiation and
non price-based
competition
New Framework
 Private developer develops,
owns and operates the zone
on a cost-recovery basis
 Zone Authority only regulates
activities within the zone
 Outsourcing of core functions
to private sector
 Zone enterprise designation
extended to developers and
service intermediaries
Tourism
Commercial
The result is multi-market zones that can adapt to rapid change
AECOM International Development
Public - Private Partnership (PPP)
AECOM International Development
Public Policy – Private Project . . .

Although Zones are elements of public policy, the
real estate development and operation aspect
properly belongs in the private sector

It is estimated that 60% of all zones (2000+) are run
by private developers/operators on commercial terms

Exceptions:

Market failures in availability of land and backbone
infrastructure

High levels of risk brought about by lack of rule of law, post
conflict, or economies in transition

Zones that are essentially non-commercial “pump-priming”
initiatives that serve as demonstration models
AECOM International Development
Public/Private Partnerships in Zones
Principles:

Two or more parties wish to share risks and
rewards associated with Zone development

The Private sector party needs a favorable
investment environment to make a return
commensurate with the risk he is taking on

The Public sector party needs to achieve public
policy objectives – development of common use
facilities

There is a business case to begin with – the
market – while avoiding direct competition with
private sector within or outside of zones.
The Goal:

Ultimately, the Government and Operators should
have aligned goals, and therefore work together
within a national strategy to achieve them.
AECOM International Development
Country Attraction to Private Sector
- Benchmarking Criteria
Country 1 Country 2
History and Existing SEZs
Foreign Ownership Regarding Real Property and
Business Enterprises (National Treatment)
Protection of Private Property: Land
Access/Tenure/Transfer /Land Registration System
Zoning and Construction Building Permits
Transfer of Funds and Capital
Alternative Dispute Resolution (ADR)
Tax Regime and Incentives
Legal and Regulatory Framework Affecting /For SEZs
Customs Administration
Environmental Regulations
Administrative Regime
Available PPP Mechanism
Business Registration
Immigration
Labour
AECOM International Development
Country 3
Country 4
Aligning Public and Private Interest
- Private and Public Sector Roles
Public Sector:
Private Sector:
Partnership:
Public sector’s
principal roles are to
regulate and facilitate
economic development
in the national interest.
Private sector’s
principal roles are to
invest capital and
implement economic
activities in its own
interest.
Partnership based on
clearly defined and very
different roles between
two sectors.
• Regulate but not implement
• Efficient resource allocations
• Push, pull, persuade private sector
• Efficient capital allocations
• Promote efficiencies (competition)
• Responsive to demands
Achieve public policy priorities
AECOM International Development
Take risks, earn rewards
Public sector establishes
environment for private
sector to implement public
policy priorities
Healthy tension
Best Practice SEZ Institutional
and Management Framework
• Emerging “Best-Practice” SEZ principles favour public sector
authorities focusing on zone regulation and administration, while
private sector entities concentrate on development, operation
and management activities
• SEZ regulatory authority is an inherently government function
that is legally delegated by the legislative branch to the
executive branch in accordance with modern constitutions
• Government function is best organized through: Semiautonomous, independent, adequately funded, sufficiently
staffed, and customer oriented “One-Stop-Shop” , often
enhanced by adopting an “Accounts Executive” approach
AECOM International Development
Models of Public - Private Partnerships
Highest Degree of
Private Sector
Involvement
Risk and Control
Assumed by Private Sector
Joint Ventures (open ended)
Assets contributed by public sector and cash
contributed by private sector into a special
purpose vehicle to develop the assets
Concessions (20-30 years)
Private sector owns and operates under-performing assets
under agreement with public sector and generally transfers
assets back to public sector at end of term
Leases (10-20 years)
Private sector pays for use of facilities (e.g., land with infrastructure
connections) from public sector under agreement which sets out specific
terms of use
Management Contracts (5-10 years)
Public sector pays the private sector to manage under-performing assets
under agreement, usually with some revenue sharing arrangements
Highest Degree of
Public Sector
Involvement
AECOM International Development
Length of Commitment
Zones Business Models
AECOM International Development
Classic Zone Business Models
Rent or sale of Land and Buildings

Land sale/lease ratio depends
upon:




Sale of Services

Market conditions (what
customers want and what they
will accept)
Legal environment (land sales
permitted?)

Business goals of the developer
(long term play – hold the
assets, or short term play – flip
the assets)
Availability and source of
finance (project finance or
balance sheet finance, rates and
tenor)
AECOM International Development

Real Estate related
services:

Maintenance and security

Common infrastructure

HR facilitation and training
Zone-specific services:

Permits, badges

Registration

Customs Facilitation
External Services

Utilities (water, power,
telecoms) to the local market
Developer or Developers ?
• A “best-practice” governance framework also authorizes the
SEZ administering entity to select multiple developers for each
zone site to take advantage of specialized expertise, maximize
economic opportunities, guard against private-sector defaults,
and avoid monopolistic tendencies. In scenarios in which a
private sector developer/operator is granted exclusivity at a
particular zone, such a privilege is generally tied to strict
economic performance criteria and is further limited to a specific
time frame (e.g., 10-30 years).
AECOM International Development
Sources of Finance & MDRs
AECOM International Development
What is Being Financed?
Characteristics of a Classic Zone:
US$m
100ha+ serviced land
Land cost (say US$10/m2)
Land servicing internal (say US$400k/ha)
External Infrastructure costs (say US$200k/ha)
Buildings for rent/common facilities (say 100,000m2 @ US$500/m2)
Startup and working capital (say US$10m)
US$10m
US$40m
US$20m
US$50m
US$10m
-----------US$130m
Debt (60%)
Equity (40%)
US$78m
US$52m
------------US$130m
Cost: (US$130/m2 gross or US$185/m2 net)
AECOM International Development
Sources of Finance - Governmental
Source
Terms
Central Government
• Meet Economic Rate of Return (ERR) requirement (usually 20% for zones)
• Fit with National Strategy
• Obtain political backing
• Sometimes use of a special agency or vehicle
Government
Development Agency
• Quasi commercial terms
• 10%-15% return
• Will partner with a private developer for some or all of the development
• Has remit not to “crowd out” private sector
• Often provides land as equity
Public Utilities Provider
• Sufficient market size to warrant investment
• Will partner with the private sector through a PPP
• Offtake agreement may be required
Provincial or Local
Government
• Often provides land, and some level of public services to the gate of the
site
• Will provide facilities on site in the Zone for municipal functions
AECOM International Development
Non-Governmental Sources of Financing
- Advantages/Disadvantages of Various Sources
Source
Advantages
Disadvantages
Multi-lateral
Development
Banks
- Adds credibility to project
- Reduces perceived risks
- Higher appetite for risk
- Subject to the fluctuating
investment objectives of the bank
- Greater due diligence load for
environmental and social impacts
Commercial
Banks
- Global pool of financial
resources
- Flexible financing
structures
- Low appetite for risk
- Short duration of financing
options
- May add to national debt burden
Private Equity
and Asset
Managers
- Some appetite for risk
- Product-specific financing
structure
- Active involvement of an external
investor in investment and, or
operational decision-making
Insurer
- Reduces actual risks
- Cost
AECOM International Development
Grant Financing


Much public financing is in the form of a Grant

Allocation of state resources in accordance with a national
plan

Funds the capital expenditure, but care needs to be taken on
the ongoing maintenance/servicing costs

Can be subject to the fluctuations in the fortunes of the
exchequer – an issue for multi-year programs
Grants come with conditions

Environmental and social impacts

Performance of public services (schools, social amenities,
provision of additional utility capacity)
AECOM International Development
Non-Grant Financing Characteristics

Debt Financing

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


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
Tenor: 7-10 Years maximum
Currency: home currency or USD
Grace period: depending on the institution and
circumstances. 3-5 years not unusual
Fees: origination fees. Can be 2%
Interest rate: varies and currently not stable.
Balance Sheet backing usually sought
Political risk and other insurance, step-in rights
Equity Financing


Minimum return on investment of 15%
Usually a partnership between Government and private
equity provider. Government equity goes in first
AECOM International Development
Non-Governmental Sources of Financing
- Example Political Risk Insurance Source
 Many lenders and investors have turned to the
Multilateral Investment Guarantee Agency (MIGA) –
part of the World Bank Group - to mitigate noncommercial risks in large projects in developing
countries. Coverage includes:
 Currency inconvertibility and transfer restrictions
 Expropriation
 War, civil disturbance, terrorism, and sabotage
 Breach of contract
AECOM International Development
Cross-Subsidization and Cross-Financing
 Some elements of a Zone project are more profitable
than others
 Housing, commercial, tourism – any product that is
sold directly to individual end-users
 Zone developments can be bundled to cross-subsidize
or cross-finance from one product to another
 This is achievable through use of Minimum
Development Requirements (MDRs) in any PPP
agreements
AECOM International Development
Example of MDRs
Newco.
Newco.
AECOM International Development
Leveraged Expansion – An Emerging Model
AECOM International Development
Governmental Sources of Financing
- Example
ZonesCorp, Abu Dhabi, UAE
“Established as a government- backed higher corporation for specialized
economic zones, ZonesCorp is directly responsible for the establishment,
management and operation of specialized economic zones in Abu Dhabi.”
ZonesCorp was set up as a 'commercial' government entity
via the investment of:
 400M AED from the government
 Transfer of ICAD 1 (Industrial City Abu Dhabi)
from the local municipality
AECOM International Development
Mixed Sources of Financing
- Zone Expansion Example
 Macquarie Group manages certain investment vehicles
such as the ZonesCorp Infrastructure Fund (ZIF) to
offer both private and institutional investors the
opportunity to access new and existing infrastructure
and infrastructure-like assets.
 ZonesCorp has provided 75% of the equity with Abu
Dhabi Commercial Bank and Macquarie Group (a joint
venture established in 2005) has provided the
remaining 25%.
 ZIF has interests in four projects: ICAD II and ICAD III
(expansion of ICAD I); Industrial Effluent Treatment
Plant concession for ICAD; and concession for Al Ain
Industrial City
AECOM International Development
Conclusions
AECOM International Development
Conclusions
 Times are tough – many investment decisions are on
hold right now
 There will be large public infrastructure programs put in
place aimed at job creation. This equates to potential
public investment in Zone infrastructure
 Price reality is re-entering the market, and soon
investors will be looking for projects
 The current lull in development is a good time to plan
for future expansion and do the necessary homework
 There are many sources of finance, both public and
private. These can be combined for effective risk
management
AECOM International Development