101. Counterparty risk is a dominant issue for potential private-sector investors. The private sector's counterparty in a PPP is a public authority, agency or ministry. Regardless of the nature of the public sector signatory to the project agreement, the ultimate public counterparty is simply the state. It is very likely that private-sector investors and/or their creditors will want comfort and assurance that all obligations of the contracting authority for the duration of the contract are obligations that bind the sovereign and are enforceable against the sovereign. This is true not only in MENA, but in PPP projects worldwide. The enforceability of project agreement obligations against the state can be evidenced in two ways, through an examination of the status at law of the contracting authority or by way of an explicit sovereign guarantee. Governments are often reluctant to provide a sovereign guarantee due to their desire to avoid contingent liabilities, but failure to provide one may sabotage attempts to attract private investment and will result in higher bid prices, jeopardising value for money.
102. Even when a sovereign guarantee is provided or investors are otherwise satisfied that the public counterparty's obligations are obligations of and enforceable against the state, counterparty risk will remain high and may deter some developers and investors. Due to often unstable political environments and profound fiscal challenges, most MENA governments hold non-investment grade credit ratings, meaning that any obligations of the state will also be considered non-investment grade from a credit perspective. For many institutional investors and commercial banks, this will disqualify the project from consideration. Political risk insurance, if available, usually covers 90% of an investment and is applicable in certain circumstances enumerated in the insurance contract. Such policies do not replace the credit risk of the public counterparty with that of the political risk insurance provider - they may provide comfort to investors, especially equity investors, but they are less likely to satisfy potential creditors. However, these policies have an additional benefit: the insurance provider may be able to intervene to address problems before they worsen and lead to an insurance claim.
103. Political instability has characterised much of the MENA region since 2010 with some countries seeing a number of changes in government and constitutional rearrangements. Apart from the reality and perceptions of heightened political risk, transitional governments feature numerous personnel changes at senior political and official levels. This has resulted in delayed decision making and lower investor confidence, since decisions may be overturned by subsequent ministers or governments. Continuity is important in PPPs; transactions are complicated and as a project evolves challenges will inevitably arise that require a state decision. It is essential that someone with deep knowledge of the transaction is available and empowered to make these decisions, otherwise substantial delays may occur.
104. It has also been reported that some MENA governments and government officials are suspicious of the private sector and uneasy with private-sector participation in the provision of public services. These views are fuelled by the sometimes corrupt practices of previous governments, and by the fact that many regional economies were, until very recently command economies over which the state still maintains a high level of control. This state-centric mind-set still permeates much of the bureaucracy and the political level. Since high-level political support and capacity at the official level is absolutely vital to advance PPP projects, these attitudes are not helpful.
105. Since PPP arrangements are contractual, transparency and the rule of law are paramount. Dispute resolution should be transparent, third-party, timely and enforceable. Reducing the legal risks for contracting parties increases the attraction of PPPs for investors and therefore limits the risk premium they request. The manner in which the law is applied and interpreted, and above all, the practices of the public bodies involved in PPP projects, will play a large role in determining the success of a PPP programme. The additional cost linked to financing can become even more significant when the legal and regulatory framework is not designed to strengthen investors' legal position. Lack of confidence in the legal framework and the rule of law will also be reflected in fewer offers being submitted, reducing competition and value for money, or no bids at all (OECD, 2010).
106. Improper criteria in project location choice have been involved in a number of failed projects studied by the ISMED programme. In one example, the proposed location for a concession-based PPP was determined on the basis of the authority owning the land in question and a political desire to promote regional development. There was no evidence of demand for the service to be provided at the selected location, and consultations with potential users confirmed that it would be very low. In another case, a MENA government ignored an IFI recommendation on location that had been based on studies of demand and feasibility, and selected a site based on political considerations. Both projects failed to attract any qualified bidders. Location should depend on the business case and economics of a particular site, supported by rigorous quantitative studies conducted prior to tendering. This is especially true for concession-based PPPs.
107. A clear legal and regulatory framework for PPPs has not been created in all MENA countries. Of the four ISMED focus countries, Jordan, Egypt, Tunisia and Morocco, only Egypt has passed a PPP Law and created a permanent PPP central unit at the Ministry of Finance11. This reduces certainty of process, decreases investor confidence and may result in confusion on the part of government officials as to their responsibilities and roles. It will also mean that transactions are not conducted in a systematic manner that allows capacity building and a learning process. Rather, each transaction will be conducted on a more ad-hoc basis, increasing costs, decreasing value for money, and lowering developer and investor confidence in the process.
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11. Morocco and Jordan are in the process of passing PPP laws, but as of the date of publication these have yet to come in to force.