23 November 2012 Istanbul, Turkey Martin Spicer, Manager

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

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

3. IFC’s Three Businesses IFC AssetManagementCompany IFC Investment Services IFC Advisory Services • Loans • Equity • Other forms of financing • Resource Mobilization • Advice • Problem-solving • Training • Wholly owned subsidiary of IFC • Private equity fund manager • Invests third-party capital alongside IFC $56.5 b portfolio $200 m per year $4.5 b under mngt

4. 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 Singapore 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

5. IFC in Europe Middle East and North Africa Barents Sea North Sea Moscow Minsk Warsaw Brussels London Kiev Frankfurt Paris Aral Sea ATLANTIC OCEAN Belgrade Zagreb Bucharest Almaty Black Sea Bishkek Tbilisi Sofia Tirana Caspian Sea Tashkent Istanbul Yerevan Baku Dushanbe Algiers Mediterranean Sea Kabul Rabat Beirut Islamabad Jerusalem Amman Cairo Dubai Karachi Red Sea 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.

6. 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.

7. IFC’s Infrastructure Investment Franchise • IFC is the largest provider of financing among the development financial institutions • Over the last 10 years, IFC has provided US$20 billion in debt and equity financing for infrastructure projects • IFC has relationships with more than 300 global, regional and local clients in the infrastructure space • IFC has invested $2.5 billion in equity in about 170 infrastructure companies in the last ten years

8. Investment transactions in the region TTS (Romania) - River shipping Podgorica (Montenegro) - Roads Arabesque (Romania) - Logistics • 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. • 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: • €28mn in A-loan (9.5 maturity) • €28mn in B-loan (9.5 maturity) • $10.5mn as IFC guarantee • Total project size: €100mn • 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: • €14mn A-Loan in 2005 (10-year maturity); Total project size: €31mn • €10mn C-Loan in 2008 (10-year maturity) • €12mn C-Loan in 2012 (Equity); • C-Loans supporting capex of €30mn • Podgorica is the capital and largest city of Montenegro with an estimated population of 187,000. • 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: • €10mn A-Loan in 2010 (12-year maturity); Total project size: €13.2mn • €25mn A-Loan in 2012 (12-year maturity, €10.7mn committed); Total project size: €47.8mn

9. 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

10. IFC PPP Transaction Advisory in Southeastern Europe • Albania: Milot-Morine Motorway • Advisor to the GoA 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 GoM 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)

11. Delivering Transport Projects in Southeastern Europe

12. 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%

13. 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)

14. 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

15. Structuring sustainable agreements • “Balanced deals” • Transparency • Attention to downside • Financially, economically, politically sustainable structures • Financing • Capital • Local currency facilities; guarantees and structured financial products Shared Responsibility • Financial Support • Assets • In-kind contributions • Funding • Subsidy • Political support • Legal and regulatory frameworks Infrastructure Project • Financing • Management Expertise • Technical Expertise

16. PPP: Key Factors What is Needed to Succeed Making PPPs Last • 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 • 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).

17. “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…

18. 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 • Realistic market expectations • Construction cost control • Competent Sponsors (operations and commercial aspects) • Government commitment • Robust financial structure • Sponsors’ financial resources • Unrealized market expectations: • ramp up period • gaining market share • changing traffic flows • Over-supply leading to declining rates • Financially weak sponsors • Labour unions unrest • Political events • Government interference • Bad Management Key Success Factors Key Failure Factors

19. 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

20. Annex: IFC Products & Process

21. 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 FY2012 highlights *IFC’s account only.

22. IFC Investment Services: Infrastructure & Natural Resources • Current portfolio: $12.5 bn, $2.6 bn of which is equity investments • FY12 investments: $4.3 bn, including $2.1 bn in mobilizations • Infrastructure practice group established in early 1990s • 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.

23. IFC’s Investment Parameters

24. IFC Offers a Wide Range of Financial Products Equity $2.3bn committed in FY12 Mezzanine / Quasi-Equity $13.2bn committed in FY12 Senior Debts & Equivalents

25. IFC works together with banks and investors to mobilize additional resources for projects Loan Agreement Borrower • 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 FY12 Equity Mobilization Parallel Loan Debt Syndication A + B Loans Participation Agreement • 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 B Loan Participants Sponsor IFC Asset Management Company Lender 2 IFC as Arranger and/or Administrative Agent Shared due diligence, structuring, negotiation Lender 3 Max 40% share Borrower Lender 4 Project SPV Lender 5 Lender 6

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

27. How We Finance Projects • IFC Investment • Project Type • Up to 35% of project cost for IFC’s account • Up to 25% of project cost for IFC’s account • Up to 50% of project cost • Greenfield, total costless than $50 million • Greenfield, total costmore than $50 million • Expansion or rehabilitation • 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

31. 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

32. 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

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