Questions and Answers
Participant
Thank you very much, sir, for giving me this opportunity. Let me thank all the presenters for their wonderful speeches. We learned a lot today. Minister Fakhoury was talking about infrastructure and mega‑projects in collaboration with the private sector. One of the problems that we are seeing in making projects with the private sector is that the IRR is not up to the level the private sector wants; hence, we have to increase the attractiveness of the economic feasibility of these projects. One of the ways we can do that is by increasing construction time. I wonder what other mechanisms Jordan is using to make PPP projects more attractive to the private sector?
Professor Jean-Pierre Lehmann, Director, The Evian Group; Professor, International Political Economy, International Institute for Management Development
I would be interested to hear about some of the political risk factors in attracting investment – both in respect to the Caspian and MENA regions and how you see this over the course of the next five or six years. Thank you very much.
Lord Powell of Bayswater, Former Private Secretary and Adviser on Foreign Affairs and Defence to Prime Ministers Thatcher and Major, UK; IISS Council Member
Let me reassure you at the start, that some of us devoted considerable effort to ensuring that nothing ever happened at G7 summits. They were devised as occasions for intimate consultation between heads of government – with 6000 journalists, intimacy is rather hard to achieve. I think we all agree on the importance of attracting investment after the financial crisis and competing demands on the industrialised countries for such investment. However, there are two points that should be mentioned which have not been dwelt upon. First of all, the importance of creating the right conditions for investments. We do have to recognise that in several of the World’s largest economies including its very biggest – China and India – there are still very considerable restrictions on investment. There are lists of areas where you cannot invest and restrictions on, for instance, energy, telecommunications, retail and insurance and so on. There is still a long way to go to open up markets in that sense.
Secondly, there is the importance of being able to earn decent returns on your investment. I could cite examples, but I will not, because I am tactful, where conditions have been altered retrospectively. That is, a certain price is agreed for power and then once the investment is complete, you suddenly find that you cannot get the price that was promised. I believe it is important just to put those two points on record. Of course there are many countries that have excellent records – of course, Bahrain in particular. The spokesmen today have today set out what Jordan and Kazakhstan do and I would also cite Libya as a good example of where the market is extremely open for investment. However, there are many other cases where this is not the case. I think we should all keep in mind how far there is to go to get a really open market for investment. Thank you.
Mohamed Ait Ouali, Ambassador of the Kingdom of Morocco to Bahrain
I just want to ask Mr Kelimbetov what his country Kazakhstan has been dealing with investment in the energy sector with the shying away of the oil companies and also the lack of funds from banks. Thank you.
Xu Xiaojie, Head, International Energy Program, CASS Institute of World Economics and Politics; Advisor, National Energy Administration; Advisor, China National Petroleum Corporation
My question is for the speaker from Kazakhstan. Kazakhstan is of growing importance especially as one of the oil and gas producing countries of the world. In the near future Kazakhstan will become as an important producing country as China. My question is about the policy issues of the international corporations in Kazakhstan. We know that for the last few years, Kazakhstan has been very open to cooperation and international investment in megaprojects. International majors have almost always dominated oil and gas projects and now would like to step in to take some control rights on megaprojects. I would like to ask any new dimensions of policy on the corporations and megaprojects in the energy sector.
Bill Emmott
Let us get some responses, moving from the macro to the micro. Ambassador Park, you can answer any of the points that you wish but I think this question about the continuation of investment restrictions is I think quite an important one that the G20 needs to address. The debate regarding the question of openness – not just sudden changes – is one in that has been the focus of much attention in Korea, as to how open they have been to foreign direct investment at various points of your development. Perhaps you can start by addressing this issue.
Dongsun Park
As I said, the big picture is that the investment climate is better than expected under the circumstances. It is part of the economic crisis and surprisingly and pleasantly, many important players in the world economy are maintain open policies for investments. A second point I would like to make is that, because of the higher unemployment rates, job creating investments are getting popular as far as my country is concerned. I think that is the case for many countries. However, I think it is important that the G20 has been leading the way for maintaining and increasing the opening up of the investment regimes for many countries by inviting the OECD, UNTAD and WTO to monitor the national policies of major countries. I believe it is so far so good. However, we cannot be complacent in this, although I believe this is the big picture.
Bill Emmott
Minister Fakhouri, perhaps particularly this question about political risk and how it needs to be factored in. This reminds me of a conversation I had with Lord Skidelsky regarding the Berlin to Baghdad railway which was built a hundred years ago and that your railway ambitions sound reminiscent of. Political risk prevented the Baghdad railway from having its economic function, what do you think about this today?
Imad Fakhoury
Basically, the story today is one of globalisation and increased competition. I think more and more countries cannot afford to be protectionist or add restrictions. Today, when we promote a project in Jordan we are competing with other projects globally. The story for us has been not to have any barriers to entry or any restrictions, and year in, year out we work on continuous improvement to ensure that we remain competitive and keep attracting regional and international investment. The question of political risk is also one that is both perception and reality. I think there is an over exaggeration in terms of perception of political risk. The story of Jordan is definitely one of those stories. If you worry too much about political risk, then you miss out on a lot of opportunities that are already taking place in Jordan in the past five years, and actually, in difficult circumstances. If you look at the 10 year average for Jordan, we had the second intifada, the build up to the war in Iraq and the post-Iraq conflict and so on. All of these regional difficulties, and I would include September 11. At that time we had the highest economic growth rate. I am trying to say that if you perceive political risk, somebody else will be using that as a good barrier of entry for you and taking advantage to go in and take the low-hanging fruits and the projects. In the past five years we have packaged $5 billion of PPP projects quite successfully: imports, airports, water, waste water, industrial zones and logistics parks et cetera. This has been a reality – these have been national, regional and international investors who have stepped up and taken the projects. With that in mind, the question of revenue enhancement and making IIR more important for PPPs is a critical component. We are finding that critically important this year specifically. We managed to reach financial closure last year, in the worst of times, for a $1 billion project – the DESA water conveyance system. This is taking water from south Jordan almost 300km to the north and implementing the project. We even managed to reach financial closure of the project in 2009, which was a very difficult year. We are finding that there is a probable need for governments to put up more equity – to look at restructuring service charges with higher increments. I think that would apply more pressure. There is a clear need to increase equity upfront because you are not going to get the debt equities that we have got before. We are also adding revenue enhancement schemes – either specific project taxes such as carbon tax to finance transport projects and similar - or we are raising service charges slightly as we start projects. We are actually even adding additional development rights in real estate and the non-core business part of the project. We are giving development rights, revenue rights and other things. We are even considering actual subsidies to support some projects. This is because we in Jordan are meeting a trade-off between affordability for the public – in terms of service charges – Vis-à-vis feasibility of the infrastructure and projects. Therefore we do not view the subsidy issue as a bad one; we see it as a way to ensure that the projects remain affordable for the Jordanian public. We have to make that trade-off of maybe even putting cash upfront or annual payments for a certain period of time to enhance the IIR feasibility.
Finally I think we have to look at the issue of the fundamentals of the project. In the Jordanian case, it is an exciting geo-economic story. Our infrastructural programme is actually that today, Jordan imports 96% of its energy needs. Jordan has some significant reserves of Uranium and we are mining this with companies like Arriva and Rio Tinto – the World’s best. We are also levering to create electricity generation through nuclear energy by 2018/2019. We are launching the first nuclear power plant on a PPP basis – actually the first precedent in the world. Here the government will commit to a long-term power purchase agreement. In return we generate electricity by introducing the private sector sovereign and pension funds to come in and invest into these projects. All of a sudden, Jordan which has a deficit of fossil fuels and imports 96% of its energy has already been working to connect its electricity grids with Egypt, Syria and Lebanon as well as connecting with Jericho which we have already done. We are also working to connect with Iraq. The GCC is connecting and will connect through Jordan. All of a sudden we take a challenging deficit situation and we turn it into an opportunity where Jordan will be leveraging its uranium, producing electricity and selling across the grid.
It is similar in transport where we are looking at a situation where Jordan will continue to play an important role as gateway for the Levant region. We continue to be the trucking bridge across the ferry service from Nuweiba to Aqaba where we are connecting the GCC to Mashrak or the Levant to North Africa and we continue to position ourselves as a key gateway for the reconstruction efforts in Iraq. That is a story based on very strong fundamentals, very strong economic growth and very strong population growth. These drive feasibility and economics of many of these projects. If you perceive the political risk in the right framework, I think you can take advantage of these opportunities. If you exaggerate them you are missing out on great opportunities across the MENA region.
Kairat Kelimbetov
Thank you very much for the opportunity to develop my speech in terms of giving you more ideas in terms of Kazakhstan and the development of our region. First of all, how to bring investment in terms of this complicated financial situation. I would like to give you the idea that Kazakhstan is very rich in terms of the raw materials. We are probably in the top ten in terms of oil and gas. We now produce 1.4 million barrels a day, which, as I have indicated, will double. In terms of this we do not worry about the investment in the oil and gas area because we have what you could call a mechanism of concessional production sharing agreements which are used by the major oil and gas companies. We are working very successfully with different American, European, Russian and Chinese companies such as Exxon Mobile, Chevron, ConocoPhillips as well as Rosneft, Lukoil, Eni, Total and Mubadala from the GCC region. All of them are happy in terms of the tax regime and the condition which the Kazakhstani government creates for them. I think that the future of big deposits like Tengiz, Kashagan and Karachaganak give us a great opportunities to develop a serious economy around oil and gas. I believe that we are considering the creation of a special energy hub in the west of Kazakhstan where we will try to repeat the experiences of Houston and Stavanger in Norway in developing new industries related to the oil and gas sector.
In terms of raw material beyond oil, Kazakhstan is the largest producer of uranium. There is a very ambitious uranium programme in Russia and China and Kazakhstan will be a big supporter of these programmes. Kazatomprom, which is part of our holding, was the largest producer of raw materials in 2009.
We are also a very rich country in terms of mining and we would like to emulate countries such as Australia and Canada, which have developed mining very actively. This would be a great opportunity for diversification in Kazakhstan reducing our dependence on oil.
We are not just thinking about industrialisation and major innovatory projects, but also about factors such as the business climate and educational development in Kazakhstan. I know the Gulf countries have focussed on setting up branches of some of the top universities in the world in their region. The government of Kazakhstan pays for 3,000 students to study at the top 100 universities in the US, UK and Europe each year. The Kazakhstani government’s approach to developing human capital is one of the crucial measures in developing our country.
We have faced a great challenge in restructuring some of the external debt of the Kazakhstani banks. In the end three Kazakhstani banks wrote off about $11 billion US through a dialogue between investors, creditors and the Kazakhstani banks and I think the sector is now in better shape. In terms of the development of the non‑oil sectors of our economy we will use the opportunities presented by our national oil fund. Up to the end of this decade we expect to have more than $100 billion US to invest in joint ventures first with our partners in Russia and China and then with other developed countries in terms of the industrialisation of our economy.
There is no restriction in investment in Kazakhstan. We have a special vehicle, the Foreign Investors’ Council and every six months the president of Kazakhstan has a face‑to‑face conversation with the biggest investors in Kazakhstan to discuss any issues. I believe this mechanism works successfully. There is a second organisation, which acts as a partner to the different investors in Kazakhstan and this is a reliable umbrella for challenging bureaucracy, fighting corruption and recruiting finance. We are very keen to encourage investment. We have recently agreed new joint investment plans based in private equity principles with the Abu Dhabi and China. This fund is currently worth more than £1 billion US and I believe it is a good beginning for real investment.
The development of the Kazakhstani economy is foreign direct investment (FDI) driven. I believe this will be very useful not only for Kazakhstan, but also for our partners as well.
Silvina Vatnick, Center for Financial Stability, Argentina
I would like to draw your attention to the need to raise more awareness among the business community in particular, but also among the legislatures and judiciaries in countries that are part of the G20. It is necessary to strengthen institutions and develop traction for the G20 process. In my own experience in Argentina and dealing with other Lain American countries I find that not there is less than universal understanding about what opportunities and challenges are presented by the new G20 rules. The role of think tanks in terms of both analysis and forums like this one is particularly useful, but forums need a lot of preparatory work, as well as post‑meeting work to be really useful.
On the strengthening of the regulatory regime I would like to express my concern about some of the risks we face as a community with respect to what is happening there. Despite the recent moves, particularly in the US, but also in other parts of the world, the message seems to be that it is business as usual, when in fact there is a lot to be done in that area. There is too much emphasis on international financial institutions (IFIs) to promote these stronger regulatory processes and I hope we can discuss these later in the meeting.
Fleur De Villiers, Chairman of the IISS Board of Trustees
Listening to Mr Fakhoury and the experience of Jordan and contrasting that with the experience of Kazakhstan, the countries over the last 30 years that have made the greatest progress are those that have invested heavily in the knowledge economy, primarily through investment in education. This has given them a huge competitive advantage, by and large, those countries that were endowed with huge natural resources. I think experience has shown that natural resources while they initially attract investment, that investment tends to concentrate in the hands of elites through a lack of transparency and properly regulatory regimes that are properly administered in open court. This in turn, and I look particularly at the experience in Africa, although it is not entirely unique in this, becomes the focus for internal conflict, which brings us back perhaps as an institute to our prime interest in regional conflict and strategic studies.
One of the biggest disincentives for sustained foreign investment is a lack of transparency and proper regulatory regimes that can be interrogated by the participants in open court. Without this an abundance of natural resources is by and large not assisted in long‑term, sustained economic development.
Dr Dhafer Al Umran, Ministry of Foreign Affairs, Bahrain
The title today is attracting investment after the financial crisis, but as an economist or economic development strategist to look at all crises in the world as a real challenge, because we will not really move forward unless we do that.
In response to the Kazakhstani speaker I would like to say something about economic diversification. In this area, all the GCC countries have moved towards diversification, but at different levels. For us in Bahrain it is a survival strategy, because we do not have that much oil and our oil wells will run out before everybody else, so we really need to move faster. That is why we started doing that in the 1970s and we have created a service sector for the Middle East. We have the financial centre here for the Middle East and that is something we can share.
There is a huge list of ideas about investment, but we need to be a bit practical these days, especially with the financial crisis. We need to look at quality investment rather than quantity. It is not how many projects we create, but how good they are so that we can market ourselves to the international community.
Nader Mousavizadeh, Managing Director, Archipelago Partners; former Executive Director, Goldman Sachs International; Consulting Senior Fellow, IISS
In terms of attracting investment as well as looking at the shift of geo‑economic power in the world today we should pay more attention, and hopefully we can discuss this further today, to the increasing flows between emerging market countries not only in the energy sectors but also in telecommunications and financial services. These are very important flow in terms of both the corporate and state‑backed investments that are being made as they relate to the issues of state capitalism we talked about earlier. They are also important in terms of the relative influencing power of the West in the broader development question in a lot of these markets, where the best kind of capital, certainly in terms of scale and availability will come from state‑backed institutions and the way that will change the global order.
Dongsun Park
I do agree we need increases awareness of the opportunities and challenges presented by the G20 process. That is why I am here and why the Korean government is engaged in outreach activities. We are having Business 20s and Tourism 20s, inviting young people to get involved in this globalisation process. I would like to draw your attention to the development issues and safety nets that are going to be among the main agendas at the Seoul summit. These two areas are going to have some impact and will be engines for stimulating growth in developing countries. Certainly the fact that the emerging economies including China, Russia and Brazil are part of the G20 leadership is making the game very interesting and productive.
Imad Fakhoury
Clearly Jordan’s story has been one of investing in human capital to compensate for a very difficult geopolitical situation and geography and transform that into an advantage, as well as compensating for a lack of resources. The knowledge‑based economy is helping us to dig deeper into sectors we would never have looked at such as oil shales, where we are the fourth largest country in the world in terms of reserves. It requires a lot of knowledge and technology and in the past 10 months Jordan has signed mega agreements with Shell as well as Estonia and BP. We have found a small quantity of gas in some very difficult areas, but knowledge and technology are helping us to develop that.
Good governance is key to all of that. We cannot afford not to have good governance. We are competing globally and competition is increasing. The idea that a private investor can use the government and win a case has been a fantastic phenomenon and increased the credibility and success of the story.
Finally, I think there are two critical points at which the IISS need to look. The first is what happened post September 11 and secondly the fact that a lot of sovereign funds need to diversify their investments. Jordan has been trying hard and has succeeded to a large extent in pitching a story that we are a good investment proposition. There has been movement of GCC surpluses coming into Jordan to invest in projects and not the traditional flow from sovereign countries into developed economies. I believe that diversification of risk and return is a key lesson from this story.
From a geostrategic point of view, it is important to look at the infrastructure of Jordan that is supporting peace efforts in our region, the reconstruction of Iraq and building redundancy into the transport and supply chains and energy corridors at a regional level. These include both gas and electricity networks. That geostrategic hub and networking is very important as we move forward with deeper geo‑economic integration in our region.
Kairat Kelimbetov
Firstly, I would like to support the comments about transparency in the oil sector. There are certainly some issues about this. There was an initiative by Tony Blair aimed at providing transparency in the oil sector, and within that the Kazakhstani government, together with investors from other countries, are thinking about how to give more information on how oil revenues are working for the development of communities in Kazakhstan, and how oil revenues are distributed.
Secondly, I also support the comments about trust in financial institutions. The recent financial reform package from President Obama has raised a lot of issues, not only about the US and EU markets but also about emerging markets. We famously have a lot of problems with issues such as derivatives and financial institutions which are ‘too big to fail’, which has created a moral problem around appropriate financial supervision, appropriate credit ratings agencies and audit firm activities.
I also appreciate the comments about diversification, and I think there are several reasons why the oil‑rich countries are not working as efficiently as we would like. These include issues of ‘Dutch disease,’ the role of appreciation, of exchange rates, which killed the non‑oil sub‑sectors of the economy, or issues of rent‑seeking behaviour. I think studying all this experience, and using the appropriate lessons, the GCC countries, countries from Central Asia and the CIS could manage oil wealth the right way, becoming successful countries as well.
