Energy infrastructure in MENA countries: case studies and opportunities in renewables

South and East Mediterranean Countries (SEMCs), although currently accounting for only one-fourth of the total GDP of the Mediterranean region, are expected to grow at twice the rate of the North Mediterranean Countries (NMCs) till 2030, when they will make up approximately one-third of the total GDP of the region. In terms of population, we can observe a similar trend: the population will grow in the SEMCs at a faster rate than the north. As a result, 60% of the population will be based in the countries belonging to the south shore of the basin by 2030. This uneven situation has profound implications in many sectors of the region’s society, and in particular in terms of energy balance and trade implying that energy consumption, as well as electricity demand, will increase in the South, whereas a weak economic cycle will contribute to declining energy consumption in the North.

Observatoire Méditerranéen de l’Energie (a private non-profit organisation based in Paris, dedicated to promote Regional dialogue and cooperation on energy issues in the Mediterranean) indicated that over €715 billion will be needed by 2030 to ensure the additional generation required and Med-TSO (the Association of the Mediterranean Transmission System Operators for electricity, based in Rome as a technical platform to facilitate the integration of the Mediterranean power systems) estimated that a further 3,000 MW of North-South Interconnections in the Mediterranean basin will be required necessitating an investment in the order of €20 billion by 2020.

Although state-level energy policies are still dominant in the energy sector, it is indisputable that countries in the Middle East and North Africa (MENA) will not be able to deliver investment of this variety and size only via the public budget. Therefore new business models need to be developed to allow active private sector participation. What is the role, then, that Public and Private Partnership[1] (PPP) might play in the MENA region? Will it represent a viable business model in the region to develop its infrastructural needs in the coming years?

PPP is a relatively new feature of infrastructure investments in many low and middle-income economies. Since 1990, a growing number of countries have experienced an increasing participation of the private sector in supporting the development and diffusion of effective infrastructure endowment. Whereas governments remain the main source of infrastructure financing in developing countries, providing around 70% of the funds necessary, the private sector is also a key source, contributing 22% – well beyond the 8% provided by official development assistance.

MENA countries are hungry for infrastructural investment, but when looking at their consolidated global trends in energy and infrastructure investment (transport, water and sewage sector) made available by the PPI Database (http://ppi.worldbank.org/), it emerges that MENA performance is particularly poor in attracting private investments. When we zoom into the energy sector, PPI in MENA countries is lagging behind both in relative and absolute terms: investment in the MENA region only represents 4% of global investment in the sector, resulting as the least performing region in the world.

However, while the general outlook for PPI in the MENA region is grim, Morocco was able to figure among the top six destination countries for energy investment in recent years. Together with Jordan, Morocco represents the only other weighty destination for PPP energy investment in the MENA region, almost entirely in renewable energy technologies. The seeds of this success, relative to the performance of the overall MENA region, in cases such as Morocco and Jordan, depend crucially on their long-term strategy and their institutional endowment.

Several factors coalesce to play a relevant role in determining the level and magnitude of private engagement in PPI and they can be grouped into three main categories: 1) factors that determine governments to engage the private sector in infrastructure financing; 2) the underlying context in terms of the overall macroeconomic environment, which drives to some extent the respective motivations of the public and private sectors, and 3) factors that affect the incentive and motivation of the private sector to enter into a PPP with the government. The third group of factors is deemed critical by private investors. These include adequate regulatory framework and proper enforcement of laws, independence of regulatory institutions and processes, access to credit, government effectiveness and responsiveness, political stability and public opinion on private provision of infrastructure services. Two  indicators of these dimensions are measured by the Political Stability (PS) and Rule of Law (RoL) score as defined by the Worldwide Governance Indicators project (provided by the World Bank).

PS and RoL are positively correlated with the level of investment. Therefore greater the political (and financial) stability, the lower is the perceived country risk, thus the lower the return required on investment. A high score related to the indicator RoL implies a greater certainty on the judicial and legal system, thus improving the level of contract enforcement in the country considered. It is therefore not surprisingly that Morocco and Jordan show a (comparatively) higher score in terms of both PS and RoL compared to other countries in MENA region. These differences yield a similar disparity in the level of investment and thus mean that Jordan and Morocco are perceived by investors as better endowed, compared to other countries of the region (Algeria, Egypt and Tunisia), to attract (energy) investments. In addition, their long-term strategies paved the way for a successful transition in the energy sector.

The process of energy sector liberalization in Morocco dates back to 1995, when a first liberalization strategy was introduced. Successively the government of Morocco considered a more far-reaching energy strategy, to respond to the challenges that the sector represents for the country. In this framework, a variety of institutional stakeholders have been designed to deal with renewables promotion. The existence of this thick institutional environment demonstrates the high level of interest that Morocco has in renewable energy in particular, and in sustainable development in general. As a result, between 2012 and 2015 six PPP projects were developed, attracting nearly $7.7 billion in investments.

Similarly, Jordan’s policy in the energy field was shaped through the adoption of the updated National Energy Strategy (NES) for the period of 2007 until 2020, to develop a reliable energy supply by increasing the share of local energy resources in the energy mix; to reduce dependency on imported oil; to diversifying energy resources and finally to enhance environmental protection. Jordan’s government has underlined its commitment to reach these ambitious targets and issued the Renewable Energy and Energy Efficiency Law on April 17, 2012. As a result of the introduction of this bottom-up approach, 14 PPP projects were developed between 2012 and 2015, amounting to an investment commitment of $2.4 billion.

PPPs represent a shortcut to the modernization of the energy sector and the provision of much-needed infrastructure. Different strategies are a possibility in attracting private investors. Two successful cases in the MENA region illustrate that both decentralized and centralized models can be viable. In the first case, positive results have emerged from Jordan following an attempt to promote widespread diffusion and social acceptance of renewable energy sources (RES), while promoting domestic and residential installations at the same time.

Decentralized energy projects are also promoted as part of government’s localism and rural development agenda, meeting local needs and involving local stakeholders. In contrast, Morocco has promoted a centralized investment strategy, to attract a few flagship projects, in combination with a policy to develop, at the same time, green growth and an industrial sector specialised in components related to RES generation. This main strength of the policy framework also represents the main limitation of the Moroccan renewable energy strategy – namely that it is focused solely on large-scale projects.

Certainly the stabilization of the remuneration provided with the most common regulatory tool for RES technologies (in particular a RES quota and targets) are essential to provide the necessary guarantees, and represents a positive step toward attracting PPI investments in the renewable sector. However, while widely diffused, such measures alone will not suffice. Those instruments need to be accompanied by long-term strategy – one capable of generating an environment conducive to investment in order to become effective. In such a framework, the strategies adopted in Morocco and Jordan, although different in their approach, have been able to provide these preconditions.

Recent energy policy development, particularly in Egypt and Algeria, testifies for a move toward a more sustainable and investment-friendly environment in the broader region. However, it is still unclear how effective these reforms will be in the absence of an improved institutional environment able to guarantee credible regulatory framework, efficient access to credit and a reliable judicial system.