# **Getting MFD right**

Reinforcing state capacity and devising appropriate legal frameworks for PPPs are essential if the MFD is to succeed. The capacity of the state to negotiate PPPs must be reinforced to maximize job creation and government revenue.

At its core, success requires that the state move from being a “doer” to an “enabler.” This relegates the state to a regulatory role and to promotion of markets that have few, if any, barriers to entry and exit. Governments in MENA should disengage from sectors where there is no rationale for public intervention and should be seen as honest brokers by providing a regulatory framework that improves markets. Many countries in the region have promotion policy on their books but enforcement is selective.

Rate regulation is a critical issue.<sup>5</sup> PPP operators are often local natural monopolies. The regulation of monopoly pricing is therefore key to protecting both customers and the PPP operator. Of course, rates are set during the bidding stage. But contingencies are likely to arise and require rate revisions. It is in this scenario that a regulatory commission including with representatives of consumer associations charged with setting or revising rates becomes important.

MDBs play a fundamental role in reducing both market and government failures and in helping governments identify and structure infrastructure projects. The impact studies they undertake and the strict due diligence standards they impose on the origination of new infrastructure projects are the best guarantees of the sustainability of these projects. Moreover, because of their international governance structure they also are ideally placed to help mitigate political risk. Indeed, MDBs’ debt is senior to other commercial creditors according to existing conventions. Also, as repeat players and essential partners in infrastructure investments, MDBs are in a stronger position to be able to enforce repayment on their debt. MDBs can thus play a critical disciplining role, without which private lenders would not be willing to invest. MDBs could further leverage this disciplining role and act more as catalysts stimulating private investment in projects that are currently perceived as too risky, with too few protections for private investors. To fully play that role, however, MDBs must venture further in the direction of extending guarantees to private investors, so as to bring in more private capital (see Arezki et al. 2017). The Multilateral Investment Guarantee Agency (MIGA), part the World Bank Group, provides political risk insurance guarantees to private sector investors and lenders. MIGA’s guarantees protect investments against non-commercial risks and can help investors obtain access to funding sources with improved financial terms and conditions.

But MDBs have limited funds available for infrastructure investment. This is why MDBs should adopt the MFD approach—which would allow them to conserve their scarce capital and leverage their gatekeeping capabilities to give PPP infrastructure projects access to the vast pools of long-term institutional savings.

Other commitments a country makes toward the international community can also be important. For instance, signing an international arbitrage treaty can have an important signaling role. Indeed, signing such treaty could act as a commitment device to also encourage private sector investment and the establishment of PPPs.

> 5 See http://ppp.worldbank.org/ppp/legislation-regulation/framework-assessment/legal-environment/dispute-resolution.

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