What the refugee crisis means for investment in MENA

Approximately 4 million Syrians are currently displaced in countries neighboring the war-torn nation, mostly in Jordan, Turkey, Lebanon and Iraq. These countries have long histories of hosting and resettling those displaced by war in the region — the population of Jordanian capital Amman more than doubled, for example, as a result of the Israeli-Palestinian conflict.

These states also know first hand from previous refugee flows that, more often than not, displacement is long term. The United Nations estimates that the average displacement lasts 17 years and, with that in mind, host countries are seeking longer-term assistance from donors. Meanwhile, governments and multilateral investment banks are adjusting investment strategies to shifting priorities, as well as opportunities.

The International Finance Corp. — the private sector arm of the World Bank — seeks to improve investment climates through economic growth through infrastructure investment, entrepreneurship support and greater access to finance tools, as well as through advisory work with host governments. Devex sat down with Mouayed Makhlouf, IFC’s head of the Middle East and North Africa region, to discuss investment trends in light of the refugee crisis.

Makhlouf pointed to a shift in investment interests from infrastructure to manufacturing as one of the key solutions to economies flooded with new, skilled workers, and called for governments to provide more sustainable energy to fill growing gaps in energy production.

Here are some more highlights from that conversation.

In the short term, how has the refugee crisis affected the investment climates of host countries in the MENA region?

If you look at places like Jordan, Lebanon, and to a certain extent Iraq, in some places populations have increased by 30 percent or more, so demand on public services has increased manyfold. The World Bank estimates that the cost of the refugee crisis in Lebanon in terms of [gross domestic product] growth alone between 2012-2014 has reached about $2.5 billion.

The need is greater than ever for the private sector to step up to fill the gaps the public sector has not been able to fill. From our point of view, as a multinational institution supporting private sector engagement, this is true not just in refugee hosting countries but across all of MENA.

One of the key things we’ve been focusing on in recent years is support to infrastructure projects, and this is still a priority. The World Bank estimated the need at $106 billion investment in infrastructure per year for the next 10 years to meet the demand in MENA’s infrastructure space.

For our work around the refugees, take a look at Jordan, or Iraq to a certain extent, or Lebanon. We have tried to invest in spaces where we see the public sector unable to invest, including infrastructure.

For example, because of the energy expenditure due to the population surge, we’re able to invest to cope with what we see as a long-term need for increased energy production. Governments are telling us this is what they need [and] where they are most concerned for the long term. In the case of Jordan, this is infrastructure, power generation, specifically renewable energy. We supported seven solar power plants in Jordan, we built Tafila, their first wind power plant. Last Thursday we signed a large investment in power, about $370 million in one power generation plant, which will hopefully fill the energy gap in Kurdistan that has grown much more serious because of the increased number of refugees.

Are investors more hesitant to get involved as a result of the crisis?

To be honest, no — especially not the corporate clients. In Jordan and Iraq we have clients who’ve already said, “how do we start turning this crisis into a benefit?” — whether by supporting refugees directly, or creating something around the refugees that would ultimately benefit the whole economy. We are also thinking about something similar with our colleagues from the World Bank. It has to be a holistic approach; it’s not just one transaction with one client, it has to be a macro picture.

For example, we are encouraging Syrian investors to come and set up plants in Jordan where they can employ Syrian refugees.

Do you see the refugee crisis as an opportunity to fast-track reforms to improve investment climates in the region?

Governments should do some reform to allow for the right investment climate, certainly, and undergo regulatory reforms to allow corporates and outside investors to easily come in and set up in certain areas and have access to energy, water, the banking system, etc. So that would have to happen with the help of IFC, with the World Bank of course, but governments as well.

For example, our focus now with MENA governments is helping establish a movable asset registry, improving leasing law, microfinance law, and credit bureaus, all to allow the private sector to access the capital market and banking sector.

Likewise, how is the conversation shifting around domestic resource mobilization, both from the donor and host country perspective?

For [domestic resource mobilization] we’ve been championing [public-private partnerships] for the past seven or eight years ... We have good examples: Queen Alia Airport in Amman was built and run by IFC as a PPP advisory mandate by the government. The whole airport was built by the private sector and given to the government, which gets a percentage of the revenue regardless of how the airport is run.

Some governments have the notion that if they do a PPP they’re losing part of the control, but they’re actually not. They retain control of security and migration, but the issue of running it and asset management could be done by the private sector.

Which donors are trying something new in the space?

[The U.K. Department for International Development] is a good example. We work very closely with DfID across the whole region, and we really like it — on projects where we’re coordinating with them — when they look at us and say, “You know what, you’re better equipped to provide the advisory work with governments’ rather than throw donor funds directly into government.” We then give it to an agency that provides the support to the government to allow them to make the right decisions and create further private sector investment.

When DfID comes to us and says, it’s going to cost $10 million to work over the next two years to help this government set the right framework for the investment climate, we will fund that work. I think this is the kind of donor work that’s extremely good and much needed.

Is there a MENA model you point to for decreasing energy dependence while increasing investment?

There isn’t one model, but because of its lack of natural resources, I would say the closest is Jordan. They were very good in addressing the subsidy issue because they could no longer afford subsidies. Let the people be accountable for the amount of energy they consume, then put the right regulation [in place] to allow private sector to share some of the burden.

What industries, companies and sectors are you hoping to draw into the MENA region? Who do you really want to approach you?

Infrastructure is more or less covered. But the manufacturing space: If the global manufacturers — the Nikes, Gaps, etc. — see the possibility and if it makes sense to set manufacturing up in the MENA region, we would be eager to support something like this. We have some relationships with [global manufacturers], but not all of them. There are certain things that MENA provides that others don’t, like cheap labor, cheap energy, [and the] location is very central logistically for exports. Egypt could make a great manufacturing hub for Europe and Africa ... and the manufacturing zones are created with this in mind.

On the whole, MENA countries need to put more production in the country, and that will more rapidly improve the unemployment issue in the region. You need a certain level of GDP growth to support the economy. If you don’t have this, you’re just exporting.

Across Borders is a monthlong online conversation hosted by Devex and partners — World Vision, the European Commission's Humanitarian Aid and Civil Protection department, the U.S. nonprofit partner of the International Organization for Migration and United Nations Volunteers — to analyze and amplify the discussion on global migration and current refugee crises through the lens of global security, development cooperation and humanitarian aid work, and more. Visit the campaign site and join the conversation on social media tagging @devex and #AcrossBorders.