Al-Mirsal

Kuwait Power and Water Projects to Take-Off Following Publication of PPP Regulations

Posted in Kuwait, Power, Project Development and Finance, Regulatory

PPPNew PPP Regulations

Further to the publication of the new PPP law in August 2014, the corresponding executive regulations were published in the official gazette on 29 March 2015.

The new regulations provide developers with additional information and clarification on key procurement matters such as prequalification, bid submission requirements, bid bond requirements, bid evaluation procedures, selection of and negotiation with the preferred bidder, and award of the project. Such clarifications should provide developers with greater certainty as to the procurement process for important upcoming projects such as those mentioned below.

Developers may also be interested to learn that the new regulations permit developers to take the initiative and propose projects to the Kuwait Authority for Partnership Projects (KAPP) which, if accepted, offer certain economic benefits with respect to the costs of the feasibility study for such proposal.

The KAPP has yet to publish an updated PPP Project Guidebook, which developers will be looking towards for practical guidance as to how the new PPP law and regulations are to be interpreted.

Project Pipeline

The KAPP is currently procuring two major independent power and water production complexes in accordance with the new PPP law and executive regulations and the IWPP law and executive regulations.

The first of these complexes is Az-Zour North which is expected to be developed in 5 phases with a total capacity of 4,850 MW of power and 283 MIGD of water. The second of these complexes is Al-Khairan which is expected to be developed in 3 phases with a total capacity of 4,500 MW of power and 125 MIGD of water.

The KAPP was receiving qualifications for Phase 2 of Az-Zour North and Phase 1 of Al-Khairan up until 9 April 2015 and is expected to release the request for proposals (RFP) for Phase 2 of Az-Zour North ahead of the RFP for Phase 1 of Al-Khairan to avoid any overlap in the procurement process for, and to ensure a high level of private sector participation in, both projects.

The projects represent Kuwait’s second and third IWPP, building on the success of Phase 1 of Az-Zour North which established the Kuwaiti IWPP model in 2013.

PPP Infrastructure in Kuwait

Power and water are not the only sectors to be developed in accordance with the new PPP law and executive regulations.

The Government of Kuwait plans to spend USD$47.2 billion on infrastructure projects outlined for 2015 according to MarketResearch.com.

Together with the KAPP, the Ministry of Communications intends to procure a metropolitan rapid transit system (KMRT) and a railway system which are both in the feasibility and study phase. In addition, the Kuwait Municipality intends to procure the KABD Municipal solid waste to energy project, which is in the prequalification phase, and the Ministry of Public Works intends to procure the Umm Al Hayman wastewater project, which has completed the prequalification phase.

Photo: Dreamstime

UAE Corporate Law Reform

Posted in Capital Markets, Investment Funds, United Arab Emirates

United Arab Emirates, new commercial Law

The UAE has recently passed a new commercial companies law and approved some key changes to its public takeover regime.

1. New UAE Commercial Companies Law

UAE Federal Law No. (2) of 2015 Concerning Commercial Companies (2015 CCL) was published in the Official Gazette on 31 March 2015 and comes into force on 1 July 2015.

The 2015 CCL is substantially similar to the 2013 draft of the Commercial Companies Law (2013 Draft CCL). The key differences from the 2013 Draft CCL are:

  • Decrease in shareholding required for directors and employees to be related parties to companies in which they hold shares from 35% to 30%
  • Clarification that transactions between joint stock companies and related parties in excess of 5% of the company’s share capital require board and general assembly approval
  • Express provisions which provide for shareholders to elect directors of joint stock companies by way of cumulative voting
  • Increases in several fines for breaching the 2015 CCL, including an increase from AED100,000 to AED1,000,000 for participating in transactions for the purpose of influencing the price of securities.

More generally, the 2015 CCL represents an evolution rather than a revolution for the UAE’s existing commercial companies law. In particular, the rules on foreign ownership remain unchanged. The 2015 CCL retains an odd provision from the 2013 Draft CCL, which provides that all provisions applicable to joint stock companies also apply to limited liability companies. This provision is likely to create much uncertainty – e.g. on the face of this provision, the new prohibition on joint stock companies providing financial assistance would also apply to limited liability companies.

2. New Mandatory Offer Rule

Following reviews conducted by the Emirates Competitiveness Council, the Board of the UAE Securities & Commodities Authority (SCA) has approved changes to several instruments in order to raise the competitiveness of the UAE on the minority investor protection index.

The most significant change is SCA Board approval for a new article to be added to the Disclosure and Transparency Regulations requiring a mandatory offer to all shareholders in accordance with procedures determined by the SCA for any shareholder (or associated parties) in a listed public joint stock company who owns 50% or more and wishes to increase their level of ownership.

The mandatory offer rule and other changes approved by the Board of the SCA are not expected to come into force until June 2015.

The mandatory offer rule would have had a greater impact on the UAE takeover landscape if the threshold had been set at a lower level, such as 30%, which is common in many other jurisdictions.  In addition, it is not yet clear what procedures the SCA will require offerors to follow.

Click here to read more about the new UAE Corporate Law reform.

Image Source: Dreamstime

Financing the Middle East’s Shopping Spree

Posted in Banking and Finance, Islamic Finance, Qatar, Real Estate, Saudi Arabia, United Arab Emirates

Mall financingThe continuing strong economic conditions of the UAE and other GCC economies has led to an upsurge in consumer spending in recent years. With retail sales in the region expected to reach US$284.5 billion by 2018, the need to meet the growing demand for consumer goods has led to a boom in planned shopping mall developments in the Middle East.

 

Dubai might be the world’s most visited retail destination thanks to The Dubai Mall, which attracted nearly 80 million visitors last year, but it’s not the only GCC city investing in the retail industry: in Abu Dhabi, 8 new mega shopping centres are to be constructed over the next three years; in Doha, a QAR1.65 billion contract was awarded in 2014 for the construction of the mega Doha Festival City development; and in Jeddah, Al Futtaim Group will partner with Kayannat Real Estate Company to build and operate the SAR6 billion Mall of Arabia.

Many of these mall developments are financed through a combination of debt and equity, allowing lenders to mitigate their exposure and ensuring sponsors hold enough risk to be incentivised to deliver a successful project. Below are five key considerations to note when financing shopping malls in the region:

1. Market Knowledge: Lenders will typically require a market study as part of their due diligence. Recently, in Saudi Arabia there has been a gap in the market for luxury malls and lenders have generally been happy to fund these projects absent the need for a market study.

2. Tenant Profiles: The most successful mall developments have an anchor tenant profile comprised of (i) a mixture of brands with an established track record in other malls in that market and/or region and (ii) high profile brands and franchises which are new to the market. To successfully commit financing, a developer needs to secure leases from a select basket of anchor tenants for a period of time at least as long as the tenor of the financing.

3. Financing Structure: Mall developments have typically been structured as structured financings rather than project financings. Key structuring aspects to note include:

  • Sponsors are required to contribute equity up-front and to cover cost-overruns.  Occasionally, there may be cost overrun facilities (but with increased pricing).
  • Sponsor guarantees cover completion of the project, cost overruns and amounts due to lenders under the financing and are usually in place for the tenor of financing.
  • Stringent account waterfall structures (often with cash-sweeps) are documented with security granted over accounts.
  • Security will also be taken over shares in the project company, all real property, rights over tenancy contracts and other material contracts, performance bonds, insurance policies and other significant income streams.

In light of the sponsor support identified above, the covenant and reporting regimes tend to be lighter than those documented in a project financing.

4. Construction Risk: The support arrangements described above also means that limited (if any) due diligence is performed on the construction contracts.

5. Zoning and Permitting Issues: Zoning, permits and utilities are key; these can be time consuming to obtain but are required as a condition to funding.

Image Source: Dreamstime

How Oil and Gas Companies can Optimize Technology Performance and Costs During Oil Price Volatility

Posted in Oil & Gas, Outsourcing, Qatar, Saudi Arabia, Technology, United Arab Emirates

An unexpected surge in production coupled with weakened global demand has resulted in a 50 percent drop in the price of crude oil since June 2014 and currently averaging US$50 a barrel. The Organization of the Petroleum Exporting Countries (OPEC) announced it would leave market forces to determine crude oil price and would not cut oil output. The current oil price is the lowest it has been since Spring 2009. As oil and gas companies begin to feel the pressure of oil price volatility, efforts become focused on reducing capital and operating costs while maintaining, or improving operational services, particular technology services.

In parallel with this trend, the Middle East is one of the world’s fastest growing information technology markets with total technology spend predicted to have exceeded US$32 billion in 2014 and 10.71 percent of such spending attributed to the GCC oil and gas sector. Executives in the oil and gas sector recognise the need to invest in technology goods, software and services in order to maintain competiveness in global energy markets and to protect the critical infrastructure of their companies from cyber security threats. In the foreseeable future this recognition will be balanced against the need to manage or reduce costs associated with technology services.

So how can oil and gas companies achieve this? Here’s four approaches to consider:

1. Effective asset management: Does the company pay maintenance fees for “shelfware”, i.e. software or hardware that was bought in bulk but is not actually being used? Such fees rapidly erode any volume-based discount obtained for buying the software or hardware in the first place and over time can become a significant drain on technology budgets with no corresponding benefit to the company. In addition, the absence of centralised asset management capabilities within a company can sometimes result in the procurement of additional licenses to use software or additional hardware, notwithstanding existing stockpiles of unused software licenses or hardware in a separate part of the company. According to a Gartner research paper from 2013, introducing an effective asset management programme can help companies achieve savings of 30% in associated technology costs within one year. Part of an effective asset management program includes reviewing existing technology vendor agreements to understand the company’s ability to reuse or transfer software and hardware within the company, to return unused software or hardware and to terminate ongoing maintenance and support arrangements related to unused software and hardware.

2. Renegotiate existing vendor agreements: If a vendor agreement is coming up for renewal, or if the company is planning to procure additional goods or services from a vendor then the company should seek to renegotiate the commercial terms previously agreed with the vendor to share the risk caused by the volatility in oil prices. This may be achieved by agreeing on lower rate cards for personnel involved in the provision of services, discounted unit prices for software and hardware and a flexible pricing mechanism that allows the company to reduce its spend with the vendor as needed to reflect changing demand within the company for the vendor’s goods and services.

3. Outsourcing: Outsourcing of a company’s specific technology or business process functions is a proven way of reducing both capital and operating costs. By outsourcing, a company can transfer the need to make significant capital expenditure, such as large investments in technology infrastructure, to their vendor and enter into an arrangement whereby the vendor agrees to provide the outsourced function, like application management and support, back to the customer over an agreed period of time for a lower cost than the customer can itself provide the same function.

4. Cloud computing: The cost-efficiency benefits of cloud computing are widely acknowledged yet concerns relating to data security and integration have impeded large-scale deployment in the region. According to IDC only 30 percent of oil and gas companies operating in the Middle East and Africa have implemented a private cloud solution, and only 15 percent have adopted the public cloud. The cloud is not the solution for all of a company’s technology needs, but can present an effective solution for hosting volume-intensive public-facing components of a company’s technology environment, such as corporate websites and customers apps.

One, or a combination of these approaches, can form the basis of effective strategy for oil and gas companies to deal with the competing challenge of increasing technology performance while reducing technology cost. Execution of such a strategy not only requires collaboration and alignment across a company’s technology, procurement and finance functions, but also requires the involvement of a company’s internal or external lawyers to ensure that the company understands its ability to achieve cost savings in existing vendor agreements and captures agreed performance improvements and cost savings in new or renegotiated vendor agreements, as well as identifying and mitigating risks associated with the procurement of technology.

In addition, execution of any cost-reduction strategy should not sacrifice or dilute a company’s information security and governance mechanisms or increase the risk of the company being subject to a cyber-attack. Cybercrime is, unfortunately, a growing trend in the Middle East and globally and companies must continue to take measures to maintain and strengthen their defences against security vulnerabilities and ensure they have a plan in place to deal with the consequences of a security breach. See our previous blog post “5 Ways to Protect your Business from a Cyber Attack” for more information on this topic.

Latham & Watkins’ technology transactions and outsourcing team has advised on many of the world’s largest and most complex business process, IT and network outsourcing transactions and is ranked as one of the top technology and outsourcing legal practices in the world. Please contact us if you would like to receive further information or discuss this topic further.

 

What You Need to Know About Abu Dhabi Global Market’s New Draft Regulations

Posted in Banking and Finance, Capital Markets, Regulatory, United Arab Emirates

The Abu Dhabi Global Market, Abu Dhabi’s new financial free zone, located on Al Maryah Island, recently issued a first wave of draft regulations and related consultation papers.

The Global Market’s general approach in the draft regulations follows very closely the  English law model. In particular, the Global Market is proposing to apply English common law and certain English statutes in the Global Market. No draft financial services regulation was included in the first wave of regulation. The draft financial services regulation is expected to follow later this year.

In addition, the Global Market flagged that its initial key anchor sectors will be private banking, wealth management and asset management, which represents a much narrower focus than contemplated in the Global Market’s earlier press releases.

Please click here for more detail on this development.

Photo: Thinkstock

Navigating the Risks of Omnichannel Retail

Posted in Intellectual Property

Digital innovation is reinventing the retail experience. IT is changing the way retailers interact with customers by integrating sales and communication channels, enabling in-store digital interfaces and diversifying payment platforms.

As retailers look to fuse existing operational silos in favour of an omnichannel strategy, the role of IT is increasingly recognized as critical to achieving seamless and integrated retail experiences.

Omnichannel retailing combines the bricks and clicks aspects of retail, allowing for multiple, easily accessible retail touchpoints or channels. At the same time, it can effortlessly customize the  customer interface, based on their past purchases and preferences.

Key Considerations for Omnichannel Retail Success

  • Integration: Aspiring omnichannel retailers seeking to connect inventory, supply-chain, order management & distribution, Customer Relationship Management (CRM), marketing and Point of Sale (PoS) systems are likely to face back-office technology integration challenges as traditionally these operational functions have worked autonomously. Yet centralizing these systems is key in achieving an omnichannel strategy. Currently there exists a disconnect between internal technology and business functions. Therefore retailers must align the capabilities of its IT assets with overall business strategy.
  • Investment: Technology investment is too often evaluated from the perspective of cost-reduction. Retailers need to assess the advantages IT can bring to business operations such as service innovation, customer analytics and product development. For example, centralizing all data can enable retailers to more effectively understand customer behaviour and detect purchasing trends which may not be visible to an organization that houses data by department.
  • Innovation: Innovation is quick to outdate. The industry is just beginning to trial and implement digital technologies such as mobile PoS, virtual mirrors, interactive displays and RFID inventory. As such, retailers need to implement flexible and interoperable systems that can adapt and expand with the needs of their business.

Navigating the Risks of Omnichannel Retail

In addition to these strategic considerations, the contract for the implementation of an omnichannel retail system needs to address a number of key commercial, operational and legal risks:

  • Operational and delivery risk including running over budget or time; incompletion; failure of system to meet business requirements; over-engineering, poor quality, inefficient maintenance; and changing requirements over time.
  • Intellectual Property Risk such as ensuring that the retailer has sufficient rights to use the system; owns any bespoke developments or innovations which give it an advantage over its competitors; and is not “locked in” to a relationship with a vendor by virtue of having no rights to use the system should it terminate its relationship with the vendor.
  • Liability risk such as protecting the retailer from third-party claims related to its use of the omnichannel system; ensuring that the retailer may bring a claim to recover its actual losses in the event of a breach by the vendor; and ensuring that the retailer’s exposure to liability from the vendor is commensurate with the fees being paid by the retailer to the vendor.

Each of these risks are significant and result in material losses caused by failure. It is essential that retailers address these risks in agreements with vendors and take great care in determining the manner in which a systems implementation is priced, vendor performance is incentivised and implementation is governed and managed.

Photo: Thinkstock

Kuwait Projects to Press Ahead Following PPP Law Publication

Posted in Kuwait, Power, Project Development and Finance

The financial close of the 1500 MW and 105 MIGD Az Zour North independent water and power project (IWPP) in January 2014 served as the trailblazer for the start of the public-private partnership (PPP) programme in Kuwait, representing the first project under the new PPP Law. The development of the Kuwaiti PPP projects market hinges on the publication of the executive regulations to the new PPP law which was published in August 2014. The Director General of the Partnerships Technical Bureau (PTB) suggested that the executive regulations are substantially complete and on schedule for publication in early 2015 at the recent MEED Kuwait Projects conference held in November this year.

Executive Regulations Target 2015 Launch

The new PPP law provides that the executive regulations should be published within six months of the new PPP law, which suggests a long-stop date of sometime in February 2015. According to Kuwait’s National Assembly Financial and Economic Affairs Committee, given Kuwait’s need for mega-financing and advanced technology transfer, all new projects are intended to be implemented pursuant to the new law.

5 Considerations of Kuwait’s New PPP Law

Project developers and lenders should be aware that Kuwait’s new PPP law impacts:

  • Existing Projects: Permitted to continue in accordance with the terms of their concession and related licenses until they expire, or terminate earlier in accordance with their terms but no amendments to the concession or related licenses are permitted after the new PPP law takes effect. This is an important provision for developers of and lenders to existing projects who may be questioning what impact such a change in law may have on their existing projects.
  • New Regulators: The Supreme Committee for Projects will be replaced by the Supreme Committee for PPPs (SCPPP) who will, among other things, approve new PPP projects, handle land allocations for such projects and approve both the successful bidder and the project documents. The PTB will also be replaced by the Public Authority for PPPs (PAPPP) who will, among other things, nominate the successful bidder and prepare the project documents and establish the public joint stock company which will undertake the project. PTB’s transition to a formal government entity should help expedite the procurement process and it is anticipated an updated PPP Project Guidebook will shortly follow to reflect how the new law and executive regulations will impact project procurement and implementation.
  • Shareholdings: The previously set 26 percent floor continues to apply to the successful bidder and although it is a floor, depending on the proposed shareholding offered to bidders, developers (and lenders) will be focused on how the successful bidder secures management and board control in the project company. Conversely, the 24 percent ceiling continues to apply to the relevant public authority, although there is now also a 6 percent floor. In addition, the 50 percent allocation for public offering continues to apply. PAPPP is envisaged to subscribe for the shares allocated to both the relevant public authority and the public.
  • Project Financing: Lenders may be interested to learn that whilst restrictions still exist on taking security over the land allocated for the project, the project company may encumber the other project assets as part of the security package. As was the case under the old laws, it seems only the successful bidder may, with the SCPPP’s approval, pledge its shares in the project company.
  • Extended Term: Whereas the old laws limit the concession period from 25 to 40 years, projects may now have up to a 50 year concession period.

Project Pipeline

New projects such as the 1500 MW and 100 MIGD Az Zour North IWPP Phase 2, the 2500 MW and 125 MIGD Al Khairan IWPP and the 280 MW Al Abdaliyah Integrated Solar Combined Cycle Project along with many others, have been on hold pending the publication of the new executive regulations. Consequently, 2015 could be a very active year for developers and lenders in the Kuwaiti projects market.

Photo: Thinkstock

Megatrends in M&A: 3 Key Regional Opportunities

Posted in M&A/ Private Equity, United Arab Emirates

With the rise in frequency of mergers & acquisitions (M&A) in Africa, the 26 percent growth of M&A in the Middle East this year and the global volume and value of M&A at its highest for years in the first three quarters of 2014, global M&A activity is expected to continue its growth through 2014 and into the first quarter of 2015. Latham & Watkins recently hosted, in collaboration with PwC and the Dubai Economic Counsel (DEC), an industry event entitled ‘Megatrends in Mergers & Acquisitions’ at the Dubai International Financial Centre (DIFC). The event was held under the Patronage of Sultan Bin Saeed Al Mansouri, Minister of Economy, UAE.

The following is a brief overview of 3 key regional opportunities discussed at the event:

1. Evolving M&A Landscape in the Middle East

The United Arab Emirates (UAE) is considered the nineteenth most attractive country globally for M&A, with recent significant growth in both inbound and outbound M&A transactions. The growth is attributed to factors such as lower cost of debt, increase in globalization, liquidity and appetite for risk. Aramex, a leading global provider of logistics and transportation solutions based in the UAE, have put in place a successful growth model of franchise and majority acquisition, most recently announcing that revenues were at a 12 percent increase compared with last year.

2. Growth of M&A in Africa

Having had a slow start to the year, M&A deals in Africa have now greatly increased. Although principally the main deals have been in the energy sector over the last few years, there is now a real interest from companies wanting to invest in sectors reaching African consumers, such as financial services, telecoms, healthcare and retail. Private equity is also set to be critical to Africa’s economic growth.

3. Investment Climate in Russia/CIS

The geopolitical conflict happening in Eastern Europe and Western sanctions have slowed investment growth in Russia. As energy assets have been effectively nationalised, there is particular M&A growth in sectors such as consumer and telecoms. For example, investment is expected from specialist investment funds to drive development in the Russian e-commerce market, one of the world’s fastest growing online markets.

Click here to view further discussion by Latham & Watkins partners on these and other Middle East M&A considerations.

Photo: Dreamstime

Rise in Middle East IWPs as Demand for Water Increases

Posted in Project Development and Finance

IWPsThe majority of the world’s desalination plants are located in the Middle East and we are likely to see a further increase given the region’s increasing water consumption and general water scarcity. GCC demand for desalinate water has increased at a rate of 9-11 percent in recent years according to Frost & Sullivan. By 2020, it is expected that the Middle East will add an additional 39 million cubic metres per day of desalination capacity since 2010, which indicates an approximate investment of US$50 billion.

Desalination plants in the Middle East have to date been a relatively small bolt-on to a much larger scale power project forming what are commonly known as independent water and power projects (IWPPs) i.e., an integrated water and power plant developed by an independent producer,  which is typically a global industry player.

However, given the increasing demand for water, it seems regional governments are increasingly adopting an independent water project (IWP) model to expedite supply and, given the introduction of solar and nuclear power projects in the region, IWPs are likely to become more prominent going forward.

Regional IWP Projects

One of the region’s earliest and Oman’s first IWP was the 80,000 m3/d Sur IWP commissioned in 2009. Five years into the 20 year operation period and the owners are reportedly planning to expand the plant’s capacity by a further 48,000 m3/d (12.7 million imperial gallons per day (MIGD)) to meet projected demand for water in the Sharqiyah region of Oman. Oman has since launched the Al Ghubrah IWP –a 191,000 m3/d (42 MIGD) 20 year desalination project expected to be commissioned by the end of 2014– and the Qurayyat IWP – a 200,000 m3/d day (44 MIGD) 15 year desalination project which is targeting commissioning by H1 2016.

UTICO, a UAE based private power and water utility company, has this year launched the Al Hamra IWP, a 22 MIGD 20 year desalination project which is targeting commissioning by Q1 2016.

Bidding, Building and Licensing

The region’s IWPs are largely being awarded, following a competitive bidding process, as long term concessions on a build-own-operate (BOO), build-own-operate-transfer (BOOT) or design-build-operate (DBO) basis to global industry players such as Abengoa, Acciona, Cadagua, Hitachi, Malakoff, Sembcorp, Sumitomo Corporation, Tedagua and Veolia. Each IWP is required by law to be licensed by the national regulator to carry out water desalination.

To a lesser extent some IWPs are being awarded as engineering, procurement and construction (EPC) contracts such as that awarded by the Iraq Ministry of Municipalities and Public Works to Hitachi and Veolia in 2014 for the construction of a 199,000 m3/d desalination plant in Basrah which will be Iraq’s highest capacity single water purification plant. In addition Marafiq, a Saudi based private power and water utility company, awarded Acciona in 2012 the construction of a 100,000 m3 per day (22 MIGD) desalination plant in Al Jubail expected to come into operation by the end of 2014.

Desert Design

The Middle East has historically utilised thermal desalination technology such as multiple-effect distillation (MED) and multi-stage flash evaporation (MSF) although more recently has increasingly utilized membrane technologies such as reverse osmosis (RO), which often require their own supply and maintenance arrangements.

Environmental conditions in the Middle East such as red tide, high sea water temperatures and salinity, mean the pre-treatment facilities need to be designed or adapted to handle those conditions and/or the project documents need to address the occurrence of those risks as, for example, force majeure events with corresponding relief for the developer.

Whether awarded as a long term concession or EPC, there are increasing opportunities for global industry players in Middle East IWPs.

Photo: Dreamstime

 

3 Top Legal Issues to Tackle on Solar Projects

Posted in Capital Markets, Project Development and Finance, Renewables

The Middle East and North Africa region is on the cusp of a new energy revolution. US$50 billion has been set aside for investment in solar power projects by 2020, as MENA governments seek to maximise the long term value of their hydrocarbon resources by utilising solar energy to meet growing domestic consumption. Whilst these ambitious targets present a significant opportunity for potential sponsors of solar power projects in the region, there are a number of key considerations which sponsors may wish to bear in mind in establishing a framework for their investments.

3 Legal Considerations for Solar Development

  1. Ownership and Structure: Middle East solar power projects typically adopt the Independent Power Project (IPP) model, in which a project company is formed for the sole purpose of managing the development, financing, construction, operation and maintenance of the project and holds all of the project’s associated assets. The project sponsors hold their interests through one or more immediate holding companies which protect the sponsors from liability to the project company’s contractual counterparties. In turn, the project company will be subject to a multifaceted contractual framework entered into with its senior lenders and project counterparties.
  2. Risk Allocation: Sponsors should seek to insulate the project company from as many risks as possible, principally by passing those risks through to the project company’s various subcontractors. To achieve this, the project company will enter into a number of project documents through which risks of, for example, construction/completion, operations, feedstock supply and market/offtake, will be passed to contractual counterparties such as EPC contractors or O&M services providers. Such risk allocation determines the risk profile presented for financing.
  3. Financing: Once the risk profile for the project has been finalised, sponsors will seek to structure the financing arrangements in such a way so as to achieve the most competitive levelised cost of electricity (LCOE) and maximize their own equity rate of return. Sources of financing in the MENA region include:
  • Syndicated loan markets: Traditionally, commercial banks have been the preferred source of financing for solar projects as they are willing to lend to project companies during the construction phase of the project and are prepared to assume some of the risk of that construction.
  • Capital markets: Typically, bond investors have been unwilling to take on construction risk and, as a result, have been primarily used to refinance loan facilities after a project has achieved operational status and developed a substantial financial track record. At this stage, capital markets can be an extremely attractive option offering more competitive pricing than loan facilities and longer tenors.
  • Public sector lenders: Export credit agencies, development banks and similar institutions may offer more competitive pricing and longer tenors than commercial banks in certain circumstances.  In addition, many such institutions offer other products such as political or commercial risk insurance or guarantees.

If you found this interesting, you may also like:

How Project Bonds Can Release Asset Value

Saudi Capital Market Authority Publishes Draft Rules for Qualified Foreign Financial Institutions Investment in Listed Shares

Photo: Dreamstime

LexBlog