Saudi Arabia’s recently announced plans to privatise several key industries in the Kingdom has once again brought the Kingdom’s privatisation agenda back into the spotlight. The announcements form part of the countries transformational initiatives as part of The 2016-2020 National Transformation Plan (NTP) to improve public sector efficiency and boost non-oil revenues in the region, and will reportedly include airports, municipalities, hospitals and education.
Privatisation covers many types of transactions but typically includes the divestiture, whether by sale or lease, of state-owned assets to private investors. The Kingdom already has an established history of such privatisation through the partial sales of Saudi Telecom Company (2003), Saudi Arabian Mining Company (Ma’aden) (2008) and, most recently, the National Commercial Bank’s privatisation through its US$6 billion IPO (2014).
Although the Kingdom reduced its use of PPPs in recent years (instead procuring the development of such infrastructure projects directly through an engineering-procurement-construction (EPC) arrangements), recent market announcements suggest a comeback with the GACA currently tendering Taif Airport as a PPP – the GACA’s first since 2012.
However, with a larger number of diverse public services to potentially be privatised, each with its own unique capex requirements and strategic importance, we are likely to see a wider range of PPP options coming to the market.
These may include:
Fig. 1: Overview of key features of PPP options
Outsourcing has historically not been a major pillar in Middle East public and private sector organisation’s strategic architecture. While the benefits of outsourcing are understood and recognised, organisations have sought to engage with major outsourced service providers through managed service agreements and joint ventures. This approach has generally worked well. It has enabled local organisations to maintain control of their infrastructure, environments, people and third-party contracts and, in the case of joint ventures, provided organisations with the potential opportunity to benefit from any upside growth in the value of the joint venture entity.
Notwithstanding that, the current financial climate in the Middle East and pressure on organisations to reduce capital and operating expenditure while maintaining, or improving services, may mean that 2016 is the year that outsourcing comes of age in the Middle East and starts to deliver on its promise of enabling organisations to deliver better services while reducing their costs.
If your organisation is considering outsourcing in 2016, then we have distilled 3 key considerations that should be assessed and worked through before you proceed to execute an outsourcing agreement with your preferred service provider.
It is critical to articulate your organisation’s objectives for the transaction and obtain a broad management consensus in support of them. Are you outsourcing to cut costs? To facilitate organisational change? To free up resources? If there are multiple reasons, consider which are the real drivers and what the relationships are among them? The answers to these questions will help you identify the key issues you will need to address and develop appropriate responses to them.
Does your organisation have a clear understanding of the:
All too often companies that outsource start the process without first having gathered this critical information and inevitably they are disadvantaged as a result. In our experience, organisations that can describe their objectives, outline the scope, identify the service level metrics and accumulating service level data, and determine their own base costs are in a much stronger place to structure a transaction that will deliver the organisation’s anticipated benefits and savings.
We understand that running a competitive procurement process requires an organisation to commit significant time, resource and effort to an outsourcing project and in the face of this upfront commitment “sole-sourcing”, i.e. selecting one service provider at the outset and negotiating directly with them, appears attractive and economical. The reality is that sole-sourcing delivers a false economy and in our experience sole-sourcing actually takes longer, costs more money and produces a less favourable result for the organisation that is looking to outsource, compared to a competitive process. We firmly believe that an organisation can use the procurement process to significantly reduce the time and cost required to execute a contract that better protects the organisation’s interests as illustrated in the diagram below.
Diagram 1: Mitigating risk through effective procurement
To put it simply, an organisation has much greater leverage to negotiate legal and commercial terms before it down-selects to one service provider and doing so enables the organisation to get to contract signature on its terms in a faster period of time than seeking to negotiate legal and commercial terms when there is only one service provider left in the race. In making a decision to run a competitive procurement, it is important to recognise that in an outsourcing transaction, price, scope, service levels, and risk are all integrally related and for a competitive procurement to be successful it must address each of these aspects of the transaction by way of reasonably detailed contract terms (including clear agreement on scope and service levels) and not simply focus on price.
In conclusion, for outsourcing to deliver the benefits and savings your organisation requires, it pays to take time at the outset to consider your organisation’s objectives, scope, service levels and cost base and to effectively utilise the procurement process to maximise your leverage in negotiating the best deal for your organisation. At Latham & Watkins we have decades of experience in assisting organisations in the Middle East, Asia, Africa, Europe and the US in taking first steps into outsourcing and renegotiating existing outsourcing transactions. If you require further guidance and whitepapers on this topic, please do not hesitate to contact Andrew Moyle or Brian Meenagh.
In 2015, Egypt issued its unified Electricity Law no. (87), paving the way for market liberalisation of its power generation and distribution services. A few months on from its introduction, what are some of the key takeaways?
The Electricity Law has promised to reform the electricity market and allow for private sector participation (both locals and foreign entities) by introducing a simple licensing regime. With a transitional timeframe of 8 years granted, the Egyptian Electricity Transmission Company (EETC), which currently exercises market monopoly over power transmission and operation of the grid, is expected to restructure to adopt to a far more competitive environment. The government has obliged EETC to provide equal third-party access to the national grid yet will retain control of network charges.
As part of the reforms, two distinct power markets have been created; a competitive market consisting of wholesale and competitive retail and a regulated retail market. Whilst full market liberalisation is not anticipated at this stage, it is expected that the government will increasingly scale back the scope of the regulated market to eventually achieve full market liberalisation. The law has also unbundled the electricity business chain (i.e. generation, distribution, grid operator, market operator, authorised suppliers and qualified consumers) to provide the private sector with more opportunities to participate in Egypt’s electricity market.
Proactive on Pricing Regulation
The Egyptian Electric Utility & Consumer Protection Agency (ERA) will now be taking a more active role in pricing regulation under revised law. No longer solely a monitoring function, ERA is tasked with defining the appropriate rules and economic basis for the calculation of power tariffs to non-qualified consumers, calculating power exchange prices in the regulated market and determining consideration for the use of transmission and distribution networks.
Transitioning to a Liberalised Market
The Electricity Law has also granted more powers and autonomy to EETC, formalising its natural autonomy and consequently reducing Egyptian Electricity Holding Company’s (EEHC) control over the electricity utility. The law now stipulates that EETC exclusively undertakes grid operation and electricity transmission services and is responsible for defining commerce and settlement in collaboration with other utility participants. Notably, EETC has been tasked with ensuring no preferential arrangements occur between any of the producers or consumers and to promote efficiency and competition in power sale and purchase. EETC will be required to step-up its role in securing the power supply needed for the regulated market by purchasing it from generating companies.
EETC has 8 years to restructure and become compliant with the law and 3 years to conduct necessary grid capacity and expansion studies. With EETC taking a more active and independent role in the future of Egypt’s electricity market, the EEHC will also need to adapt to a more liberalised market. It is unclear at this stage whether EEHC will opt to operate as a private sector corporation or whether existing state-owned generation assets will be privatised.
To read more about Egypt’s Electricity Law, download the full guide: The New Electricity Law Explained
On October 26, 2015, Raja Al Mazrouei, the Commissioner for Data Protection for the Dubai International Financial Centre (the DIFC), issued guidance on the adequacy of US Safe Harbor for the purpose of exporting personal data from the DIFC. The guidance is significant for organisations that transfer personal data from the DIFC to the US and such organisations should urgently review the basis upon which they transfer personal data from the DIFC to the US to ensure that they continue to comply with the DIFC Data Protection Law (No 1 of 2007).
The guidance follows the decision of the European Court of Justice (the ECJ) in Case C-362/14 – Maximillian Schrems v Data Protection Commissioner that Decision 2000/520 of the European Commission, which stated that Safe Harbor-certified US companies provide adequate protection for personal data transferred to them from the EU (the Safe Harbor Adequacy Decision), is invalid.
The key message from the guidance is that:
“the invalidation of the Adequacy Decision by the ECJ provides cause for the Commissioner to reconsider the adequacy status previously afforded under the Law to US Safe Harbor Recipients. However, the Commissioner also understands that there are ongoing negotiations between Europe and US authorities towards an improved Safe Harbor framework and that these negotiations are well advanced. Continue Reading
On 15 June 2015, the Abu Dhabi Global Market (Global Market), Abu Dhabi’s financial free zone, published the following six new regulations concerning the regulation of non-financial services in the Global Market:
– Application of English Law Regulations;
– Companies Regulations;
– Operating Regulations;
– Insolvency Regulations;
– Employment Regulations; and
– Real Property Regulations.
As expected from the draft regulations issued by the Global Market earlier this year, the Global Market’s final approach in the regulations follows very closely the English law model. In particular, the Global Market applies English common law, as amended by certain English statutes, as its over-arching legal regime and a slightly modified version of the UK Companies Act (2006) as its company law regime.
On 30 June 2015, the Global Market issued draft regulations and a consultation paper covering the regulation of financial services in the Global Market. The Global Market has stated that these draft regulations are broadly modelled on the UK financial services framework and is seeking feedback on these draft regulations by 11 August 2015.
Please click here to read more about this development.
The recent showdown over renewal of certain provisions of the USA Patriot Act (often called simply the Patriot Act) and the subsequent enactment of the USA Freedom Act have raised a number of questions about the ongoing impact of these laws on data traversing or being stored in the United States. While the new law takes the NSA out of the direct business of maintaining metadata (which includes phone number called, the time and duration of the call, and location information) on all phone calls originating or terminating in the US (with a declared intent of transitioning instead to a program that will allow court-moderated access to phone company data) and reinstates provisions that enable so-called “roving wiretaps” and monitoring of “lone wolves,” it essentially leaves unchanged the underlying laws that govern the US authorities access to data stored in the cloud.
A look back at the history of the Patriot Act and then the specifics of the USA Freedom Act are helpful in evaluating the impact of recent events. First, the Patriot Act.
Rather than create new means of access to data, the Patriot Act primarily streamlined and consolidated various processes that had long been in place—processes similar to those found, it is worth noting, in the laws of many other countries. The Patriot Act made many changes to existing laws, including the Foreign Intelligence Surveillance Act of 1978 (FISA) and the Electronic Communications Privacy Act of 1986 (ECPA), with the stated intent of allowing investigators to “connect the dots” to stop terrorists. From the perspective of a non-US person using a cloud service run by an entity subject to US jurisdiction, perhaps the most significant changes made concerned various thresholds of proof or nexus to gain access to data. These changes broadened the scope of existing authority and lowered the burden on the government to show the need for access. Despite being passed in the wake of 9/11, the Patriot Act’s enactment was not without controversy and among the compromises made was the inclusion of automatic sun-set for some provisions (in the absence of Congressional reauthorization), including the changes to FISA authorizing enhanced data collection and access. These changes, in Section 215 of the Patriot Act, were largely the basis for the telephone metadata collection program disclosed by Edward Snowden, but are also relevant to access to other data. So, with the expiration of the most recent extension to Section 215, the changes it made to FISA were swept away, leaving the prior provisions of the underlying statutes in place.
As noted above, the USA Freedom Act extended the effectiveness of the otherwise sun-setting provisions of the Patriot Act, but with notable changes to the collection of phone metadata. The USA Freedom Act, which passed the House of Representatives prior to the expiration of the Patriot Act provisions it replaces, was drafted with the intent of amending and extending the expiring programs. Instead, the relevant Patriot Act provision sun-set before the Senate passed USA Freedom and, not wanting to risk passage or delay implementation of the collection programs, the Senate passed an unamended version of USA Freedom. As a result, USA Freedom does not expressly reinstate the changes made by Section 215 of the Patriot Act, but instead purports to amend the law as it was in place prior to expiration. Therefore, there is some murkiness as to exactly what the new law is, but either way, the underlying basic laws that existed prior to the Patriot Act remain essentially in place and provide for access to information (including data in cloud services) subject to various procedures and levels of review.
The broad rule under the USA Freedom Act is the same as that under the Patriot Act; the government may make requests from the private sector for the production of “tangible things” (including books, records, papers, documents, and other items) related to foreign intelligence, counterterrorism, and criminal investigations. The USA Freedom Act attempts to strengthen judicial oversight of these requests, making modest changes to the Foreign Intelligence Surveillance Court and significantly prevents the “bulk” collection of records by requiring enhanced specificity in requests. Despite a great deal of discussion in the press, the USA Freedom Act does not appear to create new duties on the private sector to comply with government requests (though the existing duties remain and are substantial). Congress did however grant new protections to the recipients of access requests, including a new right to consult with an attorney before responding to the confidential request.
In any case, with or without the changes in the USA Freedom Act—or with or without the original changes made by the Patriot Act—the US is not the only government with laws granting law enforcement access to data (including records held by cloud service providers). Indeed, other countries have such laws (or take such actions)—sometimes with less or no process and limited review. France, the United Kingdom, and Canada are among the jurisdictions with such laws, many of which have implemented changes that expand their scope. To be clear, there is no suggestion here that these laws are all the same. The salient point is that the world is full of jurisdictions with laws that afford access to records in cloud storage (not to mention jurisdictions that effectively offer no practical protection against such access). Indeed, setting aside laws and lawful government action, private data—whether stored in a shared cloud or using local storage —is likely far more at risk of unauthorized access from criminal acts and covert state actors (acting both domestically and internationally) than from judicially monitored access grounded in the USA Freedom Act.
As a result, those investigating data protection issues arising from the use of cloud services might be well advised to consider how encryption with customer-held keys might address all of these issues. While governments with jurisdiction over the cloud customer may demand access to corporate records whether they are encrypted or not, the adoption of effective, well managed encryption technology essentially eliminates concerns about other access. And, as the US Office of Personnel Management has been made painfully aware in the past weeks—encryption is something that data subjects (or at least those out for their votes) have come to expect.
New 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.
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.
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:
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.
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The 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.
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