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MEGA in MENA: Large-Scale Infrastructure Pipeline Deepens and Broadens as PPP Rules Gather Pace

The GCC is rarely known for doing anything in half-measures, and infrastructure projects – which have grown in number and size in recent years – are no exception.

Dec 4, 2018 // 3:39PM

We speak with James Simpson, Partner and Co-Chair of Winston & Strawn’s Project Finance Practice and Chris Shelton, an associate at the firm focused on energy and infrastructure projects in the MENA region, about the sectoral dynamics underpinning the GCC’s infrastructure drive over the next few years, and how new PPP laws could help attract further attention from international sponsors and investors on the region.

What is your view on the pace of growth and scale of investment into large-scale projects in the MENA region? What sectors account for the bulk of activity?

James Simpson: We have seen an uptick both the number of projects and the breadth of sectors seeing activity, particularly in large-scale power production and utilities, energy and petrochemicals, and roads.

We have seen a number of impressive large-scale solar projects in Abu Dhabi and Saudi Arabia. Abu Dhabi alone has plans to bring up to 4,000 MW online over the next few years. In Saudi Arabia, we’ve seen a number of independent water projects (IWPP) and water de-salination projects making progress. Abu Dhabi is currently developing the Taweelah Reverse Osmosis IWPP, which once completed will be the largest in the world.

We are also seeing strong activity in the petrochemicals sector, particularly in Saudi Arabia – with Saudi Aramco either participating with or leading several projects. We have also seen a number of refinery greenfield and brownfield projects in Kuwait and Oman. There are a number of conventional power projects in Qatar and Bahrain, with others being planned in the coming years.

We have also seen more activity around – and as a firm have been involved with – motorway projects in Turkey, including the award-winning Marmara Motorway Project.

Chris Shelton: Energy activity is also broadening. In addition to the rise of renewables in the region and the marginal decline of conventional gas or fuel-powered electricity production, we are starting to see more activity in nuclear energy in Egypt and Saudi Arabia. But along with the growth and rising pace of renewable energy project development, the combination of nuclear – which brings substantial supply that can’t be switched on and off easily – and renewables – which provide intermittent supply – is likely to drive demand for energy storage as well as new conventional generation plants that can ramp up production and shed load quickly as well.

From a transaction structure perspective, or in terms of structural mechanisms that are helping to make deals bankable, are we seeing any notable themes emerge from deals arranged this year?

James Simpson: We’ve seen a general preference for classic project financing structures, but what we expect to see – particularly in solar and utilities – is the rise of mini-perm structures, which will enable banks to further rationalise how they deploy their balance sheets. There have so far been less than a handful of projects with mini-perm structures in the region, and the relative scarcity of that structure in MENA is largely down to the fact that long-term liquidity was generally available from the region’s banks, at least until the oil price crash of 2013/14. This is starting to change.

In line with that, it’s also important to stress the growing prevalence of the capital markets in financing these projects, which we’ve already seen in the context of refinancing large-scale IWPPs; we think we are definitely going to see more of this, as international fixed income investors become more familiar with the region, and as banks shift their liquidity appetite towards the shorter end of the curve.

From a regulatory perspective, it’s always a delicate balance between seeing the passage of laws that generate more certainty and those that create more questions. In the GCC region, where do you think we’ve tended towards in recent years?

Chris Shelton:  Over the decade we’ve seen public-private partnership (PPP) legislation coming to the fore, helping to underpin confidence in investing in large-scale projects. Kuwait enacted its PPP law in 2008 and updated it again in 2014; Dubai enacted its PPP legislation in 2015; Qatar are currently on the cusp of enacting its PPP framework. Saudi Arabia, Bahrain and Oman do engage in PPPs but haven’t yet codified any comprehensive legislation and have instead opted to legislation in bits and pieces through decrees with relevant, though at times limited, scope. But it’s important to point out that with the exception of one project in Dubai, not many have actually been completed under these laws, meaning they remain relatively untested. For the moment, it’s less a question of whether they create certainty or additional headaches, and more the fact that we haven’t seen a true test of how robust many of these frameworks actually are.

Saudi Arabia among others are looking to further formalise PPP laws into one coherent set of rules, and we think this will certainly help create more certainty for investors – and help attract international participants and sponsors to projects in the region. The real question is: When is are these laws going to be developed and passed? And once they do, will they be utilised – or will they simply fall by the wayside? It really comes down to implementation and modelling off best-practice.

James Simpson: Additionally, in countries like Oman and Saudi Arabia in particular, we are seeing greater emphasis being placed on privatisation, especially though not exclusively in the power sector – so the sets of laws pertaining thereto will start to come sharply into focus in the coming years, there and potentially elsewhere in the GCC

That said, cross-border regulatory harmonisation has for years been a theme across the GCC. On the tax and bankruptcy law front, are we finally starting to see greater harmonisation across these countries? How would harmonisation impact investment into the region’s mega-projects?

Chris Shelton: Harmonisation certainly breeds greater confidence from international lenders and sponsors, particularly first-time entrants into the region, and we have seen more international companies set up in Dubai in search of inbound investment opportunities within the GCC. Greater harmonisation therefore also leads to greater competition in various sectors, which will lead to reduction in costs for businesses, the cost of funding, and ultimately the prices consumers pay – whether in education, healthcare, energy and other groups.

It will also create more certainty and ease for legal advisers and specialists working on large-scale projects, who would be more readily able to transport case studies across jurisdictions in their bid to solve project challenges.

James Simpson: PPP laws certainly fit into this category – and we think you will start to see consistent elements across all of the frameworks being developed in the GCC countries, as we have seen in other parts of the world – in Latin America, Europe and southern Africa, for instance. While large-scale projects differ from cross-border mergers or similar cross-border transactions in that assets tend to be firmly based in one jurisdiction, I do think that when it comes to attracting international investors and project sponsors, commonality is important.

Winston & Strawn has advised on some notable transactions in the Middle East this year. Is there one that stands out for you – either in terms of personal or professional satisfaction, or in terms of having to overcome key challenges?

James Simpson: The Phase II expansion of a large downstream refinery complex operated by Rabigh Refining and Petrochemical Company – also known as Petro Rabigh, a joint venture between Saudi Aramco and Japan’s Sumitomo Chemical is definitely a highlight for both myself and the rest of the team working on this. The project is going to create thousands of new jobs and add significant refining capabilities for the company and the Country, further anchoring the company’s strategic importance. We hope to be able to share more details about the development in the coming months.

Macro Middle East CEE & Turkey Energy Projects & Infrastructure Deals Policy & Government

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