On 2 December 2010 FIFA, the international governing body of football, officially announced that a desert state would be hosting the 2022 World Cup. Qatar, a country with a population of only 1.6 million people, endures average daytime temperatures in excess of 40°C in June and July. How will the players cope?
The bid chairman, and sixth son of the current Emir of Qatar, Sheikh Mohammed bin Hamad bin Khalifa Al Thani was unruffled: ‘We will have to take the help of technology to counter the harsh weather. We have already set in motion the process.’
He wasn’t kidding. With Qatar announcing plans to invest a few million dollars in a fleet of artificial clouds to project a cool shade over stadia, there is no doubting Qatar’s commitment to creating a first class World Cup. But it’s not the only country spending its petrodollars. The volume of Middle East project finance rose by 18% to $32.7bn in 2010, according to Dealogic’s latest league tables. Deal volume in Saudi Arabia alone reached $25.9bn, with the Ras Az Zawr Aluminum Project accounting for around $7.5bn of that total.
Baker & McKenzie advised the joint venture of Saudi Arabian Mining Company (Ma’aden) and Alcoa on the Ras Az Zawr project. ‘The Saudi government’s decision to create a third pillar of the economy through the establishment of a minerals sector has been enormously successful,’ says Michael Webster, London-based global transport and infrastructure head at Baker & McKenzie. ‘From a standing start, mining will stand shoulder-to-shoulder with the country’s oil and gas and petrochemical sectors.’ Under the Saudi government’s economic stimulus package, $385bn has been allocated for infrastructure development up to 2014, and a significant proportion of this will be spent on public private partnership (PPP) projects. The push to diversify economies is driving infrastructure spending in the Middle East, and as regional populations swell and sweeping unrest places living standards at the heart of the political agenda, the race is on to build and build.
Empowering the private sector
Law firms have been heralding the death of the domestic private finance initiative (PFI) or public private partnership (PPP) for years, and certainly the statistics show that domestic PPP is on the decline. Growth in the UK facilities management market slowed to just 1% in 2010, according to the UK Facilities Management Market Development report from Market & Business Development (MBD). The total value of the market last year was £118.8bn. But it’s not all bad news for projects lawyers; the export of PPP products abroad, particularly to the Middle East, is proving to be a lucrative market.
‘There is an increased interest in, and use of, “PPP” structures in the region for social infrastructure such as hospitals, schools and large-scale housing projects,’ says James Elwen, head of McGrigors’ new Qatar office. ‘This is a technology developed in the West and presents a significant opportunity for investors, advisers and developers who are experienced in PPP projects to build successful businesses in the region.’
Bahrain is already using the model to structure projects. In February Dominic Harvey, head of Middle East project finance for Norton Rose, was involved in advising the Ministry of Finance, Bahrain, on the country’s first wastewater treatment plant procured on a PPP basis. ‘The main driver behind the growth of project finance has been the need for social infrastructure to service a growing population and people moving to the region,’ he says.
PPP is an attractive method of procurement for these projects not just because it spreads risk, which is of less importance to cash-rich states, but because it encourages private sector involvement in the economy.
‘Abu Dhabi announced that it will be looking at PPP going forward,’ says Stijn Janssen, tax partner and head of Loyens & Loeff’s Dubai office. ‘And I wouldn’t be surprised if even in Qatar there will be more PPPs.’
With a veritable abundance of natural reserves, Abu Dhabi and Qatar can well afford to pay outright for its infrastructure requirements, but PPP provides a valuable opportunity to create a private sector, which will help to diversify regional economies away from their over-dependence on oil and gas reserves. It is also good news for the international firms in the market; in addition to being a product UK firms are familiar with, these PPP deals are largely path-finder projects and are not subject to the price constraints currently beleaguering the commoditised UK PFI market. Before the political unrest, Egypt, Libya and Kuwait were all looking at initiating PPP programmes, and the Arab Spring will make fulfilling these infrastructure commitments even more important.
Throw in
Qatar’s growing financial clout and readiness to flex its political muscle (it has become a prominent peacemaker in the Middle East, mediating between Palestinian factions, as well as the government of Yemen and rebels) has lifted it firmly into the regional spotlight. Its growing relevance has made it a strong contender for the new ‘hub’ of the Middle East, and it has already become the new go-to location for law firms. In May, Baker & McKenzie became the latest firm to announce it will be opening its doors in Doha.
‘Qatar’s economy is growing at the rate of 20% a year,’ says Calvin Walker, head of the London project finance group at Baker & McKenzie. However, despite that growth, diversification remains a priority, with oil and gas accounting for more than 50% of GDP, 70% of government revenues and 85% of export earnings. Lucky then, that the ‘World Cup effect’ is already being felt.
‘The decision to award Qatar the World Cup certainly gives credibility to the region and places trust in the Middle East.’
Georges Racine, Lalive
‘The decision to award Qatar the World Cup certainly gives credibility to the region and places trust in the Middle East,’ says Georges Racine, partner at Swiss firm Lalive in Qatar. Lalive was the first law firm from the European continent licensed to offer international legal services and it has been active in the country since 2006. ‘As soon as the decision was announced, we saw an increase in activity from parties interested in conducting business in Qatar. Clients want to line up their ducks now, so that they’re already here when the tenders are announced.’
Qatar’s international profile has risen considerably since December and firms have been quick to take note. This year alone, three international firms have decided to make the move into Doha. Baker & McKenzie, Clifford Chance and McGrigors have joined a market that is already well-serviced by the traditional Middle East heavyweights of Simmons & Simmons (the first international firm to be granted a licence to open in the country), Clyde & Co, Eversheds and SNR Denton, as well as Magic Circle firm Allen & Overy and US giant Latham & Watkins. So, inevitably, the question is being asked: is there enough work to go round?
The big scramble
SNR Denton represented Qatar on its successful bid to host the World Cup and is understandably upbeat about the opportunities the event provides. ‘I predict that the millions of visitors flocking to the World Cup, even with the enormous proliferation of hotels that will be constructed here, will also be looking to stay in other areas in the region,’ says Romi Nayef, corporate finance partner in SNR Denton’s Doha office. ‘In the build-up stage alone we’ve already seen a huge increase in the number of business conferences being held here. And even before we start discussing the World Cup infrastructure needs, the National Development Strategy has targeted health, education and research as key areas of investment going forward.’
So it is not just a question of stadiums: in addition to its fundamental infrastructure requirements, Qatar currently lacks hotels, restaurants and shops. In fact, some law firm partners have suggested that they don’t think it’s possible to build the amount of accommodation needed, and that even with the ‘floating hotels’ that have been proposed, Dubai is going to be asked to pitch in. It is a mammoth undertaking.
‘Qatar winning the World Cup means that there is no choice but for the country to push ahead with an aggressive projects timetable,’ says Dominic Harvey, head of Middle East projects for Norton Rose. ‘Qatar is not the sort of country to drop the ball. So whereas before regional projects like these may have had the potential to stall, well, that just won’t happen now and that gives projects certainty, and hopefully many will be on a project finance basis. Water systems, roads, rail – all of these projects must go ahead.’
So it makes sense for the larger global law firms to queue up to take full advantage. However, it would be unfair to suggest that it will only be international firms that get a piece of the action. Qatar’s domestic firms are also eyeing the opportunities afforded by the World Cup. In fact, even the arrival of more firms to the market is being seen by some as a positive development.
‘We don’t view the international firms as competition because many of them still come to us when they need local knowledge and experience,’ says Rukhsana Khan, consultant at Qatar firm Law Offices of Gebran Majdalany. ‘So in the long run, the influx of international firms to the market is also good for us.’
‘In the build up to the World Cup we’ve seen a huge increase in the number of business conferences being held here.’
Romi Nayef, SNR Denton
Khan also points out that the World Cup could potentially lend a helping hand to the country’s litigation framework, particularly with regard to the development of its alternative dispute resolution (ADR) laws.
‘The Qatar Financial Centre (QFC) Court is keen to increase ADR and is looking at ways to support it,’ says Khan. ‘There will be a lot of projects on the go in the lead up to 2022, so mediation will become an important tool. With a hard and fast project deadline, you can’t afford to be spending years in court.’
Firms based outside Qatar are also confident of seeing the work disperse throughout the region. Sadiq Jafar, managing partner of UAE firm Hadef & Partners’ Dubai office, believes that Dubai is set to benefit significantly by virtue of being the region’s leading hub for logistics and trade. ‘Demand for services during construction will be a boon to the UAE,’ says Jafar. ‘Moreover, substantial hardware will be sourced from or through the UAE or will arrive in Qatar via UAE ports. During the lead up to the tournament, and during the tournament itself, there will undoubtedly be 100% occupancy in the UAE’s hospitality industry and great demand for its airlines.’
It’s win-win for Qatar and its Gulf neighbours. But while Qatar’s infrastructure boom is in the ascendant, Saudi Arabia continues to lead the way on project finance in the region.
Arabian might
Oil-rich Saudi Arabia’s ambitions are immense. ‘The density of project finance across the region is so deep that most firms will get a slice of the pie,’ says Dr Habib Al Mulla, founder and executive chairman of UAE firm Habib Al Mulla & Co. ‘Saudi Arabia alone is going to spend $90bn in the next five years; there is no doubt that its neighbours will have to get involved.’
While it is the richest country in the region, with a GDP of $622.5bn in 2010, Saudi Arabia does have its problems. The country houses six million foreign workers and is attempting to reduce unemployment among its own population through initiatives such as the opening of the King Abdullah University of Science and Technology and the establishment of its six economic cities. While some of these projects have been scheduled for some time, their sheer size and scale has affected delivery times. However, the recent regional unrest is making poverty-busting infrastructure projects a priority again.
‘We expect nuclear to be a big trend going forward. Power capacity in the UAE is expected to double in the next decade.’
Neil Donoghue, Baker & McKenzie
‘The Saudi government realises that they have been largely insulated from the regional crisis,’ says Ali Abedi, finance partner at Saudi firm Hatem Abbas Ghazzawi & Co. ‘But they still want to take steps to ensure that the economy continues to grow and benefit the population by building projects to boost employment, and by focusing on research and technology to create an educated workforce.’
Hatem Abbas Ghazzawi has particular experience in the area, often being chosen to provide local knowledge on big deals. Most notably the firm recently acted alongside Shearman & Sterling to advise Alcoa on its joint venture with Ma’aden to construct the Ras Az Zawr project. Significantly, the fact that international law firms need a local partner in Saudi Arabia before they can practise on the ground has not been a substantial barrier to entry. Allen & Overy, Clifford Chance, Baker & McKenzie and Trowers & Hamlins are among the firms with presence and power, and infrastructure projects continue to roll in. If anything, the market could be seen as mature, whereas Abu Dhabi continues to grow.
Plan A
Famously the Emirate that was forced to put its hands into its deep pockets and bail out Dubai during its financial crisis, Abu Dhabi may not have a World Cup, but what it does have is a plan. Under ‘Plan Abu Dhabi 2030: Urban Structure Framework’, everything from mixed housing to culture (including ‘a new Louvre museum’) through to transport and tourism has been designed to cope with the needs of a growing population. Fortune and CNN recently stated that Abu Dhabi is the richest city in the world, so it can certainly afford to see the plan through. But is its vision to become another world class hub achievable in what is becoming a region of hubs?
‘Dubai may have a head start, but Abu Dhabi has the will,’ says Doug Peel, executive partner at White & Case’s Abu Dhabi office. The firm knows the UAE inside out and is currently involved in a $2.5bn power project financing for a water and power project in Fujairah, another UAE Emirate. ‘Its cultural development alone will put the city on the map.’ And while Saudi may have a slew of headline-grabbing projects on its books, the Emirate’s ambitions aren’t to be sniffed at. Its commitment to nuclear energy alone will see it running four new Braka nuclear reactors by 2020.
‘The density of project finance across the region is so deep that most firms will get a slice of the pie.’
Dr Habib Al Mulla, Habib Al Mulla & Co
‘We expect nuclear to be a big trend going forward,’ says Neil Donoghue, joint head of Baker & McKenzie’s global oil and gas practice. ‘Power capacity in the UAE is expected to double in the next decade.’ It’s an impressive figure, and the growing regional trend of looking at alternative energy to fuel home supplies as a way of protecting export receipts will mean that it continues to be an important source of work for firms well into the next decade.
It is not just energy requirements that are driving project finance numbers up. The current tide of change sweeping across the Middle East is creating an impetus for improvement. ‘It’s not just Saudi Arabia. Even Oman has seen the importance of investing into raising living standards,’ says Husam Hourani, managing partner at regional firm Al Tamimi & Company. ‘We are slowly seeing tender invitations for projects start to flood in. Public spending will be further supported by the increasing price of oil.’
There is no doubt that by the time the World Cup arrives in Qatar, the Middle East will be a very different place. LB