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Project Finance – Q&A – Practical Guide - UAE

What are the key difference in the legislation in the UAE and other key international jurisdiction?

In comparison with other jurisdictions, the laws regulating project financing in UAE are not stringent. The Federal Law Number 18 of 1993 concerning the Commercial Transactions Law, as amended (the Commercial Law) and the Federal Law Number 5 of 1985 concerning Civil Code, as amended (the Civil Code) govern the legalities concerning the financing of projects in the UAE. Further, Regulations and Supervision Bureau (RSB) regulates water and power/electricity projects and has set out regulations in Abu Dhabi regarding Water and Electricity project financing. Parties should obtain the prior approval of the RSB before submitting the security in water and electricity projects. Regulations and further materials and projects executed are detailed on their website and brochures. In comparison with other major countries, these laws are not too detailed. Dubai Government recently enacted Law Number 22 of 2015 to increase the level of participation of private sector in public projects (the P3 Law). Some of the key differences in project financing between the UAE and other jurisdictions are: -:

In several jurisdictions, the court or the relevant government authority of that country requires them to register a mortgage over a movable property to permit project financing. In the UAE, Federal Law Number 20 of 2016 has laid down the registration procedures for pledges of movable properties. The UAE has imposed a mandatory requirement to register the mortgage at the Land Department of the respective Emirate. It follows that depositing the title of the property in the bank at the time of initiating the financing procedures is not sufficient and parties should also adhere to the rules and regulations of the relevant Land Department.

Additionally, the prior approval of the Regulatory and Supervisory Bureau (RSB) is mandatory for the financing of water, electricity and power projects, where securities are provided to project lenders.

Are there differences in the way project finance operates in the free zones and secondary jurisdictions?

There are some procedural and regulatory differences when a project is undertaken or carried out in a free zone area. Different free zones have their regulations governing project finance. For instance, in most of the free zones, mortgages over land are not possible on account of properties being under leases. However, the Jebel Ali Free Zone Authority (JAFZA) passed Law Number 1 of 2002 concerning the lease of immovable property in JAFZA permit mortgages over buildings; but not over land.

Within the UAE, different Emirates have promulgated their local laws which govern mortgages and pledges in addition to the Commercial and Civil Codes. The Emirate of Dubai has implemented Dubai Law Number 13 of 2008 concerning the Interim Real-Estate Register, which facilitates the registration of a security interest in land (property).

Although, parties should note that governmental entities generally mandate (or prefer) mainland entities; however, this varies from each bid and project.

It is advisable to operate in the free zones rather than the mainland because of the ownership restriction in the mainland. The foreign investors can enjoy hundred (100) percent ownership in the free zone as opposed to forty-nine (49) percent in the mainland.

Do Islamic finance concepts impact the way the project finance is structured?

Islamic finance structures (and principles) have a major impact on the structuring of project financing. In the UAE, project financing is structured by numerous quasi-project finance transactions in accordance with Islamic finance principles. For instance, one of the standard forms of Islamic project finance structures for infrastructure and power projects is Ijara structure. In simple terms, Iraja means to provide goods and/ or services on a temporary or provisional basis for rental. This includes the leasing of equipment, machinery, or other capital assets. There are three types of Ijara used in Islamic financing:

simple ijara (operating lease) – this is a primary form of Ijara and the lessee does not have any obligation to purchase the property once the lease agreement terminates, ijara wa iqtina ijara muntahi bittamleek (finance lease) – In this form of Ijara, the lessee is the owner and possessor of the property during the term of the contract, and the lessor and lessee may sell or purchase the property at their discretion; and or(finance lease) – In this form of Ijara, the lessee is the owner and possessor of the property during the term of the contract, and the lessor and lessee may sell or purchase the property at their discretion; and ijara mawsoofa bil thimma (forward lease) – this form of ijara is a mix in the principles of a general leasing contract and Istisna. Istisna is a traditional Islamic construction financing technique that is used in the UAE whereby the lessee purchases the property (generally a constructed project) at the end of the contract period.

Similarly, Islamic financing structures such as Murabaha are also used in the UAE. Murabaha is a contract of sale in which case a bank purchases an item from a client and then sells it to them in installments at a cost including a profit margin. The murabaha form of financing is similar to ijara wa iqtina, and the party would retain ownership of the property until the end of the contract. In simple terms, the buyer purchases the property from a party for a fixed price and sells it back to the same party over a pre-determined period. In this form of financing, the buyer charges a fixed fee to the seller instead of any interest for purchasing and re-selling the property. Under Islamic finance principals, financiers are encouraged to become partners in the project to divide profits as well as losses and risks.

What types of collateral can be used?

In the United Arab Emirates, the most common securities include assignments over contracts and receivables, mortgages over immovable property, commercial mortgage, pledges over moveables, pledges over shares and pledge over bank accounts and deposits, performance undertakings, corporate guarantees and personal guarantees of parent companies and shareholders. Assignments over contracts and receivables, which involve the transfer of rights from one person to another, are used as securities for financing agreements. As for pledges of shares and bank accounts, companies can pledge their shares with lenders by providing the shares in exchange for loans from banks. The Central Bank of UAE and the Securities and Commodities Authority (SCA) regulates securities in the United Arab Emirates. Federal Law Number 20 of 2016 has allowed product stocks to be securitized which has brought more security to financing transactions.

How do creditors assure themselves?

A secured creditor has priority over other creditors at the time of liquidation or insolvency of a company. To safeguard its interest, the creditor must perfect the security, where applicable, by way of registration in the official records. Security documents allow creditors to take possession of an asset and they also permit the enforcement a property. These can also be achieved by way of a court order. The court process is often laborious and tedious.

Outside bankruptcy/ insolvency procedures, how can a project lender enforce their rights as a secured creditor?

The lender of the project is expected to be involved in the project more closely. There is one self-help method through which the project lender can enforce their rights which is by discussing their interest with the relevant stakeholders to ascertain the position. The lender should ensure the real value of the security, as in some cases it is hidden in the underlying assets mentioned in the concession agreement.

Are there preferences periods or clawback rights, creditor rights which can impact collateral?

At the time of structuring the documentation for a particular project, the creditor can ensure that the terms of the project loan and the security agreements entered into between the parties shall include preferential rights and entitlements in favor of the creditor, including clawback dividends, etc..

What procedures other than court procedures can be used to seize project company assets?

The standard procedure to seize project company assets is through court procedures. The parties cannot use any other procedures to seize these assets. The secured assets will be sold at public auctions to redeem the outstanding amounts.

Is there any relevant tax, fee or foreign currency restrictions which can impact project finance?

Though the country has implemented Value Added Tax (VAT), it is not applicable to transfer or conversion of foreign currency.

What are the rules governing how project companies can maintain foreign currency accounts locally and outside the jurisdiction?

UAE law does not impose any restrictions for operating or maintaining foreign currency accounts inside or outside the UAE. However, the country might oppose or impose sanctions for receiving and sending money to certain countries due to political reasons.

How does repatriation of foreign earnings work?

The UAE laws have not provided for any procedure with regards to the repatriation of foreign earnings, and thus, there are no restrictions for the same.

Does any financing and project documentation need to be registered with authorities - if so who?

In the case of water and electricity projects, the documents pertaining to the project finance should be registered in Regulatory and Supervisory Bureau (RSB) for projects in Abu Dhabi to obtain the necessary approval to create securities in favor of lenders. Mortgages over movable and immovable properties are required to be registered with the concerned authority. The parties would first have to file a request for mortgage application at the Land Department of the relevant Emirate along with all the requisite documents. The Land Department would also charge a registration fee, depending on the type of mortgage and the regulations of the Land Department. For instance, the Dubai Land Department charges 0.25% of the mortgage value plus UAE Dirhams two hundred and fifty (AED 250) plus UAE Dirhams four thousand (AED 4,000) and a knowledge fee of UAE Dirhams ten (AED 10) for a registering a mortgage of real property. However, the charges and documentation vary depending on the type of property, type of mortgage and the regulations of the respective Land Department authority. Decree Number 31 of 2016 concerning Mortgage of Granted Land in the Emirate of Dubai permits beneficiaries to mortgage land after meeting the below-mentioned criteria: -

The land should be mortgaged to invest the loan amount in developing the property; The amount obtained from mortgaging granted residential land should be used for maintaining, expanding, constructing or reconstructing an existing residential building; The mortgage should be registered with the land department in accordance with Law Number 14 of 2008; and Any other criteria or conditions laid down by the Mohammed Bin Rashid Housing Establishment or Dubai Land Department.

In regard to movable assets, pursuant to UAE Federal Law Number 20 of 2016 on mortgaging of movable assets as security for debts, any security created over movable assets before its date of its entrance must be enlisted in the security register provided that it is done within one year of such date of entry and sufficient evidence was furnished with regards to such security.

Are government or government agency approvals needed for project finance transactions?

The parties should obtain the approvals of respective government agencies’ are required for project finance transactions in the United Arab Emirates. The relevant ministry will differ based on the type of activity concerned. For instance, for water and electricity projects, the approval of the Regulatory and Supervisory Bureau is required. Non-objection certificates are required for the construction of entrances and exist on roads as stated by the Ministry of Infrastructure Development. The parties may also have to obtain approvals from the Federal Environmental Agency, the Environment Agency – Abu Dhabi for projects that may affect the local environment of the locality or area. Most of the projects also require approval or no-objection certificate from the particular municipality of the Emirate. However, most of these approvals focus on the project itself rather than the financing structures of the project.

Are any incentives provided to foreign investors?

Incentives are provided to foreign investors in the United Arab Emirates. The United Arab Emirates’ regulations offer foreign investors the right to fully own property, the right to be the partners in a company, tax-free initiatives, and investment opportunities in oil, gas and other hydrocarbons.

Which jurisdiction's laws typically cover project agreements?

Project agreements will typically be covered by the United Arab Emirates’ law, the law of the Emirate in which the project is located or any foreign law with international arbitration options.

Which arbitration bodies are typically cited in project agreements?

There are various arbitration centres in the UAE such as the Dubai International Arbitration Centre (DIAC), Abu Dhabi Commercial Conciliation & Arbitration Centre (ADCCAC) and DIFC-LCIA where companies may refer their disputes.The International Chamber of Commerce (ICC) is the arbitration body typically cited in project agreements in the United Arab Emirates.

What are the typical structures of project companies?

The type of corporate structure of project companies depends upon the requirement of the parent entities and the length (or period) of the project. Typically, joint ventures and SPV structures in the form of a limited liability company or joint stock company is a preferred structure in the UAE.

Originally published by STA Law Firm on Lexis Middle East Law Alert