Middle East - Vinson & Elkins

Middle East Legal Insights September 2012

Saudi Arabia’s New Arbitration Law (2012) The Council of Ministers of the Kingdom of Saudi Arabia recently approved a new arbitration law (the “2012 Law”). The law, which is generally based on the UNCITRAL Model Law, came into effect on 8 August 2012 and replaces Saudi Arabia’s previous arbitration law (the “1983 Law”). The new law is forward thinking — it embraces national and international arbitration proceedings, provides for rules governing arbitration proceedings in Saudi Arabia, and deals with the enforcement of foreign arbitral awards.

1. The Arbitration Agreement The 2012 Law provides guidelines on how notification of the parties should be carried out (i.e. by mail or as provided in the agreement). The arbitration agreement itself must be in writing, but this requirement can be satisfied by an exchange of correspondence or by reference to another agreement which includes an arbitration clause. Government departments cannot agree to an arbitration clause in a contract unless prior approval is given by the Cabinet of Ministers, or inclusion of such clause is authorized by existing law.

Challenges against arbitrators can only be made in narrow circumstances and within five days to the tribunal.

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2. Arbitrators Qualifications and Appointments Under the 1983 Law, arbitrators were required to be experienced, of good conduct, and reputation and have full legal capacity (i.e. be male adults and of the Islamic faith). The 2012 Law is silent as to gender, nationality, and religion. However, arbitrators must be adults, of good conduct, and hold a degree in Shari’a science or law. Unsurprisingly, they must inform the parties of any conflicts of interest (this is an ongoing requirement) and remain impartial throughout the proceedings. The selection process for cases involving multiple arbitrators is similar to most institutional rules: each party nominates an arbitrator and the two then appoint a chairperson. If the two cannot agree, the Court will appoint the chairperson. Challenges against arbitrators can only be made in narrow circumstances and within five days to the tribunal.

INSIDE THIS ISSUE: 1 Saudi Arabia’s New Arbitration Law (2012)

3 East Africa — A Vast Potential for Investment

7 Islamic Syndicated Financing: An Underdeveloped Method of Shari’a-Compliant Financing

13 Liquidity and Secondary Markets in Islamic Finance

16 Has the New Dawn of Solar Finally Arrived in the Middle East?

19 Dubai Cares Honors Vinson & Elkins for Pro Bono Work

Interestingly, the 2012 Law requires the parties to enter into a contract with the arbitrator(s) regarding his/her fees and terms. If no agreement is reached, the Court will decide those points.

3. Jurisdiction and Law The 1983 Law required the Court to act as a supervisory authority in all arbitrations conducted under the Saudi rules. This had the potential to undermine the privacy of arbitration proceedings,

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and usurp the arbitrators’ powers. Under the 2012 Law, the Court’s supervisory role is removed (as is the case with most modern systems), and the Courts have no jurisdiction to hear a matter that the parties have agreed to refer to arbitration. However, the Courts will (unless the parties agree otherwise) have the power to grant urgent provisional measures, before, during or after the arbitration. The 2012 Law embraces the doctrine of competence-competence — it allows the arbitrators to decide on their own jurisdiction and on whether there is a valid arbitration agreement or if it is wide enough to include the scope of the dispute. The 2012 Law also gives regard to the doctrine of separability in that the arbitration agreement is considered independent of the principal agreement and that the invalidity of that agreement will not invalidate the arbitration agreement. The 2012 Law allows the parties to choose the substantive law and provides that the arbitrators are bound to apply that law, even if it is not Saudi law. However, parties should ensure that the chosen law does not affront the Islamic principles of Shari’a, as this may adversely affect the enforceability of the award in Saudi Arabia.

4. Procedural Rules Under the 2012 Law, the parties are free to agree which particular rules to apply, including (for example) rules of international organizations such as the ICC, LICA, and IBA. However, the rules must not be contrary to Shari’a law. In the event the parties cannot agree on the applicable rules, the 2012 Law prescribes guidelines for the conduct of the proceedings, or the arbitrators may decide the applicable procedures. Note also that the 2012 Law allows a case to proceed in the absence of one of the parties. The 2012 Law enables the arbitrators to ask a relevant authority for help in the arbitration process (e.g. summoning a witness or ordering the production of documents). Again, this accords with most modern arbitration laws where arbitrators lack coercive powers and local Courts can assist but not undermine the independence of the arbitral process.

The clarity of the new law should afford users with greater confidence and understanding when commencing or participating in arbitration proceedings in Saudi Arabia.

Awards must now be issued within 12 months from when the arbitration commenced. However, this can be extended by six months. This is more pragmatic than the 90-day period under the 1983 Law. The award itself must be in writing, state the date of the award, place of issue, summary of arguments, and other relevant information. A party seeking to challenge an award must do so within 60 days of it being served; it cannot challenge the award when the successful party seeks enforcement. The grounds for challenging an award are limited, but are similar to those contained in the New York Convention and the UNCITRAL Model Law. However, as noted elsewhere, an award that affronts the fundamental principles of Shari’a or is contrary to Saudi public policy is open to challenge. Unlike the 1983 Law, the 2012 Law provides that the Court, where enforcement is sought (i.e. The Board of Grievances in Riyadh), may not examine the merits of the case. However, the Court will consider the award to ensure it does not contradict a previous judgment, that it does not violate Shari’a law and public order, and that it has been served on the other party. As for recognizing and enforcing foreign awards, the 2012 Law requires, among other things, an original copy of the award, an Arabic translation (duly notarized), copies of the arbitration agreement, and proof the award was filed.

Conclusion

The 2012 Law is an improvement on the 1983 Law and brings arbitration in the Kingdom into line with modern international commercial practices. The clarity of the new law should afford users with greater confidence and understanding when commencing or participating in arbitration proceedings in Saudi Arabia. However, parties considering arbitration in Saudi Arabia 5. The Award should also be cognizant of the need for compliance with local In reaching their decision, the 2012 Law requires that the arbitrators laws and Shari’a law. That said, the 2012 Law represents an must take into consideration the Islamic principles of public policy admirable step forward for commercial law in Saudi Arabia and of Saudi Arabia, the law and procedure chosen by the parties, and should be applauded. the best principles of custom and usage and the common practice applicable to the nature of the transaction at issue. The Court will assist the arbitrators in making a decision if they cannot agree on John Zadkovich is an associate in Vinson & Elkins’ London office a final award. and a member of the firm’s International Dispute Resolution practice. Unlike the 1983 Law, the 2012 Law allows the parties to choose the language of the proceedings — it no longer needs to be conducted in Arabic. However, if the award is to be enforced in Saudi Arabia, it must be in Arabic.

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East Africa – A Vast Potential for Investment It is widely acknowledged that, following the Arab Spring, the need for infrastructure investment in North Africa is of paramount importance, with commentators earmarking the power and renewable energy sectors as key growth areas. The main hurdle new governments in this region will have to overcome is defining what is economically achievable in light of the infrastructure redevelopment needs in such countries, especially where political risk is a concern for international companies and financial institutions considering investing in North Africa. Acknowledging the well documented challenges which North Africa faces, how are other countries in Africa, in particular those situated in East Africa, faring in the current climate? In energy terms, East Africa has historically been viewed as somewhat insignificant, although recent discoveries of oil in Kenya and gas fields offshore Tanzania and Mozambique mean this label is no longer applicable. While there are a number of unique obstacles for sponsors and financial institutions to navigate, East Africa — Kenya, Tanzania, and Mozambique in particular — holds much promise for future growth and cannot be ignored by potential investors in light of these natural resource discoveries and the fact that many areas are yet to be explored. For a number of years, India and China have increasingly looked to Africa in order to obtain mineral and resource deposits to fuel their growing economies. Obtaining these resources is not an easy task. Finding resource deposits is, of course, the first challenge, but once located, there are additional hurdles to overcome, including problems with infrastructure and power generation which can hinder progress in bringing the minerals or resources to market. The demand for electricity exceeds supply in many African countries and accordingly new power generation capacity is top of the agenda for many countries going forward.

PPP Model One way in which power generation capacity can be increased is via private investment by experienced international companies in the electricity sector. The first question any government needs to answer is what level of private sector involvement do they wish to see, since this will ultimately influence the model they adopt. This often becomes a discussion between the merits of direct procurement versus the Public-Private Partnership (PPP) model as a form of public procurement. Direct procurement can be expensive as the government will need access to a sufficient pool of capital in order to be able to pay for the entire project. It is often not a viable option for the government to reconcile all of the competing demands on the public purse. PPPs are frequently used as a means to accomplish national infrastructure delivery in these instances. By using project finance, a government can develop its country’s economy and infrastructure at limited cost, thereby reducing up-front public expenditure. Governmental resources can then be channelled elsewhere. Often times, technical expertise related to these projects is imported from overseas, resulting in a “technology or knowledge transfer” to the domestic workforce as local employees are trained in new skills by people with a wealth of industry experience in their particular field.


PPPs can often enhance services more efficiently than a country’s public sector would otherwise be able to do. However, they will only be able to succeed and thrive in a country if there is a comprehensive legal and regulatory framework in place, as well as stability and commitment from the government. This is vital if delays in project delivery are to be avoided. The historic lack of stability in East African countries means that PPPs are still in their infancy in this region, but, as discussed below, this situation is changing and international investors are now closely watching regional developments. It is also crucial that the PPP tendering processes are clear and are adhered to. Ultimately, the PPP project needs to be properly structured as private sector participants and financiers will not be interested if the structure is not achievable. For many countries, the solution lies in the government’s ability to integrate PPP within a broader investment budgeting strategy, in which capital investment in projects where PPP could be better value for money becomes a priority. This article focuses on Kenya, Tanzania, and Mozambique, as they have each demonstrated a commitment to PPP through enacting, or plans to enact, PPP legislation. Kenya and Tanzania have also outlined long-term national development plans identifying specific projects which will need to be undertaken to ensure their visions become a reality.

Kenya Kenya recognizes that it needs to improve its transport and social infrastructure and has identified PPP as a means of achieving this objective. It released a Kenya Vision 2030 plan (Vision 2030)1 in 2007 for national development, in which development of a policy on PPPs was called out. Vision 2030 identifies a pipeline of flagship projects, including the dredging of Mombasa Port and the development of Lamu Port and the New Transport Corridor Development to Southern Sudan and Ethiopia (LAPSSET). Also planned is the energy generation of 23,000 MW which will comprise numerous projects ranging from geothermal power plants and coal fired plants to wind and solar plants and will mobilize private sector capital for the generation of electricity. A new PPP law was approved by the Kenyan cabinet in December 2011 and it is hoped that this will become law by the end of 2012. The need to improve transport links in particular has become all the more apparent following the financial close of the MombasaKampala Rail Link (Kenya-Uganda Railway) in 2011. Transport prices in East Africa are among some of the highest in the world due to the dependence on trucks and the poor condition of the roads. It is estimated that only eight percent of goods are currently transported by rail. Renovation of the 2,350km rail track from Mombasa Port in Kenya to Kampala in Uganda is key, as this rail line is regarded as critical infrastructure that will herald much needed economic regeneration in both countries, encouraging cross-border trade and investment. Financing for the project was provided by a number of multilaterals and development finance institutions, as well as one commercial lender, with the International Financial Corporation (IFC) playing a key role in ensuring the project reached financial completion. Brazilian rail company, America Latina Logistics, served as technical adviser on the project. This successful execution of a project involving

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international companies with the wealth of experience in their particular fields will play a key role in upgrading East Africa’s infrastructure needs and, possibly, provide additional comfort to potential investors keeping an eye on the region. Some important and encouraging developments are described below. In August 2012, Infrastructure Journal reported that the EU has approved a finance package of US$39.5 million to support new transport infrastructure in Kenya as part of the Tenth European Development Fund (EDF). The Tenth EDF covers the period from 2008-2013 and these funds form part of the €400 million which the EU has set aside for Kenya during this period. This grant will be utilized to finance new transport infrastructure, including the improvement of rural roads, with the aim of facilitating Kenyan exports and contributing to job creation. Under the EU Rural Roads Rehabilitation Project the target is the construction of 4,000km of roads and maintenance across an area of 38,000 square kilometers in Kenya, with 11,000 jobs expected to be created over five years. In addition, the EU will finance the €12.1 million “Standards and Market Access Programme” to increase the volume, diversity, and competitiveness of Kenyan exports. This project aims to improve the country’s food safety standards and regulations for Kenyan plant and animal-based products. On the energy side, financial close on the 300MW Lake Turkana wind project (comprising 365 wind turbines in the Lake Turkana region) is expected to be achieved in the next few months. The developer, Lake Turkana Wind Power, signed a 20-year Power Purchase Agreement with Kenya Power in 2010 and the project is understood to be the largest single private investment in Kenya’s history. The first phase of the project is said to include the construction of over 200km of roads to transport the relevant materials from Mombasa to Turkana. The Kenyan government has reportedly agreed to provide a letter of comfort in order to facilitate the financing. In March 2012, Tullow Oil reported that it had struck oil at the Ngamia-1 exploration well in Kenya, the first oil discovery ever in the country and a significant and exciting breakthrough which further highlights the growing role East Africa will play in the supply of energy resources. Although it is early days for project finance in Kenya, this country is definitely one to watch given the pipeline of projects identified in Vision 2030. The Kenyan market will truly begin to flourish once the new PPP legislation is enacted (and any conflicts or overlaps with existing laws are addressed), the procurement process is developed and the various roles played by Kenyan agencies in the PPP process are clarified. The development of the domestic finance market in Nairobi will also be important if investors are to be able to raise some of the financing locally in Kenya. The private sector will only enter into PPPs once the environment is conducive.

Tanzania Tanzania is striving to reduce poverty by 2025, modernize agriculture and develop its economy as outlined in its Tanzania National Development Vision 2025 (Vision 2025). The three principal objectives of Vision 2025 comprise: achieving quality and good life for all; good governance and the rule of law; and building a strong and resilient economy that can effectively


withstand global competition. The Tanzanian government recognizes that PPP is a way of achieving these ambitions and established a PPP law in 2010. The 2010 PPP Act set up a coordination unit to examine and assess all planned PPP projects and affiliated matters. One project which has been proposed is the US$5.3 billion East Africa Rail project linking Dar es Salaam port in Tanzania to Burundi and Rwanda. In March 2012, Canarail was awarded a contract to carry out a study on the second phase of the East African Rail project to determine the best PPP model. The study is being funded by the AfDB and the Rwanda Transport Development Agency, which represents the transport ministries of Rwanda, Burundi, and Tanzania. It is expected that the study will be completed in 2013. Additionally, the World Bank has established a Transport Sector Support Project (TSSP) for Tanzania, whose mission is to improve the condition of the national paved road network, to lower transport cost on selected roads and to expand the capacity of selected regional airports. Infrastructure Journal reported in May 2012 that, according to reports in the local press, the African Development Fund (the concessional window of the World Bank) had invested US$140 million in the Road Sector Support Project II. The US$212.78 million Road Sector Support Project II aims to improve the road network in Tanzania to reduce maintenance costs, increase mobility and provide cities and towns affected by the plan with greater access to bigger markets and social services. It is to be implemented in the cities of Dodoma, Manyara, and Ruvuma and is due to be completed in 2017. The project will also save money by reducing vehicle operating and travel costs. The remaining funding is reported to have come from Japan International Cooperation Agency (US$62.14 million) and the Government of Tanzania (US$10.64 million). It was also reported in June 2012 that Tanzania Ports Authority was seeking consultants for a feasibility study for the development of a dry port at Kisarawe North with bids to be submitted by the end of June 2012. The project is part of TSSP and the aim of the study is to propose a model which delivers the best value for money and is in line with Tanzania Ports Authority’s time frame. Although Tanzania is still in its infancy with regard to PPP structures, it has demonstrated the right approach. It is investing time in preparing the relevant feasibility studies with comprehensive analysis and understanding of the impact that a given project will have on the government, instead of rushing and failing to conduct adequate due diligence. The potential is there for Tanzania to develop into an interesting market and the on-going support of multilateral and development finance institutions will be vital in securing commercial lender and sponsor involvement in projects going forward.

Mozambique Recent natural gas discoveries by Eni at Mamba North East 1 (50km offshore of Mozambique) and Mamba North East 2 and by Andarko Petroleum at Offshore Area 1, Rovuma Basin, have put the country firmly on the energy supply map since liquefied natural gas (LNG) is much sought after by the growing Asian markets. The energy outlook for Mozambique is positive with additional areas (and potential further gas reserves) still to be explored and commentators have remarked that Mozambique is likely to become the energy hub for the South African region,

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Middle East Legal Insights September 2012 particularly given the plans to build an LNG terminal. The north of Mozambique and south of Tanzania will finally be opened up to much-needed investment. Aggreko and Shanduka Group are building a US$250 million, 107MW gas-fired power plant at Ressano Garcia, 90km northwest of Maputo (on the Mozambique-South Africa border) to supply South Africa and Mozambique. The plant will use gas from Mozambique’s Temane gas field and represents the first time a private company will provide cross-border power to two utilities in southern Africa. It is understood that the project includes a major sub-station and 1.5km of 275kV transmission line and is backed by a power purchase agreement awarded to the Aggreko-Shanduka joint venture by Eskom in South Africa and Electricidade de Moçambique (EDM) in Mozambique. The output is intended to cover outages from the two countries’ coal-fired plants and will be split between the two utilities with Eskom utilizing 92MW and EDM 15MW. More power infrastructure is also in the works. In August 2012, Infrastructure Journal reported that Mozambique plans to construct three gas-fired power plants by 2014, powered by natural gas sourced from Mozambique’s onshore reserves. Two of the plants are to be built in the Ressano Garcia region near South Africa and the other in Chokwe in the South of Mozambique with tenders expected to be released later this year. The power supplied by these plants will be utilized by the Mozambique population and exported to adjacent countries which are suffering from power shortages. PPP law no. 15/2011 came into force in August 2011 and established guidelines for the process of contracting, implementation, and supervision of PPPs, large scale projects (LSPs), and business concessions (BCs). The law’s aims are twofold: to encourage greater private partner participation on PPPs, LSPs, and BCs, and to bring greater quality and effectiveness to the manner in which resources and other national assets are exploited. The area in which a project is situated will determine which government entity has authority over that sector and financial authority will be exercised by the government entity which supervises that financial sector. Contracting of a PPP may take the form of a tender with pre-qualification or a two stage tender. The law also deals with risk allocation and identifies the parties best placed to manage specific risks. In order for PPPs to flourish in Mozambique, inflation rates need to be controlled, political stability must be achieved and an adequate legal and regulatory framework needs to be in place. By enacting PPP law no. 15/2011, Mozambique is striving to ensure that it develops sound laws and regulations to encourage growth and investment.

Where Will the Revenue Come from to Fund Projects? Oil, gas, and mining projects provide important revenues for governments which can then be utilized for investment in other projects, such as social infrastructure and transport networks. Awards of mining contract concessions may include obligations to build or upgrade existing roads and provide housing in local villages near to the mine.


There have been substantial increases in recent years in the amount of revenues which governments are trying to capture from mining contracts executed with the private sector by raising taxes on mining companies including windfall taxes in respect of “super profits” in addition to royalties, with such actions dubbed “resource nationalism.” Bloomberg reported in June 2012 that the South African Chamber of Mines had rejected proposals being considered by the African National Congress (ANC) to extract more revenue from the industry through a windfall tax and other levies (the ANC is expected to make a final decision on new mining policies in late 2012). The Youth League had lobbied the ANC to pursue a policy of nationalizing the mines so as to give the black majority a bigger stake in the country’s mineral wealth. The 2010 ANC commissioned study called for a 50 percent resources rent tax on all mining operations which is triggered once companies earn returns in excess of about 15 percent annually. The study was rejected by the South African Chamber of Mines on the basis that it would significantly increase the industry’s existing tax burden and have a detrimental impact on the sustainability of some mining companies. Other potential issues stemming from the adoption of such a policy include litigation from foreign investors and a withdrawal of foreign investment. There is a fine line to be tread, if governments increase the taxes to such a level in the short-term they will reap the immediate rewards but in the longer term the mining companies will fail to invest in the future, as it will be too expensive to do so, and they will instead move operations to other countries with more favorable legislative regimes. Revenues earned during boom periods are typically used by mining companies to sustain existing operations or to finance new ventures. Mining companies are a soft target for governments looking to increase their revenues since Africa has the natural resources which the growing economies need to drive them forwards and the mining companies are not, given the long-term nature of their investments, in a position to be able to quickly move operations elsewhere although some are now diversifying into other geographical locations and other minerals.

Financing and Other Challenges Facing Countries Embarking on PPPs With the economic slowdown in the West many companies are looking to other growth markets and East Africa can be an attractive option. As noted above, several East African countries are considering the PPP model to facilitate their national infrastructure requirements but what challenges lie ahead for Sponsors looking to do business in this part of the world? As with many initial forays into PPP, the early pathfinder projects are likely to take a bit longer to reach completion while each of the parties involved familiarizes itself with what is required. Changes in the local laws may even be required to deal with issues which arise. Once these early projects have closed investor confidence will increase with the foundations laid for a projects pipeline. Instructing a knowledgeable local law firm will be of paramount importance in addition to obtaining any tax structuring advice and a consideration of any applicable bilateral investment treaties to which the host country is party. Where a project is being carried out pursuant to a procurement process it is crucial that the sponsor complies with the relevant laws and determines if the public bodies and partners with whom it is dealing are also in compliance. If such parties are not in compliance, the project

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Middle East Legal Insights September 2012 may be open to challenge, the contract award could be annulled and allegations of corruption could arise. An understanding of the local environmental laws will also be necessary as multilaterals and development finance institutions each have their own internal requirements which will need to be reflected in the finance documentation on a project. Accordingly, any project company will need to clearly understand the relevant environmental laws which will apply to it and the project. The implementation of anticorruption practices in respect of the project company’s business will also be required.

If Japanese and Korean Sponsors are involved on projects in East Africa they will likely bring long-term ECA financing to a project which is an attractive proposition as it is often cheaper than commercial bank debt. In some countries a sponsor may look to enter into a joint venture with a local partner and in some jurisdictions this may even be a requirement of local law. Satisfactory due diligence is very important so as to avoid any unwelcome surprises down the line. Although the local partner may be well connected, business practices will likely differ and may give rise to compliance risks in the sponsor’s home jurisdiction such as pursuant to the Bribery Act in England or the Foreign Corrupt Practices Act in the United States. Other issues will also need to be considered. If the project involves international lenders they may, for political risk reasons, request that the project revenues be transferred offshore (or be paid directly into secured offshore accounts to the extent possible). Local laws may prohibit such transfers of funds (or funds in excess of a certain threshold) and consent may need to be obtained from the regulator. The lenders may require foreign exchange hedging transactions to be implemented. The laws on taking security may be unsophisticated and not contemplate syndicated transactions. For example, if a project reaches financial close and the security is entered into and the relevant registration fees in respect of the security are paid (this is often a percentage of the amount secured) and syndication takes place a few months later the security may have to be amended to include the new lenders as secured parties and the project company may have to pay the registration fees again. These are just some of the issues which we have encountered in the past when advising on Africa based projects. Should the governments in East Africa forge ahead with project finance, the sponsors involved on such projects will likely find that raising the requisite money from international financial institutions proves to be a challenge. International lenders may be unfamiliar with these countries and following the global financial crisis, higher liquidity costs and the recent crisis in the Eurozone, many have less capital available than before and are more cautious in their approach. The involvement of multilaterals and development finance institutions on a project, such as the IFC or the AfDB, can allay some of these fears and assist in getting commercial lenders across the line. Some international financial institutions finance


East African projects from their Dubai offices and have identified this market as a key growth area for them. Although institutions such as AfDB will not require separate political risk insurance, this will be a major concern for commercial lenders. However, political risk insurance can be procured from a multilateral agency such as the Multilateral Investment Guarantee Agency (MIGA), a member of the World Bank group. MIGA was established in 1988 and they focus on insuring investments which involve complex deals in infrastructure and extractive industries, particularly ones which include project finance and environmental and social considerations. MIGA only supports investments that are developmentally sound and meet high social and environmental standards. They apply a comprehensive set of social and environmental performance standards to all projects and the parties, be they lenders or sponsors, need to ensure compliance with these standards. Risks which a MIGA guarantee may insure include: war, terrorism and civil disturbance; breach of contract (in respect of losses following from a breach or repudiation by the government contractual counterparty); expropriation (in the event that the government, for example, expropriates, requisitions, confiscates or seizes the land on which the project is situated thereby preventing the project company from being able to complete the project); and currency inconvertibility or transfer restrictions (the project company may, due to the government’s actions, be unable to transfer money outside of the country or be unable to convert the local currency into foreign exchange). Any guarantee will only cover specific risks and accordingly the trigger for payment under the guarantee will be a breach of one of these covered risks under the finance documents. It is therefore important when structuring your project that the facility agreement or common terms agreement (this will be the core document for the financing) includes breaches of these covered risks as events of default. Although lenders will likely expect some tangible commitment from the government, governments are typically very reluctant to provide sovereign guarantees for projects as these would be treated as ‘on balance sheet’. It may be the case that sovereign guarantees are provided for the early projects to obtain market confidence but this is unlikely to be repeated in later deals once the market is established. A compromise may be the provision of a letter of comfort by a country’s ministry of finance and this, although not constituting a government guarantee, may provide the lenders with sufficient comfort. If Japanese and Korean Sponsors are involved on projects in East Africa they will likely bring long-term ECA financing to a project which is an attractive proposition as it is often cheaper than commercial bank debt. Unlike commercial banks, ECAs will accept political risk with some providing political risk insurance. As ECAs fund themselves differently to commercial lenders, they do not face the same exposure to market liquidity.

Final Thoughts The discovery of natural resources coupled with the pressing need for infrastructure and the development of adequate legal and regulatory frameworks means that East Africa will, in the longterm, be a key growth area for project financiers. When deciding if they wish to participate in these emerging markets, project

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sponsors and international commercial lenders will need to weigh up the risks and concerns and while initial pathfinder projects will likely take a little longer to reach financial close, those sponsors and commercial lenders who take up the challenge will, in light of gained experience, put themselves in a strong position for future projects in that country. Although it is difficult to predict the speed with which this market will develop, this region is definitely “one

to watch” and will certainly prove to be an interesting journey for those involved in the early projects. Gail Bassett is an associate in Vinson & Elkins’ Abu Dhabi office and a member of the firm’s Finance practice. 1 http://www.vision2030.go.ke/index.php

Islamic Syndicated Financing: An Underdeveloped Method of Shari’a-Compliant Financing With the growth of the Islamic finance industry, there have been significant developments in the structures used to effect Shari’a-compliant financings as well as in the techniques used to implement these structures, including balance sheet and off balance sheet financings. Islamic syndicated financing is one of these techniques. This Note: • Examines Islamic syndicated financing and its similarities to and differences from conventional syndicated financing. • Explains the techniques used to structure Islamic syndicated loans. • Analyzes the issues to consider when structuring an Islamic syndicated loan transaction and developing a strategy for a successful syndication. • Examines the future of Islamic syndicated financing.

loan is fully syndicated, the arranger may fund a small portion of the loan. If the loan is not fully syndicated, its terms are either renegotiated or the loan does not close. Arrangers often prefer to use the “commercially reasonable efforts” standard because it is believed to be a slightly more lenient standard than “best efforts” (which, while not a clear standard, is believed by practitioners to require extraordinary measures). Similar to conventional transactions, an Islamic loan transaction may be syndicated before or simultaneously with financial close or after financial close (and earmarked for distribution in the primary market or the secondary market). However, unlike conventional financings, there are timing issues that must be considered. Islamic syndicated financings are derived from the same concepts and must take into account the same commercial considerations and provide the same protections as conventional syndicated financings from the perspective of both the borrower and the participating lenders. These include:

Similarities to and Differences from Conventional Financings

• Allowing lenders to mitigate their exposure by sharing the borrower’s credit risk

Generally, Islamic syndication has the same conceptual foundation and takes into account the same commercial considerations as conventional syndication, but there are material differences between the two transactions that must be considered.

• Allowing lenders to participate in more transactions than they may have otherwise and thereby diversify their loan portfolios because they are only taking a portion of each loan transaction.

Similarities to Conventional Syndicated Financings To better understand Islamic syndicated financing, it is important to examine what this concept means in its more entrenched conventional equivalent. In a conventional syndicated financing, the loans to the borrower are shared among two or more banks or other financial institutions (collectively, the lenders). The syndication may be structured either as a: • Fully underwritten deal. In this case, the lead bank (also referred to as the arranger) commits to fund 100 percent of the loan whether or not it is able syndicate part of the loan to other lenders. • Partially underwritten deal. In this type of deal, the arranger commits to use its best efforts or commercially reasonable efforts to arrange a syndicate of lenders that will make the loan but has no obligation to fund any part of the loan itself. If the


• Enabling the borrower to raise more capital than it may have otherwise if it had only one lender.

Differences with Conventional Syndicated Financings While there are a few differences between Islamic syndicated loans and conventional syndicated loans, the principal difference is the philosophical underpinning of these transactions. In conventional loan syndications, commercial and legal considerations are generally the only issues that determine the terms and forms of these transactions and the rights of the parties. By contrast, Islamic loan syndications: • Must comply with Shari’a principles including the prohibitions against Riba, Gharar, and Maisir. • Cannot invest in products and services that are Haram. For example, the borrower cannot be involved in the manufacture, production or sale of tobacco products, pork or alcohol or

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involved in providing gambling or pornographic activities or services. • Require the approval of Shari’a scholars or the Shari’a committees of the lenders. However, Islamic finance institutions are as interested in protecting their investments and making a return as their conventional counterparts. So while an Islamic syndicated transaction must abide by the conditions set forth above, it must also make financial sense. As a result, any structure that is ultimately adopted must give the lenders the same rights, benefits, and protections as they would have in a conventional syndicated financing. This is especially important in transactions involving conventional lenders or the Islamic windows of conventional financial institutions who may not be as aware or sensitive to Shari’a principles.

Structuring the Relationship Between the Arranger and the Other Lenders In an Islamic syndication, the relationship between the arranger and the syndicate is structured in the same way as conventional financings. Typically the arranger, known in an Islamic syndicated financing as the investment agent or Wakeel, enters into an investment agency agreement with the other lenders under which it is given the authority to act as the lenders’ agent. In this capacity, the investment agent: • Negotiates with the borrower and coordinates the drafting and preparation of the loan documents. • Monitors the transaction and the borrower’s compliance with its obligations under the loan documents. • Manages the relationship with the borrower, including receiving notices and responding to queries. • Keeps the other syndicate banks apprised of developments at the borrower. In exchange for performing these services, the Wakeel, like a facility agent in a conventional syndicated financing, would expect to receive administrative or other appropriate fees.

Structuring the Loans to the Borrower Generally, any Shari’a-compliant structure may be used to document the loan. The structure used depends on: • The purpose of the financing.

The structures most commonly used to effect to an Islamic syndicated financing are: • Murabaha. • Commodity or reverse Murabaha (commonly referred to as Tawarruq). • Mudaraba. • Musharaka. • Ijara. • Istisna’a.

Murabaha Commonly referred to as “cost-plus financing,” Murabaha is frequently used in trade financing arrangements and to finance equipment. In this structure, the investment agent (as agent of the lenders) and the borrower typically enter into a Murabaha agreement under which the borrower agrees to buy an asset the investment agent, using funds received from the lenders, buys from a third-party supplier. The investment agent then sells the asset to the borrower at an agreed marked-up price. The borrower pays the marked-up sale price on a deferred basis in installments or as a bullet repayment. Typically the mark-up charged is based on a benchmark, such as LIBOR plus a margin. The economic effect of this structure is similar to an interest calculation under a conventional loan facility. In a Murabaha-syndicated transaction, the investment agent holds title to the asset until it is sold to the borrower. Shari’a principles require that a seller owns the asset at the time it is offering to sell it. As a result, the investment agent (and, by extension, the lenders) bear the risk of loss, however briefly. Because the lenders bear this risk, the difference between the price the investment agent pays the third-party supplier and the marked-up price the borrower pays to purchase the asset from the investment agent is treated as a profit derived from a sale of the asset and not as interest on a disguised loan which is prohibited under Shari’a. Amounts paid by the borrower toward the purchase price of the asset are used to pay: • The investment agent its agreed on fee. • The syndicate banks (including the investment agent, if applicable) their pro rata share of the amounts they advanced.

• The assets that will be used to repay the loans. • The nature of the borrower’s business. • The amount of flexibility the parties require. • The lenders’ view of the Shari’a-compliant nature of the transaction.


Commonly referred to as “cost-plus financing,” Murabaha is frequently used in trade financing arrangements and to finance equipment.

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The following sets out a diagram of a typical Murabaha syndication transaction: This structure, often referred to as a “true” Murabaha is used when the purpose of the transaction is for the borrower to acquire a particular asset. If the purpose of the transaction is instead for the borrower to obtain access to capital, the commodity Murabaha or Tawarruq structure is typically used.

Commodity Murabaha or Tawarruq A variant on the Murabaha structure, a Tawarruq transaction involves many of the same steps. The investment agent and the borrower execute an agreement in which the borrower promises to buy an asset that the investment agent will then buy from a thirdparty supplier. However, in a Tawarruq: • The investment agent purchases a freely tradeable asset in the spot market using the funds received from the lenders. • The investment agent then immediately sells that asset at the agreed marked-up price to the borrower for immediate delivery. However, the borrower’s obligation to pay the purchase price is deferred (to be paid in installments or as a bullet repayment at a later date). • The borrower then immediately sells the asset in the spot market to a third party for immediate payment and delivery. The end result of these transactions is that the borrower receives cash which it can use to meet its working capital or other needs. A diagram of a typical Tawarruq-syndicated loan transaction is set forth below:

The commodity Murabaha may be used for a term loan or a revolver. In the case of the latter, the investment agent, on or before the drawdown dates, purchases additional assets on the spot market for resale to the borrower in the amount to be drawn down. The Tawarruq structure is the most commonly used Islamic syndication structure. However, it has been criticized by the International Council of Fiqh Academy as a deception because the simultaneous transactions are a disguised interest-based financing which is prohibited under Shari’a. As a result, many Islamic financing institutions will not participate in a Tawarruq syndication and some Islamic scholars will not issue the Fatwa approving these transactions which is required to close Islamic finance transactions. The sales by the investment agent and the borrower are done on a spot basis and occur virtually simultaneously. As a result, fluctuations are unlikely in the price of the asset between the time the investment agent buys it on the spot market and sells it to the borrower for the agreed price. While unlikely, this risk does exist and it is not assumed by the lenders. Lenders do not want to be in a position of having to sell the asset for a lower price than it acquired the asset. Therefore, the investment agent, on behalf of the lenders, typically requires the borrower to enter into a Murabaha agreement to indemnify the lenders in case there is a change in the value of the commodities. In addition to the potential liability issues that must be dealt with, Murabaha participants must also consider the tax implications of the purchase and sales. For a discussion of the tax implications of these transactions in the U.S.

Mudaraba A Mudaraba constitutes a special kind of partnership where one partner contributes money which is then invested by the other partner in a commercial enterprise. In a Mudaraba-based Islamic loan syndication, the borrower and the lenders (through the investment agent) form a partnership in which the lenders provide the money and the borrower provides the investment expertise. In a Mudaraba, the investment agent (the Rab al Maal), and the borrower (the Mudareb) share in any profits earned from the investment according to pre-agreed percentages. These percentages are calculated to give the lenders an amount that is the functional equivalent of the periodic interest and principal payments that the borrower would make if the transaction was structured as a conventional financing. After receipt of these amounts from the borrower, the investment agent pays the lenders their pro rata share of these payments as provided in the Mudaraba agreement. Any losses from the investment are solely for the account of the investment agent (and ultimately, the lenders). In exchange for investing the funds, the borrower receives a management fee. Because this is a financing arrangement, this fee is usually nominal. However, loan documents often require that this fee (together with any share of the profits to which the


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borrower may be entitled) be deposited into a segregated account and used to pay the lenders in case of a shortfall in the amounts required to repay the loans or following an event of default. For a structure of a typical Mudaraba-syndicated transaction, see:

fund the venture and the borrower makes a contribution in kind. The Musharaka partners share the profit in agreed proportions but losses are shared in proportion to their initial investment. This arrangement is similar to an unincorporated joint venture. However, depending on the jurisdiction in which the Musharaka is formed, the Musharaka can take the form of a legal entity. If the Musharaka structure is used to structure the Islamic syndicated financing, the lenders, through the investment agent, provide financing to the borrower for a project. The borrower makes contributions in kind (in the form of expertise, property or services) and acts as the manager of the Musharaka. It is responsible for investing the Musharaka assets to earn a return for the Musharaka partners.

A Mudaraba Can Be Either: • A restricted Mudaraba (al-Mudaraba al-Muqayyadah). The investment agent or Rab Al Maal may specify a particular business for the Mudaraba, in which case the Mudareb must only invest in that business.

Typically the profit sharing arrangements are structured in a way that ensures the lenders receive their agreed yield. The borrower may charge a management or investment fee, which may be the difference between the yield the lenders should receive as their share of the joint venture’s profit and the amount the venture actually earns. This ensures that the lenders do not earn more than they would as earned interest or principal repayment. For a diagram of a typical Musharaka structure, see:

• An unrestricted Mudaraba (al-Mudaraba al-Mutlaqah). The Mudareb has discretion to invest the money advanced by the Rab al Maal in any Shari’a-compliant business it deems fit. Because Shari’a requires that the Mudaraba participants share in the investment, this structure has fallen out of favor and lenders generally prefer non-partnership structures like the Tawarruq and Ijara.

Wakala A common and preferred alternative structure to the Mudaraba structure is the Wakala, an Islamic agency arrangement. In a Wakala-based Islamic loan syndication, the investment agent appoints the borrower as its agent to manage the funds it receives from the lenders. In exchange, the borrower receives a pre-agreed fixed fee or a fee calculated as a percentage of the net asset value of the investment. Similar to the Mudaraba structure, these fees are often used repay shortfalls in amounts payable to the lenders. The profits earned from investing the loan proceeds in Shari’acompliant investments are paid periodically to the investment agent who uses these earnings to make payments (much like periodic interest and principal payments) to the lenders. Unlike the Mudaraba structure, the Wakeel does not have any discretion and must invest the funds for the specific purpose the investment agent has identified.

Musharaka Under a simple Musharaka arrangement, a lender forms a joint venture with the borrower. The lender provides the financing to


A Musharaka arrangement can take one of two forms: • Muskaraka-Aqd. In this form, the lenders and the borrower agree to combine their efforts and resources towards a common objective. The borrower usually contributes a tangible asset and the lenders contribute cash through their investment agent. • Musharaka-al-Melk. In this form, the lenders and the borrower act as co-owners of a specific asset or assets. The revenue is generated by leasing that co-owned asset to a third party or, as has become more common, by the lenders (acting through the Wakeel) leasing out their shares in that co-owned asset to the borrower. A variation of the Musharaka arrangement is the diminishing Musharaka. Under this arrangement, the lenders (acting through the Wakeel) and the borrower participate in the joint ownership of a tangible asset or in a joint commercial enterprise. The shares owned by the investment agent and the borrower are divided

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into units and the borrower purchases the Wakeel’s share on a periodic basis. This decreases the Wakeel’s ownership share of the asset or joint commercial enterprise. The agreed proportions of the profits are used by the borrower to satisfy the commercially agreed payment profile, with the Musharaka coming to an end, at the term of the financing when all these payments have been made.

The Ijara structure is the most accepted among Shari’a scholars and provides the most flexibility for purposes of developing a syndication strategy (see Method of Syndication). However, it does propose some issues, including: • The borrower must have assets of sufficient value to sell to the investment agent to support the amount it wants to borrow.

Similar to the Mudaraba structure, the Musharaka has fallen out of favor as a structure for Islamic syndications.

• In the case of a revolving loan transaction, these assets (and in the required amount) must be sold on the drawdown dates.

Ijara

• The assets must not be subject to any restrictions (for example, lien or other covenant restrictions) that preclude their sale to the investment agent.

The literal translation of Ijara is “to give something on rent” is basically a sale and lease back. Ijara in the context of a Shari’acompliant transaction means to transfer the usufruct of a particular property to another person in exchange for a rent claimed from that person or, more literally, a lease. The rules related to Islamic leasing are similar to the rules of sale as the asset is transferred to another person for valuable consideration. The only difference is that where the title to the asset passes on a sale, under an ijara title to the asset remains with the lessor. Ijara is commonly referred to as a hybrid between an operating lease and a capital lease. It offers both the certainty of regular payments throughout the life of the financing as well the flexibility to tailor payment installments in a manner that allows the lenders to achieve a profit margin structure comparable to that in a conventional financing. While the traditional Ijara involves the lease of an existing physical asset, to enable the lenders to receive compensation during the period of construction, certain Shari’a scholars have permitted the use of the forward lease arrangement (known as Ijara Mawsufah fi al Fhima or Ijara fil Thimma). This is usually combined with an Istisna’a contract (see Istisna’a).

These issues may make it difficult for borrowers with small asset bases or other debt obligations to do an Ijara-based loan.

Istisna’a Istisna’a involves the investment agent requesting a manufacturer to manufacture a specific asset for the borrower in exchange for a fee. The Wakeel uses the funds provided by the lenders to pay the manufacturer. To be Shari’a-compliant, the arrangement must meet these conditions: • The manufacturer must use its own materials to produce the asset. • The price and specifications of the asset to be manufactured must be settled at the outset. The investment agent then charges the borrower the price it pays the manufacturer, plus a commercially agreed rate of profit. Until the asset is delivered, the borrower is not obligated to purchase it. (However, to mitigate the lenders’ risk, the borrower enters into a wa’ad with the Wakeel under which it promises to buy the asset). Therefore, although the Wakeel does not manufacture the asset itself, it takes the manufacturing risk of the asset.

In an Islamic syndicated financing, the Wakeel uses the funds advanced by the lenders to purchase a Shari’a-compliant asset from the borrower which it then leases back to the borrower. The borrower pays rental payments (which may be tied to a benchmark (such as LIBOR) and coincide with the commercially agreed For a diagram of a typical Istisna’a syndicated loan transaction, see: payment profile). At the end of the term of the financing, when all the payments have been made, the borrower has the right to buy back the asset. For a diagram of an Ijara-based Islamic syndicated transaction, see:

An Istisna’a has, to date, been used in several different Shari’acompliant financing structures, most commonly for project financings. The Istisna’a structure is commonly used in conjunction with the Ijara structure. In this case, the borrower leases the asset


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once it is delivered to the lenders and uses the rental payments to pay the purchase price owed to the Wakeel. While the bank uses the Istisna’a method to advance funds to the borrower, the Ijara provides a repayment method for the borrower. The Wakeel, in turn, uses these funds to repay the other members of the syndicate.

Method of Syndication The arranger, the lenders and their respective counsel must also consider when and how the loan should be syndicated.

Assignment or Novation of the Loans

Depending on the structure of the transaction, Shari’a scholars or the Shari’a committees of the investment agent may not permit it to novate or assign its financing commitment. Shari’a prohibits trading in debt. The sale by the arranger of an interest in Issues for Developing a Successful Syndication Strategy the loan, which is the essence of the syndication process, is not permissible. As a result, any novation or assignment must be of While Islamic syndicated financing is derived from the same an asset. This is not an issue for asset-backed structures such fundamental notions and shares some of the same commercial as Ijara or Istisna’a. In these structures, the Wakeel is selling its considerations as a conventional syndicated financing, it does interest in the underlying asset (the asset under lease in the case present some unique issues. These issues include: of an Ijara transaction or the asset being manufactured in the case • The absence of standard documentation. of an Istisna’a). This structure is often used for project financings or construction loans.

• The Shari’a approval process. • The methods of syndication.

Absence of Standard Documentation The Islamic finance industry does not have a universally agreed form of documentation to match its conventional counterparts (which tend to use the documents prescribed by a loan market body, such as the Loan Market Association (LMA) in the UK and the Loan Syndication Transactions Association (LSTA) in the U.S.). As a result, the documents used in a Shari’a-compliant structure must be vetted by the lenders (with the assistance of their in-house legal team or external legal advisors) to ensure they understand their rights and obligations under the documents. This may be a cumbersome and time consuming process. However, these documents are typically based on LSTA and LMA forms which enable conventional lenders to participate in an Islamic syndication by giving them an established frame of reference for understanding their rights.

Shari’a Approval Process The loan and syndication documents must also be approved by the Shari’a scholars or boards of the lenders. This may inhibit the syndication process because the arranger may not be able to sell down its underwriting commitment to a new bank or financial institution unless the financing or the structure is deemed compatible with Shari’a, as interpreted by the Shari’a scholars or boards of that new bank or financial institution. As noted above, certain transaction structures have been criticized as disguised loan transactions and some Islamic financial institutions will not participate in them (see Commodity Murabaha or Tawarruq). These syndication-specific issues are in addition to the other issues that the Shari’a approval process may present such as: • The insufficient number of Islamic scholars who are available to assess the Shari’a compliance of Islamic finance transactions. • The over-representation of certain scholars on the boards of certain companies.


However, this is an issue in structures that are not backed by an asset but that rely on a payment stream such as the Murabaha or the Tawarruq. In these structures, once the investment agent has sold the asset to the borrower, its only interest is the right to receive the purchase price of that asset.

Modification of the Loan Terms Many conventional syndications, especially in the U.S., include flex language that allow the arranger to change the terms of the loan to give it the flexibility it may need to attract investors. Some of these transactions also include reverse flex language that gives the investment agent the right to modify the terms of the financing to make it more favorable to the borrower in case the loan is oversubscribed to give the borrower the benefit of an attractive deal. Flex language can also be included in Islamic syndicated financing, but depending on the change the agent wants to make, the investment agent may need to obtain the approval of its Shari’a committee. In addition, the agent must consider whether it can sell down the loan at a premium or discount. Generally, Shari’a scholars and boards only permit a sell down if it is done at par or if there is a tangible asset that backs the commitment being syndicated. This is intended to mitigate the argument that the lead bank is trading in debt which is generally not permissible under Shari’a principles. This, however, may cause a problem for the investment agent if the transaction is fully underwritten because it would be forced to fund the entire commitment if it cannot sell the loans at a discount to attract investors.

Participation of the Loan Many conventional loan syndications give the lenders the right to participate the loans. Although superficially an Islamic syndication has components that are similar to a participation, it is a very different structure. If the lenders are considering a participation (or sub-participation, in the case of the UK), they must consider the following issues: • Will it be permitted by their Shari’a committees? Because of the prohibition against trading in debt, a lender who wishes to participate a portion of its loan must do so at par unless the

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transaction is using an asset-backed structure. If an assetbacked structure is being used, the lender can sell any portion of its interest in the underlying asset at any price it chooses. • If permitted, can it be effected through a funded or unfunded arrangement? In a funded arrangement, the participant gives the existing lender a deposit up front (which is a portion of the principal amount of the loan), to be repaid from the proceeds of the loan. By contrast, in an unfunded participation, the participant agrees to give the existing lender a portion of the loan under certain circumstances (for example, if the borrower defaults).

Timing of Syndication

North Africa region was down 40 percent from the same period in 2011 at US$1.97 billion, which is the lowest volume since 2004. When the global markets recover, Islamic syndicated financing volumes may increase. But to be a viable alternative to conventional syndicated financings on a grander scale it must provide the same protections as conventional syndicated financings. While great strides have been made, Islamic syndications lag way behind conventional syndications because of: • The absence of uniform international Shari’a principles that can assure borrowers and investors that their transactions and structures are Shari’a-compliant, will be upheld and can give them the same confidence and protections they have in conventional syndicated financings.

Unlike conventional financings, most Shari’a-compliant structures do not allow for a stub period in connection with a syndication • A developing secondary market for Shari’a-compliant post financial close. This means that any new banks that are financings which has, for the time being, led to investors acquiring an interest in the loans post-closing must do so at an holding their primary commitment. interval that coincides with the commercially agreed payment date. The same perseverance and intellectual rigor which the Islamic If the acquisition does not match a payment date or a commodity finance industry has applied to its capital market and derivatives trading date, it may be viewed as trading in debt. platforms must be replicated in developing the framework and Presence of a Conventional Tranche scope of offerings regarding Islamic syndicated financings. This should not be difficult because compared to other Islamic finance Many Islamic syndicated financings have a conventional products, such as Sukuk, an Islamic syndicated financing is tranche. The syndication strategy and documents may need to relatively easy to implement. Despite the requirements that must be accommodate the syndication of the conventional tranche and the met to satisfy Shari’a, the concepts of Islamic syndicated financing Islamic tranche. The conventional tranche must factor in the issues are generally familiar to conventional lenders and use documents discussed above. (albeit on a revised basis) that are well tested and understood.

The Future of Islamic Syndication Shari’a-compliant methods of financing have become prevalent among industry participants in the capital markets because of the current economic climate, and in particular, the refinancing risk to which many borrowers are now subject. However, although Islamic syndicated financing has increased considerably in the last 20 years, it has also suffered from the economic recession. While there was some recovery in 2010 and 2011, Islamic syndicated financing in the first half of 2012 has been losing some of the strides it has made. This is due in part to the crisis in the Eurozone. According to Islamic Finance News (IFN), European banks, which were the major participants in Islamic syndicated financings, have withdrawn from the market to preserve their own liquidity and better manage their balance sheets. According to IFN, Islamic syndicated financings volumes in the Middle East and

This is particularly important because syndication remains an important tool that banks and other financial institutions use to manage their own balance sheets and financial condition, which has become even more important in the current economic and regulatory climate. Ayman Khaleq is a partner and Amar Meher and Amanjit Fagura are associates in Vinson & Elkins’ Dubai office and members of the firm’s Islamic Finance practice. This article previously appeared in Practical Law Company, June 2012.

Liquidity and Secondary Markets in Islamic Finance Liquidity and the secondary market, or the lack thereof, in the world of Islamic finance, has been an issue of much debate for many years among industry professionals. It has arguably been the single largest factor in pushing down yields on Sukuk recently and also in slowing the long-term growth of the industry. Moves by certain central banks to create a liquidity platform, such as that of


the Central Bank of Bahrain’s Bai al Arboun program, have been welcome attempts to address this issue but problems persist. However, there are many opportunities available to the industry as the Middle East, in particular, moves on from some of the more distressed scenarios of the past few years. With oil prices still

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far higher than they were even five years ago, plenty of capital remains available to be developed. The challenge for the industry will be to create products and develop markets to tap into that liquidity. The increasing rise of infrastructure projects in Islamic countries is great cause for hope.

Sukuk and the Hold to Maturity Culture Sukuk have traditionally been the asset class of choice for Islamic asset managers seeking to deploy the capital at their disposal. However, there are simply too few Sukuk in the market and those that have been issued have traditionally seen their investor class comprised of a majority of conventional and not Islamic investors. The logical outcome of this must surely be that Islamic investors are unable to purchase enough Sukuk. With this supply/demand imbalance, Sukuk holders feel unable to trade out of a position for fear of not being able to find another Sukuk in which to invest. As a result, the prevailing culture amongst Sukuk holders in the Middle East is to buy and hold to maturity. The problems this causes with liquidity are obvious and the sort of vibrant secondary market for Sukuk that exists for conventional bonds is sorely lacking. This is a purely market-driven issue as scholars have been more than accommodating to issuers that seek to provide the option of trading in and out of a holding of Sukuk. Scholars have taken a pragmatic approach to the value of assets required to underpin a Sukuk which is intended to facilitate secondary market trading. A Sukuk is a certificate of ownership representing a pro rata interest in certain assets. Buying and selling a Sukuk is the equivalent of buying or selling those particular assets and as such, the tradability of Sukuk should not be in doubt. Clearly there are arbitrage opportunities in such trades but this is akin to the arbitrage opportunity in buying a limited edition car in the belief that its value will appreciate over time. It is therefore clear that secondary market trading is possible but the chief culprits preventing this are lack of supply and incorrect valuations.

Sukuk have traditionally been the asset class of choice for Islamic asset managers seeking to deploy the capital at their disposal. By not considering trading as an option, mark to market (MTM) valuations have not been considered to be a requirement of risk management for Sukukholders. As balance sheets became distressed over the past few years and options to restructure were being explored, one of the factors that caught a number of restructuring advisors from conventional markets off guard was this lack of MTM valuation. This led to difficult conversations with certain creditors when ‘hair-cuts’ were being discussed. A lack of MTM valuation also impacts secondary markets as it does not establish any sort of profit-making opportunity for traders. Without effective valuation of Sukuk there is no way to establish a market and as a result trading does not happen.


Uncertainty and Legal Risk Barriers to secondary market trading are not the result of a lack of effective valuation alone; there are also other considerations relating to differences of opinion among scholars as to the acceptability or not of certain structures. It is possible that certain investors shy away from secondary market trading because of a lack of clarity as to the acceptability or not of the transaction structure employed. Were a scholar to rule against a particular structure, and a secondary market trade to be sought to be unwound, it would cause huge complications both on a practical level and from the point of view of market reaction. Allied to this is the continued legal risk that pervades the Sukuk market. It is only in the U.S. (with the East Cameron Sukuk) and the UK (with the Shamil Bank case) that any sort of legal precedent has been laid down in relation to Islamic finance transactions in particular when things do not go according to plan. There is still no clarity in many jurisdictions as to how a dispute will be resolved nor is it clear what level of ownership of assets (if any) has been achieved. Further, the tax laws in many jurisdictions do not yet accommodate Islamic finance transactions where, for instance, there can be a double charge to stamp duty or similar land transaction taxes in the case of a property financing. Many jurisdictions have either taken steps to address this (such as the UK) or are going through the law making process to address such matters (such as Tanzania).

Lack of Variety However, even within the Sukuk market there is far too little variety for investors. There are too few options for short-term commercial paper instruments. A notable exception to this particular rule is the Central Bank of Bahrain (CBB)’s Sukuk al Salam program which leverages off Bahrain’s aluminum supply to provide a platform for short-term investment for banks in the Kingdom. The program offers a three-month Sukuk al Salam which, for the Sukuk maturing in August 2012, had a subscription level of 178 percent. Similarly, and again in Bahrain, the CBB also offers 182-day maturity Sukuk al Ijarah which, for the November-maturing installment, had a subscription level of 175 percent. However, perhaps the success of this initiative serves to highlight the comparative lack of effective liquidity management tools elsewhere in Islamic investor environments. Structured products both in the form of structured investments and risk management tools are too scarce in the Islamic sphere and it is not possible for a secondary market in Sukuk trading or for effective liquidity management programs to be put in place without the commensurate development of such products. Sukuk should not be the only asset class available to investors, but at present that seems to be the case. Many investors that bought into Sukuk pre-2008 were convinced that it was a product almost immune from default. Much was written in support of this idea, but this has proven not to be the case as many high-profile examples have shown. Declining balance sheets and declining asset valuations will always result in a loss irrespective of the assetbacked versus asset-based debate.

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Any investment, whether it is a conventional credit derivative or an asset-backed true sale Sukuk, carries the risk of financial loss as well as gain. This sort of risk is a central tenet of Shari’a and cannot be ignored. What is more important, however, is for those with excess liquidity looking for investment opportunities to be provided with such opportunities through a wide variety of products that provide a real variation in risk profile as well as products that can manage that risk and therefore provide diversity. No portfolio should be overreliant on one asset class and Shari’acompliant portfolios are no different.

Growth Opportunities Sukuk to fund infrastructure are becoming more common, with Malaysia exploring one such issuance to fund development of the urban mass rapid transport system (MRT) in Kuala Lumpur — a project that is currently predicted to require RM36 billion (US$11.25 billion). Other infrastructure and project financing opportunities continue to present themselves in Africa and in Asia. Infrastructure lends itself particularly well to Islamic financing as there are assets either in place or in the process of construction. Infrastructure assets such as the proposed Malaysian MRT are also revenue generating assets which are ideally suited to Islamic structures.

Any investment, whether it is a conventional credit derivative or an asset-backed true sale Sukuk, carries the risk of financial loss as well as gain. What has also become noteworthy in the past 12 months is the willingness of non-Islamic institutions and corporates to consider Islamic finance as a source of funding. The lack of supply has created a bottleneck of demand which has pushed down yields much to the delight of issuers. This has led a number of conventional institutions to choose Sukuk ahead of conventional bonds as a result of such pricing pressure. As the sophistication of investors grows, so should the availability of more structured investment products. Sukuk should not be

the only asset class available for investment and both structured deposits and Shari’a-compliant swaps should provide opportunities for investment in new products. A Shari’a-compliant total return swap or price return swap structured through a Musawamah are examples of products that could address this gap in the market. Such products are particularly useful when overcoming investment hurdles such as foreign ownership restrictions. They are also a useful means by which investors who find themselves in a long position vis-à-vis a particular stock option incentive scheme or similar can try to unlock liquidity opportunities. However, in order to achieve this, products need to be created which specifically address the needs of Islamic investors.

Conclusion Islamic finance faces the same problem it has faced for many years when it comes to liquidity: a lack of assets in which to invest and a lack of a secondary market for those assets. The success of Bahrain’s short-term liquidity programs are clear evidence that such initiatives are needed and well received and it is hoped that similar products can be offered by other sovereigns in the future. The growing familiarity with Islamic finance means that Sukuk should not be as focused on the property market as they once were with infrastructure projects now coming to the fore. This familiarity also leads to a wider geographical diversification with countries from Brazil to Japan seeking to issue a sovereign Sukuk. However, Sukuk cannot be allowed to be the only asset class for Islamic fund managers and as such a greater diversification must be achieved in order for such funds to be properly managed. The Islamic finance market has come a long way but there is much still to do in order for it to truly rival its conventional equivalent. Dominic Harvey is a partner in Vinson & Elkins’ Abu Dhabi office and a member of the Finance practice and Barry Cosgrave is an associate in Vinson & Elkins’ Dubai office and a member of the Finance practice. This article previously appeared in Islamic Finance News, July 2012.

Islamic Finance News (IFN) Issuers & Investors Asia Forum Monday, October 1 - Tuesday, October 2, 2012 | Kuala Lumpur, Malaysia Vinson & Elkins is proud to sponsor the 2012 IFN Asia Issuers & Investors Forum. The forum will explore growth opportunities, question Asia’s exhibited resilience towards the world’s current financial woes, and discuss investor appetite for Asian-based investments and their concerns. Through a series of exclusive regulatory country presentations, practitioner-led roundtable discussions, original case studies, and sector focused side sessions, the IFN Asia Forum is the key, must-attend industry event for issuers, investors, regulators, and all financial intermediaries involved in the Islamic financial markets with the slightest interest in the Asian markets. On Monday, October 1, V&E partner, Dominic Harvey, will speak on “Islamic Asset, Project and Infrastructure Finance - Regulation, Structures and Opportunities in Asia and Beyond”.


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Has the New Dawn of Solar Finally Arrived in the Middle East? Despite the abundance of sun in the region and the regular expressions of desire to roll out solar generation programs on both a micro and utility scale, the most we could reasonably say to date is that we have seen “green shoots” for the solar sector in the Middle East and North Africa (MENA). While North Africa (particularly Morocco) seems to be moving forward at pace, there has been little sign of significant development in the Gulf Cooperation Council (GCC)1 countries or even the Levant area. We can point to the success of the 100MW Shams 1 CSP project in the Emirate of Abu Dhabi, which is nearing completion, and smaller 10MW plants in Abu Dhabi and the Kingdom of Saudi Arabia, but there is little else in terms of significant movement on installed solar capacity in the region. On the positive side, there is new capacity in the pipeline. Masdar is currently working on the development of its next 100MW project, the Noor 1 PV project, and the general speed of regional project implementation appears to be about to ramp up with the announcement of two new formal renewable energy programs in the United Arab Emirates and Saudi Arabia. Additionally, King Abdullah City for Atomic and Renewable Energy (K.A.CARE) recently announced plans to generate 41GW solar energy over the next ten years at an estimated cost of US$109 billion. In Dubai, the development of a new 48 square kilometre solar park was also recently announced, which will boast 1GW of capacity at an estimated cost of US$3.27 billion. The park is to be named after His Highness Sheikh Mohammed bin Rashid al Maktoum, the ruler of Dubai, and Vice President and Prime Minister of the UAE. These are both very significant programs in terms of size — not just by Middle East standards, but also in comparison to global solar developments to date.

So What’s Changed? The rapid increase in the demand for power throughout the MENA region has been driven largely by population growth, expanding economies, and the development of energy intensive industries — three factors that have put a strain on the region’s conventional fuel sources in recent years. This demand is forecasted to continue to grow at more than seven percent per year for the foreseeable future, which will require an additional 80 to 90GW of new capacity by 2017.2 Taking Saudi Arabia as an example, the country’s 2009 domestic consumption of oil and gas was 69 percent higher than in 1999, but its 2011 consumption of crude oil for power jumped an estimated 340 percent in the last five years alone.3 In addition, political and commercial issues have prevented the development of planned gas pipeline interconnections in many other regional jurisdictions, such as the proposed pipelines from Qatar to Bahrain and Kuwait, and from Iran to Sharjah and Oman. This suggests the Middle East is running out of time to introduce significant renewable energy into its generation mix.

Why is Solar the Answer? Solar irradiance levels in the MENA region are very well matched to meet the midday summer demand peak. It is the opposite


of Europe or many parts of North America. Here in the Middle East, the middle of the day in summer represents the time that everyone turns on their air-conditioning and power demand spikes to a peak. Those of us who are involved in the renewable energy business know the capital cost per unit of power output is comparatively expensive. It is unlikely the capital costs will ever reduce to the low levels enjoyed by gas-fired combinedcycle power generation. But that is the key. Solar is not trying to compete there—its true value is represented by “shaving the peak.” Peak power in the Middle East currently costs a lot of money to generate and solar competes with it already in many places where expensive peak pricing of fuel stock (e.g., diesel, spot LNG) comes into play. Grid parity is already upon us to a significant degree. When relying on conventional fossil fuels alone, the summer demand of about 10.8GW is met with baseload combined-cycle turbines running on cheap legacy gas, together with expensive imported LNG. If 3.5GW of solar PV capacity is introduced, the optimal generation mix changes and the need to “top up” the power supply during peak hours by using expensive LNG-run open-cycle turbines can be almost entirely eliminated.4 With oil prices above US$13 per MMBtu (about US$80 per barrel oil), solar PV projects become commercially viable in the generation mix without the need for subsidies. As imported gas and/or oil prices continue to increase, this break-even point will continue to drop and solar power will become increasingly more cost effective. This is without factoring in any economic benefit to be obtained through emissions trading schemes, which appear to be growing in influence around the world.

What Are the Other Drivers? The Arab Spring and Diversification of Economies The Arab Spring has clearly identified the need to respond to the demands and aspirations of the region’s population. Many GCC countries have very young populations which will soon be entering the workforce and seeking new job opportunities. For example, 60 percent of the population of Saudi Arabia is currently under the age of 25. According to the European Photovoltaic Technology Platform, every megawatt of solar power installed creates about 50 jobs in research, manufacturing, installation, and distribution activities. Research has shown that for every 100MW of solar power installed, US$600 million of GDP growth is generated. These factors have lead to a strong push by regional governments towards clean technology and renewable energy innovation as a source of job creation. Many MENA countries have recognized the importance of diversifying their economies and moving away from the traditional reliance on fossil fuel generated income. For example, the Abu Dhabi government, in an effort to encourage the transition towards knowledge-based and export-oriented industries such as renewable energy, has announced a commitment to making renewable energy sources account for at least seven percent of the Emirate’s total power generation capacity by 2020.5 Almost all of this new capacity will come from solar energy. The Shams and Noor projects represent a good step forward in meeting those

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targets. The decision will contribute to the ongoing diversification of the Emirate’s economy and it is estimated that this commitment will create a renewable energy market valued at more than US$6 billion over the next 10 years. On the other hand, some commentators believe that the future lies in creating a large manufacturing base of solar panels in each of the Middle East countries looking to implement solar programs. That concept may not hold true and probably warrants further examination. We accept that if Saudi Arabia implements its program in full, there may well be an economic incentive to install significant manufacturing capacity as a result of the scale of that program. Nonetheless, we remain to be convinced that this would apply across other jurisdictions. More likely, governments would have to fabricate such a market by specifying local content requirements in their programs.

For the third year in a row, Vinson & Elkins was ranked as a law firm providing extraordinary client service in the BTI Client Service A-Team 2012 report, published by BTI Consulting. The report ranked 306 law firms serving large and Fortune 1000 companies, and is based solely on client feedback from more than 200 corporate counsel interviews. This ranking also earned V&E a place in The BTI Client Service 30 for 2012, a list of 30 firms who surveyed clients say offer the best client service and have truly differentiated themselves in the eyes of the client.

If governments are to roll out solar programs in a competitive bid scenario with a local content requirement, then this will lead to paying higher than necessary electricity costs as opposed to allowing the market to choose a cheaper source of product (whether it be from China or elsewhere). Should this happen (and setting aside the wails of discontent from electricity regulators in the region), the governments would just be funding another form of subsidy for renewable energy. Is that where regional governments want to end up? A solar program can create jobs in research and development, and based on location, will also necessarily create jobs in maintenance and some in manufacturing. After all, some 60 percent of the cost of a solar PV plant is not related to panels—it relates to the balance of the plant (concrete/steel foundations, the inverter and transformer pads, high voltage wiring, etc). But one needs to be realistic about the aspiration of hosting an entire solar value chain in each country in the region. We must remember that many governments in Europe and elsewhere have also claimed the blossoming renewable energy market as their answer to increased job creation and promotion of economic growth in these difficult financial times. It is not an approach that is exclusive to the Middle East.


The Environment It is now established wisdom that burning crude oil and its derivatives releases harmful greenhouse gases. The MENA region is facing rapidly rising pollution levels and the accompanying high costs and widespread reduction in quality of life. The region currently has the world’s second-highest air pollution levels (behind South Asia), and the estimated particulate matter concentration is nearly 50 percent higher than the global average.6 It is estimated that damage costs due to particulate matter emissions in MENA countries are equivalent to about 0.9 percent of GDP—nearly double the world average of 0.5 percent.7 Clean energy sources that do not burn fossil fuels and release particulates would significantly improve air quality. Lost Opportunity Cost As well as meeting increasing power demands, renewable energy also has the potential to reduce the domestic consumption of valuable fossil fuels which can then be sold at market prices in the international market. In Saudi Arabia, oil supplied to power plants domestically at the subsidized price of US$4 per barrel is oil that could otherwise be sold on international markets at a much higher price. The Saudi Electricity and Co-Generation Regulatory Agency estimates that by 2030 the country could burn 850 million barrels of oil a year (30 percent of its crude output) to generate electricity domestically rather than exporting it at world market prices.8 In those countries where oil resources are being consumed for domestic power generation (and that does not apply to every country in the region), solar power generation makes economic sense.

What Are the Barriers? Lack of Single Point Responsibility The renewable energy industry needs a focus for its efforts to engage in the development of a renewable energy program. In most countries in the MENA region, there is no clear ownership at the government level of issues related to renewable energy. This position is beginning to change however as various institutions are being mandated to secure the growth of renewable energy in a country (e.g., MASEN in Morocco, K.A.CARE in Saudi Arabia). Allocating responsibility to one central body allows the industry to engage meaningfully with a country’s goals and targets. Lack of Regulated Environment In most MENA countries, the regulatory environment is structured such that national utility companies define power generation requirements which they are mandated to meet at the lowest possible cost. For this reason, the models for procuring and developing the power sector usually involve private developers under independent power producer (IPP) schemes and at a utility scale only. This procurement model is geared toward large-scale, conventional power stations, which are able to meet specific generation/dispatchability requirements. Again, this position is changing as the traditional IPP model is adapted to suit renewable energy plants on a case by case basis. For example, the Shams 1, 100MW CSP plant adopts a modified form of the Abu Dhabi IPP model such that the power purchase agreement has been extensively modified to take into account the “take-or-pay”/ non-dispatchable nature of a solar plant.

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However, procurement of renewable energy on a project-byproject basis (regulation by contract) is time-consuming. To implement wide scale use of solar technology in the shortest time, governments must consider alternatives and this does not necessarily require the implementation of a “feed-in tariff.” There are some examples of positive changes in the regulatory environment. Jordan has enacted a renewable energy law designed to kick start the implementation of renewable energy projects on a broad basis but to date its government has failed to get behind any significant development. However, the process of developing a regulatory framework which identifies clear policies to govern the installation and distribution of solar power is now underway in several other key markets such as the UAE and Saudi Arabia. As these programs come online and result in development of generation capacity, it is hoped that more and more countries in the region will start adopting policies which will gradually make the MENA region a global hub for solar power. Lack of Funding Sources The economic crisis has also led to a global lack of liquidity which has in turn made financing of renewable projects more costly. Bank lending is a precious commodity in the international markets and the Middle East is no exception. Major project development across the region competes for those sources of funding and the smaller-scale renewable energy projects are still seen as getting less “bang for the buck.” However, the nature of solar generation projects (particularly in the PV space) could turn this to their advantage. As the capital cost of PV panels drops, so does the capital cost of funding these projects, ensuring less demand for lending. It will be easier to cover funding gaps on smaller projects than multi-billion dollar projects in other sectors. Further, solar PV is modular. It can grow over time, allowing the possibility to structure lending on a similarly modular basis as plant is brought online and the construction and related performance risk is removed. Lending becomes less risky and could therefore attract more risk-averse lending institutions. Local Law Requirements Many countries in the Middle East have complex local law requirements which can prove difficult to navigate for new entrants to the market. Local ownership obligations and complex licensing arrangements require more attention to local law regulation than is commonly the case in the U.S. or European countries. Many new businesses fall afoul of the strict terms upon which a business can operate in the region (licenses do not necessarily cover all activities a business may wish pursue in the field). These and the foreign ownership restrictions may potentially discourage, or at least make it difficult to attract, some investors, but each can be successfully navigated with the appropriate guidance. This is something that we do on a regular basis for clients in the renewable energy sector.


Next Steps It is now clear that major governments in the region are serious about the implementation of a renewable energy program. It will take time to roll out the programs announced by K.A.CARE and the Dubai government. The devil is always in the detail and it would be foolish if each country did not take its time to ensure that implementation of these programs is tailored to the varying specific requirements or individual jurisdictions. A mere reproduction of what has gone before in the U.S. or Europe would inevitably result in unnecessary difficulties and significant delays. However, the formal commitment of a country to a program and the setting of goals is a very positive step and, for that reason, we are excited by some of the previously mentioned announcements by regional governments looking to expand renewable and alternative energy production and look forward to the next stages of solar energy development in the region. Jon Nash is a partner and Christina Kersey is an associate in Vinson & Elkins’ Abu Dhabi office and members of the Energy Transactions/Projects practice. V&E is currently advising Masdar on the implementation of a 100MW solar PV plant in the Emirate of Abu Dhabi and also recently advised K.A.CARE in connection with the establishment of a legal and regulatory framework for renewable and alternative energy in the Kingdom of Saudi Arabia. The firm is a founding member of the Emirates Solar Industry Association and the Middle East Clean Energy Business Council. 1 The GCC consists of the United Arab Emirates, the Kingdom of Bahrain, The Kingdom of Saudi Arabia, The Sultanate of Oman, Qatar, and Kuwait. See The Cooperation Council for the Arab States of the Gulf Secretariat General, http://www.gcc-sg.org/eng/indexc64c.html?action=GCC. 2 Ibrahim El-Husseini et al., A New Source of Power: The Potential for Renewable Energy in the MENA Region, Booz & Co. 5 (2009), available at http://www.booz.com/media/file/A_New_Source_of_Power-FINAL.pdf [hereinafter Booz & Co.] 3 Saudi Arabia’s Coming Oil and Fiscal Challenge, Jadwa Investment (July 30, 2011), http://www.susris.com/2011/07/30/saudi-arabias-comingoil-and-fiscal-challenge/ 4 Sunrise in the Desert: Solar Becomes Commercially Viable in MENA, Emirates Solar Indus. Ass’n &PricewaterhouseCoopers Int’l Ltd. (January 2012), available at http://www.pwc.com/en_M1/m1/publications/sunrise-in-the-desert-incollaboration-with-emirates-solar-industry-association.pdf. 5 Joanna Hartley, Abu Dhabi Pledges 7 percent Renewable Energy by 2020, Arabian Bus., Jan. 19, 2009, http://www.arabianbusiness.com/abu-dhabipledges-7-renewable-energy-by-2020-81231.html. 6 Booz & Co., supra note 2, at 6. 7 Id. 8 Rhys Clay, Saudi Arabia to Unleash Solar by Investing $109 Billion, The Energy Collective, May 14, 2012, http://theenergycollective.com/ node/84828.

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Dubai Cares Honors Vinson & Elkins for Pro Bono Work Vinson & Elkins was honored for its pro bono work with Dubai Cares at the charity’s fifth anniversary celebration. V&E has supported Dubai Cares on pro bono legal matters since its establishment by His Highness Sheikh Mohammed bin Rashid al Maktoum in 2007. The charity has provided education and infrastructure to over seven million children in 28 countries, including building and renovating 20 schools and 1,500 educational centers in Bangladesh, providing daily free meals to 320,000 students in

Ahmed el-Gaili, Lucy MacArthur and Barry Cosgrave above (left to right)

Ghana, and supplying drinking water and health care facilities to 2,300 schools in Mali and Indonesia. Dubai Cares partners with organizations including The Bill & Melinda Gates Foundation, Médecins Sans Frontières, and Oxfam. V&E partner Ahmed el-Gaili received the award on behalf of the firm, whose volunteers have included associates Barry Cosgrave, Philip Dowsett, and Lara Turner and Trainee Solicitors Lucy MacArthur and Zeina Haidar.

Ahmed el-Gaili receives an award on behalf of the firm from Sheikh Hamdan bin Mohammed bin Rashid Al Maktoum, Dubai Crown Prince.

Islamic Finance News 2012 Vinson & Elkins has been recognized as Best Law Firm for Cross-Border work and Mergers and Acquisitions in Islamic Finance News’ 2012 IFN Law Poll. Additionally, V&E lawyers Barry Cosgrave, Dominic Harvey, Kamar Jaffer, Ayman Khaleq and Amar Meher have been named leaders in their field across 13 areas of law.

ACQ Global Awards 2012 The ACQ Global Awards are an annual awards program celebrating the best industry practitioners across Europe, the Americas, Asia Pacific, the Middle East, and Africa in a variety of fields. Magazine readers participate in a voting system to select the winners. V&E is pleased to have been selected as an ACQ Global Award winner for 2012 in the following categories: Construction Law Firm of the Year — UK Capital Markets Law Firm of the Year — U.S. Competition Law Firm of the Year — U.S. Corporate Governance Law Firm of the Year — U.S. Environment Law Firm of the Year — U.S. Insolvency & Restructuring Law Firm of the Year — U.S. Law Firm of the Year — UAE


Project Finance Law Firm of the Year — UAE Mergers & Acquisitions Law Firm of the Year — U.S. Oil & Gas Law Firm of the Year — UAE Oil & Gas Law Firm of the Year — U.S. Product Liability Defence Law Firm of the Year — U.S. Patents & IP Law Firm of the Year — U.S.

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MENA Partners

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Vinson & Elkins’ Shale & Fracking Tracker If you are following Vinson & Elkins’ Shale and Fracking Tracker — a resource focusing on legal, regulatory, and other newsworthy developments about horizontal drilling and hydraulic fracturing — you’ll know that we have added a Global Fracking Resources section. There, you’ll find up-to-date, proprietary reports on shale development around the world with country-specific legal, political, and economic information. Vinson & Elkins’ Shale and Fracking Practice Group attorneys conduct ongoing research and analysis that is available to all visitors to the site in executive summary form. Full access to the premium content versions of each country profile with more in-depth information and analysis is available upon approved request. We encourage you to visit this new resource at http://fracking.velaw.com/publications-resources/global-fracking-resources-ii/, and to return often to review updated country information as well as new country profiles.

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