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Unlocking the Potential of Project Financing in Saudi Arabia’s Energy Sector

Posted on May 2, 2023 - 9:59 am by perpetual-admin

Project financing has played a significant role in the development of the energy sector in Saudi Arabia. The Kingdom is a critical player in the global energy industry, and its vast oil and natural gas reserves have helped fuel economic growth for decades. In recent years, however, the Saudi government has recognized the need to diversify the country’s energy mix and reduce its reliance on fossil fuels. As a result, there has been a surge in investment in renewable energy projects, which has required innovative financing solutions.

Project financing is a method in which the lender provides financing for a specific project based on its expected cash flows rather than the borrower’s assets. This method of financing is often used in large infrastructure projects, such as those in the energy sector, where the risks and costs are high. In Saudi Arabia, project financing has become an increasingly popular method of financing energy projects, particularly those involving renewable energy sources.

The Saudi government has set ambitious targets for renewable energy development, with plans to generate 9.5 gigawatts of renewable energy by 2023 and 58.7 gigawatts by 2030. The government has launched several initiatives to achieve these targets, including the National Renewable Energy Program (NREP) and the Green Middle East Initiative, which aim to attract private sector investment in renewable energy projects.

One of the advantages of project financing is that it allows investors to spread their risks across multiple stakeholders. In the energy sector, this means that lenders can share the risks associated with the project developers, contractors, and other stakeholders. This approach can help reduce the project’, making it more attractive to investors.

Another advantage of project financing is that it provides a structured framework for managing the project’s cash flows. This is particularly important in the energy sector, where projects can have long lifetimes and complex cash flow structures. Project financing allows investors to manage these cash flows in a predictable and structured manner, which can help to mitigate the risks associated with the project.

In Saudi Arabia, project financing has been used to fund a range of energy projects, including solar and wind power plants and transmission and distribution infrastructure. For example, in 2018, the Saudi Arabian government signed an agreement with a consortium of international lenders to finance the 300 MW Sakaka solar project, which is expected to generate electricity for 75,000 households. The project is being developed by ACWA Power, a Saudi-based energy developer, and is one of the first utility-scale solar projects in the country.

Another notable project in Saudi Arabia is the Dumat Al Jandal wind farm, which is being developed by a consortium led by French energy company EDF Renewables. The project, which is expected to have a capacity of 400 MW, will be the country’s first utility-scale wind farm and is expected to generate electricity for up to 70,000 homes. The project is financed through a mix of equity and debt, with international lenders providing project financing.

Project financing is a complex process that requires careful consideration of various legal aspects. This is particularly true in Saudi Arabia, where the legal system is based on Islamic law, and local regulations can differ from those in other countries. This article will explore some critical legal aspects investors and developers should consider when seeking project financing in Saudi Arabia.

Contractual Frameworks

One of the most important legal aspects of project financing in Saudi Arabia is the contractual framework that governs the project. The contractual framework should clearly define the rights and obligations of all parties involved in the project, including the lender, borrower, and other stakeholders. It should also establish dispute resolution mechanisms in case of disagreements.

In Saudi Arabia, project agreements are typically governed by Saudi Arabian law, and ensuring that the contracts comply with local regulations is essential. Investors should also consider incorporating Shariah-compliant financing structures based on Islamic finance principles.

Security and Collateral

Another critical legal aspect of project financing in Saudi Arabia is the security and collateral required to secure the loan. Lenders typically require a range of security and collateral to protect their investment, including mortgages, pledges, and guarantees.

In Saudi Arabia, the legal system recognizes various forms of collateral, including real estate, movable assets, and shares in a company. Ensuring that the collateral is appropriate and enforceable under Saudi Arabian law is important. It is also essential to ensure that the collateral is sufficient to cover the loan in case of default.

Regulatory Compliance

Saudi Arabia has a highly regulated business environment, and project financing transactions are subject to various regulatory requirements. Investors and developers must comply with various laws and regulations related to foreign investment, taxes, and environmental protection.

Working with experienced legal advisors familiar with the local legal and regulatory environment is essential to ensure regulatory compliance. Before starting the project, investors and developers should also obtain all necessary licenses and permits.

Dispute Resolution

Disputes are an inevitable part of any project financing transaction, and it is essential to establish clear and effective dispute resolution mechanisms. In Saudi Arabia, disputes can be resolved through various methods, including arbitration, litigation, and mediation.

Arbitration is often preferred as it is more efficient and confidential than litigation. Investors should ensure that the dispute resolution mechanism is clearly defined in the contractual framework and complies with local regulations.

As the Kingdom progresses toward a more sustainable future, project financing in the energy sector will undoubtedly play a crucial role. By prioritizing the legal aspects of project financing, investors and developers can ensure that their renewable energy projects in Saudi Arabia are set up for success. With the right approach and partnerships, project financing in Saudi Arabia can unlock opportunities for growth, innovation, and long-term success in the energy sector.

However, investors and developers must know the various legal aspects of project financing in Saudi Arabia. This includes ensuring the contractual framework is transparent and complies with local regulations, providing sufficient collateral, and meeting all necessary regulatory requirements. Effective dispute resolution mechanisms must also be established to mitigate potential conflicts. Working with experienced legal advisors can help ensure a successful project financing transaction in Saudi Arabia.

Powering Up: M&A in Saudi Arabia’s Energy Sector

Posted on May 2, 2023 - 9:57 am by perpetual-admin

Mergers and acquisitions (M&A) within the energy sector in Saudi Arabia has become increasingly common in recent years. With the country being the largest oil exporter in the world, the energy sector is a critical component of the Saudi Arabian economy. As such, M&A activity within this sector has significant implications for both the country and the global energy industry.

M&A activity within the energy sector in Saudi Arabia is primarily driven by a desire to increase operational efficiencies, gain access to new technologies, and expand market share. Additionally, the recent economic and political reforms in the country have encouraged foreign investment, which has further fuelled M&A activity within the energy sector.

One notable example of an M&A within the energy sector in Saudi Arabia is the acquisition of a 70% stake in Saudi Basic Industries Corporation (SABIC) by Saudi Aramco, the state-owned oil company. The acquisition was completed in 2020 and was one of the largest M&A deals in the world, valued at $69.1 billion. The acquisition allowed Saudi Aramco to diversify its business and expand its downstream capabilities, while also giving it access to SABIC’s technology and expertise.

Another notable example of an M&A within the energy sector in Saudi Arabia is the acquisition of a 51% stake in ACWA Power, a leading developer and operator of power generation and desalinated water plants, by the Public Investment Fund (PIF), the sovereign wealth fund of Saudi Arabia. The acquisition was completed in 2018 and was valued at $1.2 billion. The acquisition allowed PIF to expand its investments in the renewable energy sector and support the country’s efforts to diversify its energy mix.

Here are some continued themes impacting the energy sector in Saudi Arabia:

Diversification of the energy mix: Saudi Arabia has set ambitious goals to diversify its energy mix and increase its share of renewable energy. The country plans to develop 58.7 gigawatts (GW) of renewable energy capacity by 2030, which would account for 30% of the country’s energy mix. This shift towards renewables is expected to reduce the country’s reliance on oil for power generation and support its efforts to reduce greenhouse gas emissions.

Continued investment in the energy sector: Saudi Arabia has signaled its commitment to investing in the energy sector to support its economic growth and diversification goals. The country’s Public Investment Fund (PIF) has announced plans to invest $40 billion annually in the domestic economy, with a significant portion of this investment expected to be directed toward the energy sector.

Expansion of Renewable Energy: The country has set ambitious targets for renewable energy, with a goal of generating 50% of its electricity from renewable sources by 2030. This target is expected to drive significant investment in the renewable energy sector, particularly in solar and wind power.

Increased Foreign Investment: Saudi Arabia has been actively seeking foreign investment in the energy sector, particularly in the form of joint ventures and partnerships. The recent reforms in the country, coupled with its large reserves of oil and gas, are likely to attract continued foreign investment in the sector.

Growth in the downstream sector: The country has significant downstream capabilities, with its state-owned oil company, Saudi Aramco, being one of the largest downstream players in the world. The country is expected to continue to invest in its downstream sector to capture more value from its oil and gas resources and support the growth of its petrochemicals industry.

Adoption of new technologies: Saudi Arabia has been exploring the use of new technologies in the energy sector, such as carbon capture and storage (CCS) and hydrogen production. These technologies could help the country reduce its carbon footprint and increase its energy efficiency. Saudi Arabia is expected to adopt new technologies to increase operational efficiencies and reduce costs in the energy sector. This includes the adoption of digital technologies such as artificial intelligence, the internet of things, and blockchain to improve efficiency, reduce costs, and enhance safety.

Impact of Global Energy Transition: The global transition to cleaner energy sources is likely to have a significant impact on the energy sector in Saudi Arabia. While the country is taking steps to diversify its energy mix, it remains heavily dependent on oil exports. As the demand for oil declines in the global market, Saudi Arabia may need to adjust its energy strategy to remain competitive.

M&A activity within the energy sector in Saudi Arabia is subject to a range of legal and regulatory requirements. The Saudi Arabian General Investment Authority (SAGIA) and the Capital Market Authority (CMA) regulate M&A activity in the country and must approve all transactions. Several laws impact energy companies in Saudi Arabia who are considering an M&A. Some of the key laws are as follows:

Companies Law: The Companies Law in Saudi Arabia governs the formation, operation, and dissolution of companies in the country. The law provides guidelines on the various types of companies that can be formed, their legal structure, and the rights and obligations of shareholders. Any M&A transaction involving a company in Saudi Arabia must comply with the requirements of the Companies Law.

Antitrust Law: The Saudi Arabian General Authority for Competition (GAC) is responsible for enforcing the country’s antitrust laws. These laws prohibit anti-competitive practices, such as price fixing and market allocation, and require that M&A transactions be reviewed for potential anti-competitive effects.

Foreign Investment Law: The Saudi Arabian General Investment Authority (SAGIA) is responsible for regulating foreign investment in the country. The Foreign Investment Law outlines the rules and regulations governing foreign investment in Saudi Arabia, including the procedures for establishing and registering foreign-owned companies.

Environmental Laws: Energy companies in Saudi Arabia are subject to a range of environmental laws and regulations that are designed to protect the environment and public health. These laws cover areas such as air and water pollution, waste management, and environmental impact assessments.

Tax Laws: M&A transactions may have tax implications for energy companies in Saudi Arabia. The country has a complex tax system, with different tax regimes for different types of companies and industries. Energy companies should seek professional tax advice before engaging in an M&A transaction.

Securities Law: The Capital Market Authority (CMA) regulates the securities market in Saudi Arabia. Any M&A transaction that involves a public company or the issuance of securities must comply with the requirements of the Securities Law.

In conclusion, the energy sector in Saudi Arabia is expected to undergo significant changes in the coming years, driven by a range of factors such as diversification, renewable energy, foreign investment, new technologies, and the global energy transition. While these changes may bring challenges, they also present opportunities for the country to adapt and thrive in a rapidly evolving energy landscape.

Saudi’s (CMA) Board Ecludxes Foreign Strategic Investors from 49% Foreign Ownership Cap in Listed Companies

Posted on August 19, 2021 - 3:08 pm by perpetual-admin

Saudi Arabia recently eliminated the cap for foreign strategic investors in shares of listed companies. The Kingdom eased its rules to increase international funding and diversify its investor base. This decision will allow foreign strategic investors to purchase controlling stakes in the nation’s economic sectors that surpass 49 percent. By 2030, their financial regulators expect the relaxed rules to raise foreign investment to ten percent of the nation’s GDP. International investors can purchase majority ownership in the country’s commercial lenders for the first time in almost 40 years.
The Capital Market Authority (CMA), based in Riyadh, adopted the Foreign Strategic Investors’ Ownership in Listed Companies instructions. According to the nation’s regulators, the new laws will increase their market’s attractiveness and efficiency. It will also expand Saudi Arabia’s institutional investor base. There will be no maximum or minimum limits placed on foreign investors concerning the ownership of listed companies.
According to the CMA, these steps align with the Kingdom’s Financial Sector Development Program objectives outlined in its Saudi 2030 vision program. The directive also adheres to its Financial Leadership Program, a strategic program launched by the nation. These instructions will go into effect on the date of their publication. Additionally, the CMA board amended the Rules of Qualified Foreign Financial Institutions Investment in Listed Securities (Subparagraph (a\2) of Article (14)). They also changed paragraph (2) of Part (3) of the Guidance Note for the Investment of Non-Resident Foreigners in Parallel Markets.
In the 1970s, the Kingdom forced foreign lenders to sell majority stakes in local operations to Saudi residents. Currently, the largest foreign strategic investors in Saudi Arabia are HSBC Holding Plc, Credit Agricole SA, and the Royal Bank of Scotland Group Plc.
During a telephone interview, Bloomberg News spoke with the CMA Chairman Mohammed El-Kuwaiz. “Saudi Arabia, increasingly, is open for business, not just or local investors but for international investors,” the regulatory official said. “It is ironic, I would say, that Saudi is rapidly opening up and embracing the world in a period when the rest of the world seems to be closing down.”
Saudi Arabia started introducing market reforms four years ago to help attract international investment and issuers. The Kingdom’s stock market remains one of the largest in the Middle East and Africa. According to data collected by Bloomberg News, the exchange has a capitalization of $540 billion.
In 2019, the Saudi Stock Exchange has seen an expansion of its international cash flow. The number of qualified foreign investors (QFI) in emerging market indicators rose from 453 QFIs to 1,195 in June 2019. This data represents a 163.7 percent increase. Additionally, the ownership percentage of QFIs in the Saudi Capital Market has skyrocketed from 4.7 percent in January 2019 to 7 percent. QFIs have made investments and purchases worth 51.2 billion riyals ($13.6 billion) by May 2019, and now own 6.6 percent of the nation’s equities.
Although the CMA has relaxed the 49 percent cap on foreign strategic ownership in publicly traded companies, other rules and limitations still apply. For example, industry authorities will need to approve deals that surpass the thresholds in different sectors such as petrochemicals and banking.
Chairman El-Kuwaiz said that the Authority has seen a huge request for investment from non-financial foreign investors. The CMA decided to grant approval on an exceptional basis to this select strategic foreign investor group. Non-financial foreign investors can now invest in Saudi Arabia’s listed company holdings.
According to the Capital Market Authority, qualified foreign investors (QFI) are individuals or companies that can invest in securities listed on the Saudi Stock Exchange in accordance with its rules. These laws regulate how foreign financial institutions invest in the Saudi Stock Exchange listed securities (including equities, debt instruments, and funds).
To qualify as a QFI, an applicant must be a financial institution that has a legal personality that falls into one of the six categories. QFIs must be either banks, brokerage or securities firms, insurance companies, government or related entity, investment fund, or Authority-eligible financial institution. Additionally, the applicant must possess assets under management equating to a SAR 1,875,000,000 (one billion eight hundred and seventy-five million Saudi Riyals), an equivalent amount, or more.
Additionally, the financial institutions must be licensed or monitored by jurisdictions who have standards equal to the CMA’s. The agency must provide an Authorized Persons (AP) who have a dealing or custody licenses in jurisdictions that apply regulatory and monitoring standards equal to the CMA, or pursuant to its Financial Action Task Force (FATF). Newly established financial institutions can submit applications to qualify as QFIs however, they must meet the nation’s minimum assets under management requirement.
Assets under management include those owned by the applicant or its group for investment purposes or owned by foreign portfolio managers or its group. An applicant (or account for another person related to the financial institution) can manage this account. These include assets owned by a foreign portfolio manager or their group for the account of another person or people.
The Kingdom requires strategic investors who buy stakes in a listed company to hold their investments for 24 months before they can sell them. This period doesn’t apply to those who already hold shares in listed companies unless they purchase more. The two-year rule will apply to the new shares.
For a full list of rules, please read the Capital Market Authority’s “Frequently Asked Questions on the Rules for Qualified Foreign Financial Institutions Investment in Listed Securities.”
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Category Archives: Uncategorized

Unlocking the Potential of Project Financing in Saudi Arabia’s Energy Sector

Powering Up: M&A in Saudi Arabia’s Energy Sector

Saudi’s (CMA) Board Ecludxes Foreign Strategic Investors from 49% Foreign Ownership Cap in Listed Companies

Jada Okur

Nadeen Ezzat

Ghada Alyamani

Mansour Almehdar

Mohd. Al-Mehdar

Saif Mutabbakani

Osama Binmahfouz