2017 Project Finance Report: Saudi Arabia

In April 2016, the government of the Kingdom of Saudi Arabia (the Government) announced Vision 2030, a comprehensive agenda of socio-economic reforms with the aim of achieving fundamental economic, social and structural changes in Saudi Arabia by the year 2030.

The economic reforms envisaged by Vision 2030 are expected to stimulate significant demand for project financing. In addition to a number of new large-scale infrastructure projects, Vision 2030 reaffirms the Government's commitment to an extensive privatisation programme that has already been initiated in a number of sectors, including telecommunications, oil and gas, petrochemicals, mining, aviation, housing real estate, logistics, and electricity and water.

Export credit agencies from the US, Europe and Asia Pacific regions have traditionally been very active in Saudi Arabia, principally supporting suppliers from their home jurisdictions seeking to participate in major oil and gas and power sector projects.

In addition, the Government has established five specialised credit institutions (SCIs) which provide medium- to long-term loans to SMEs and the industrial, real estate and agricultural sectors. The SCIs comprise the Agricultural Development Fund, the Saudi Credit and Saving Bank, the Public Investment Fund (PIF), the Saudi Industrial Development Fund and the Real Estate Development Fund. The total assets of the SCIs reached SAR635.3 billion ($169 billion) as at December 31 2015 and total loans outstanding reached 55.3% of the SCIs' total assets as at that date. While the PIF has historically been a significant source of loans for strategically important projects, In 2016 as part of Vision 2030 it underwent a restructuring with regard to its future role in Saudi Arabia's economy.

The Islamic Development Bank, an international Islamic financial institution that supports economic development and social progress in its member states, is also headquartered in the city of Jeddah, Saudi Arabia.

Further, the Ministry of Housing has recently established a real estate refinancing company owned 100% by the PIF to help inject SAR50 billion during the coming five years in the real estate sectors (housing in particular).

There is no general public-private partnership (PPP) law in Saudi Arabia and individual PPP projects are governed by the terms of their own concession arrangements.

The right of the concessionaire to grant security in project assets to its lenders will be governed by the terms of its concession. Furthermore, even if the terms of the concession permit a concessionaire to pledge its shares in the project company, minimum ownership requirements and other similar provisions in the concession may restrict the ability of the lenders to enforce their pledge over the concessionaire's shares in the project company without the consent of the Government or contracting authority.

The Investment Law requires that any company with foreign shareholders (with certain exceptions for Gulf Cooperation Council (GCC) entities) be required to obtain a foreign capital investment licence issued by the Saudi Arabian General Investment Authority.

Once appropriately licensed, a company with foreign shareholders generally enjoys all privileges and incentives offered to wholly Saudi-owned companies, such as ownership of freehold property that is necessary to carry out the licensed activity, privileges granted by the double tax treaties to which the Kingdom of Saudi Arabia is a party and rights to repatriate profits. It should be noted, however, that pursuant to the Investment Law, the Council of Economic and Development Affairs (a newly established government body reports to the Council of Ministers) issues a list of certain industrial and service sectors in which foreign investment is prohibited. This list is regularly reviewed and amended.

Non-Saudi citizens (other than GCC nationals) must obtain a residency permit to reside in Saudi Arabia. Companies are required to register their employees' contracts with the Ministry of Interior before residency permits can be issued. Each company is permitted a certain quota of residency permits. Employees cannot work for anyone other than their sponsor company and sponsorship cannot be transferred until the employee has worked for their original sponsor company for at least two years.

The Government has a strategic goal to increase the proportion of Saudi employees in both the public and private sectors. This policy is known as Saudisation and is effected by requiring companies, through Nitagat (a program established by the Ministry of Labour), to employ Saudi citizens.

Once a company has been appropriately licensed, it would be unusual for the Government to seek to unwind a lawful private transaction entered into by that company. There are of course specific exceptions – for example, under the Expropriation Law, a Government entity may expropriate private real property to undertake a public interest project if certain conditions are satisfied and equitable compensation is provided to the private sector owner of such property.

Saudi Arabian tax laws provide for actual withholding tax at different rates on payments made to non-resident parties (including those located in the GCC) by a Saudi resident from a source of income in Saudi Arabia. Services are defined to mean anything done for consideration other than the purchase and sale of goods and other property. Interest or loan charges paid to non-residents generally attract five percent withholding tax in Saudi Arabia, unless such withholding tax is reduced or eliminated pursuant to the terms of an applicable double tax treaty.

There are no general restrictions on the holding of foreign exchange or the making of payments in foreign currency.

The insurance and reinsurance industry in Saudi Arabia is governed by the Law On Supervision of Co-operative Insurance Companies and regulated by the Saudi Arabian Monetary Agency. Both foreign and domestic companies undertaking insurance or reinsurance business in Saudi Arabia are subject to a number of additional restrictions, controls and fees arising out of such regulations.

Reinsurance requirements remain a very common element of large-scale project financing transactions in Saudi Arabia.

Under Saudi Arabian law, there is no general right for an insured party to cut-through to claim directly against a reinsurer. Such a right would have to be provided for specifically in the reinsurance contract by way of a cut-through clause or by way of assignment in favour of the insured party of the insurer's right to claim against the reinsurer under the reinsurance contract. If a cut-through clause were included and the insured party were able to identify the relevant reinsurer, a Saudi Arabian adjudicatory authority may permit the reinsurer to be added to any proceedings relating to the insured party's claim.

A Saudi Arabian adjudicatory body would not be bound by a submission to the jurisdiction of foreign courts or a submission of disputes for resolution by arbitration, as the case may be. Saudi Arabian law also does not recognise the doctrine of sovereign immunity.

A Saudi Arabian adjudicatory body would not be bound by the choice of English or New York law as the law governing a specified contract and would apply Saudi Arabian law, which does not recognise the doctrine of conflict of laws.

The recognition and enforcement of a judgment obtained in a court outside the Kingdom of Saudi Arabia requires the submission of that judgment to an enforcement judge, who would be responsible for enforcing foreign judgments and orders, subject to:

• the provisions of any bilateral or multilateral treaties and conventions for the reciprocal enforcement of judgments;

• verification by the enforcement judge that, pursuant to an official confirmation by the Ministry of Justice, the country or state in which the foreign judgment was rendered would recognise and enforce a Saudi Arabian judgment in the same manner as a domestic judgment; and

• satisfaction of certain conditions contained in the Enforcement Law, including (among other things) that: the foreign judgment does not conflict with any decision issued in relation to the same subject matter by a Saudi Arabian adjudicatory body; the subject matter of the foreign judgment is not a matter over which the Saudi Arabian adjudicatory bodies have exclusive jurisdiction; and the foreign judgment contains nothing that contravenes the Shari'ah or public policy of Saudi Arabia.

In the event that a foreign judgment is not enforced in whole or in part under the aforementioned procedure, the judgment creditor could proceed by way of a new proceeding instituted in the Kingdom of Saudi Arabia before the appropriate Saudi Arabian adjudicatory body.

With respect to the enforcement of foreign arbitral awards, we note that Saudi Arabia has acceded to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (the New York Convention). As a result, an arbitral award obtained against a Saudi Arabian person in an arbitral proceeding held in a New York Convention member state should be recognised and enforced in conformity with the New York Convention, though we note that, in reliance on the public policy exception under the New York Convention, the Saudi Arabian adjudicatory bodies may enforce only those portions of the award which, in the view of the Saudi Arabian adjudicatory bodies, do not contravene the principles of Shari'ah or Saudi Arabian public policy (such as the award of interest).

We also note that arbitral awards within the Arab League would be subject to the Convention on Enforcement of Judgments and Awards dated September 14 1952 and that Saudi Arabia has acceded to the Gulf Cooperation Council Convention on the Enforcement of Judgments and Judicial Representation and Notices among members of the Gulf Cooperation Council.

Under the general principles of Saudi Arabian law, it is permissible to create a security interest known as a rahn, which terms means mortgage as well as pledge, in respect of collateral, from which it is possible to obtain payment or satisfaction of a debt. In addition to such principles, the Commercial Pledge Law Implementing Regulations address mortgages of movable property which can be validly or properly sold.

Project finance transactions usually feature pledges over facilities, equipment, onshore accounts and shares and assignments of contracts.

Although it is in principle possible to grant security over real property by way of pledge, it is uncommon to do so in favour of commercial banks. This is because, in practice, such a pledge is unlikely to be enforceable against third parties without notarisation and public notaries in Saudi Arabia typically refuse to record pledges on real property other than in limited circumstances in which Governmental funds are financing a real estate development.

In addition, it should be noted that a pledge would not be effective in respect of assets acquired by the pledgor after the effective date of the pledge and, as a result, it is not possible under Saudi Arabian law to create security over a class of assets including future assets. Such future assets may, however, be made part of the collateral by providing that the relevant pledge is amended and restated periodically and by taking other action to ensure the pledgee has the necessary possession and control of such future assets.

Contractual subordination is not generally precluded as a matter of Saudi Arabian law. However, subordination provisions that purport to give effect to a ranking or priority in right of payment that differs from the ranking prescribed by law is unlikely to be upheld in an insolvency of the relevant debtor.

Under Saudi Arabian Law, a mortgage or pledge is validly created only upon the pledgor delivering to the pledgee actual possession and control of the collateral. If a Saudi Arabian adjudicatory body determines that the pledgee failed to obtain, or ceased to have, possession and control of the collateral, the pledgee will be treated as an ordinary creditor and his claims will rank pari passu with all other unsecured claims against the pledgor.

In the case of an assignment of contractual rights, the consent of the contractual counterparty is generally required in order for the assignment to be effective as against that counterparty.

A pledge or assignment of bank accounts presents a particular challenge as regards perfection under Saudi Arabian law. As funds flow through such bank accounts over time, it is difficult to establish indicators of possession over the cash balance at any one point in time and to deal with the issue that security may only be taken over existing collateral (as opposed to a future flow of funds through a bank account which is the subject of collateral).

Pledges over assets (other than real estate) are also required to be registered with the Unified Centre for Lien Registration (UCLR). The UCLR implementing regulations are silent on whether the failure to register a pledge with the UCLR would make the pledge unenforceable so, as a matter of best practice, pledges are typically registered at the UCLR whenever possible.

Notarisation and registration fees will apply in connection with entry into pledges of certain assets; however, these are typically not significant costs in the context of a project financing transaction.

The pledgor and pledgee may agree to appoint a third party collateral agent, or adl, to hold collateral on the pledgee's behalf. If the collateral agent takes possession of the collateral, such possession is equivalent to possession by the pledgee.

As a general matter, the commencement of insolvency proceedings does not itself affect a secured party's rights to enforce its security in accordance with available enforcement procedures – please see the responses to questions 10.2 and 10.3 below.

As a general matter, a Saudi Arabian adjudicatory body will permit a secured party to enforce its security if there has been a failure by the debtor to pay or repay an amount of principal in accordance with the relevant procedures stated in the Enforcement Law. It is unclear whether a Saudi Arabian adjudicatory body would permit a secured party to take enforcement action in respect of any other event of default and, under Saudi Arabian law, security cannot be enforced because of a failure by the debtor to pay interest (howsoever described).

The specific enforcement procedure will depend on the nature of the assets in respect of which enforcement action is to be taken. In the case of enforcement in respect of personal property, a petition may be filed with the Board of Grievances to sell the pledged personal property by way of a court-supervised public auction.

Self-help remedies are not available under Saudi Arabian law, even if contractually provided for in the terms of a security arrangement.

About the author
		Chirag Sanghrajka Associate, Latham & Watkins London, UK T: +44 20 7710 4670 T: +971 4 704 6377 E: chirag.sanghrajka@lw.com W: www.lw.com Chirag Sanghrajka is an associate in the London and Dubai offices of Latham & Watkins, and is a member of the Project Finance and Development Practice Group. Sanghrajka focuses on project finance and banking (including Islamic finance) transactions in the energy, infrastructure and natural resources sectors.

About the author
		Abdullah Al-Hoqail Associate, Latham & Watkins T: +966.11.207.2522 E: abdullah.al-hoqail@lw.com W: www.lw.com Abdullah Al-Hoqail is an associate in the Riyadh office of Latham & Watkins. Al-Hoqail regularly assists government agencies, regional and international financial institutions, public and private companies on a range of matters, including banking and finance, debt and equity capital markets, regulatory, in addition to general corporate matters.

About the author
		Zaid Nael Shalhoub Associate, Latham & Watkins London, UK T: +44 20 7710 4669 E: zaid.shalhoub@lw.com W: www.lw.com Zaid Shalhoub is an associate in the London office of Latham & Watkins, and is a member of the firm's Finance Department. Shalhoub's practice focuses on the representation of sponsors, borrowers and developers as well as credit agencies, commercial and investment banks, and other financial institutions in connection with the development and financing of projects.