The laws governing project financing in UAE are strict and precise. Project financing is the long-term venture that is generated from investors based on the cash flow of the project. In UAE the law concerning any project financing is covered by Federal Law Number 18 of 1993 regarding the Commercial Transactions Law enforced by commercial code and the Federal Law Number 5 of 1985 relating to Civil Code. There are two major sectors in the UAE that is power and water sector which is run by project financing under the law of Abu Dhabi and Dubai governments. Nevertheless, the introduction of PPP (Public-Private Partnership) which was enforced in November under federal Law number 22 of 2015 which will initiate the new partnership with the private sector by the government that used to be only with the power and water sector.
In UAE. Any project financing to take place requires approvals from the government that authorize the upcoming important project which can be planning and environmental license to real estate. In regards to water and power, it needs to be permitted by the Regulatory and Supervisory Bureau (RSB) to provide security to the investor. Every financing project is investigated case by case, by the prosecutor to tackle any financial issues. Any financing project that is likely to take place in any free zone, should follow the rules set by the regulator who controls that zone along with general law in check. It is moreover, important to register or file the project development with finance papers of the project to ensure the safety of the lender. Any organization project initiated in UAE to operate as an independent power producer or independent water producer can hold only 49 % while the majority will be held by the UAE national or companies.
To structure financing projects it is significant to know the parties involved that including Sponsors, Public authority for the relevant segment, Lenders, Construction contractors. These are commonly used for project financing in UAE. The majority of funding can be generated from banks which can be up to 70% to 80% of the total cost of the project while the other 30 % is likely from other lenders like shareholders, equity, and share capital. This has many advantages mainly from a sponsor point of view which can be shared risk, long term depth shared which brings equity of more return in the future. One of the main reasons to be attracted to project financing by the host government is the rapid development of infrastructure with the advancement of technologies that adds to the overall growth of the economy. Nevertheless, there is risk associated which can be separating huge amounts from a bank for long-term financing with the risk involved further negotiating with other lenders on terms. This all can be provided with certainty by forming the documentation in terms of shareholder documents, finance and safety documents, and development documents.
Many jurisdictions around the world enforce legislation for Public-Private partnerships or related methods to generate financing for the project. Public-Private Partnership is the agreement between the government body and the business sector to work together to finish the project which is usually for long-term purposes. The Dubai Law No 22 of 2015 has passed its own PPP. This will regulate the partnership between the public body and the private sector.
The major reason behind UAE adopting Public-Private Partnership is to meet the goal and program set for a suitable viable economy to meet the demand for expert’s knowledge in diverse markets like UAE. Additionally, it is an economical source of generating finance keeping the risk minimal to make the use of the private sector. Furthermore, it supports the private sector to advance by creating more opportunities in the international market with foreign investment. The UAE 2017 resolution (1/1) aims to provide guidelines concerning the ministry of finances. Under the Dubai enforced Law No. 22 of 2015, the government has initiated many projects with the private sector to involve more sectors in the growth of the UAE. Keeping the terms intact is the priority of the UAE therefore, the government sets the rules for practicability of the project cautiously, commercially, technically, and communally. Moreover, funds will be allotted in the different government sectors to meet the demand for financing.
There is no general restriction on the transaction of Public-Private Partnership when initiated under the set laws of UAE. The overriding factor of Public-Private Partnership is a return of the investment will be based on the asset valuation of the project being financed. It is important to note the key difference between project finance with other finances. That is sponsors under project financing can protect themselves against the risk associated with the project or debt by using a special purpose vehicle which is a subsidiary company that will take the risk instead of the parent company. However, sponsors with another source of financing will have to join the debt with the balance sheet of the organization. Regardless of the method of financing there can be security in form of a direct agreement that is a Business direct agreement, infrastructure contract direct agreements, Procedure, and maintenance direct agreements, Source contract direct agreements, Off-take direct agreements.
Foreign investment denotes investment in local companies and assets of the company by foreign investors which includes corporations, commercial institutions, and private investors. In UAE there is no system for foreign investors incentives regardless. The UAE does not impose any tax on any sector, either its overseas or local investments for the corporation but there can be the introduction of VAT shortly where registration, permits, and more can be enforced. That being said, there is an open offering process by the government to promote sectors in different fields which will be considered case-by-case basis. UAE being the joint to many sectors for investment makes it is a safer option for foreign investors further political involvement in UAE is comparatively lower with other jurisdictions which eases the concern for project financing in UAE.
Since there is no establishment against currency account in UAE it can be established and withstand locally and in other jurisdictions. With the timeframe for distribution being available, there is a lesser restriction for shareholders to inject money in the parent company or to pay dividends which are the problem with some of the jurisdiction. In general, the only limited restriction could be with the importation of types of equipment from overseas of plant or machinery essential for the project which will be assessed on a case-by-case basis.
With foreign investment, the law can be different for another jurisdiction. The initial right to choose the law of one particular jurisdiction is given to the contracting party as per the article of Article 19 of the Civil Code which states that the law of the country where the contract formed will be an application for the contract made. Unless there is an agreement or requirement that needs to be tailed as per the given project. But as per Article 27 of the same law if there is a conflict of interest between a law against Article 19 which includes sharia rules, public conduct, and morals of UAE the law governing of state will apply. Likewise, as per Article 28 which states that the determination of the law of other countries proves difficult to imply or interpreted, concern the law of UAE should be implemented.
Article 20 states that the UAE court will hear cases that are against nationals of UAE and foreigners that have the status of residence apart from those with real property disputes. As per article 24, the court has control over finance and project documents when it interrupts Article 20 With any disputes between the Emirates of UAE, no law provides the immunity against the state yet the permission of the ruler is required to litigate against the state in concern. Failure to meet this, request to court will be rejected as per the Dubai Law No 3 of 1996.
There has been a huge growth in the commercial sector that deals with real estate considering the financing structure. Although, with the introduction of new laws in the UAE there have been many changes concerning the ownership of property. Security and insolvency have been much more flexible now when compared to other provincial countries. The recent development can be seen from the previously enforce Article 4 of Law 7 of 2006 about real property authorization which was wholly owned by UAE and GCC national companies. Nonetheless, with enforcement of law 3 2006 for designated areas, Article 4 now provides non-nationals to freehold ownership short of restriction or to own the property for 99 years with leasehold contract for selected areas.
The project financing in Dubai for real estate needs to be following the law set by UAE despite changes unless and until based on a case basis for major corporations. Nevertheless, there is flexibility with lenders in international banks. Keeping aside the other risk factors that relate to project financing. The international bank, which provides the majority financing can be reluctant when lending huge investments unless and until there is a local agent appointed or substitute security is provided. moreover, the local banks usually lend the financing to the corporate sector than a special developer for the project. One possible way out is to guarantee the payment through the parent company that way the security is on priority since the return will be with parents and not based on the return of the project profit to minimize high risk. The developer is usually reluctant with this method of security since the guarantee of the parent company can provide financial information about the company. this will limit the borrowing power of the company and in terms of the financial crisis, the developer has to settle the dispute until the financed project is completed.
It is possible to expect the current situation with convention and sharia financing in the real estate and banking sectors. However, with a current market situation that has seen vast growth in real estate, there is an increase of financing by a developer which can make possible changes following a mature market. additionally, with changes in legislation with project financing the real estate can also expect some changes in financing structure.