1. The article first appeared in a slightly different form in the July 2006 edition of
Islamic Finance.
Islamic Project Finance in
The Kingdom of Saudi Arabia
Craig Nethercott and Mohammed Al Sheikh – White & Case llp
Hissam Kamal and Sheikha Al Sudairy – HSBC Saudi Arabia Limited
On March 2, 2006, the project finance in the Gulf in large financings, including
market saw the long awaited debut of a US$530 million Islamic tranche in the
Saudi Aramco to the project finance Qatari Qatargas II financing in 2004 and a
market, with the US$5.8 billion financing US$260 million Islamic financing tranche in
for the US$9.9 billion Petro-Rabigh project the Omani Sohar smelter financing in 2005.
(the “Rabigh Project”)—Petro-Rabigh is a
50/50 venture between Saudi Aramco and However there was a common scepticism
the petrochemical company Sumitomo as to whether the products applied in
Chemical of Japan. Qatar, Oman and elsewhere in the Gulf
could be used in Saudi Arabia. The full
On completion of the project, the spectrum of Islamic financing products is
Rabigh complex will be one of the world’s commonly utilised in Saudi Arabia (mostly
largest integrated export-oriented refinery in retail banking), but never before had an
and petrochemical complexes. The Rabigh Islamic financing product been used in a
complex will produce 18.4 million tons per multi-sourced financing.
annum of high value petroleum products and
2.4 million tons per annum of ethylene- and The Rabigh Project Islamic tranche is
propylene-based petrochemical derivatives. based on a form of Istisna’a, a Procurement
Agreement, entered into between a special
An important component of the US $5.8 billion purpose company, in this case—Rabigh
financing was a US$600 million Islamic Assets Leasing Company Ltd (the “SPV”), as
financing tranche provided by the leading Purchaser and the project company—Petro
Saudi, regional and international banks: Rabigh, as Procurer. Under the Procurement
APICORP Bank Al Bilad, Calyon, Citibank,
, Agreement Petro-Rabigh agrees to procure
Islamic Development Bank, Gulf International assets (two new core units for the Rabigh
Bank, Riyad Bank and SABB. The Islamic Project) for the Purchaser by a certain
financing tranche represented, at the time date. Liquidated damages are payable in
of signing, the first Islamic financing tranche the event that the assets are not delivered
in a multi-sourced project financing in on schedule.
Saudi Arabia and the largest ever Islamic
finance tranche in a project financing. Petro-Rabigh (as lessee) and the SPV
(as lessor) entered into a Forward
Islamic financing tranches using the Istisna’a Lease Agreement (Ijara-fil Thimma) to
(a sale of asset(s) to be constructed) lease the assets on delivery until the
and Ijara (an Islamic lease) combination year 2020. Petro-Rabigh and the SPV
had been successfully used elsewhere also entered into a Service Agency
SEPT 2006 | 0766

2. Islamic Project Finance in The Kingdom of Saudi Arabia
Agreement, whereby Petro-Rabigh was appointed concern regarding whether or not Islamic finance
as agent to provide certain services (including structures used elsewhere in the Gulf could be
maintenance and insurance). As with other regional applied in Saudi Arabia. A few important changes to
transactions, Petro-Rabigh and the SPV entered the mechanics of the Islamic finance structure were
into a Purchase Undertaking in favour of the SPV required in order to improve the enforceability within
with respect to the assets, to purchase the assets Saudi Arabia’s local legal environment. The final
from the SPV upon the occurrence of certain events structure was not only considered in compliance with
of default. the local Shariah perspective, but also satisfied the
other diverse stakeholders’ requirements: the equity
The Rabigh Project established a viable framework providers (Saudi and Japanese), governmental financial
within the Saudi legal system for the inclusion of institutions (including a multilateral development bank
Islamic tranches in multi-sourced transactions. At and Saudi and Japanese government agencies), the
the time of writing it is understood that at least one EPC contractors and a varied range of banks (both
other transaction has included an Islamic tranche dedicated Islamic banks and other banks).
(based on the Rabigh Project structure) in its
financing plan. With the development of a product that can be
used in project financings in the Kingdom what is
First, the scepticism as to whether the structures the future potential for the product in upcoming
used elsewhere in the Gulf could be replicated in project financings?
Saudi Arabia was based, in part, on the perception
that certain practice and legal impediments to the Islamic financing products are most attractive to
replication of the structure existed, a good example project finance sponsors in large capital projects when
being the availability of a “special purpose company” they can deliver additional capital participation—the
in Saudi Arabia. “additional benefit” being very important. The inclusion
of multiple financing sources, be it export credit
An important element of the structure used agency, bond or Sukuk, adds structural complexity
elsewhere in the Gulf is the use of the “special (and with complexity comes a time cost and execution
purpose vehicle” to act (on behalf of the Islamic risk). The Islamic financing therefore needs to bring
facility participants) as the “purchaser” and the that “additional benefit” to overcome the perceived
“lessor”. The “special purpose vehicle” structure process and structural burden associated with the
has perceived benefits for both the Islamic facility inclusion of an Islamic financing tranche.
participants (such as protecting the participants
from some of the extraneous risks associated with Two issues in the current market which limit the
the ownership of the asset, e.g., environmental commercial ability of Islamic finance tranches to
liability) and the lessee (the asset is not held by deliver this “additional benefit” are “price” and
the Islamic participants directly). As a general rule “tenor.” The pricing of project financings in the
the Ministry of Commerce in Saudi Arabia does Middle East has reached historic lows—the pricing on
not permit the establishment of “special purpose the Rabigh Project was a reference rate plus 0.35%
companies”. However in the Rabigh Project both the pre-completion rising to 0.65% late in the maturity
Saudi Arabian Monetary Authority and the Ministry of the tranche. The ticket size is also commonly
of Commerce were supportive in the establishment US$100 million. Pricing alongside the ticket size and
of a “special purpose company” (namely Rabigh tenors of up to 15 years makes for an unattractive
Assets Leasing Company Ltd) for the purpose of the proposition for a number of potential domestic banks
Islamic financing. The shareholders of the “special (including Islamic banks) which tend to focus on retail
purpose company” were both Saudi banks. In other banking, whereas international banks (which have
words, there were no changes in regulations per access to more developed capital markets) consider
se but an increasing flexibility towards this form of these terms attractive given the available alternatives.
financing by the authorities.
An aspect that is increasingly important in raising
Second, legal enforcement issues as well as approval capital and distributing wealth is the development
by local Shariah Scholars presented another area of of the local equity and debt capital markets in
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3. Islamic Project Finance in The Kingdom of Saudi Arabia
the Gulf. The headline news generated by Sukuk either by banks (as part of their capital raising) or by
issuance (a debt capital market instrument targeted project companies would naturally be an important
primarily towards institutional investors) and IPOs instrument to meet these needs.
(Initial Public Offerings of equity targeted towards
public participation) illustrates that more public
forms of capital are being sought and promoted in Craig Nethercott is a Partner in White Case’s
large financings. global Energy, Infrastructure and Project Finance
Practice. He has worked on a variety of project
With the development of Islamic finance products finance transactions throughout the Middle East
and the increasing desire to engage and include and most recently advised Saudi Aramco with
the public in financing infrastructure development, respect to the Rabigh Project.
“public values” is an increasingly important driver in
the selection of a financing structure. It is expected Mohammed Al Sheikh is a White Case Partner
that the size of Islamic finance tranches in multi-tranche and the executive Partner of The Law Office of
financings will increase and wholly-Islamic financings Mohammed Al Sheikh in association with
will emerge (in fact, HSBC is currently advising White Case based in Riyadh. Mohammed
Sponsors on project financings in the Kingdom that is engaged in general corporate practice and
are contemplated to be wholly Islamic in nature). concentrates in particular on project finance
transactions.
Project finance companies have, especially in
Mohammed Al Sheikh and Craig Nethercott
Saudi Arabia, tapped in to public funds with IPOs.
co-head the White Case Islamic Finance Unit.
This is a regulatory requirement in certain sectors
and all IPOs to-date have been successful Hissam Kamal (Director, Islamic Finance) and
particularly in the petrochemicals sector. But Sukuk Sheikha Al Sudairy (Associate, Islamic Finance)
(an instrument providing for structured ownership advised Saudi Aramco and Sumitomo Chemical on
in assets of activities) issuance has to date been the Islamic financing with respect to the Rabigh
a less utilised instrument in project financings in Project. Both Hissam and Sheikha are in the
the Gulf. This is not surprising as project finance Islamic Finance team (HSBC Amanah) of
bonds are highly specialised and not common HSBC Saudi Arabia Limited, which is responsible
forms of capital even in developed capital for advising, arranging and lead managing
markets. However, the intrinsic nature of a Sukuk HSBC’s Islamic financing activities in Saudi Arabia
complements equity participation and would be a in the areas of Sukuk, project finance, syndications
natural instrument for project re-financing. Indeed, and structured finance.
in the Rabigh Project, provisions for the issuance
of Sukuk post project completion (by banks rather Views are those of the authors and not of any of
than Petro-Rabigh itself) were built in to the the institutions mentioned in the paper.
financing structure.
The information in this article is for educational
purposes only; it should not be construed as
Furthermore, the very large capital need forecasted
legal advice.
for the projects envisaged to be implemented in
the next three to five years demands more creative Copyright © 2006 White Case
capital raising techniques and Sukuk issuance,