Despite the rapid growth and interest in the Islamic finance sector, until now there has not been a firmly accepted structure for project financing that can satisfy the requirements of all stakeholders.
In January 2008, however, Standard Chartered Bank, WestLB AG and Dubai Islamic Bank (DIB) closed a unique and innovative Islamic project finance structure, developed in consultation with DIB’s Shariah board and Lovells as legal adviser, which it is anticipated will set the precedent for future project financings.
This syndication was the first major Islamic project financing in Africa and represents the first ever World Bank Group political risk cover for a Shariah compliant deal. The container port project is meant to help Djibouti improve its role as a gateway port to East Africa.
Background
The project company, Doraleh Container Terminal SA, a Djibouti-registered company, was granted a 30-year concession to construct and operate the Doraleh Container Terminal in Djibouti to service predominantly landlocked Ethiopia and adjourning countries.
Doraleh Container Terminal SA is a joint venture between DP World of Dubai and the Djibouti government.
The financing for the project, which won ProjectFinance magazine’s 2007 African Infrastructure Project Finance Deal of the Year award, was settled on the basis of a Musharakah/Istisna/Ijarah structure, with the structure working as follows.
The participating banks, represented by DIB as investment agent, and the project company entered into a Musharakah agreement to implement the project, whereby both parties agreed to contribute capital for the purposes of the Musharakah.
For the investment agent, this capital contribution is the funding provided by the participating banks and for the project company the contribution is its rights, benefits and entitlements in and to the concession agreement and the project generally as well as the equity investment.
Simultaneous to this, though standing conceptually as an independent arrangement, the project company and the Musharakah partners entered into an Istisna agreement.
The forward lease requires the payment of advance rental during the construction phase and actual rental during the operating phase.
Documentation
Other important documentation included a sale undertaking and a purchase undertaking to accommodate early repayment and acceleration respectively, with the sale undertaking also being the mechanism, whereby title to the project is returned to the project company at the end of the forward lease period.
A servicing agency agreement was also an important component of the arrangement as major maintenance and repair must be undertaken by the lessor.
Under this document, the investment agent appoints the project company as the servicing agent.
This is the first Islamic project financing which benefits from a multilateral investment guarantee agency (MIGA) political risk guarantee.
During the negotiation process, MIGA showed a great deal of flexibility in structuring its policy to fit in with the complex nature of the Musharakah/Istisna/Ijarah financing structure.
While the formulation and negotiation of the structure were lengthy to achieve an appropriate project financing model that was completely Shariah compliant, it is anticipated that this model will be embraced by financiers seeking an Islamic project financing structure that does not affect their usual expectations under a conventional financing.
As Islamic finance had not previously been adapted to project finance in such a successful way, this deal showcases not only the dynamic and flexible nature of Islamic finance but that its underlying structures can be viewed with confidence by the market.
Doraleh Container Terminal
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