Castles in the sand
13 December 2010 | By Joanne Harris
Saudi Arabia is investing heavily in infrastructure to cope with a booming population, but international firms looking to make a fast buck may have to temper their ambitions for a while yet.
The Riyadh skyline is dotted with cranes these days, as artists’ impressions of grand futuristic buildings become reality.
The building boom in Saudi Arabia is just part of a huge, government-led initiative to modernise and expand the kingdom’s infrastructure. Saudi Arabia’s demographics are skewed towards the young, with recent estimates putting the proportion of Saudis aged 14 or under at around 40 per cent of the 27 million-strong population.
That means the kingdom is being forced to invest heavily in areas such as education and health, as well as building up its transport and power infrastructures, in preparation for the glut of children needing schooling and adults needing employment.
The ensuing raft of projects is providing plenty of work for lawyers in Saudi Arabia.
“It’s a boom,” says Donald Turley, who recently joined Clyde & Co’s associate Saudi firm Abdulaziz Al-Bosaily as a consultant. “It’s across all areas of infrastructure and the related construction flowing from that.”
In August King Abdullah approved Saudi Arabia’s ninth five-year development plan, worth $385bn (£246bn). The commitment means there is a reasonable amount of certainty that planned projects will go ahead.
Time for action
But the construction sector in the kingdom was not always so active. Mohamed Hamra-Krouha, a Clifford Chance partner seconded to Riyadh, who heads the projects practice at Al-Jadaan & Partners in Saudi Arabia, explains that project work slowed right down during the credit crunch and deals took longer to progress.
“We’re now seeing an acceleration in the timing of these projects and an increase in the volume of them,” adds Hamra-Krouha.
Paul Fitzgerald, a senior corporate lawyer at Trowers & Hamlins’ associate firm Feras Al Shawaf, agrees. “The official line’s been that things were just bubbling along, but they weren’t bubbling, they were simmering,” he says.
Fitzgerald says a pick-up was noticeable during the Muslim holy month of Ramadan in August, coinciding with the government’s announcement of the new plan.
Major projects springing up around the country include the Princess Noura Bint AbdulRahman University for Women, the King Abdullah Financial District and the King Saud bin Abdulaziz University for Health Sciences project. According to Mohammed Al-Jadaan, managing partner of Clifford Chance’s associated firm Al-Jadaan & Partners, the rate at which the Princess Noura University in particular has shot up has been phenomenal.
“It’s been an incredible workshop,” says Al-Jadaan, describing the pace of change on the Princess Noura site. He adds that the university is en route from Riyadh King Khalid International Airport to the city centre, meaning regular visitors witness the university’s rapid growth.
Other areas of infrastructure development include alternative power sources as Saudi Arabia seeks to diversify away from its reliance on oil and gas. A project to develop a copper mine is also underway, with Trowers involved on the Australian-Saudi joint venture.
Although the government is contributing a substantial amount of the capital needed for the projects, both Saudi and foreign banks are also investing.
“What we saw in the credit crunch was obviously a falling-off of new-money deals. Some transactions were reformulated as on-balance sheet,” explains Julian Johansen, an Allen & Overy partner working with Abdulaziz AlGasim Law Firm.
“What’s interesting is that recently we’ve seen some new-money deals coming in,” adds Johansen. “The banks, of course, are now coming under a bit of pressure to do something with the liquidity that many commentators say they’ve got. Most projects will have an offshore and an onshore element.”
PPPs are also increasing. White & Case Middle East executive partner Doug Peel points to the forthcoming expansion of the already enormous Holy Mosque in Mecca as an example. Construction group Saudi Binladen won the contract for the work, but is subcontracting elements to foreign companies, including US-based Johnson Controls for the air-conditioning units.
“I think that’s a model for what’s happening around the kingdom,” says Peel. “The techniques that are being used for PPPs now are driven by innovation in that sector all around the world.”
Project financing, therefore, has been and will continue to be a core part of Saudi legal practices, and several firms have been bulking up in the projects and project financing areas.
Most notably perhaps, Clifford Chance sent its joint London finance and capital markets head Tim Plews on secondment to Al-Jadaan in April. Plews’s high profile and long experience was a signal of the magic circle firm’s belief that the practice area would continue to bear fruit.
And the focus on financing is spreading out from projects.
“We’re working on some financing for local borrowers being financed by foreign banks, not necessarily as part of a project financing,” says Johansen.
Other external investment is manifesting itself through joint ventures across a number of fields. Fares Al-Hejailan, head of corporate at Freshfields Bruckhaus Deringer in Saudi Arabia, says the government is making efforts to use these to stimulate employment.
“There are a number of longstanding relationships that the government and the private sector has with international corporations all around the world in various sectors,” Al-Hejailan comments. “I think we’ve seen a push to encourage more international companies to step up operations in Saudi Arabia with the primary aim of utilising and employing young Saudis.”
He does not think this push is manifesting itself as political pressure. Instead, the government is encouraging companies to invest in Saudi Arabia and employ locals.
Al-Hejailan’s colleague Tobias Müller-Deku, managing partner at Freshfields in Saudi Arabia, says corporate activity is also beginning to pick up.
“If you look at my desk, what I’m really seeing is listings,” Müller-Deku says. “We’re being swamped with stock exchange listings. There’s clearly an equity boom in the making.”
Other lawyers are less confident about the market for listings. Fitzgerald says the recent IPO of Abdullah AM Al-Khodari Sons Company was undersubscribed, a situation he describes as “unknown”.
“If you talk to the corporate financing guys, they see there’s a lot of the early stages in the pipeline,” notes Fitzgerald, pointing out that much of the work is yet to translate into offerings.
Even the optimistic Müller-Deku adds a note of caution. The securities regulators in several of the six Gulf Cooperation Council (GCC) nations are currently reviewing listing rules, and Müller-Deku points out that this means “the parameters aren’t that good” for listing at present.
“Anybody who lists at the moment might be caught by these rules in market listing, which isn’t ideal,” Müller-Deku says, adding that this makes it harder to achieve the best price for listings.
Around 90 per cent of stock exchange listings by Saudi companies take place in the kingdom, by Müller-Deku’s estimate, although increasingly they are looking at other exchanges.
Find a friend
The activity in the Saudi market makes it a natural target for international law firms. However, the past few months have shown that maintaining a relationship with an associated Saudi firm is not always plain sailing. In February, White & Case was hit when associate partner Mohammed Al-Sheikh and partner Christopher Langdon jumped ship for Latham & Watkins.
White & Case then began the hunt for a new firm to team up with. Peel admits the process was tougher than he had expected. “From my perspective, to be quite plain about it, it took longer than we expected to find the right partner in Saudi Arabia,” he says.
The search eventually led to the doors of Waleed Al-Nuwaiser, who was previously associated with French firm Gide Loyrette Nouel. Gide announced it was pulling out of the Middle East at the end of October; by the first week of November White & Case had officially teamed up with Al-Nuwaiser.
“We’ve been collaborating now for a couple of months,” Peel says, adding that he is “delighted” with the partnership.
Al-Nuwaiser says the focus for international firms has moved away from simply finding a “sponsor” firm. “Both sides have become more sophisticated about the relationship and the need to take it to the next level,” he says.
Al-Hejailan, who joined Freshfields as a partner in March, after the firm switched its formal association from his firm to that of his father, also points to internationalisation and increased competition as factors in the complex relationship.
“Competition’s been good,” he says. “It’s made the standard go up. It’s made Saudis more aware of the need for them to deliver a high international standard.”
The best in the West
Meanwhile, Al-Jadaan says it is imperative to keep building up local talent. He praises Clifford Chance for its commitment to this role and emphasises the reciprocal secondments that are of benefit to lawyers from both sides of the relationship.
“We pay a premium to bring talent from Western countries,” Al-Jadaan admits. “It’s not the easiest place to find the right people and the right quality, and we have to pay them significantly more to attract them to come. We also need to show them that they can do transactions they’d be doing in London or New York.”
Lawyers already present in the kingdom think the arrival of other international firms is inevitable, although they also think the newcomers could struggle to do well.
“There are enough opportunities for international firms to come,” says Al-Jadaan. “The problem is that, if international firms are aiming to come to break even and make a profit in a short period of time, Saudi Arabia isn’t the place.”
Fitzgerald says that, although the market is picking up, it has been a “tough 12 months” for lawyers in Saudi Arabia.
“There are three or four major players and the rest of us are in the second tier,” he admits. “The rest of us have to fight a little bit harder for our living, but it’s going to be a growing market.”
Despite the headline projects in the kingdom, Fitzgerald offers a warning to lawyers hoping for a flood of exciting business.
“The majority of work out here isn’t cutting-edge at all,” he says. “It’s very much old-fashioned commercial solicitors’ work.”
But old-fashioned commercial solicitors’ work is not to be sniffed at as the global economy struggles to recover.
Lawyers also think that, compared with its GCC neighbours, Saudi Arabia is in a good position, with its infrastructure work and oil reserves giving it protection against a double-dip recession.
The upbeat mood in the kingdom looks set to continue for quite some time.