Privatisation full of Eastern promise

Oil prices may be down but firms are increasingly looking to the Middle East as work in power projects and privatisations surges.

“Law firms are extremely focused on what is going on in the Middle East and Africa,” says Peter Taylor, projects partner at Clifford Chance.

“The Middle East is more immediate than Africa, which is slow-moving and viewed as a medium to long-term investment. The potential for project work is huge.”

Lawyers say there has been a shift of focus in recent years from pure energy work to the financing work that goes with privatisation.

Brian Cassidy, former head of Scottish firm Ledingham Chalmers' office in Azerbaijan's capital Baku, says that the downturn in oil prices has had a knock-on effect: “We were aware of potential investment from the Middle East into Azerbaijan. But with the low price of oil, investment has slowed.

Cassidy, who is now based in Ledingham's Edinburgh office, says his firm is now advising multi-lateral lending agencies on infrastructure projects, whereas in the past its primary source of work lay in direct investment.

Ewan Cameron, Clifford Chance's local partner for Dubai, says the downturn in oil prices has, ironically, been a catalyst for opportunities. “The budget deficits and downturn in oil revenues has led governments to challenge the balances between public and private sector investment, and forced them to implement long-standing world bank recommendations.”

UK firms have been heavily involved in privatisations in the region. In January, a 35-strong London-based project team at Denton Hall completed the corporatisation of the water and electricity sectors in Abu Dhabi, which included the restructuring of the industry sectors in preparation for privatisation.

Often a combination of Middle East and western offices are involved – US firm White & Case's London, New York and Riyadh offices worked together on the privatisation of SCECO West, a power project at Shoaiba in Saudi Arabia.

And there is also room for more than one international firm to advise on complex financing deals.

Clifford Chance is advising InterGen on the first Egyptian private power project, in Sidi Krir. White & Case is advising the investment arm of the World Bank. The banks involved, which include Barclays, are being advised by Shearman & Sterling.

According to many lawyers, it is not important where the firms' offices are. What is important is where the particular project is financed.

Peter Finlay, head of project finance for White & Case in Europe, Middle East and Africa, says: “Teams in London, New York and Paris are deployed according to where finance is raised.”

White & Case's Paris office recently advised on the financing of coal-fired power plants in Jorf Lasfar, Morocco. Finlay explains: “A Moroccan deal would typically involve a Paris team, as French banks are likely to be involved.”

White & Case and Clifford Chance argue that as far as their business is concerned, the Middle East stretches from North Africa and Israel through to India. Projects in this area are dealt with from western financial centres, while power projects further east are financed in Asia and dealt with from the Singapore or Hong Kong operations.

Clifford Chance's Taylor says his firm has slimmed down and centralised Middle East operations. Since the Gulf War, he argues, firms have developed business in the area but have not felt the need to have offices throughout the region. He says not having an office in every city has not been a disadvantage, claiming the amount of local work has been very limited.

The big debate, however, is whether smaller firms will be able to ride the wave of new business. The common belief is that large-scale projects tend to be the preserve of large-scale firms as they have the resources to carry out complex and labour-intensive work.

The simple fact that international firms have resources across a range of different disciplines makes them attractive, and for this type of work regional offices are dispensable, claims Taylor.

On the other hand some analysts believe that smaller, focused firms are more flexible and in an ideal position to develop business in the region.

In October Denton Hall acquired Fox & Gibbon's offices in Cairo, Istanbul and Gibraltar. These offices now trade as Denton Fox & Gibbons.

At the time of the acquisition, Michael Doble, managing partner of Denton Hall's Middle East practice, said: “The markets in Turkey and Egypt are poised for take-off and we can see tremendous opportunities in both countries for our international projects practice – and also for corporate work.”

Many use City firm Trowers & Hamlins as an example of a smaller-firm success story, having just opened in Cairo and moved to larger premises in Oman earlier this year.

Trowers & Hamlins markets itself as “the largest law firm in the Middle East”. And its new Cairo office gives it a large presence in the region, with offices in Abu Dhabi, Bahrain, Dubai and Oman.

David Wilson, who heads the Cairo office, hopes to target the growth in financing work. He says: “Egypt has a rapidly expanding economy and there are some exciting projects already under way, particularly in the power, telecommunications and oil & gas sectors.

“We will be concentrating on project finance, capital markets, banking and insurance work.”

The firm, alongside White & Case and Shearman & Sterling, advised on the first project financing in the United Arab Emirates (UAE) – the $750m (u469m) Taweelah A2 water desalination project, which is part of the Abu Dhabi government's comprehensive privatisation drive to restructure the water and electricity sectors.

Trowers & Hamlins is hoping to use its increasing experience of working in the region to expand its international projects portfolio. Adrian Creed, the firm's resident partner in Abu Dhabi, whose team advised the developers on English, Abu Dhabi and UAE law, says: “Taweelah A2 is expected to provide a blueprint for future privately financed power and water projects.”

But usually there is work for both regional and international firms with a Middle East practice. With the complex international nature of the work and the political sensitivities of the area, governments may look at a combination of advisers. McKellar says local firms are appointed for local legal advice in tandem with an international firm with global experience.

He explains: “There is only a very small number of very specialist project finance lawyers.”

Cameron points to the need for local expertise: “On a deal the scale of the Saudi telecoms privatisation, the reality is you have to have people on the ground.”

McKellar agrees, arguing that firms are often selected on an ad hoc basis according to personality and compatibility.

Although the number of power projects that have been completed is quite small, the general trend towards a more complex mixture of specialities is growing.

The growth in finance work can be seen by the number of other institutions focusing on the area. The latest figures on businesses in the Middle East show that consultants, accountants and banks are heavily investing in the changing economy.

James McKellar, investment director at Barclays, which was also involved in the Taweelah power project, anticipates more deals in the region.

“Banks have a big appetite for Abu Dhabi,” says McKellar. He explains this is in part because of the UAE government's good credit rating, but also because it rarely comes to international banking markets for financing. In addition, he says, there is an established local banking market.

Whether this drive towards finance work can be achieved through local focused firms or through strategic relationships between international players and local networks, is still to be seen.

However, White & Case's Finlay sounds a warning note for firms looking to focus too narrowly on the current boom in privatisation business. He advises firms moving to the area to have more long-term view. A Middle Eastern practice, he argues, must be broader than simply power projects.

His own firm also offers banking, litigation and arbitration services and he believes that with the region's market changing so rapidly, firms would be wise not to put all their eggs in one basket.