CONTEXT AND TRENDS
Qatar's profile has grown considerably since UEFA awarded it the right to host World Cup 2022. "No one had heard of Qatar before the World Cup, but now everyone is looking at it as an opportunity," says one lawyer....
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CONTEXT AND TRENDS
Qatar's profile has grown considerably since UEFA awarded it the right to host World Cup 2022. "No one had heard of Qatar before the World Cup, but now everyone is looking at it as an opportunity," says one lawyer. With the cost of implementing the plans set out in its bid mooted to be in the region of $220 billion, there will be a number of lucrative contracts up for tender. All too aware of this, foreign companies have been looking establish a foothold in the country. Qatar's strict foreign ownership restrictions, which stipulate at least 51% of all local companies must be owned by a Qatari national, mean foreign businesses can only enter the market through joint ventures, which have been generating a substantial level of interest recently. "There has been and I think we will continue to see a lot of joint venture activity. Principally it's being driven off the infrastructure projects that are going to take place over the next 10 years and I think when the consultants finish up their work and the real action can start, we're going to see more and more of that," observes one partner. A major recent example was the Qatar Foundation on a joint venture with Siemens.
Of the infrastructure projects which must be complete by 2022 only the stadiums are new. The bulk of the proposed developments – roads, railways, a metro system, tunnels, and bridges - were first outlined in the government's 2030 vision for the economy. "These projects were already planned but most of them got put on hold after the crisis. What the World Cup has done is accelerated some of these projects," says one lawyer. While the projects have been given fresh impetus, lawyers are still awaiting the RFPS. "What we've seen in 2011 is a lot of, I think, prudent introspection on the part of Qatar. They clearly realised they have 10 years until the World Cup to put the infrastructure together and the starting point is not to break ground and start building, but to sit back, take its time and plan," says one partner. Generally, the consensus is that projects will start coming to market after Ramadan. "Qatar rail is gearing up to appoint advisers and I imagine that will happen over the second part of the year," observes one lawyer.
Exactly how the government intends to fund the projects is not completely clear, but currently the state appears to be content to finance the deals itself. "A lot of the world cup related infrastructure doesn't seem to be being done primarily through projects there is a lot of direct procurement going on, which I think is understandable given the rather immovable timeline," says one partner. A recent example of this saw Qatar issue a $4 billion sukuk (Islamic bond), which attracted orders of $25 billion, indicating it will have no problem attracting financing. It is unlikely that the state will be willing to continue accruing such significant sovereign debt, however, and reputedly it has been emphasising the importance of alternative financing. "You can't pick up the paper these days without reading quotes from the minister of finance saying we need to diversify the funding sources for Qatar to fund these projects," says one partner.
One alternative under consideration is the PPP (public-private partnership) model. "There's a PPP unit, which has been established by the ministry of finance with the ministry of business and trade to work on the regulatory improvement. I don't know how advanced they are, it would be an interesting development and it suggests that some of the work for the World Cup will be done on a direct procurement basis, so there might be some project work which would flow from that," says one partner. The main appeal of this type of scheme for Qatar is the benefit of private sector efficiency. "They recognise when you have a lot of infrastructure that needs developing on time, you need to bring in the foreign expertise to do that," says one partner. It would be an interesting development for the country and perhaps an essential one for it future. "If you look at social infrastructure: the healthcare; the development of institutions like SIDRA; the focus the Qatar foundation has on education; the absolute paucity of schools here at the moment ,which is going to require some rectification as the population will undoubtedly increase over the next few years, PPP's going to be the heart of all that," notes one partner.
Outside of infrastructure, the projects market has been frenetic since the crisis but there are a number of deals in the energy sector being discussed. "There is an enormous amount in the offing. We've seen opportunities recently in the oil and gas and pet chem (petro-chemical) sectors. Brazan just closed. There are some pet chem. projects in the really early stage of financing, I mean the sponsors are talking about it," notes one lawyer.
Typically, lawyers note finance was "slow" and limited to Islamic finance deals, typically a murabaha (deferred sale) or ijarah (capital leasing) structures, to tap the liquidity of the local institutions. Where banks have been more active is in consolidating. After the Central Bank's decree in 2011 that conventional banks can no longer offer Islamic facilities, there has been a high degree of divestment from the conventional banks.
Activity on the debt market has been limited to deals by the state and its related entities. "We have seen increased capital markets fund raising by the main banks QNB and CBQ but we haven't seen much capital markets activity from the other financial institutions, although a number have been reported as planning to issue bonds for the first time such as Al Khaliji Bank. There hasn't been much sukuk issuance either, unlike in the UAE and Saudi," notes one partner. But, the government is doing its best to stimulate the market. "There's a real push for debt capital market instruments from general corporates even outside of the Qatar sphere," says one partner. With the huge infrastructure spend that is planned, lawyers are increasingly getting enquiries from Qatari entities as to how they can access the capital markets to raise funding. A number of different routes into the capital markets are being investigated including the use of governmental guarantee, project bond and PPP (public-private partnerships) structures. "We are likely to see a lot more activity in this space over the course of 2013," says one partner.
The equity capital markets have provoked further cause for optimism. "The outlook is good. A number are looking to go public," says one. While this has not translated into successful IPOs, with several deals postponed there have been a handful of rights issues. Similarly to the debt side, the state has been encouraging listings. "The activity is partly due to the government pushing these companies because they need to meet a certain level to be upgraded from a frontier market to an emerging market," says one lawyer. A longstanding and understandable ambition of the government's is to achieve the aforementioned upgrade. If the MSCI changed Qatar's status it would enable foreign funds currently prohibited from investing in the market to trade, proving a major boon for the economy. Currently there are several hurdles, namely the low level of companies listed on the exchange and the foreign ownership restrictions. The state is trying to rectify one of these hindrances. "It needs to have at least 100 companies listed in the next two years, right now there is around 35. There is a big push. On the one hand the government is privatising some of its entities on the other hand it is pushing larger establishments to go public. There is also a development where companies in the QFC, which is a parallel jurisdiction, are now allowed to list on the Qatar exchange." Even if this target is achieved the likelihood the state will relax its prohibitive foreign ownership restrictions is slim. "I'm not sure if they are going to do it. There's a lot of push from a local lobby. On the capital markets front there's a limitation of 25% which can be increased to 49% by the resolution of the government of ministers. There was talk about relaxing it and making it 49% for every company. The other things is the general restriction on the ownership of companies to 49% I'm not sure we are going to see that," notes one partner.
In terms of outbound M&A, the Qatari's are still active largely focussing on a remit of diversifying the economy. "They've all been very, very active over the last 12 months. QPI, QP, Qatar Mining and the sovereign wealth funds; there's been a lot of due diligence being done on targets, valuations particularly in Asia and Eastern Europe and Russia seem quite attractive right now," says one partner. The particular focus has been on commodities and mining but agriculture and is also deemed attractive. Generally, lawyers concur it is not only sector specific but, as the country has been unaffected by the crisis, regional and international, it is taking advantage of relatively low valuations.
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