Its robust financing framework, relatively trouble-free tendering process and strong power and water purchase and energy conversion agreement structure are already being used as a template for other local IWPPs, including the Jubail and Shuqaiq cogeneration schemes.

A key element of the project's success was its innovative legal framework. In the following legal briefing, Leroy Levy, partner at Trowers & Hamlins, which advised the successful local/Malaysian developer consortium, explains how legal enforcement of the power and water offtake agreements was strengthened by changing the governing legislation to English law. This allowed both the developer consortium and the lender banks ultimately to reduce their risk, and has set a precedent for future IWPPs:

'The power and water purchase agreement (PWPA) for the Shuaibah IWPP project marked a significant improvement on the model previously used in the region. The project was the first in a series of three IWPPs to be tendered in Saudi Arabia by Water & Electricity Company (WEC).

The principal legal challenge was the enforceability of the payment obligations of WEC under the PWPA. WEC agreed to make capacity and output payments in respect of the electricity and water produced by the plant, and is obliged to buy the plant from the project company in the event that the PWPA is terminated. The idea is that the amounts borrowed to finance the project can be repaid to the lenders from the purchase proceeds.

The draft PWPA, issued as part of the Shuaibah request for proposals, was governed by sharia law, as applied in Saudi Arabia, with disputes being referred to arbitration in Bahrain under the UN Commission on International Trade Law rules. There was also a credit support agreement between the project company and the Finance Ministry, guaranteeing WEC's obligations under the PWPA. This was also governed by Saudi Arabian law, with disputes being referred to the commercial courts in Saudi Arabia. In the event that WEC defaulted on its payment obligations under the PWPA, the contractual structure would have worked as follows:

• The project company would commence arbitration proceedings against WEC in Bahrain, and obtain an arbitral award in its favour;

The above structure, however, put the project company (and therefore the lenders) at risk. The problem was that it was questionable, as a matter of sharia law, whether WEC would ever become legally liable to buy back the plant and pay the purchase price in a termination situation. Because the termination amount, and therefore the purchase price of the plant, is intended to equate to the outstanding bank debt, the amounts payable included both the principal of the outstanding debt and interest. Under sharia law, the charging and payment of interest is prohibited. It was crucial to bridge this enforceability gap' if the project was to be bankable to regional and international lenders.

Regional precedent

Earlier regional transactions, such as the Abu Dhabi IWPPs, offered some potential solutions to the problem. The Abu Dhabi structure provided for a local law PWPA, as was the case for Shuaibah, but with an English law credit support direct agreement. The direct agreement included special enforceability provisions. These provisions enabled the lenders to bring arbitration proceedings against the government outside of the UAE, and enforce an arbitral award against assets abroad. This satisfied the concerns of lenders lending into the Abu Dhabi IWPPs, and addressed bankability concerns insofar as they related to enforceability.

In terms of local precedent, the Saudi Petrochemical Company (Sadaf) and Tihama projects were closely examined. Having looked at Sadaf, there were a number of questions as to the efficacy of that structure and it was felt that it would not be appropriate to adopt it. The Tihama model, although setting a strong Saudi precedent, could not be adapted for the Shuaibah project as the latter's structure was different.

The Shuaibah solution

The enforceability issue in Shuaibah was finally resolved by changing the governing law of the PWPA to English law, again combined with arbitration in Bahrain. This marked a clear departure from the general approach in Saudi Arabia of using sharia law for government-related projects. The switch to English law provides certainty that WEC's payment obligations under the PWPA will be held to be legal, valid and binding, and confidence that the project company will be able to obtain an arbitral award requiring payment of all amounts, whether principal or interest, that can be presented to the Finance Ministry for payment. Of course, there remains the theoretical risk that the ministry might default on its obligations under the credit support agreement, but Saudi Arabia's strong credit rating ultimately provided comfort to the lenders.

The Shuaibah PWPA is widely recognised as one of the best commercial deals for IWPPs in the region, and the commercial structure represents a significant improvement over the Abu Dhabi and Oman IWPPs. It is now very likely that the Shuaibah IWPP agreements will be used as a template for the 60-plus future IWPPs that are planned in the kingdom. This, more than anything else, demonstrates the significance of the Shuaibah project to the wider privatisation process in Saudi Arabia, and the commitment of the government to see through its ambitious development plans.'