43747 DORALEH CONTAINER TERMINAL CASE STUDY WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY MIGA and Islamic Finance DORALEH CONTAINER TERMINAL PROJECT, DJIBOUTI Increased liquidity in Islamic financial mar- products to make sure the developmentally investment into DCT and $422 million in kets, spurred by oil revenues in the Gulf sound deal could go through. Islamic project financing--against the risks region, is creating a growing demand for of currency transfer restriction, expropria- deals structured using Islamic finance. In The main challenge faced by the agency was tion, breach of contract, and war and civil order to satisfy this demand, traditional that the project's Islamic financing structure disturbance. The Islamic project financing business tools need to be adapted to meet had payment obligations spread out across comprised 99 percent of the amounts allo- the relatively unique and complex needs of numerous agreements, while MIGA's guar- cated for the principal portion of the financ- Islamic finance. antee coverage for third party lenders nor- ing, DCT's future rental obligation, capital- mally considers such obligations under a ized future premium, and Islamic profit rate In 2007, MIGA was tapped to provide politi- single loan agreement. MIGA structured its swap facility. cal risk insurance for a critical project in guarantee in a way that addressed the key Djibouti that was being funded through an risks that concerned the project financiers, Islamic financing structure. An agency well while meeting the strict requirements gov- Overview of Financing Structure known for meeting the needs of diverse erning the Islamic structure. This resulted investor groups in the face of changing mar- in the agency's first-ever guarantee coverage The project financing was designed to reflect ket conditions, MIGA adapted its guarantee of an investment supported by an Islamic a "debt-type" profile to ensure compli- financing structure. ance with Islamic jurisprudence or Shariah principles, while satisfying the commercial requirements of both DCT and the project The Doraleh Project financiers. The project financing was execut- MIGA, a member of the World Bank Group, mitigates noncom- ed by combining the following key concepts mercial risks by insuring invest- The Doraleh Container Terminal project of Shariah: ments against the risks of: involves the development, design, construc- tion, management, operation, and mainte- 1. Musharaka--literallymeaning"partner- r Currency inconvertibility and nance of a new container port terminal in ship," refers to an arrangement where transfer restrictions the city of Doraleh, Republic of Djibouti. It two or more partners pool together r Expropriation is being developed under a 30-year conces- resources (capital and contract rights) r War, civil disturbance, sion granted by the government of Djibouti to jointly own assets or undertake a terrorism, and sabotage to the main sponsors--DP World of the commercial venture. r Breach of contract United Arab Emirates and Port Autonome International of Djibouti--via their joint-ven- Through the Musharaka Agreement, MIGA provides dispute resolution services for guaranteed investments ture vehicle, the Doraleh Container Terminal DCT and the project financiers agreed to prevent disputes from escalating. S.A. (DCT). When completed, the terminal to procure assets for the project jointly will have a total quay length of 2,000 meters and committed to making respective MIGA also provides free online and an annual handling capacity of 1.5 mil- capital contributions representing the information on investment oppor- lion 20-foot container equivalent units. financing plan's debt and equity com- tunities. ponents. MIGA issued guarantees totaling $427 million--$5 million for DP World's equity APRIL 2008 page 1/4 DORALEH CONTAINER TERMINAL CASE STUDY WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY 2. Istisna'a--refers to a contractual lease their co-ownership interest in ity amount, any accrued and unpaid agreement for constructing or devel- the project to DCT (the lessee) in lease rentals and any other outstand- oping assets, allowing cash payment exchange of periodical rental payments ing amount under the financing docu- in advance and future delivery of the linked to a floating benchmark. Given ments. assets. that the assets were under construc- tion, the documentation allowed the r DCT was also allowed to prepay the Through the Istisna'a Agreement, the project financiers to pay advance lease financing via a Sale Undertaking (i.e. partners appointed DCT as a procurer rentals during the construction period. call option), according to which it has a to construct the container terminal and After delivery and commencement of right to buy out its partner (the project ensure delivery of assets at the end of lease, the project financiers were to financiers) in return for paying off its the construction period. Capital con- receive periodical lease rentals based contribution in full (equivalent to the tributions under the Musharaka were on both floating and fixed rates, reflect- principal of the financing). paid to DCT, which in essence is equiv- ing amortization of the loan. alent to multiple drawdowns under a conventional lending arrangement. In addition to the above, the financing struc- Key Adjustments to MIGA's ture also entailed: Guarantee Contract 3. Ijara--a mode of finance wherein the right to use an asset is leased by the r APurchaseUndertaking,whichallowed MIGA's non-shareholder loan contract con- owner (the lessor) to another party the project financiers to sell their co- templates coverage of scheduled payments (the lessee) in exchange of rental pay- ownership interest to DCT in case of of principal and interest under a single loan ments. a dissolution event (such as default or agreement. If the loan is accelerated by the change in circumstances). The exercise lenders, MIGA still pays under the original The Forward Lease Agreement allowed price under this undertaking was an schedule. To create a parallel obligation the project financiers (the lessor) to amount equal to the outstanding facil- Islamic Financing Structure Islamic Financing Structure for Doraleh Container Terminal Project for Doraleh Container Terminal Project Direct Agreement Equity Guarantee MIGA Dubai Islamic Bank DP World Djibouti Owns PJSC FZCO Musharaka (Financing) Guarantee Port Autonome Doraleh Container Financiers Investment Standard Chartered International Owns Terminal S.A. Agent Bank de Djibouti (Project Company) SOE X% X% WestLB AG Government of Djibouti Concession ontributesC ontributesC DCT Musharaka JV Owns Doraleh Container Terminal Project APRIL 2008page 2/4 Equity Guarantee MIGA DORALEH CONTAINER TERMINAL CASE STUDY WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY Dubai Islamic Bank DP World Djibouti Owns PJSC FZCO Musharaka (Financing) Guarantee under Islamic financing, MIGA agreed to determined by a judge according to the growth. By improving container facilities in cover the following: Port Autonome Doraleh Container Musharaka Agreement. Financiers Investment Djibouti, the project is expected to increase Standard Chartered International Owns Terminal S.A. Agent Bank de Djibouti (Project Company) port traffic and open up new opportunities 1. Advance rental and rental under the The events described in 2, 3 and 4 above for investment and growth, including break- Forward Lease Agreement; SOE were referred to as "Early Termination ing the country's reliance on Ethiopia's trade Events."X% and attracting other African countries to use X% WestLB AG 2. In the event that construction is not Government of Djibouti the port as a gateway. A state-of-the-art con- completed, the termination payment All references to "interest" in the contract, tainer terminal could establish Djibouti as a Concession ontributesC ontributesC under the Istisna'a Agreement (but including interest owed to MIGA for late gateway for the Common Market for Eastern under the original lease schedule); premium, etc., were replaced with "late pay- and Southern Africa (COMESA) members, DCT Musharaka JV ments," which would be donated to chari- and in light of trade flows through that part Owns 3. In the event that the Purchase table foundations. of the world, promote regional integration Undertaking is exercised, DCT's pay- Doraleh Container Terminal Project through trade development. ment obligation to purchase the assets from the project financiers (but under Project's Development Impact This is MIGA's first project in Djibouti, which the original lease schedule); became a member in 2007. By supporting Djibouti's economy is dependent on port- this project, MIGA is helping Djibouti take 4. In the event of an unwinding of the related services. Agriculture and industry advantage of a growing volume of trade and partnership and where none of the are largely undeveloped. Development and strengthen its position as the gateway to the above amounts are payable, the expansion of port infrastructure is an impor- African hinterland. MIGA's participation in amount owed by DCT as partner to tant pillar of the World Bank Group's coun- the deal played an important role in mitigat- the financiers under the Musharaka try assistance strategy for Djibouti. ing perceived political risks for the financiers Agreement (but under the original of the project, enabling project sponsors to lease schedule), which will only include The Doraleh Container Terminal project is raise the financing needed to get the project the "profit" component to the extent considered vital to the country's economic going. Structure of Islamic Profit Rate Swap Facility Structure of Islamic Profit Rate Swap Facility 1. Project Company "sells" commodities (Murabaha basis) to Swap Bank, payable on a pre-ageed date, and yielding a "fixed" profit return. Project Company sells fixed rate Murabaha Project Project Swap Bank Company Financiers Project Company Project Company buys floating pays floating rate Murabaha rate rental 2. Project Company "buys" to financiers commodities (Murabaha basis) from Swap Bank, payable on a pre-agreed date, and yielding a "floating" profit return. 3. Profit rate risk is hedged for Project Company by matching rental payment obligations with inflows from floating Murabaha investment APRIL 2008page 3/4 DORALEH CONTAINER TERMINAL CASE STUDY WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY MIGA's Value Partnerships MIGA works with the following key MIGA provides a unique umbrella of deterrence against political risks and can offer comfort partners in the Middle East and to clients by improving projects' risk-return profiles. North Africa region to better support inward and outbound investments: Investment Protection and Prompt and knowledge of developing countries r The World Bank and IFC Claims Payment to each transaction. r Jordan Loan Guarantee r Offering environmental and social Corporation (JLGC) r Deterring harmful actions. MIGA's expertise. MIGA helps investors and r Inter-Arab Investment relationship with shareholder govern- lenders ensure that projects comply Guarantee Corporation (IAIGC) r Islamic Corporation for the ments provides additional leverage in with what are considered to be the Insurance of Investment and protecting investments. world's best social and environmental Export Credit (ICIEC) r Resolving disputes. As an honest bro- safeguards. r Islamic Development Bank ker, MIGA intervenes at the first sign of (IDB), Saudi Arabia trouble to resolve potential investment disputes before they reach claim sta- Types of Coverage Offered Contact tus, helping to maintain investments and keep revenues flowing. Transfer restriction coverage protects For general information r Ensuring prompt claims payment. If against losses arising from an investor's a dispute cannot be resolved, MIGA inability to convert local currency into for- World Bank Group ensures that valid claims are paid eign exchange for transfer outside the host Multilateral Investment promptly. country. The coverage also insures against Guarantee Agency excessive foreign exchange delays caused by 1818 H Street, NW the host government's actions. Washington, DC 20433 Improving Financial Terms and t. 1.202.458.2538 Conditions for Investors/Lenders f. 1.202.522.0316 Expropriation coverage offers protection migainquiry@worldbank.org against loss of the insured investment as r Accessing funding. MIGA guarantees a result of acts by the host government www.miga.org help investors obtain project finance that may reduce or eliminate ownership from banks. or control of the insured investment. This For information on guarantee r Lowering borrowing costs. MIGA policy also covers partial losses and "creep- products supporting Islamic guaranteed loans may help reduce the ing expropriation," a series of acts with an financing structures cost of capital. expropriatory effect. r Increasing tenors. MIGA can provide Muhamet Bamba Fall insurance coverage for up to 15 years War, civil disturbance, terrorism, and sabo- t. 202.473.4074 (in some cases 20), thereby increasing tage coverage protects against loss due to mfall3@worldbank.org the tenor of loans available to inves- the destruction, disappearance, or physical tors. damage to tangible assets caused by politi- r Helping to structure project financ- cally motivated violence. It also extends to ing. MIGA also ensures that risks are events that result in the total inability of the allocated properly. project enterprise to conduct operations essential to its overall financial viability. Country, Social and Environmental Breach of contract coverage protects Expertise against losses arising from the host govern- ment's non-payment of an arbitral award r Providing extensive country knowledge. in favor of the investor, due to the govern- MIGA applies the World Bank Group's ment's breach or repudiation of a covered decades of experience, global reach, contractual agreement with the investor. APRIL 2008 page 4/4