How to Implement a Project in the Middle East - Coursework Example

How to Implement a Project in the Middle East Table of Contents Introduction 3 Legal Regulations to be Followed While Entering into a Project in the Middle East 5 Application of Different Financing Methods in Conducting a Project in the Middle East 8 Potential Political and Economic Risks Associated with the Projects in the Middle East 13 Impacts of Political and Economic Risks on the Financial Structure of the Project Companies 16 Conclusions and Recommendations 19 References 21 Introduction ‘Project finance’ is fundamentally described as an exercise of allocating risks of a project in an equitable way amid varied stakeholders involved in undertaking such projects1. In precise, it can be affirmed that the perception of project finance is reckoned to be an effective funding method wherein a lender seeks forward to attain revenues generated from the smooth conduct of a particular project. There lay certain fundamental reasons for which, transformations can be witnessed in project finance. In this similar concern, such reasons could be apparently noted as increased level of internationalisation and changing business market settings in an organised way. Correspondingly, it is worth mentioning that the transactions associated with project finance play an imperative role when aimed at developing the financial structure of the nations throughout the globe. This development of the financial structure could be measured in terms of developing the infrastructure concerning mines, transportation, plants of chemical processing, power plants and telecommunications among others2. Certain ways could be apparently observed based on which, projects are completed successfully within a specific time. In this regard, one of such ways include ensuring that a project has previously undergone through the Project Evaluation Process (PEP) and that particular project was approved for execution. From a conceptual perspective thus, the notion of PEP is mainly concerned about conducting a need analysis, performing a quality architecture review and paying utmost attention in embracing vendor contracting among others. It is strongly believed that a smooth execution of PEP could result into limiting risks and raising the scope of better project implementation as per the desired levels3. While implementing a particular project in any nation throughout the globe, certain guidelines need to be followed. These guidelines typically entail understanding the specific contract, forming an effective project management based committee, keeping records, developing contracts, preparing budgets as well as making appropriate expenditures and getting engaged into procurement. From the perspective of one of these elements discussed above, concerning understanding the specific contract, the involved parties need to become aware about the legal frameworks to be adopted while forming a valid project contract. Specially mentioning, it is projected that for the smooth execution of a project within the specified time limit, an effective committee of project management is required to be formed that would provide advice whenever required and supervise the entire project. This would certainly ensure project viability by a considerable level. On the other hand, keeping precise records about project management related details, including the expenditures lists and outgoing as well as ingoing project correspondences, would also ensure the effective implementation of the project irrespective of its global presence. The development of contracts may further ensure timely implementation of a project by clearly depicting the project goals, intended outputs, fees and other conditions that the involved parties in a contract agreed to. In terms of procurement element, a project could be implemented in an effective way by making effective decisions regarding quality, price and often the degree of maintenance services being provided to the involved parties. Finally, the role of preparing budgets, consisting expenditures along with incomes could not also be ignored while implementing a project4. With this concern, the coursework intends to analyse and discuss about the legal structure of project finance, particularly in the Middle East, with focus on examining relevant regulations, financing methods and potential economic as well as political risks associated with the same. Legal Regulations to be Followed While Entering into a Project in the Middle East It is obvious to follow different legal regulations while undertaking any particular project in the regions throughout the globe. Similarly, their also exist certain lawful regulations those are required to be followed while undertaking projects in varied parts of the Middle East. In this similar concern, while analysing the legislative regulations required to be followed while entering into a specific project in the Middle East, the introduction of Sharia law and its different attributes is essential to be considered. Sharia law, in the Middle East, is recognised to be the local law of various regions belonging to this part of the world, which assists a project management team to perform numerous activities while undertaking a specific project. In this similar concern, such activities can be apparently observed as dealing with varied project related risks, making wider strategic as well as commercial considerations and most importantly, making deliberate efforts towards evading or resolving any kind of disputes among others. It can therefore be apparently observed that the Sharia law plays a significant role in different regions of the Middle East, especially when raising the weight of Islamic Finance in such regions. From a detailed perspective, Sharia law is duly considered as a religious law, which tends to deliver an inclusive behavioural code covering numerous legal viewpoints along with ethical standards practiced within the society5. Prior to discussing the legal regulations to be followed in the Middle East while entering into a new project relating to any specific sector, it must be mentioned that the major sources of Sharia law are deemed to be the Sunna and the Koran. Specially mentioning, the stated law endeavours to make sure that justice as well as equity with regards to contracts and an appropriate equilibrium of benefits amid the involved parties are maintained while implementing a project in the Middle East. The law portrayed certain legal guidelines those are required to be taken into concern while executing a new project in diverse regions of the Middle East. In this particular scenario, such guidelines could be ascertained as conducting a detailed analysis of the risks generated from the local law, if any, along with the impacts associated with the same and maintaining an effective equilibrium amid the involved participants in a project for evading the issues concerning unfairness. Besides, the other legal requirement for entering into a project based on the postulated laws as well as regulations in the Middle East include recording the intentions of the involved parties in a specific project and identifying the contract foundation. More specifically, the other legal guidelines include drafting any sort of prevailing unclear or unambiguous project related terms and adhering to varied formalities during the time of contract formation6. With regards to the above stated context, it can be ascertained that the projects to be implemented in the Middle East are ought to be followed in accordance with the legal provisions of Sharia law. Since, their does not exist any sort of standard and criterion for evading restrictions of such law, the decisions for ensuring the projects to get completed within a stipulated time frame lay into the hands of the members belonging to Sharia committee. Based on the rules imposed by the above stated law, it can be apparently observed that all the interested parties involved in a specific contract, specifically in the Middle East, are ought to attain profits and address varied sorts of risks under equal circumstances. However, certain changes could be noted in the negotiation procedures at the time of implementing a project in distinct regions throughout the Middle East. These changes eventually impose significant impacts on the policy implications those are derived while executing a specific project in the aforesaid region. In this regard, the aforesaid policy regulations could be duly measured in the form of developing the project finance concept by offering attractive financial schemes and taking effective decisions relating to effectual project implementation in diverse regions of the Middle East7. Apart from the above discussed legal guidelines, there also exist certain lawful mechanisms based on which a project could be executed in varied regions throughout the Middle East. In this similar concern, one of such legal mechanisms can be identified as the necessity of licensing a project, if the same involves huge figure of investments. This can be justified with reference to the fact that in one of the regions of the Middle East, i.e. Saudi Arabia, massive industrial projects, whose rates of fixed capital surpasses the amount of SR 1 million, are ought to be licensed. Under this circumstance, the above stated industrial projects get entitled to certain incentives as well as exemptions under the legal guidance of Saudi law. Such incentives along with exemptions could be ascertained in the form of tariff exclusions, free from letting industrial housings as well as lands to be subsidised, offering effective export assistance towards the locally produced products and promoting preferences for public procurement among others. On a further note, from a legal perspective, while implementing a new project in distinct regions of the Middle East, there lays the requirement of providing clarifications regarding the kind of project activities to be undertaken in such regions. This eventually results into a strict monitoring of the undertaken project activities that could impose extensive level of impacts on wider development of the communities belonging to different regions of the Middle East. It is strongly believed that effective following of the above depicted legal structures or mechanisms could assist the project management team undertaking any specific project to reap several significant benefits. These benefits could be ascertained in the form of fulfilling the predetermined project objectives and ensuring that the respective project gets completed within a definite period as well8. Application of Different Financing Methods in Conducting a Project in the Middle East In relation to assess the application of different financing methods when conducting a particular project in the Middle East, it is to be affirmed that financing is recognised to be a challenging issue for most of the project management teams involved in undertaking a project. This might be owing to the reason that the project management teams need to find out certain potential funding sources through which, the entire project would get completed successfully within a prescheduled time9. It can be identified in accordance that the nations belonging to the Middle East are involved in undertaking numerous large-scale infrastructures and social along with financial developmental projects those would eventually trigger the need for obtaining financial and credit supports from various local or regional financial institutions10. By taking into concern the above stated situation, certain effective financing methods could be applied while conducting a project in different regions of the Middle East. In this regard, such financing methods could be identified as limited-recourse project finance and nonrecourse project finance. From the perspective of limited-recourse project finance, the potential investors as well as the creditors involved with the execution of any specific project are regarded as the primary sources of repayment. In this sort of project financing, the respective project management team tends to rely more on financing made by the prospective investors as well as the creditors who pay utmost attention on determining the risks relating to project finance. On the other hand, the method of nonrecourse project finance signifies such an arrangement, wherein the potential investors or the lenders are not regarded as the primary sources of repayment. Under this particular financing method, such investors or the contributors lack any sort of direct recourse towards implementing a project successfully, for which, they are not regarded as the principal sources of repayment11. By considering the above stated fact that the nations of the Middle East are regularly involved in undertaking several large-scale projects based on dissimilar fields, certain other financial methods are also deemed to be applicable in the aforesaid region. In this regard, the techniques concerning equity, subordinated loans, capital markets and senior loans are noteworthy. From a conceptual perspective, the funding method of equity indicates seeking investment opportunities from those particular financial institutions those deliver high amount of yields. On the other hand, subordinated loans, acting as the other technique of financing, may be offered to the respective project management teams involved in undertaking a project by the potential investors or the equipment vendors. On a further note, in lieu of applying distinct financing methods while conducting a project in the Middle East, senior loans can be acquired from various prospective commercial lenders. These could be foreign or local financial institutions including the insurance companies, agencies of export credit and varied other multinational corporation such as the World Bank among others. Finally, greater access to capital markets could also be recognised as the other potential financing method, which would aid in implementing a project in distinct regions of the Middle East. This can be justified with reference to the fact that capital markets appear as the potential financing methods for the respective project management teams at the time when the market conditions are found to be appropriate as per the desired levels. The funds relating to the method of capital market can be mainly acquired from public offerings, private securities and long-term bonds among others12. With respect to future cash and borrowings, various financing methods, including Islamic finance and project bonds could be applied while conducting a specific project in the regions of the Middle East. The conception of Islamic funding generally represents lending money to the individuals or the organisations without paying any interest charge. This particular sort of financing method could be applied while implementing or performing a project in the Middle East, as it tends to build relationships and expand the roles played by the banking system within different regions of the Middle East13. Apart from taking into concern Islamic funding as one of the potential funding methods, the contribution made by project bonds in financing a project could also not be ignored. This particular financing technique, i.e. project bonds, seeks towards refinancing projects with the intention of freeing the liquidity approach towards future actions of development. For instance, this sort of financing method was adopted and executed in the year 2009 relating to the Dolphin Energy Project of the UAE. It can be apparently observed in this similar concern that the above stated project had been refinanced with the payment of additional US$1.25 billion bond, which certainly facilitated the investors to lessen the lending tranches as well as Export Credit Agency (ECA) or trade finance facilities. It is worth mentioning in this context that the local banks could also be assumed as the other prospective financing methods, which could be duly considered while implementing a project in the Middle East. Identifiably, most of the nations belonging to the Middle East possess certain dynamic segments of local banking those have the potentiality to deliver extensive level of local currency liquidity. The wider application of this financing method, i.e. the activities performed by the local banks had its relevance in relation to the project of Gulf Independent Water and Power Projects (I(W)PPs). In this particular project, the role of financing through local banks could be measured in the form of procuring extensive level of commercial debts and accessing potential ECA facilities among others14. In relation to the above context, the generally adopted financing methods with respect to future cash along with borrowings in implementing a project within the Middle East include short-term debt financing and long-term debt financing. From a conceptual standpoint, short-term debt financing is regarded as such a method relating to finance, which necessitates fulfilling financial obligations within a single year. It is often applied in the situations wherein there exists the necessity of assessing daily operations and capital requirements of a project. Specially mentioning, the varied sources of this financing method, i.e. short-term debt financing, typically encompass short-term loans, overdraft, bill of exchange and letter of credit. While implementing a project in the Middle East, its viability could be determined and likewise, developed by adhering different needs of working capital and negotiating any transaction made. On the other hand, the method of long-term debt financing is applied at the time of financing business investments those possess longer payback periods. Similar to short-term debt financing, the distinct sources of the method of long-term financing could be ascertained as leasing, long-term loans and project bonds among others. Though long-term debt financing method tends to be more stable as compared to short-term debt financing technique, it must be applied while conducting a project in varied regions of the Middle East15. Amongst all, ECA lending is also identified as one of the dynamic financing methods, which had been used in power and water projects of the Middle East. The prime characteristic of the aforesaid financing method is deemed to be offering direct financing to the respective project team management, which in turn, examines the feasibility of the projects from a long-term perspective16. Thus, the above stated financing methods or techniques could be applied while conducting a project in dissimilar regions of the Middle East to reap the intended benefits. Potential Political and Economic Risks Associated with the Projects in the Middle East It is to be affirmed that various political as well as economic risks are likely to emerge while conducting a project in any region. This might be owing to the reason of the involvement of enormous transactions in the procedure of implementing a project. With this concern, it must be mentioned that political and economic risks are a classification, which entails those particular risks, which are generated from individual political and collective economic decisions, affecting the existing asset or infrastructure of a project. Specially mentioning, the various potential risks relating to the projects conducted in diverse regions of the Middle East are instability in following appropriate legal project guidelines, unreliable administration on behalf of respective project management teams and shortage in making effective international commitments17. Besides, the other prospective political risks in relation to the above context could be ascertained in the form of undependable mechanisms of dispute-resolution, ineffective interactions with the public sector, irresponsible business conducts and shortages in establishing the culture of an open dialogue. It is projected that the above identified potential political risks are likely to hamper the feasibility of the projects conducted within varied regions in the Middle East18. On the other hand, the various potential economic risks pertaining to the projects being conducted in the regions of the Middle East are ascertained as instability in the monetary conditions with respect to currency exchange charges as well as inflation and uncertainties associated with cash flows. The other prospective economic risks relevant to the execution of projects in the Middle East comprise fluctuations in the flow of currency exchange, incapability towards utilising the accessible resources and shortage in making relevant decisions regarding the efficiency of the projects19. In relation to the above stated context, it can further be asserted that lack of greater level of access towards the available reserves could be regarded as one of the potential political risks, which is mainly associated with the oil and gas projects of the Middle East. Besides, the making of various uncertain energy policies by the respective governments of different regions of the Middle East is also reckoned to be the other political risks those are associated with the implementation of projects in the aforesaid region of the world. One of the aforementioned policies relating to energy could be traced as deepwater regulations, which imposes considerable level of impacts on developing oil and gas projects within the Middle East. More crucially, the existence of unfamiliar political settings also erupts as a potential risk, affecting smooth completion of oil and gas projects in various places of the Middle East20. From the perspective of economic risks, the factors concerning cost containment, worsening financial terms and price volatility could not also be ignored, as these influence the oil and gas projects in the Middle East in a negative manner. In terms of the economic risks concerning cost containment, rising costs or the increased level of inflation of oil and gas products is hampering the financial feasibility of the relevant projects in distinct regions throughout the Middle East. With regards to the other economic risk factor of worsening financial terms, it is to be affirmed that claiming taxes based on coercion mode also emerge as one of the potential financial aspects to hamper the smooth completion of oil and gas projects in the above stated region. From the standpoint of the economic risk concerning price volatility, it will be vital to mention that the prevalence of unrest, particularly in the regions of the Middle East during the first half of the year 2011 eventually resulted into the surge of oil price, posing greater challenge on the economic feasibility of projects in this particular industry21. It is therefore evident that the emergence of varied political and economic risks eventually affects the overall performance of the projects those are conducted within varied regions throughout the globe. This similar perspective is also noted in relation to the case of the projects being conducted in varied regions of the Middle East. Correspondingly, impacts of the above identified political as well as economic risks specifically on the financial structure of the project companies in the context of the Middle East have been outlined in the following section. Prior to discussing and analysing the impacts of such risks, it is therefore indispensable to acquire a brief idea about the probable implications of such risks. From the perspective of the above-identified political risks thus, the implications of the same could be ascertained as new operational transformations while undertaking any further project in different regions of the Middle East and triggering the need for applying advanced technologies in the respective projects. With regard to economic risks, the implications of the same can be apparently recognised as increasing the level of price volatility, increasing the worsening factors relating to varied fiscal terms and gaining momentum of cost containment factor22. It is therefore worth mentioning that there exist certain reasons for which, different political as well as economic risks are identified to be merged while conducting a specific project in distinct regions of the Middle East. In this regard, such reasons could be determined in the form of unfavourable demographic or geographic conditions, inability to make effective decisions concerning project planning as well as execution and shortage in following effective legal guidelines about project implementation. It has been mentioned earlier that the operational and the financial risks are regarded as the major forms of economic risks mainly faced while conducting a specific project in varied regions of the Middle East. With this concern, it must be mentioned that one of those operational risks constitute transformations in cash flow and on the other hand, variability in project earnings could be categorised under the dimension of economic risks23. Impacts of Political and Economic Risks on the Financial Structure of the Project Companies From the above discussion, it is evident that there is the probability of witnessing political as well as economic risks while conducting a project in distinct regions of the Middle East. Such risks mainly emerge due to the reasons including adoption of ineffective decisions concerning smooth execution of projects, failure to measure the financial feasibility of such projects and critical demographic or geographical conditions among others. It is thus obvious that the above-discussed emerging political as well as economic risks impose considerable level of impacts on the performance of the projects being implemented in the Middle East. Such non-performance could be duly measured in the form of lacuna in utilising the accessible resources and failure to make the projects complete within a definite period. In this similar context, the impacts of political risks on the financial structure of the project companies could be mainly related to the factors of non-payment along with currency inconvertibility, expropriation as well as nationalisation, civil disturbances and breach of contract. From the standpoint of non-payment along with currency inconvertibility, the impacts of this particular political risk on the financial structure could be identified as delays in obtaining foreign exchanges those are caused by failure in adopting effective actions by the respective government of the Middle East. In terms of the political risks concerning expropriation as well as nationalisation, the impacts of the same on the financial structure of the project companies in the context of the Middle East could be ascertained in the form of eliminating project ownership and most vitally, exercising ineffective control over the rights of the project assets or investments. In relation to determine the impacts of civil disturbances on the financial arrangement of the project companies in the Middle East, it is to be affirmed that there exist the probability of causing physical damages to the project assets due to the emergence of such disturbances. With regards to the other political risk concerning breach of contract, its impact on the financial structure of the project companies could be better comprehended in the form of rising confusions amid the different members or teams involved in conducting a project in distinct regions of the Middle East24. While discussing and analysing the impacts of political risks on the financial structure of the project companies in the Middle East, it must be mentioned that such risks tend to affect the level of investments made in a particular project. This is mainly owing to the reason that the potential lenders or the investors are often eliminated from their respective ownership due to the emergence of civil disturbances and failure to obtain greater control over the project assets. Apart from affecting the investment levels made in a specific project, the impacts of political risks in the financial structure of the project companies could also be found in terms of project finance. This can be justified with reference to the fact that project finance gets hampered due to the emergence of varied political risks in various ways those fundamentally encompass undermining the potentiality of finances made towards a project, failure to utilise the available resources and making ineffective decisions regarding the maximisation of project assets among others. With efficient management of these factors, it is obvious that making viable investment decisions may lead a specific project to attain greater success, irrespective of being conducted in any region throughout the globe. This particular factor eventually gets affected by the rising political risks, which in turn, results into lessening the financial viability of the projects at large25. Apart from the impacts imposed by several political risk factors on the financial structure of the project companies, economic risks involved in the process are also identified to affect the same. It has been earlier mentioned that the factors concerning cost containment, price volatility and declining financial terms generally constitute economic risks, having the potentiality to affect the financial arrangement made by the different project companies who are involved in undertaking varied projects in the Middle East. With this concern, from the standpoint of cost containment economic risk factor, the financial structure of the project companies could be impacted in terms of rising project costs. On the other hand, relating to the economic risk factor concerning declining financial terms, the impacts of the same could be better understood as increased level of tax claims by the respective government and the prominence of inflation. Finally, with regards to the economic risk factor of price volatility, the financial structure of the project companies usually get impacted by raising the level of project costs, urging the need for procuring project ownership and more vitally, posing the challenge of price volatility. While examining the impacts imposed by the economic risk factors on the financial structure of the project companies, it is to be inferred that the above-identified economic risks have the potentiality to affect the financial feasibility of projects through the effects made in future cash as well as borrowings26. Conclusions and Recommendations From the above analysis and discussion, it can be ascertained that there exist several legal regulations required to be followed while entering into a project in any specific nation of the world. Similarly, there lay certain effective legal guidelines those are ought to be followed while undertaking a project in varied regions of the Middle East. In this regard, one of such legal guidelines include the Sharia law, which focuses on maintaining justice and equity amid the members or teams associated with the conduct of any project in the aforesaid region. Apart from this, another legal regulation to be noted while entering into a project in the Middle East could be found as licensing, which is required for implementing huge infrastructure projects. It is worth mentioning that the respective project team members could follow different financing methods while conducting a project in varied regions of the Middle East. Such financing methods could be identified as limited-recourse project finance, nonrecourse project finance, capital projects, project bonds, equity and ECA lending among others. More importantly, certain potential and economic risks are likely to obstruct effective functioning in the respective project teams while undertaking a project in the Middle East. These sorts of risks eventually impose adverse impacts not only on the financial structure of the project companies, but also on the feasibility level of the same. Thus, with this concern, it can be affirmed that there exists the necessity of addressing and mitigating such risks for generating positive outcomes and obtaining several significant benefits. In terms of recommendations, it can be inferred that the project teams could manage the above-identified political as well as economic risks with the conduct of several ways. One of such ways could be determining as well as applying effective control procedures. By considering this particular aspect, it is projected that such risks could be managed as well as controlled in an efficient way by becoming much proactive and evading certain situations those may hamper the financial feasibility of a project undertaken in distinct regions of the Middle East. These situations typically encompass future cash along with borrowings and flow of earnings among others. Apart from these, the project teams should posses exit strategies and assess substitute investment options on an ongoing basis for the effective addressal of the economic risks those emerge while undertaking a project in the Middle East. An effective and proper mitigation of the above-identified political as well as economic risks would eventually result into ensuring the promotion of financial feasibility of projects in a favourable way. References Ali & Partners, ‘Middle Eastern Laws’ [2015] accessed 22 April 2015. Austin Tracy, ‘Mitigating Political Risks in Large Infrastructure Projects’ [2005] accessed 22 April 2015. BOECS, ‘Project Implementation Guide’ [No Date] accessed 22 April 2015. Bremmer, Ian, ‘Managing Risk in an Unstable World’ [2015] accessed 22 April 2015. Chadbourne & Parke LLP, ‘Project Financing Techniques’ [No Date] accessed 22 April 2015. DP Information Pte Ltd, ‘Debt Financing’, [2015] accessed 22 April 2015. 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