Doraleh Container Terminal: Doubling Djibouti

The $263 million Islamic financing for the Doraleh Container Terminal is the first project financing in the East African country of Djibouti, with the total project value representing more than half the size of Djibouti's GDP.

The strategically important port is sponsored by DP World Djibouti (33%) and port authority Port Autonome International de Djibouti (67%). The project is let under a 30-year concession and entails the reclamation of the land and the development, financing, design, construction, management, operation and maintenance of the port. When construction is completed, the port will have an annual capacity of 1.5 million TEU (twenty-foot equivalent container units). DP World Djibouti will have management control of the project company.

The financing package is supported by a $427 million 99% political risk guarantee provided by MIGA. The project ticked a number of boxes for MIGA, principally providing infrastructure in Africa to a post-conflict nation.

It is MIGA's first guarantee for a Shariah-compliant project financing, for which it had to adjust its policy to meet compliance. The total project cost is $396 million, with the excess in the MIGA guarantee accounting for interest costs.

MIGA's guarantees are also partially protecting the investments of Dubai Port World, as covering equity is a necessity of its participation. In total there is $133 million equity in the deal. The guarantee covers a portion of this equity as well as those of the financing banks against the risks of transfer restriction, war and civil disturbance, expropriation, and breach of contract.

MIGA will reinsure $50 million with the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC).

MIGA was crucial to the success of the project given that no international project banks have country limits for Djibouti and that it has no OECD ECA risk classification. The sponsors were not interested in involving ECA's, and most of the costs are absorbed by civil engineering works rather than equipment, with the value of the crane's insufficient to allow heavy ECA involvement.

The covered debt is funded by Standard Chartered Bank ($153 million), Dubai Islamic Bank PJSC ($85 million) and West LB ($25 million) on a debt equity split of 70:30. The tenor on the debt is 10 years including construction. Islamic Development bank came into the deal after financial close, joining as mandated lead arranger. Standard Chartered Bank and Dubai Islamic Bank were financial advisers in the transaction.

The Islamic financing posed challenges in terms of providing a an international standard project financing based on elements of Djibouti law, and also because of a significant change in the way Shariah scholars view joint ventures.

The original Islamic structuring had to be reworked to enable lenders to the project to enforce their rights as scholars decreed in August 2007 that under an unincorporated joint venture, a Musharaka (a shared profit-and-loss system), each partner must bear risk. It had been the case that under a Musharaka banks could recover liquidated damgages from the project company and be made whole again in the event of default by putting their interest (say, 70% debt in a 70/30 debt-equity project) on the project company. However, this was deemed non-compliant and will effect future Islamic financings that rely on the joint venture model.

To overcome this problem, the concession had to be reworked and appease both the Standard Chartered and Dubai Islamic Bank Shariah boards. The solution was to combine elements of three distinct Islamic financing concepts: Musharaka, Isthisna (a sale contract prior to the manufacture/development of a project) and an Ijara Fil Zimma (forward lease).

The workaround on the ruling on the Mushraka became a three-in-one puzzle that was solved with the introduction by the joint venture of an Isthisna between the Musharaka and the forward lease.

Bank risk is mitigated by the MIGA political risk guarantee. Beyond the country risk, there is a potential for conflicts of interest because 67% owner of the project company – Port Autonome International de Djibouti (PAID) – is owned by the Djibouti government, which in turn sets the parameters for the concession. However, MIGA's political sway should ensure that the project company acts as a separate entity.

Commercial risk is mitigated by the importance of the port to Ethiopia, its position on a major East/West shipping line, relative lack of nearby competitors and the back-up of the transhipment business model.

Banks also draw comfort from the close relationship between Djibouti and Dubai; since 2000 emanations of the Dubai government has operated the existing port at Djibouti, its airport and a freezone where it controls customs. Dubai's relationship with the East African nation is therefore well-established.

Banks are taking construction risk without sponsor completion support, but are satisfied with the rigour of the contractual arrangements and risk allocation. Under the base-case the minimum debt service cover ratios are also healthily in the 1.50's x, with the ADSCR in the 1.60's x.

The project is expected to increase port traffic for the Common Market for Eastern and Southern Africa (COMESA) members, and, according to MIGA, promote regional integration through trade development. Currently more than 85% of total traffic in the port is destined for, or originates from, landlocked Ethiopia which has had a steady year on year increase in its GDP since 2000 of more than 5% per annum.

The financing of Doraleh Container Terminal demonstrates that, almost regardless of the country risk, deals can get done with strong sponsors and the help of the World Bank. MIGA is now actively marketing its ability to provide cover for Islamic facilities – in times of diminished commercial bank liquidity any additional funding sources are surely welcome.

Doraleh Container Terminal
Status: Closed December 2007
Description: $397 million Islamic financing package for the Doraleh Container Terminal – Djibouti's first project financing
Sponsors: DP World Djibouti (33%); Port Autonome International de Djibouti (67%)
Multilateral: MIGA
Mandated lead arrangers: Standard Chartered Bank; Dubai Islamic Bank PJSC; West LB; Islamic Development Bank
Financial advisers: Standard Chartered Bank; Dubai Islamic Bank PJSC
Sponsor legal counsel: Allen & Overy
Bank legal counsel: Lovells
Djibouti law transaction counsel: Martinet & Martinet
Technical consultant: Scott Wilson
Insurance: JLT
Market consultant: Ocean Shipping Consultants
EPC contractor: Construtora Norberto Odebrecht