Project Finance in UAE: Infrastructure Funding Structures

A pledge over the shares in a project company can be negotiated for months, approved by every sponsor board, signed and notarised, and still leave the bank holding it weaker than it believes. The document exists. What did not happen was the entry in the company's own share register recording that those shares stand pledged. Under the formalities governing security in the UAE, an interest not perfected in the required manner can fail against third parties, whatever it says between the two who signed it. So when the project stalls and other creditors appear, the lender that thought it controlled the vehicle is holding a contract rather than a security interest, and contracts do not give priority.

That is an unusual outcome, and worth opening on for what it reveals about the ordinary case. Project finance in the UAE runs on a chain of steps, each completed in the form the relevant register or authority requires before it produces the effect the parties intended. The separation of the project company from its sponsors is real, but it is a creature of incorporation documents filed in a particular jurisdiction. The claim on revenue is real, but it depends on an assignment properly made and recorded. The right to take over a failing project is real, but only within the limits regulators and courts will permit. Remove the formality and what remains is a well-drafted intention.

The commercial shape underneath is straightforward. Sponsors put equity into a company formed for one purpose; that company holds the project, signs the construction and operating contracts, and takes on the debt. Lenders advance against what the project is expected to earn rather than against the sponsors' balance sheets, which is the point of the structure and also its principal risk: if the cash flow does not arrive, there is no parent to sue. Everything else — where the vehicle is incorporated, what the shareholders' agreement permits, what the concession says about tariffs and about termination, what security has been registered — answers that single exposure.

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The vehicle in the middle: what an SPV separates and what it does not

A special purpose vehicle is a company like any other, distinguished only by the discipline imposed on what it may do. It holds the project assets, signs the project contracts, borrows, and does nothing else. That restriction is what makes the lender's analysis possible: a bank lending against a road, a plant or a terminal wants the borrower to contain that asset and no other business, no legacy liabilities, no capacity to take on obligations it has not seen. In the UAE the vehicle is usually a limited liability company; larger projects contemplating a wider equity base may use a public joint stock company instead, which changes the governance machinery, the thresholds for shareholder approval, and the mechanics by which shares can be transferred or charged.

What the SPV does not do is make the sponsors irrelevant. They provide the equity supporting the vehicle's creditworthiness, and lenders typically look to them for undertakings outside the ring-fence: completion support, guarantees, commitments to fund cost overruns. The separation is genuine as to the operating business and porous wherever the lender has insisted on a direct sponsor obligation.

Mainland or free zone

Where the vehicle is incorporated shapes both its ownership and what it is licensed to do. A mainland company is formed under the federal companies legislation, Federal Decree-Law 32 of 2021, together with the rules of the emirate where it is registered. The general requirement that a UAE national hold the majority of shares in a mainland company has been removed, so foreign ownership is no longer the obstacle it once was. Licensing remains decisive: infrastructure activity in sectors such as energy or transport carries sector-specific licensing, and where the licence can only be held by a mainland entity, the jurisdiction question answers itself.

Free zone incorporation offers different advantages. Several free zones have regimes suited to financing structures, with capital requirements and corporate procedures designed for holding and project entities rather than trading businesses. The Dubai International Financial Centre goes further, offering a common law framework and its own courts, which some international lenders find easier to price than an unfamiliar forum. The trade-off is that a free zone entity's ability to carry on business in the mainland is limited, which matters if the project involves operations, staff or contracting outside the zone.

Equity, and the shareholders' agreement

Sponsor equity rarely arrives in a single payment. It is committed up front and drawn in stages tied to project milestones, which keeps sponsor capital at risk while limiting what is exposed before the project has shown progress. Lenders take an interest in that schedule, because an unpaid equity commitment is, from their side, another undertaking to be documented and secured.

The shareholders' agreement is where sponsor relations are settled, and in a financed project it is negotiated with a reader in the room who is not a shareholder. Its familiar provisions — reserved matters, board composition, dividend policy, pre-emption on transfers, tag-along and drag-along rights, deadlock and exit mechanics — bear directly on questions the lender cares about. Who can be admitted as a shareholder? Can a sponsor sell out mid-construction? Which decisions require unanimity, and does that let a minority sponsor block something the lenders need done?

Two adjustments follow almost invariably. Share transfers are made subject to lender consent, so ownership cannot change without the bank's agreement and the pledged shares are not moved out from under the security. And distributions are constrained: cash reaches shareholders only when the financing documents permit, typically after debt service and required reserves. An agreement drafted without those hooks will be reopened during financing negotiations.

Step-in rights and the limits on them

Step-in rights allow lenders, or someone they appoint, to take over the running of the project when defined things go wrong — sponsor default, abandonment, an operator failure that threatens the asset. The logic is simple: a half-built plant is worth far more finished than sold as it stands, and a lender that can only accelerate and enforce is choosing between bad outcomes.

Drafting them is less simple. Step-in has to be reconciled with UAE corporate law and with the approvals attaching to the project. If the licence to operate is held by the SPV, a change in who controls the SPV may itself require regulatory consent. If the counterparty is a government entity, the concession will have its own rules about who may perform. Where a project carries significant public interest, appointing a receiver or manager can attract legal and regulatory scrutiny and may require court approval rather than following automatically from the contract. The practical answer is to negotiate the step-in path in advance with those whose consent it will need — grantor, regulator, operator — through direct agreements recording what each will accept before the crisis rather than during it.

Alongside step-in, the governance package gives lenders reporting obligations, approval thresholds for material decisions, and consent rights over changes to the project contracts — not control for its own sake, but because the lender sees least of daily operations and loses most by finding out late.

Concession agreements: tariffs on one side, termination on the other

Many UAE infrastructure projects rest on a concession: the right, granted for a defined term, to design, build, operate and maintain an asset in return for a revenue stream. Two provisions decide whether that grant can support debt — what the project is paid, and what happens if the arrangement ends early.

The government on the other side of the table

Concessions in the UAE are awarded and performed within a framework of federal procurement legislation and emirate-level decrees, and the granting authority is not simply a commercial counterparty. It retains public prerogatives, including rights to terminate or modify the concession in stipulated circumstances, and its role continues after signature through regulatory oversight, tariff approvals and, in some projects, direct financial support.

That imbalance is a fact to be drafted around rather than argued away. Concession agreements accordingly carry detailed conditions precedent, defined procedures for the approvals the project will need during its life, and dispute mechanisms that acknowledge who the counterparty is. For lenders the questions are narrow and constant: on what grounds can this be taken away, on how much notice, and what is paid if it is.

Tariffs and revenue

Revenue may come from users, from availability payments made whether or not the asset is used, or from both. Tariffs are frequently regulated, and where they are, the agreement needs an adjustment mechanism — a stated basis on which charges move over the term, by reference to an index, to input costs, or to defined review points. Without one, a project priced on today's costs is exposed to every year that follows.

The same section deals with revenue that departs from the assumption: how shortfalls are treated, whether over-collection is shared or returned, and whether a minimum revenue commitment or guarantee from the granting authority applies. Those commitments do real work, converting part of the demand risk into a receivable from a creditworthy public counterparty — which is why they are among the most closely negotiated terms in the document.

Termination and force majeure

Termination provisions are read by lenders before almost anything else. The agreement should distinguish clearly between termination for the project company's default, for the granting authority's own reasons, and for prolonged force majeure, attaching a compensation consequence to each. What is tested is whether a termination event leaves enough to repay the debt; if it does not, the security package is being asked to carry a burden it cannot bear.

Force majeure clauses here are drafted with regional conditions in mind, covering natural events, geopolitical disruption and, in some drafting, changes in law that make performance impossible or materially different; the usual effect is to suspend or extend obligations without penalty for the period affected. The point that matters is the tail: how long an event may continue before either party can terminate, and what is payable if that point is reached. Ambiguity there surfaces exactly when neither side has any appetite for negotiation.

Security that has to be registered to bite

Security interests in the UAE are governed principally by the Civil Code and by the federal commercial transactions legislation, Federal Decree-Law 50 of 2022. The common feature across the categories is that creation and perfection are separate steps, and only the second makes the interest good against the world.

A financing package over a UAE infrastructure project usually assembles four types of protection:

• Mortgages over land, buildings and fixed assets owned by the project company, registered with the relevant land department.
• Pledges over the shares in the SPV, over the project accounts, and over other movable assets, subject to notarisation and registration with the competent authority.
• Assignments of receivables arising under the concession, the project contracts and the insurance policies.
• Guarantees from sponsors, from third parties or, in some public projects, from government entities, supporting the debt service obligations.

Each answers a different problem. A mortgage reaches the physical asset. A share pledge reaches the vehicle that owns it, giving lenders a route to control without dismantling the project. An assignment reaches the money before it becomes the borrower's free cash — often the most valuable of the four, because in a project financed on cash flow the receivable is the real collateral. Guarantees reach a balance sheet outside the ring-fence.

Where perfection is won or lost

Real estate mortgages are registered with the land department of the relevant emirate. Pledges over movables, shares and receivables call for notarisation and registration with the competent authorities, and a share pledge also has to be recorded in the company's share register. These are not administrative afterthoughts: a failure to observe the formal requirements can leave the interest ineffective against third parties, which is to say ineffective in the only circumstances in which anyone will need it.

Two habits follow. Treat perfection as a condition to drawdown, so money does not move before the register does. And keep the package current: assets acquired after closing, new accounts, contracts novated during construction all need bringing within the security by the same formalities that applied at the start. Packages decay quietly, and the decay is invisible until enforcement.

Enforcement, insolvency and multiple lenders

Enforcement is where the structure meets the rest of the legal system. Insolvency and restructuring processes bring moratoriums and statutory creditor hierarchies affecting what a secured lender may do and when, and other creditors turn a bilateral calculation into a contest the package should anticipate rather than assume away.

Receivership provisions let lenders appoint a receiver or manager on default, though as noted that right can attract scrutiny where the project serves a significant public function. Where several lenders are involved — on projects of this size they usually are — an intercreditor agreement sets priority of payment and enforcement, who may act and on whose instruction, and how decisions are voted, so that no single lender can take a step damaging the recovery available to all.

What lenders require beyond the security

Security is the remedy of last resort. Most of the protection in a project financing operates earlier, through obligations written into the facility agreement and monitored across the life of the loan.

Covenants and monitoring

Financial covenants give lenders a measurable view of the project's health and a trigger for action before value is lost. Debt service coverage ratios, loan-to-value tests and liquidity requirements are the common set, supported by reporting obligations on a defined schedule. A breach may itself be a default, opening the path to acceleration or enforcement, but the more useful function of a covenant is the conversation it forces while the position is still recoverable.

Insurance

The insurance programme carries risks no contractual allocation can absorb: construction all-risks, business interruption, and political risk cover where the profile warrants it. Lenders will want to be noted on the policies and the proceeds routed to follow the security rather than the borrower's discretion, which is why the assignment of insurances sits in the security package rather than the insurance file.

Structuring choices that repay the effort

Dividing the project into fundable parts

Large projects are often broken into phases or components, each with its own contracts and funding under a master framework — a transport scheme separating construction, operation and long-term maintenance. The benefit is containment: trouble in one component need not contaminate the others, specialist funders can take the part matching their appetite, and capital is drawn as each stage is reached. The cost is interface risk, which means drafting the seams with the same care as the components.

Blending sources of capital

Few UAE infrastructure projects are funded from a single source. Sponsor equity, senior commercial debt and public support through grants, guarantees or availability payments are combined to match the risk profile. Blended structures complicate everything downstream — governance, security, covenants, intercreditor arrangements — because each source arrives with its own conditions and its own view of priority. That is manageable only if the interaction is worked through at structuring stage rather than discovered at documentation.

Dispute resolution

Project documentation typically provides for a staged process: negotiation, then mediation or expert determination, then arbitration under recognised rules such as those of the Dubai International Arbitration Centre or the International Chamber of Commerce. Staging matters because most project disputes are technical, and are better resolved by people close to the facts than by a tribunal reading about them two years later. Lenders look for a final stage that is enforceable, consistent across the project contracts, and incapable of leaving the concession in limbo while sponsors and contractor argue.

Where this leaves sponsors and lenders

The elements of a UAE project financing are not independent. The jurisdiction chosen for the SPV determines what licences it can hold and how its shares can be charged. The shareholders' agreement determines whether those shares can move and whether cash can leave. The concession determines what revenue exists to be assigned and what is paid if it ends early. The security documents determine whether any of it can be reached. A weakness in one place is felt in all of them.

The recurring failure in practice is not bad drafting. It is a formality left incomplete, a consent not obtained, a register not updated as the project changed shape — omissions that cost nothing while the project performs and everything when it does not. Sponsors and lenders who treat perfection, consents and registrations as live obligations across the life of the financing, rather than a closing checklist, keep the structure doing the work it was built to do.

Nour Attorneys advises sponsors, lenders and public sector counterparties on project vehicle formation and governance, on concession and project documentation, and on the creation, perfection and enforcement of security in the UAE.

Disclaimer

This article is for informational purposes only and does not constitute legal advice.

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