Project finance central to funding Gulf infrastructure

Financing outlook strong

Loans repaid from revenues

Attracting international investors

Financing a project and project finance are not necessarily the same thing.

Irrespective, project finance is as important as ever in the Gulf in funding billions of dollars of infrastructure projects, from energy and water schemes to data centres and battery storage facilities, according to experts. 

Abbas Hussein, global head of infrastructure and development finance at Standard Chartered, said the outlook for project finance this year and beyond in the Gulf region “remains strong”, especially in Saudi Arabia and the UAE, respectively the two largest Arab economies.

That is because of major infrastructure projects, investment in renewable energy and green hydrogen, the growing importance of waste and water management projects “given the region’s water scarcity” and – finally – “as sponsors look to optimise capital structures in a high-interest-rate environment”, Hussein said.

Project financing is often a misunderstood concept, said Stephen Knight, a partner at Dentons law firm in Abu Dhabi. Generally, it refers to taking on long-term loans to build a project which are then repaid from the project’s revenue after it is completed.

Unlike usual corporate financing deals, however, project finance rarely comes with revenue or debt repayment guarantees from the project sponsor. This makes it a higher-risk option for banks compared to other forms of financing. 

Relatively high interest rates over the last three years have increased costs and made “structuring and risk allocation more critical”, said Hussein, although Arab countries with stronger credit ratings have benefitted from competition among investors, contractors and lenders to participate in deals.

International investors – including private credit funds, institutional investors, export credit agencies, and development finance institutions – are increasingly participating in Gulf project finance, Hussein said.

“Technological advancements and a reduction in equipment costs have also helped keep infrastructure costs manageable,” said Hussein. That in turn keeps the lending amounts under control.

In the Gulf, three kinds of project finance deals are most common. 

The first are deals for competitively tendered transactions to finance public infrastructure such as power and water plants; the second, government-to-government projects, and the third private project financing. 

Examples of the third include building petrochemical and district cooling plants.

Government-to-government projects are rarer; they also tend to take longer to agree and are typically larger in value, said Dentons’ Knight.

Reducing costs is a major consideration for decision-makers mulling how to fund government infrastructure projects, Knight said. 

This often leads them to rule out project finance on a “value-for-money” analysis because government-guaranteed debt is generally cheaper than limited-recourse project finance debt, he said.

Projects funded on a balance sheet basis – where the project sponsor borrows the necessary money or guarantees the revenue or repayment obligations, and includes these liabilities in its accounts – are usually quicker, easier and cheaper.

Project finance deals to fund wind farms, battery energy storage facilities and data centres are likely to become increasingly common in the Gulf, Knight said.

Project financing “has become a preferred model because it allows developers to secure long-term funding aligned with project lifecycles, while keeping debt off balance sheet”, S&P Global Ratings wrote in a report this month.

“There’s less risk analysis required and, as a result, lower advisory fees and faster transaction time,” said Knight.