Project finance in the Gulf Cooperation Council (GCC) region is undergoing a rapid transformation as markets mature and political risks recede, giving investors greater confidence to fund ambitious infrastructure projects. This confidence has fostered a robust pipeline of deals across the GCC.
The region’s unique position is also a draw as the GCC offers a middle-ground risk and return profile standing between the low-risk, low-yield markets of the West and the higher-risk, high-yield opportunities in the East.
Market maturity lowers risk
Industry experts observe that the GCC’s political and economic environment has stabilised significantly in recent years. Hugh Morris, Senior Research Partner at the consultancy Z/Yen, explains that as the market matures, perceptions of geopolitical risk in the region have improved. A more stable environment has, in turn, enabled a growing pipeline of infrastructure projects.
With risks now seen as lower, more investors are willing to compete for opportunities in the Gulf than ever before. In a global investment climate where low-risk assets with decent yields are scarce, the GCC’s balanced risk-reward profile is especially compelling to international financiers.
This improved climate has paved the way for greater collaboration among lenders. International banks, armed with large pools of capital and expertise in complex project financing, are increasingly partnering with local GCC banks that have invaluable on-the-ground knowledge and relationships.
Together, these partnerships blend global financial power with local insight to ensure projects are funded and executed effectively. These synergies help major developments get off the ground, as each party brings complementary strengths to the table.
Even with these positive trends, project finance deals are not without challenges. Many projects span 20 years or more, with loan repayment schedules commonly stretching over 12 to 25 years. Critically, loans are usually repaid from the project’s own revenues once it is operational, as sponsors do not typically guarantee the debt.
This structure means lenders shoulder significant risk, since repayment hinges entirely on the project’s success. Naturally, banks expect to earn a premium interest rate in return for taking on this risk. However, competition in today’s market is pushing lenders to offer more attractive terms to win business, even as they must adhere to strict capital adequacy rules. Balancing risk-based pricing with competitive financing packages has become a key focus for Gulf banks.
Diversification drives mega-projects
Saudi Arabia and the United Arab Emirates (UAE) currently lead the region in large-scale project investments. A major driver behind this trend is the strategic push to diversify national economies away from oil and gas, building a sustainable postoil future.
Both countries benefit from centralised decision-making, as directives from top leadership are translated swiftly into infrastructure initiatives on the ground. For example, Saudi Arabia has embarked on pioneering projects in green hydrogen energy, and the UAE has made a bold entry into nuclear power. Saudi Arabia’s $50 billion Al Diriyah development near Riyadh aims to create a cultural and tourist hub, echoing Dubai’s success in drawing international visitors.
Despite this ambitious pipeline, not everything is rosy. A spokesperson for Bank ABC points out that there remains an estimated $5 trillion annual investment gap globally for clean energy, highlighting shortcomings in meeting climate targets after COP29.
The bank argues that financial institutions must play a greater leadership role in bridging this gap. This reality highlights why many Gulf-based banks and investors are focusing their efforts on funding renewable energy and other energy transition projects.
Rise of PPPs and social infrastructure
Another notable shift in the Gulf’s project finance landscape is the growth of social infrastructure projects such as hospitals, schools, and public amenities, which are often structured as public-private partnerships (PPPs). Ehab Nassar, a director at Fitch Ratings, observes that this trend is driven by the same strategy of reducing reliance on oil revenues.
Governments in the GCC have been ramping up PPP frameworks to tap private-sector capital and expertise for public projects. Until the late 2010s, true project finance deals outside the oil and gas sector were relatively limited. Since then, countries like Saudi Arabia and the UAE have introduced formal PPP programmes as part of their economic diversification agendas.
Not every major project in the region uses a PPP structure. For instance, Abu Dhabi’s Barakah nuclear power plant, a cornerstone of the UAE’s clean energy strategy, was financed through a more traditional mix of government support and international investment rather than a typical PPP, combining both debt and equity in its funding.
It was backed by over $18 billion in loans from the Abu Dhabi government and international lenders (including KEXIM), plus an equity investment of $4.7 billion from a joint venture between Emirates Nuclear Energy Corporation (ENEC) and Korea Electric Power Corporation (KEPCO).
Because the plant will help decarbonise the UAE’s power grid, the authorities classified its financing as a green loan, emphasising its contribution to the country’s green economy goals. In July 2023, once the plant was operational, two major Emirati lenders, Abu Dhabi Commercial Bank and First Abu Dhabi Bank, stepped in to refinance a large portion of the project’s debt, taking over the loan facilities that KEXIM had initially provided.
New financing structures
Project financiers in the GCC are also experimenting with new deal structures to improve funding efficiency. One notable evolution, highlighted by Abbas Husain of Standard Chartered, is the use of “hard mini-perm” financing coupled with long-term off-take agreements.
In these arrangements, a project’s initial bank loan might have a shorter tenor, effectively requiring refinancing after a few years, while the project itself benefits from a long-term concession or purchase contract.
This approach shifts much of the refinancing risk to the off-taker and offers two key benefits. There are lower initial financing costs and greater liquidity from banks to kick-start construction. Such projects often plan to refinance later by issuing project bonds or securing longer-term commercial loans once the development is operational.
For infrastructure projects where the off-taker does not shoulder refinancing risk, developers typically secure long-term bank loans up front. Export credit agency (ECA) financing and other government-backed loans remain crucial in these cases, providing stability with low interest rates over long tenors and often coming with guarantees or insurance that enhance the project’s credit profile. By boosting the project’s credit quality in this way, such support makes it more attractive to a broader range of investors.
Refinancing for cost gains
Once projects are up and running, many Gulf sponsors seek to refinance their debt on better terms. According to Mazen Singer, a partner in infrastructure finance at PwC Middle East, most project owners look to refinance about five to eight years after a project becomes operational. By that stage, construction is complete, operations have stabilised, and revenue streams are more predictable.
The project’s risk profile improves significantly. Refinancing at this point can lower the overall cost of capital and optimise the debt structure. In some cases, it even allows sponsors to free up capital for new developments. If one waits much longer, those advantages diminish, and once a loan’s remaining term becomes short, the potential savings from refinancing are far more limited.
The pool of financiers and investors has also widened as the GCC market matures. Singer notes that more export credit agencies are now involved in Gulf projects. In addition, specialised infrastructure funds are drawn to mature, cash-generating (brownfield) assets, and local capital markets are growing more open to project bond issuances.
Husain of Standard Chartered adds that improved regulatory and governance frameworks, clearer procurement processes, and high-calibre project sponsors have made banks much more comfortable with regional project risks.
Strong sovereign support underpins many deals, and often the off-taker is a state-owned utility or the obligation is backed by a government ministry. This backing substantially reduces perceived credit risk and has enabled banks to offer financing at more competitive rates than in the past.
Thanks to an expanding track record of completed projects, investors now see a pipeline of successful ventures in the GCC, which builds confidence that each new project is a sound investment. These successes, and the collaborative financing behind them, demonstrate the Gulf governments’ determination to construct a prosperous post-oil future.
However, industry veterans caution that financial discipline is still urgently needed. Hugh Morris warns that regulators must carefully prevent investors from over-leveraging projects and taking excessive returns, as such practices could ultimately end up undermining long-term infrastructure sustainability in the region.
Future of GCC financing
While progress in Gulf project finance has been impressive, experts note certain challenges remain. One issue is the lack of historical precedent in the region for some project finance scenarios, which breeds uncertainty for lenders. For example, there is still little proven case law on how readily lenders can enforce their security interests if a project runs into trouble.
Another concern is limited transparency and information sharing, which makes it harder for outside investors to gauge project risks. All of these gaps point to the need for stronger legal and regulatory frameworks across the GCC to reduce uncertainty and build long-term confidence. Notably, regulatory development is not uniform across the bloc. The UAE and Saudi Arabia boast the most advanced frameworks and capital markets, while smaller economies are still catching up.
Industry analysts suggest several steps that could further strengthen the Gulf’s project finance ecosystem. One suggestion is the standardisation of PPP frameworks. Uniform PPP laws and contracts across the region would make projects more bankable and attract international lenders. Another idea is to develop secondary markets.
An active trading of infrastructure debt and equity would facilitate refinancing and let banks recycle capital into new projects. Finally, there is a shifting refinancing risk to off-takers. If utilities (project off-takers) bear future refinancing obligations, initial lenders can free up capacity, boosting liquidity for new projects.
With continued regulatory innovation and collaboration among stakeholders, the GCC is well-positioned to emerge as a leader in the next phase of global infrastructure finance. However, sustaining this momentum will require more than just money. It also calls for developing human capital.
Analysts like Mazen Singer emphasise the importance of cultivating local expertise and institutional capacity in project finance. By training professionals and nurturing national champions in the industry, Gulf countries can ensure that the ambitious projects of today lead to a lasting legacy of knowledge and prosperity.