Although market conditions look conducive to the rapid growth of project bond financing in the GCC, bank finance will remain crucial for infrastructure projects. Image Credit: AFP

Dubai: Project bonds could become a reliable and cheaper source of funding for long term projects such as utilities and infrastructure projects in the context of economic diversification and a new wave of infrastructure spending happening in the Gulf countries, said Karim Nassif, Associate Director, Infrastructure Finance at Standard &Poor’s.

Speaking to Gulf News in an interview, Nassif said infrastructure spending in the GCC is estimated at a total $2 trillion over the next 20 years, largely driven by Qatar’s spending for World Cup in 2022 and growing demands on utility companies. An estimated $100 billion of investment is required in the Saudi power and water market alone through to 2030. The region is also diversifying away from upstream oil and gas revenues through large industrial and energy-related projects. Additionally a number of corporate and infrastructure financings obtained through shorter term funding routes are coming up for refinancing, which could boost the bond issuance in the region.

Despite significant needs in the region and relatively low yields over the past five to 10 years, the number of GCC project bond transactions remains low, mainly due to the abundant liquidity in the local bank market and strong relationship lending by commercial banks.

“This situation looks likely to change, due in part to tightening bank regulation and also due to the rising financing demands of other infrastructure sectors,” said Nassif.

Regulatory changes

Some of the regulatory changes happening in the bank finance market are also expected to catalyse the projects bond market. The implementation of the Basel III framework for banks could have a direct impact on the tenors for long-term project financing and reduce the involvement of financial institutions in long-term lending to the region. SAMA, the central bank of Saudi Arabia, has adopted new regulations affecting financial services firms.

“The regulations to introduce capital charges for bank lending to projects that previously were not required and other regulations such as limitations on exposure by banks to single name and GREs have also been discussed in the UAE. If these new regulations come into effect, availability of bank funding for project finance could be curtailed,” said Nassif.

The gap left by the banks’ declining role in project funding in the region is expected to spur the use of capital market funding, including sukuk. But the impact of this will largely depend on relative ease of liquidity with the banks and the pricing of projects via the banks versus project bond financings.

Some large and long-term capital market issuance is already evident in the region. Utilities such as Dubai Electricity and Water Authority (Dewa) and Saudi Electricity Co. have made large sukuk issues in the first half of 2013, with tenors reaching 30 years in the case of Saudi Electricity. But largely these companies have issued on a corporate, rather than project finance basis.


While project bonds have a huge role to play in funding utilities, S&P sees equal role in public private partnership based infra projects. Even within the GRE driven projects like the Shuweihat 2 power and water desalination project financing transaction includes a bond tranche.

Although the market conditions look conducive for the rapid growth for project bond financing in the GCC, bank financing from local and regional banks will remain crucial for infrastructure projects.

“There is an ongoing need for project finance in GCC countries; however, it’s not clear to us whether this will take the form of bank or capital market financing. We consider the current strong capital adequacy ratios and healthy liquidity in GCC along with the sensitivity of issuers to pricing of bank versus capital market debt, as a brake on the potential for project finance capital market development,” said Nassif.

In Qatar in the third quarter of 2013 both Nakilat Inc. and the integrated water and power division of Qatar Electricity and Water Co. opted for bank financing from regional banks rather than capital market financing.

The volume of bond issuance also has been hit by global economic pressures. The increase in yields across the GCC corporate and infrastructure market as a result of the US decision to taper its bond-buying programme led to an immediate reduction in issuance in the third quarter. “We believe potential project finance issuers may have postponed their issuance. This demonstrates the sensitivity of GCC capital markets financing to yield,” said Nassif.