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Region remains global project finance hotspot

25 October 2024

 

This package also includes: PPP activity eases back but remains strong

While the Middle East and North Africa (Mena) region has recently become the focus of global attentions for all the wrong reasons – amid surging conflict in the Levant – advisers continue to see the adjacent Gulf as a standout market for project finance.

“The Middle East market has been buoyant compared to the project finance market in many other parts of the world,” says Matthew Escritt, a partner at the UAE office of law firm Pinsent Masons, who has advised on large regional financings. 

“By far and away, the Middle East is the place to be if you want to do big-ticket project finance.”

Major deals such as the $6.1bn financing for Neom Green Hydrogen Company, which closed in 2023, affirm the region’s continued affinity with large and sometimes complex transactions that involve senior and mezzanine facilities and bring numerous financial institutions into the mix.

The use of project finance structures across a widening array of sectors – from hard and soft infrastructure, to newer asset classes such as green energy – suggests that the Middle East will remain a hotspot for funding activity.

Ratings agency S&P Global has forecast that alongside the energy sector, the region will see significant investments in transport and social infrastructure, as well as in digitalisation, with large outlays on connectivity and a doubling of data centre capacity as the region’s population continues to grow.

Regional reconfiguration

While the Mena region as a whole has seen an uptick in activity, the picture is not even.

“Activity in Saudi Arabia has seen something of a slowdown after it became clear that some of the kingdom’s more ambitious plans were being recalibrated,” says Escritt.

“Liquidity has become tighter and we’re finding that procurers are taking longer to announce their preferred bidder.”

Appetite among international banks has been weaker for some sectors, such as social infrastructure. 

Neom’s large green hydrogen financing of 2023 remains a standout rather than the norm, although local lenders appear ready to step into the breach when circumstances allow. For example, in April of this year, when Neom secured a $2.7bn revolving credit facility to cover short-term financing requirements, it was nine local banks that ended up providing the financing.  It was, according to Neom CEO Nadhim Al-Nasr, a “natural fit” within the company’s wider funding structure.

International banks’ interest remains fixed on energy sector and infrastructure projects. Outside of these, says Escritt, the project finance market is dominated by large local banks. This, he says, has contributed to a tighter liquidity environment as these financial institutions run up against exposure limits. “The key to unlocking that market’s undoubted potential is to create conditions that improve the appetite of foreign lenders for Saudi Arabian credits,” says Escritt.

International lenders’ comfort zones were once largely focused on massive financings such as the kingdom’s Sadara petrochemicals project, which in 2013 drew commitments of $12.5bn.  

“Frankly, the days of the Sadara blockbuster-type projects are over. But there’s still some substantial projects out there,” says John Dewar, a partner at international law firm Milbank, which specialises in energy and infrastructure financings.

Dewar points out that there are still a fair number of $2bn-$4bn projects in the region, but that it is more challenging to syndicate larger scales of debt. Even export credit agency (ECA) support is not a given in the Mena region.

“Even if they’ve got large export content in them, it’s still more difficult to get them mobilised into oil and gas financings, for example. The ECAs are pulling back from those types of deals,” says Dewar. “Petrochemicals is slightly easier, but nonetheless, over the next couple of years we will see fewer agency lenders involved in the petrochemicals sector than we have at the moment.”

The UAE – Abu Dhabi in particular – remains a bright spot in the region.  

 “Abu Dhabi has shown that it is very good at getting things done,” says Escritt, whose team helped bring the Khalifa University student accommodation public-private partnership project to financial close – another significant social infrastructure project in the UAE capital. 

“There’s a strong appetite among the major project finance players for Abu Dhabi risk – they like it. 

“You are also now seeing the larger local banks stepping into this space, with Abu Dhabi Commercial Bank and First Abu Dhabi Bank in particular showing appetite for these credits,” says Escritt.

The Qatari market has proved more sluggish, although the Al-Wakra and Wukair independent sewage treatment plant project – the country’s first – has seen progress this year with a $540m financing on a 75:25 debt-to-equity ratio basis, including a soft mini-perm structure.

Emergent energy markets

Energy has traditionally been a magnet for project financing in the Mena region and should support one of the emerging areas within that segment – carbon capture and storage (CCS), which is an area of focus for regional oil companies.

Saudi Aramco’s first phase of its Accelerated Carbon Capture and Sequestration project is expected to be the world’s largest CCS hub upon completion. Aramco aims to transport and capture 9 million tonnes a year of emissions by 2027 in its first phase.

Carbon-capture financing could prove an attractive opportunity for banks, swelling the liquidity that is already there for hydrogen schemes.

Lender appetite has increased for these new energy schemes. “[Saudi Arabia] had a large splash on solar power recently with Acwa Power financings, while Saudi Aramco will have relatively large financing requirements for its energy transition projects. The [kingdom is] now still very much focused on project finance transactions,” says Dewar.

With Oman pushing green hydrogen projects in Duqm and Dhofar, and Egypt backing an ambitious renewables programme under a structure that investors have found to be attractive and bankable, project financing should make more headway in the low-carbon space across the region. 

In renewables, there is more depth in the market and more lenders willing to participate, although as law firm AO Shearman has noted, there remains a deficiency in bankability and unpredictable development costs in green hydrogen schemes.

This piqued interest in non-fossil fuel project funding contrasts with the reduced appetite globally among banks for traditional hydrocarbons schemes. “If you’re looking at oil and gas financing, then it’s increasingly a struggle outside of some of the Chinese banks,” says Dewar. “That’s not to say that in the Middle East there aren’t still a number of local and regional banks that are happy to participate in the market.”

Government support will remain critical in getting centrepiece financings under way in areas such as green hydrogen. And, as AO Shearman notes, given the nature of the supply chain for green hydrogen projects, there is value in including ECA-supported debt in the financing mix. In particular, where Mena projects involve key equipment coming in from outside the region, ECAs have an important role to play in building confidence.

ECAs remain a mainstay in traditional Gulf downstream sectors such as petrochemicals. For example, South Korea’s Hyundai Engineering & Construction has tapped $1bn of project financing support from the Export-Import Bank of Korea for the Amiral petrochemicals project in Saudi Arabia. As the lone South Korean contractor deployed on the estimated $7bn scheme, it therefore enjoys sole access to this project financing facility.

Project sponsors will also be looking to capital market instruments, despite these losing favour in recent years as the global
interest-rate environment rendered proposed bond components in project financings less appealing to many.

With the US Federal Reserve in a gradual monetary easing cycle, however, the use of project-related bonds may begin to revive.

For example, Saudi Aramco has managed to complete some large gas pipeline financings using acquisition facilities that were refinanced in the bond and sukuk markets.

“As the interest-rate environment changes, that’s going to get more people thinking about bond refinancing activity. We’ll see a bit more in a year’s time, when interest rates have come down and investors readjust and start to look for more attractive yields,” says Dewar.

With a different interest-rate climate in place, and more lenders and project backers gaining experience in the new energy schemes that are emerging in the Gulf and the wider Mena region, the hope is that banks will be dipping back into the region with transactions that will maintain its status as the global project finance hotspot for a while longer.

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James Gavin

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    After initial concerns that the market would experience a sharp downturn and project cancellations following the onset of conflict in the region, regional president McGrail says WSP has yet to see a single major contract cancelled across its regional portfolio.

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    “None of the projects we are currently involved in have been put on hold or suspended,” he says. “It is more re-evaluation. Some of that is investor sentiment, but some of it is materials and logistics as well, which people do not necessarily consider.”

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    “Requests for proposals have not slowed down across any of our disciplines or business units,” he says. “We are definitely seeing an uptick in infrastructure.”

    Infrastructure pivot

    That focus points to where McGrail expects the next few years of growth to come from. Rail sits at the centre of the UAE story, alongside road upgrades and other major developments in Abu Dhabi. In Dubai, the clearest signal of intent is the expansion of Al-Maktoum International airport.

    “Al-Maktoum is a really good indicator of the future direction of travel,” he says. “That is not a project that is slowing down. There has been a commitment to Emirates that it will move there, and it is still progressing.”

    The scale of the airport – and the challenge of relocating an airline the size of Emirates in one move – raises the question of how it will be funded. Here, McGrail returns to the theme of stability and to the mechanism that underpins it.

    “One of the beauties of this region is the ability of government to step in,” he says. “They can fund it. If the private sector does start to suffer, that is the backstop. They push money into infrastructure – roads, rail, airports – which keeps our industry moving.”

    Saudi reset

    In Saudi Arabia, the recalibration story predates the conflict, and McGrail says the change should be read as a strength rather than a retreat.

    “I am positive,” he says. “When the reprioritisation started at the beginning of 2025, having lived through the global financial crisis here, I saw the decision to stop, re-evaluate and reprioritise expenditure as a positive. When Vision 2030 was set, Saudi Arabia had not won Expo or the World Cup, so the reprioritisation was the right thing to do. Saudi Arabia will come out of it stronger. Short-term pain, long-term gain.”

    The nature of the work is shifting with the budget. McGrail sees the kingdom moving towards a model long familiar in the UAE, in which core infrastructure and a handful of landmark buildings are delivered first, before surrounding plots are carved up and sold on.

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    That approach is increasingly tied to public-private partnerships (PPPs), although McGrail is measured on how far the model will stretch.

    “PPP is definitely becoming more prevalent on some of the larger infrastructure projects, though still not as significant as it was made out to be when they first started talking about it,” he says. He sees industrials, mining, healthcare and schools as a natural fit, rather than PPP becoming a blanket procurement route.

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    “Aviation is definitely a key area of focus for us as we head into the next 12, 24, 36 months,” McGrail says.

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    The $3bn Taweelah C combined-cycle gas turbine (CCGT) project has been the UAE power sector’s standout contract award this year, accounting for the majority of the $4.17bn in awards as of early September.

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    > COMMENT: Saudi projects hold steady
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    > ECONOMY: Conflict bolsters case for Saudi economic diversification
    > BANKING: Saudi lenders readjust to lower lending and deposit climate
    > UPSTREAM: Aramco upstream spending gathers pace
    > DOWNSTREAM: Sabic steps up Saudi petchems investment
    > POWER: Saudi Arabia’s power award activity slows
    > WATER: Saudi water sector hits sharp slowdown
    > CONSTRUCTION: Saudi construction defies the headwinds
    > TRANSPORT: Saudi infrastructure pushes forward amid conflict
    > DATABANK: Saudi data indicates project spending shift

    To see previous issues of MEED Business Review, please click here
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    MEED’s October 2026 report on Saudi Arabia includes:

    > COMMENT: Saudi projects hold steady
    > GOVERNMENT: Riyadh looks to reset its regional defence outlook
    > ECONOMY: Conflict bolsters case for Saudi economic diversification
    > BANKING: Saudi lenders readjust to lower lending and deposit climate
    > UPSTREAM: Aramco upstream spending gathers pace
    > DOWNSTREAM: Sabic steps up Saudi petchems investment
    > POWER: Saudi Arabia’s power award activity slows
    > WATER: Saudi water sector hits sharp slowdown
    > CONSTRUCTION: Saudi construction defies the headwinds
    > TRANSPORT: Saudi infrastructure pushes forward amid conflict
    > DATABANK: Saudi data indicates project spending shift

    To see previous issues of MEED Business Review, please click here
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