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Region sees evolving project finance demand

27 October 2025

 

The GCC remains in the grip of an infrastructure supercycle that requires project sponsors to seek out the most efficient funding solutions. This places project finance firmly in the frame, with interest piqued by developers’ preference for financing models that match long-term concessions with long-term debt. 

Deal advisers note the buoyancy of the Gulf projects market. 

“There is a collective appreciation for international capital and international resources and skills that is creating healthy competition in the region, which has not been seen before. This is fuelling some of the project finance boom,” says Andrej Kormuth, head of law firm Bracewell’s Middle East projects practice.

Deferring costs

Non-recourse lending – in which lenders rely on a project’s cash flow – remains a popular method of deferring costs in the Middle East, and one that has grown in volume and size. The availability of long-term offtake agreements with creditworthy counterparties has helped to reinforce investor confidence.

“Gulf states have recognised the budgetary benefit of not having to pay for infrastructure up front or in short order, but rather deferring these costs over a period of time – allowing a bit more budgetary flexibility in relation to critical spending,” says Kormuth.

GCC governments have seen project financing deliver value over the long term, helping them as they map out their long-term economic transformation programmes.  

“The procurers have seen how well the project finance deals in the Gulf have been run. They have seen the benefit of having international skills come in that would not historically have been locally available, and of running these assets for the long term,” says Kormuth.

Shifting asset classes

While traditional sectors such as power continue to dominate – according to ratings agency S&P Global, utilities alone accounted for 75% of project finance loans over the past five years – new sectors have come to the fore that are suitable candidates for project finance, including battery storage. 

“Over the last 12-18 months, one of the new developments has been the introduction of the new asset class of battery storage projects in jurisdictions such as Abu Dhabi and Saudi Arabia,” says Oliver Irwin, head of project finance at Bracewell.

“These projects are being developed on a very large scale, which gives rise to new challenges from a financing perspective, in terms of considerations for things like split procurement and battery degradation, which are not necessarily features of wind and solar project financings.”

Alongside the almost 90GW of renewable energy that Saudi Arabia will install over the next five years, the kingdom is also planning 48 gigawatt-hours of storage battery capacity by 2030.

There has also been a significant refocusing on the mining sector and digital infrastructure in the region, according to Munib Hussain, a partner at Milbank LLP, a project finance specialist.

“Mining [is seeing increased interest] because of factors such as the energy transition, and the rush to try and secure the minerals that support the energy transition, and as another means of diversifying economies. There is a real drive in the GCC at the moment to try and build out the midstream processing infrastructure for those critical minerals.” 

These projects are proving highly adaptable for non-recourse lending structures, backed by the preferred model of a long-term contract with a single offtaker. 

Data centres are another area of growth where project finance is likely to make a mark in the GCC, though this may require a steeper learning curve for lenders.

“In the digital space, there are still some challenges to [closing] large-scale project financing,” says Hussain. “But we know there are hyperscalers that are expected to come in with slightly longer-term leases or MSAs [master service agreements] that can support a project financing.”

These may have tenors of around 10-15 years, which Hussain points out is not particularly common, but he says the hyperscalers “see the opportunity to have a foothold there – and so they may be committing for slightly longer tenors”.

While renewable energy and data centres present new avenues for project lending, advisers point out that the Gulf has a surfeit of conventional infrastructure projects that are in need of funding – gas-fired independent power projects, for example, have seen a revival, as have water desalination and water reservoir storage projects. 

Ancillary infrastructure around Saudi Arabia’s gigaprojects is also keeping lenders busy. Saudi Power Procurement Company plans to add about 7GW of combined-cycle gas turbine capacity annually over the next five years.    

“The energy sector is quite buoyant,” says Bracewell’s Kormuth. “Two years ago, it was almost entirely dominated by renewables. Now, we are seeing quite a significant shift towards conventional, gas-fired baseload power stations.”

International re-entry

In newer sectors such as battery storage, international banks have built up their experience levels and are looking to replicate that in the GCC. 

“A lot of the international banks that are supporting the new wave of battery storage projects in the region have experience of financing battery projects in Europe and elsewhere. 

“So, while it might be new for the region, it is not necessarily new for those banks,” says Bracewell’s Irwin.

The re-entry of international lenders has changed the pricing equation, too.  

“The international commercial banks have become even more competitive, coming into domestic GCC projects, often outpricing the regional banks, which was not the case for the last five years or so,” says Hussain.

Whereas regional banks used to be much more competitive than international banks, various liquidity constraints have meant that the international banks are now coming in at much tighter pricing than ever before. 

So, while recent years have witnessed much liquidity and risk appetite from the local and regional banks that have started to play a prominent role in the financing of major infrastructure and energy projects, Bracewell’s Irwin says that in the last 12 months, there has been “a resurgence of sorts from the traditional international banks, leading to Middle East project deals, in particular in Saudi renewables projects”.

New sectors have come to the fore that are suitable candidates for project finance, including battery storage

Financing structures

Refinancing has been a feature of GCC project financing arrangements for many years. The so-called soft mini-perm structure, which involves margin step-ups and cash sweeps that give an incentive to refinance debt over time, retains popularity among sponsors. 

“The primary and preferred method for project financings in the region is a soft mini-perm. It is a proven model that works very well for the region and continues to attract a deep pool of financiers that are willing to lend to the region’s large pipeline of energy and infrastructure projects,” says Irwin.

Export credit agency (ECA) and Islamic tranches remain prominent features of project loans, sometimes in combination. This was the case with UK Export Finance’s guaranteeing of a $700m Islamic Murabaha financing facility to finance the construction of the Six Flags Qiddiya City theme park in Saudi Arabia. 

“We continue to see that Islamic financing is a key tool for project sponsors. If you are looking to diversify your funding base, it is now very normal to have an Islamic finance tranche alongside a conventional tranche, as well as an ECA tranche,” notes Irwin.  

Capital market instruments are another innovation identified by Gulf deal advisers. Saudi Arabia’s Greensaif pipeline transaction with BlackRock and Saudi Aramco in 2024 was a pipeline monetisation deal that saw BlackRock take a 49% interest in Aramco’s gas pipelines in Saudi Arabia. 

“There was a $13.4bn acquisition/stapled financing associated with that, which needed to be refinanced within a certain period of time,” says Hussain.

BlackRock went to various funding sources, including the conventional bank market, the international bond market and the sukuk (Islamic bond) market.

“The bonds and sukuk issued in connection with Greensaif are project bonds, because underlying the payment of the coupon on both was the revenue from the underlying project contracts with Saudi Aramco. These issuances were some of the largest project bonds issued in the region in recent times,” says Hussain. 

The Gulf’s pull for project financiers shows no signs of petering out. Lenders have developed a taste for regional risk, and international banks are particularly keen to get back in the game. The mood music is positive. 

“We have seen that different types of banks get priced out of the market from time to time, but they invariably look to return to the market because Middle Eastern projects are generally well-structured financings with very robust revenue streams. That gives rise to a lot of enthusiasm to support these projects,” says Irwin. 

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James Gavin

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