With infrastructure investment in the GCC only set to grow, there is a need to increase the issuance of project bonds to fill any anticipated gap in funding.

Typically, project financing of infrastructure in the region consists of bank loans provided by international banks and a highly liquid regional banking sector. Bond issuance is limited due to the debt markets being relatively new in the GCC. Yet, given the billions of dollars-worth of infrastructure spending regional governments are planning, a wider range of financing sources is required.

New regulations such as Basel III will limit banks’ ability to lend long term, which will heighten the need to explore other financing options. A new report from US ratings agency Standard & Poor’s, which highlights the global gap in infrastructure funding, has noted that although the GCC debt markets are less active compared with their international peers, there are signs that project bond issuance will increase.

Globally, there is already a clear trend towards increased project bond issuance in project finance structures, with data from the UK’s Dealogic showing project bond issuance more than doubled in 2013, reaching $54.7bn.

The GCC is trailing behind the global trend, but some regional governments are using legislation to help encourage greater use of the capital markets to fund schemes. The UAE has exempted bond and sukuk (Islamic bond) issuance from lending caps on loans to government-related entities (GREs). This could make it more attractive for banks to invest in bond issuance rather than conventional loans to GREs.

Such developments are helping reshape the way the region will finance its huge infrastructure spending plans in the coming decades.