After 10 months without a single project finance deal in the Gulf power and water sector, two have been completed in the past three months.

In June, Bahrain raised $2.1bn to finance the construction of the Addur independent water and power project. Since the Addur deal closed, financing for the $2.5bn Rabigh independent power project in Saudi Arabia has also been completed.

These deals have created optimism that the project finance market is beginning to recover from the effects of the global financial crisis.

Eight major power and water projects are expected to close between now and the end of 2010. Project financiers are optimistic that the deals will close largely because debt margins have begun to stabilise.

Before the global financial downturn struck in October 2008, project debt was typically priced at less than 100 basis points over the London interbank offered rate (Libor). Today, margins average 250 basis points over Libor, higher than a year ago but 100 points lower than six months ago when the crisis was at its worst.

However, the availability of dollars is still affecting the financing of deals.

Project finance transactions are running at just 10 per cent of the level they were a year ago and banks will continue to be selective when deciding to which Gulf power and water projects they will lend.

Despite the promise created by the two deals that have been completed this year, any revival in the project finance market for the power and water sector will be limited, with banks favouring projects either directly or indirectly sponsored by GCC governments over those proposed by private developers.