The roller-coaster Middle East project finance market is entering a new phase of growth as the turnout this month at MEED’s annual event for the industry suggests. The number attending was lower than before the credit crunch, but the mood was upbeat. After closing GCC deals probably worth no more than $20 billion in 2009, project financiers are predicting the value of completed transactions in the region could rise by up to 50 per cent this year and to $40 billion in 2011.

This would still be less than in 2007, when the Middle East was the world’s biggest project finance market. But the oil price rebound since the start of last year has restored confidence among project sponsors and delivered fresh urgency to the GCC infrastructure programme.

Driving demand will be major power and water projects. MEED’s conference was told that the Saudi Electricity Company (SEC) has been encouraged by the response to its 2,000-MW PP11 independent power project (IPP). Despite tightening credit conditions, five groups have bid and the tenors of the supporting finance were 20-22 years. To help make the deal more attractive, the SEC is to take a 50 per cent equity stake in the project, its second IPP. The first, for a power station in Rabigh, was closed last July with the SEC taking a 20 per cent stake.

Coming next are four more power IPPs required to meet the SEC’s power capacity needs to 2019. That works out at one about every 18 months to 2016.

The GCC project pipeline suggests there will be at least two, big independent power and water projects (IWPPs) every year for the indefinite future. This is a thrilling prospect for suppliers of equipment and services. But it’s going to present a massive challenge to the Gulf project finance industry because so many other major schemes are plan to seek long-term debt in the next 10 years. They will range from familiar industrial projects like Emirates Aluminium’s (Emal’s) second phase to schemes at the cutting edge of project finance: water reuse, privately-financed roads and Gulf railways.

Providers of project finance are wondering how they are going to mobilise the massive amounts the GCC will need. At a time when many international banks have retreated from the Gulf infrastructure market, the region is about to place unprecedented demands on the banking industry.

The Gulf is now a lenders’ market. It is the borrowers that have to do the wooing. Bankers have a role to play, but the starting-point is in GCC government infrastructure plans. More regional co-ordination is required to regulate their project borrowing.

The appetite among international banks for GCC project debt has been hit by fluctuations in government policy. Examples include the decision to cancel the Saudi Landbridge private finance plan and the suspension of the Saudi National Water Company’s privatisation programme. If global banks doubt Gulf government commitment, they won’t even try to win project finance mandates. Other discouraging factors include an uncertain regulatory environment in some sectors and perennial concerns about loan security, particularly when it comes to projects sponsored by government-related entities.

Banks could do more to build project expertise in the region and develop secondary infrastructure debt markets. But getting the right returns is now finance’s top priority. Investing in infrastructure debt is a low-return activity. Completing deals is hard work, takes time and delivers less than trading in short-term financial instruments.

But helping turn a vital infrastructure plan into reality gives the sector an appeal that other parts of banking can’t match. For those with a passion for the project finance mission, there is much to savour and anticipate as the Gulf economy begins to boom once more.