The evolution of project finance

06 February 2014

The region’s project finance market is evolving, as demands to find new ways of funding infrastructure rise

The project finance market in the Middle East is beginning to evolve as it starts to incorporate other financing methods that go beyond providing conventional bank loans.

Catching up with trends already entrenched in other markets in Europe and the US, the use of project finance bonds is slowly starting to gain traction in the region.

How to attract institutional investors, such as pension funds, to buy project bonds, was one of the key topics of discussion at MEED’s recent Project Finance & Infrastructure conference in Bahrain. The increased use of sukuk (Islamic bonds) was also debated. 

Even Bahrain’s minister of finance, Sheikh Ahmed bin Mohammed al-Khalifa said that if bank finance was not as freely available as it was previously, the market should consider attracting different types of investors, such as insurance companies and sovereign wealth funds.

The trend began to gain ground last year, with a $2bn sukuk issuance forming part of the $12.5bn project financing of the Sadara petrochemicals complex signed mid-2013.

Last year’s $825m project bond issuance by Abu Dhabi’s Shuweihat S2 independent water and power project could also pave the way for more bonds being used to refinance project finance bank debt. 

The market is being reshaped by tightening international and local banking regulations that will potentially limit banks’ lending appetite.

The long-term ability of the region’s governments to provide large chunks of the required infrastructure funding has also been brought into question, particularly if oil prices remain relatively flat in the coming years.

The project finance market will have to adapt to this changing environment to stay in business.

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