Evolving Credit Support Structures in GCC PPP Projects: Balancing Market Dynamics and Risk Allocation

Over the past two decades, PPP and project finance have reshaped the GCC’s utilities sector, evolving their credit support structures to balance project bankability with fiscal responsibility. From early reliance on Ministry of Finance guarantees to the adoption of alternatives like Letters of Support, this piece examines key shifts, challenges, and strategies to enhance project viability for both the Government and Private Sectors in a dynamic growing market.
January 22, 2025

By Nicolas Jarrosson, Executive Director
Nicolas.Jarrosson@TribeIG.com

Over the last 20 years as Public-Private Partnership (PPP) and project finance have become mainstream in the utilities sector in the Gulf Cooperation Council (GCC), the structure of the procurer security package within the broader risk allocation framework—particularly concerning credit support—has undergone notable shifts, driven by various market dynamics. 

In the early days (late 1990s to early 2000s), power and water procurers, regardless of their country’s credit rating, were required to provide credit support through Ministry of Finance (MoF) guarantees.  This approach was necessary to establish nascent schemes and attract sponsors and lenders that had limited visibility on the payment history of procuring entities and the robustness of the framework. These guarantees were critical in mitigating concerns over risks such as payment delays or failures in monthly payment obligations, and less frequently but significantly larger, termination payments owed by the procurer in cases of default—whether triggered by the Project Company, the procurer, or due to force majeure events. 

Over the past 15 years, Ministry of Finance payment guarantee has been maintained in the utilities sector for a range of reasons: 

  • Power & Water procuring authorities in the GCC are typically state-owned companies, legally distinct from Government bodies despite typical 100% Government ownership – and could therefore technically actually go bankrupt in case of failure of support (funding) by the Government. 
  • Power and Water remains highly critical assets in the GCC, and MoF guarantee demonstrates the level of direct support by each government (and to a certain extent ensures speed of roll-out).
  • Some regional Procurers / Governments have a credit profile (based on country rating) that does not allow departure from such direct guarantees. These guarantees are particularly critical for securing bank debt funding liquidity for individual projects, which often exceed US$1 billion in capital expenditure—especially when these projects are part of a larger fleet under development. 

In recent years, the expansion of PPPs and non-recourse project finance into other sectors of the economy—particularly social infrastructure—has driven a significant shift away from the traditional Ministry of Finance (MoF) guarantee template. Tendering authorities such as the NCP (National Center for Privatization) in Saudi Arabia and ADIO (Abu Dhabi Investment Office) in Abu Dhabi have tested the market appetite for and implemented alternative credit support in the form of Letters of Support. These alternatives are advantageous for governments, as they do not trigger the same liability disclosures in their budgets as direct MoF guarantees, thereby supporting their ongoing negotiations with rating agencies. 

It is positive to note that this shift has not hindered the launch of projects in new sectors, including the Al Ansar healthcare project (first banked healthcare PPP in the region), student and worker accommodations, courthouses, bus transport, and schools in KSA and the UAE in particular. 

However, it is important to flag that for most of those social infrastructure projects, the procurer is typically a Ministry or Department that is directly part of the government. As such, it generally has direct access to the state budget, which diminishes, to some extent, the necessity and benefits of an MoF guarantee. 

 Based on our extensive discussions with a large spectrum of lenders on regional projects as part of Tribe’s Financial Advisory mandates on transactions across sectors, including those recently tendered or developed under a Letter of Support framework, it is important to highlight that the market continues to see significant challenges with this framework: 

  • Firstly, although the counterparty (Procurer) typically is a government body, they carry a different risk profile as MoF, holder of the state’s income with the upper hand on distribution of budget funds. This distinction might be more “optical” than fully based on facts, but is nevertheless an important discrepancy in the perception by the different market stakeholders.
  • Secondly, unlike local sponsors and lenders being more aware of the government construct and certainty of cashflows to Government Procuring bodies, foreign sponsors and lenders could find it significantly more difficult to navigate the different “budget appropriation” concepts of each specific government in the region. This can lead to higher perceived project risks, particularly when there is limited transparency regarding whether termination payments in the event of default are explicitly and securely covered, given that ministries’ budget allocations are typically structured on an annual basis.
  • Furthermore, some procuring entities are currently pushing for such MoF Letters of Comfort to be drafted on the basis of it  being addressed to the procuring entity as opposed addressed to the Project Company, which render them even more difficult to be assessed by sponsors and lenders as a robust credit support.
  • Finally, Letter of Support have mostly been successfully used for projects of comparatively smaller size (i.e. ~$500m capex / debt soft ceiling), probably due to typical the smaller size of social infrastructure projects (excluding large transportation schemes) and the available funding liquidity from local lenders for such amounts not requiring access to international lenders and larger bank groups to increase access to liquidity. 

From the same market feedback, improvements in the process of handling Letter of Support by procuring entities could also be improved for better access to a wider pool of lenders, including optimizing appetite of international lenders (and therefore reducing funding costs and tariffs to procurers), such as: 

  • There is benefit for procuring entities (supported by their legal advisors) to prepare, as part of the bid documentation, some detailed information in relation to the status, position and legal standing of the Procurer as part of the Government structure as well as the working of the budget allocation against Procurer payment obligations under the concession agreement. Yes, this could be done by each bidder’s Sponsors Legal Advisor or Lenders Legal Advisor as part of their Due Diligence – in partnership with their local affiliated law firms. But preparing and sharing it upfront by Procurer would go a long way to demonstrate to stakeholders the quality of the Procurer’s bid preparation work and improve project attractiveness, especially in the case of new sector / Procurer reaching out to the market for their first project.
  • Finally, including drafts of Letters of Support in the RfP documentation early on is highly beneficial, as it provides clarity to sponsors and lenders. Delays in providing these drafts—especially close to the bid date, or not at all — can hinder efforts to attract international lenders and broaden profile of sponsors. Their participation being typically a significant advantage of PPP tenders for GCC governments and a key strategic target of such procurement schemes. 

In conclusion, credit support structures have been a cornerstone of project bankability in the GCC since their inception in the late 1990s. These structures have evolved to balance market requirements with the need to minimise their impact on national balance sheets and credit ratings, adapting to varying dynamics across countries, procurers, sectors, and market appetites. Striking this balance remains a delicate task for procurers and their advisors, requiring regular reassessment to align with market conditions while ensuring the cost competitiveness of services provided to the population.