Proceedings of the 12th Meeting of the COMCEC
Financial Cooperation Working Group
21
8. Private Sectors’ / International Institutions’ Contributions
8.1 Islamic finance practices in PPP projects
Mr. Ali Rıza KAYAR, Project Management Specialist at IsDB, made a presentation on the Islamic
finance practices in PPP projects with a focus on IsDB Member Countries. Since inception, IsDB
Group has cumulative approvals of around USD 138 billion including USD 72 billion of trade
financing and USD 61 billion of project financing.
To begin with, Mr. KAYAR made a definition of PPPs based on PPP Knowledge Lab platform. A
public-private partnership (PPP) is a long-term contract between a private party and a
government entity, for providing a public asset or service, in which the private party bears
significant risk and management responsibility, and remuneration is linked to performance.
Upon this definition, he explained a typical PPP structure. In the following part, he listed
benefits of PPPs which are increasing transparency, improving service delivery, reducing
construction time and costs, ensuring regular maintenance and providing better value for
money.
To explain the link between Islamic finance and PPPs, Mr. KARAR reiterated key principles of
Islamic finance. Those are prohibition of Interest based financing/transactions, prohibition of
excessive risk/uncertainty in transactions, prohibition of speculative transactions and
asset/service backed/based financing. These principles go hand in hand with the general
requirements of PPPs which are transparent bidding process for the concession agreement
part, experienced sponsors, risk mitigation and adequate risk allocation between the public
entity, the private entity and the banks. Overall, there is a perfect match between PPPs and
Islamic finance. PPP projects are often based on a participatory approach due to the no/limited
recourse and all the parties take the risk of the project. They are often based on an underlying
asset which supports the real economy. PPP promotes efficiency and development. Islamic
Finance has been extensively tested in various PPP projects.
In relation to conventional finance, Mr. KAYAR clarified that Islamic finance products could
perfectly co-exist with conventional tranche. When the mode of financing entails ownership of
part of the project’s assets, IsDB does not drive any privilege due to such asset. Cash flow
treatment in the financial model as well as the cash waterfall is identical. There is no additional
impact in terms of taxation.
Mr. KAYAR gave examples of IsDB interventions to address the global infrastructure financing
gap which has gone up beyond trillions of dollars. PPP Knowledge Lab and Global
Infrastructure Forum are among those examples where IsDB has been increasing cooperation
and knowledge sharing platforms with other Multilateral Development Banks (MDBs). There
are enabling environment and transaction advisory services of IsDB to promote capacity
development and PPP advisory. IsDB also engages direct financing and mobilizing resources
from other financiers via A/B Financing Scheme. The Bank has successfully financed PPP
projects in several Member Countries.
Mr. KAYAR presented some of the IsDB financed PPP projects from different regions as case
studies: