Proceedings of the 12th Meeting of the COMCEC
Financial Cooperation Working Group
5
3. Infrastructure Financing through Islamic Finance
Prof. Dr. Habib AHMED presented Chapters 1, 2 and 3 of the COMCEC research report entitled
“Infrastructure Financing through Islamic Finance in the OIC Member Countries”. He began by
identifying three themes of the presentation which were: (i) Infrastructure and financing—
Introduction; (ii) Status of OIC Member Countries; and (iii) Islamic Finance and Infrastructure
Investments. The discussions on these issues provided the background information on the
second part of the research report which relates to country case studies and policy
recommendations.
Prof. AHMED started by defining infrastructure and identifying two key types of infrastructure
as economic and social. While the former would include energy, telecom, transportation, water
& sanitation sectors, the latter comprises education, health, social housing. He stated that
although the specific features of infrastructure vary across the sectors, some characteristics
that are common to all projects were identified. The common features of infrastructure
projects include: large, lumpy, indivisible; capital intensive with high sunk costs; long gestation
and payback periods; natural monopoly and public good characteristics; non-tradability of
output; large externalities; and interconnected network systems. Prof. AHMED then discussed
the important role that infrastructure plays in growth and development by providing basic and
essential services to household sector (transportation, power, water, etc.) and being used as an
input in production which lowers the cost and enhances productivity. Furthermore, a sound
infrastructure would be essential in achieving some key Sustainable Developmental Goals
(SDGs) such as SDG3, SDG 4, SDG 6, SDG 7, SDG 9 and SDG 11.
Prof. AHMED then presented data on the global spending on various infrastructure sectors and
the status of infrastructure in different regions including the OIC member countries. Almost
one-third (33%) of the global infrastructure spending went to social infrastructure, followed
by transportation (28.7%), power (20.7%), telecommunications (11.3) and water (6.2%). The
information on the overall infrastructure shows that its status for OIC member countries was
better that the Sub-Saharan Africa and South Asia regions, but had a lower index compared to
other five regions of the world. Prof. AHMED stressed that the results indicate that there is
need to invest in the infrastructure sector to improve its status.
Having identified the need to invest in infrastructure, Prof. AHMED discussed the sources of
infrastructure financing. Traditionally governments have been responsible for infrastructure
development. However, increasing demands on public funds, budget deficits, and increasing
public debt on the one hand and huge investments needs for infrastructure finance to meet the
SDGs on the other hand necessitates seeking alternative sources to funds. While the private
sector can potentially invest in infrastructure, its involvement would depend on the risk-
return features of the projects. In this regards, he identified three types of projects: fully self-
sustainable projects (such as power, energy, telecommunications, highways); partially self-
sustainable projects (such as railways, urban light rails, water and sewerage); and financially
unsustainable projects (such as schools, hospitals and public housing).
The private sector invests in infrastructure projects through the public-private partnerships
(PPP) which Prof. AHMED defined to be a long-term contract between a private party and
government entity to provide a public asset or service. The private party bears significant risk
and management responsibility and its remuneration is linked to performance of projects. He
then identified three parameters of PPPs. First relates to type of assets which can be
brownfield or greenfield. Second parameter involves the functions and responsibilities of
private party that can be design, build or rehabilitate, finance, maintain and operate. The final