Infrastructure Financing through Islamic

Finance in the Islamic Countries

Introduction

1.1.

Infrastructure Definition, Features and Role in Development

‘Infrastructure’ has origins in French with the meaning of ‘the installations that form the basis

for any operation or system’ (Helm and Mayer 2016: 343). It is an umbrella term representing

‘social overhead capital’ (World Bank 1994: 2) providing ‘services and support that are basic

to the functioning of a community, organization, or society and crucial to its economic

productivity’ (Pratap and Chakrabarti 2017: 10). Infrastructure includes broad categories of

assets producing public goods and services essential for the functioning and growth of

economies and can be categorised in different ways. While one way to view it is in terms of its

features as hard (physical) and soft (organisational and social), another way is to categorise it

according to the sector such as economic and social. Economic infrastructure includes the

energy, telecom, transport and water, and sanitation sectors that are used by both businesses

and households (OECD 2014: 8). A sub-set within the economic infrastructure is ‘network

sectors’ that include transport (roads, highways and railways), electricity and

telecommunications (Egert

2009). Social infrastructure entails education, health, social

housing and community services used mainly by the household sector. The focus of this

research is on both physical economic and social infrastructures.

Although the types and features of infrastructure assets are diverse and varied, there are some

common elements that they share. Infrastructure involves investment in capital intensive

assets that are usually large, lumpy, indivisible and take a long time to build. Once built, they

are long-lasting and produce services for a long period of time. The large investments in fixed

capital assets in the initial stages of infrastructure projects produce increasing returns to scale.

This makes many infrastructures projects natural monopolies whereby the costs of production

decreases as the output increases. If the private sector provides the services in the absence of

price controls, possibilities of them reaping monopoly profits can arise. Some infrastructure

projects produce services that have features of public goods (Pratap and Chakrabarti 2017). A

public good or service can be viewed in two ways. First, it is something that a government

considers its responsibility to provide or ensure its provision (World Bank 2017c: 12). Second,

in academic literature public good is discussed in contrast to private goods. Whereas

consumption of a private good reduces its supply and excludes others, public goods have

features of non-rivalry and non-excludability. In other words, use of a public good such as a

road by an individual does not reduce its use or availability for others. Given the nature of

public goods and services, market mechanisms fail in their provision since they inhibit the

private sector from charging prices/fees from users (Chan et. al 2009).

A related feature of infrastructure is that they produce externalities. Although most

infrastructure projects produce positive externalities, they can also result in negative

externalities. For example, building a highway enables people to move around and also

increases trade and business. However, excessive use of highways can produce traffic jams and

pollution that can harm the environment. Thus, when assessing the overall feasibility of

infrastructure projects, social costs/benefits must be factored in along with private

costs/benefits. Thus, market failures occur in cases in which infrastructure projects are natural

monopolies producing public goods and services that have externalities.

Infrastructure sectors are also interconnected and can produce network benefits. The network

effects relate to externalities and can occur in different ways. This can happen within one