Infrastructure Financing through Islamic
Finance in the Islamic Countries
8
sector when the effectiveness of activity of one party is enhanced when others join the
network. For example, a telecommunications network increases the usefulness of a single user
when other users also join the network. The other aspect of network effects has to with the
complementarity of different types of infrastructure investments whereby a disruption in one
sector impacts the provisions of other sectors. For example, trains running on electricity will
be affected by the lack of a supply of power. The network benefits can also be enhanced with
more economies of scale. For example, the provision of different types of infrastructure such as
transportation, energy, utilities, sewerage, schools, etc. would be feasible if the targeted
population is larger (Grimes 2010). Key features of infrastructure projects are presented in
Table 1.1.
Table 1.1: Features of Infrastructure Projects
Features Explanations
Large, lumpy, indivisible Infrastructure projects are usually large and indivisible
Capital intensive with
high sunk costs
Investments in infrastructure projects require huge funds that are
sunk since once invested they are not recoverable. For example, once
investments are made on a dam to generate hydro-electricity, the
funds cannot be recovered.
Long gestation period Being large, infrastructure projects take a long time to build.
Long payback period Given the large investments and long lives of infrastructure assets,
the payback period is long.
Natural monopoly
characteristics
Large upfront investments in fixed costs in most infrastructure
projects introduce economies of scale making them natural
monopolies.
Public good
characteristics
Many infrastructure projects produce goods and services that have
features of public goods.
Non-tradability of output For some infrastructure projects, the services have to be provided at
specific places limiting their substitutability. For example, a road
connecting two cities has to be physically built in the country and
cannot be imported.
Large externalities Infrastructure projects generally produce externalities. While most of
them produce positive externalities, they can also result in negative
externalities.
Interconnected network
systems
Several infrastructure sectors are interconnected forming a network.
A disruption in one sector impacts the provisions of other sectors.
Sources: Pratap and Chakrabarti (2017) and OECD (2014)
1.1.1. Infrastructure and Development
Infrastructure is the key to the proper functioning of an economy, promoting economic growth
and alleviating poverty. The role of infrastructure in affecting the economy can be identified in
different ways. First, infrastructure provides basic and essential services such as
transportation, power, water, sanitation, etc. to the household sector. These services have
positive externalities as they not only satisfy the needs of essential services such as clean
water and power, they also help provide job opportunities and encourage business activities.
Second, infrastructure can be considered as a separate input in the aggregate production
function or as a factor that lowers the costs and enhances productivity in the business sector.