Infrastructure Financing through Islamic
Finance in the Islamic Countries
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2 Infrastructure Financing
2.1. Special Features of Infrastructure Financing
The features of infrastructures projects include having a large scale, wide breadth and longer
duration (Helm and Mayer 2016). Being large, they require huge investments that few private
sector entities can manage. The breadth of infrastructure in terms of impact is wide since a
large number of people benefit from the services provided which have features of public
goods. Similarly, the projects have longer maturities compared to projects most private sector
investors would prefer. Given these factors, infrastructure has traditionally been provided by
the government mainly through budget allocation and debt. However, with demands for public
funds for other needs, governments face budgetary constraints and rising public debt levels.
Thus, there is a need to diversify funding sources and the private sector is expected to play an
increasingly important role in the development and provision of infrastructure services. Other
than raising alternative sources of funds, one of the key benefits of involving the private sector
is to increase the efficiency of infrastructure projects (Ehlers 2014). The private sector is
expected to implement projects at lower costs than the public sector, and this can save
resources which can have alternative uses. Attracting private sector engagement in
infrastructure, however, would require providing the right environment and incentives for
them to invest. In this regard, the structural hurdles of investing in infrastructure projects
need to be minimized and the beneficial risk-return features need to be highlighted (Jobst
2018).
Chan et. al (2009) distinguishes between the investment, funding and financing of
infrastructure projects. Investments in infrastructure involve the identification of projects that
produce high community welfare. The criteria used to identify projects to invest would be to
consider those that produce the highest benefits relative to costs. As indicated, the benefits and
costs would not only focus on profitability but also on the net social benefit of the projects.
Financing involves raising funds from different sources for the construction of infrastructure
assets. The efficient financing of infrastructure would involve choosing financings modes that
reduce the overall cost of financing over the lifetime of the projects. One way to minimise the
costs of financing is to assign the project risks to those who are able to manage them the best.
The funding of infrastructure relates to how a project is funded during its lifetime (not only in
the construction phase but also in the operational phase). For example, public funding may
have to cover the gap of revenues and costs of some infrastructure projects through subsidies
from the government budget. However, funding issues will not be of a concern for a
sustainable project that generates adequate revenues to cover costs.
Investments in infrastructure projects can be carried out by the government or the private
sector, or they can be done under public-private partnership (PPP) arrangements. To
understand the conditions under which the private-sector would participate in infrastructure
projects would require examining the nature of these projects, the basic contractual structures,
and the issues arising in financing them.
2.1.1. Project Phase and Contractual Structures
Infrastructure projects can be distinguished as greenfield and brownfield. While the former
involves the development of new assets, the latter is the upgrading of existing assets.
Involvement of the private sector in infrastructure can be viewed in terms of the functions they