Infrastructure Financing through Islamic

Finance in the Islamic Countries

2.1.2.

ublic Private

artnerships (PPPs)

Four broad areas related to the development of infrastructure projects include the supply of

inputs, purchase of outputs through off-take or purchase agreements, construction, and

operations. While these activities can be carried out by the government, the private sector can

also be involved. Public-private partnership (PPP) is defined as “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.” (World Bank 2017c: 5). World Bank (2017c) identifies three broad

parameters that can describe PPPs. The first relates to the types of assets involved which can

be new (greenfield) or existing (brownfield). The second involves the functions that the

private party is responsible for in the PPP arrangement. These can be identified as design,

build or rehabilitate, finance, maintain and operate as discussed above. The contacts that can

be used under PPP would be a combination of these as shown in Table 2.1.

The third aspect of

the PPP arrangement relates to how the private party is paid. The payment mechanism for the

private party comes from the performance of the project asset and is collected as fees/tariffs

from either service users or the government or both. Examples of the former can be a toll-road

where users pay for using the road, and the latter may be seen in payments by the government

for effective delivery of hospital care (World Bank 2017c: 6-8).

There are two other ways in which the private sector becomes exclusively involved with

infrastructure projects. A full

divesture

involves privatization of a brownfield infrastructure

facility whereby a private firm buys an equity stake in the project. The change in the

ownership of the project transfers the responsibility of investment, operations and

maintenance, and all associated risks to the private entity. A

merchant

greenfield project is

initiated by a private party on its own bearing all the operational and commercial risks without

any revenue or payment guarantees from the government.

2.1.3. Structure and stakeholders in infrastructure projects

Being large projects, infrastructure investment and development involves different

stakeholders and relationships which make their contractual structures complex OECD (2014:

9). Figure 2.1 shows the basic infrastructure investment frameworks identifying the

contractual relationships between key stakeholders. The sponsors or shareholders of

infrastructure projects create a special purpose vehicle (SPV) as a Project Company that deals

with different stakeholders and carries out the various aspects of development and operations.

By establishing an SPV which acts as a separate bankrupt remote legal entity, the private

sponsors of the project deal with the project and separate the party’s assets and liabilities from

that of the infrastructure project. The assets of the project sponsors are ring-fenced by

establishing a bankruptcy remote SPV that owns the project. This creates the appropriate

incentives for the project sponsors to initiate large projects without risking their own assets.

The Project Company signs an appropriate contract with the relevant public procuring

authority that provides the relevant authorisation to initiate the infrastructure project.

While the sponsors of the project provide the equity, debt financing sought from different

financial institutions and markets finances the project development. Unlike corporate finance,

a key feature of infrastructure investments is that financing is structured based on the cash

It should be noted that involvement in full divestiture, management/service contracts and financial lease contracts do not

fall under PPP arrangements (World Bank 2017c: 10-11).