Infrastructure Financing through Islamic
Finance in the Islamic Countries
21
flow of the project itself and the liability of sponsors is limited to the equity capital and the
financiers have no recourse to their assets. Since project financing has non-recourse features,
the debt providers are to take security on all the project’s assets. Some risks that the SPV and
stakeholders cannot manage are mitigated through guarantees and insurance to create
incentives for financial institutions to provide debt financing. Rating agencies play an
important role in intermediating debt by providing useful information on the credit features of
the project. This is particularly true if the project company issues bonds to raise funds from
financial markets (Engel et. al. 2010: 48).
The non-financial contracts relate to building, operations and maintenance. The Project
Company undertakes the construction of the project by using the services of an Engineering,
Procurement and Construction (EPC) Company through a building contract. After the project is
completed, the Project Company may use the services of an Operations and Management
(O&M) Company through a service contract. The O&M Company operates and manages the
project by selling the services to the ultimate customers. It should be noted that in some cases
the Project Company may take the role of EPC Company and undertake the construction
responsibilities or operate/manage the project instead of assigning it to the O&M Company.
Figure 2.1: Stakeholders and Relationships in Infrastructure Development and Finance
Source: Adapted from Engel et al. (2010) and Miller and Morris (2008)
The issues arising for the key stakeholders at different stages of infrastructure development
are shown in Table 2.2. In the design or planning stage, the equity investors make
arrangements for debt financing. Since in the initial stages the risks of the projects are
relatively higher and the term of the financing is longer, early debt investors require higher
returns. The construction of the project is funded by equity and debt raised in the planning
stage. If there are cost overruns, these have to be covered by raising either more equity or
debt. In the operational phase, there are risks of cash flows, but once the revenues start to
Procuring Authority
(Government)
Insurance
Companies
Debt Holders
Sponsors
Project
Company
(SPV)
EPC Company OM Company
Building contract Service Contract
Users/
Customers
Service & Quality
Delivered
User fees
Rating
Agencies
Service fees & subsidies Contract
enforcement
Insurance/
guarantees
Debt finance
Equity finance
Rating
Construction Phase Operations/Maintenance
Phase