Infrastructure Financing through Islamic
Finance in the Islamic Countries
22
come in the default risk diminishes. The refinancing of debt can be done by raising funds in the
form of bank loans, issuing bonds, or getting government funds.
Table 2.2: Issues Arising in Different Phases of Infrastructure Projects
Phase Economic & Contractual
Issues
Financial Features Potential Investors
Planning  Contracts signed with
all stakeholders
 Guarantees and
insurance secured
 Ratings secured from
rating agencies
 Equity holders provide
equity as sponsors
 Sponsors need to
secure commitments
for debt
 Equity investors can be
construction companies,
infrastructure funds,
pension funds, etc.
 Debt investors can be
either bond holders or
banks providing
loans/syndicated loans
Construction  Right incentives for
monitoring
construction and
keeping costs low
 High risk phase with no
cash flows
 Total funds (equity &
debt) should be enough
to cover the costs of
this phase
 If further debt is raised, it
is costly
 Equity investors may
have to provide financing
if needed
Operational  Demand risk can result
on the volatility of cash
flows
 Positive cash flows
 Risk of default
decreases
 Debt from the initial stage
can be refinanced to
reduce costs
Source: Adapted from Ehlers (2014: 5)
2.2. Products and Approaches for Infrastructure Financing
Key economic issues in involving the private sector in infrastructure financing and investment
include exploring how revenue can be generated and costs can be reduced during the lifetime
of the project (Chan et. al 2009). A key determinant of private sector involvement in
infrastructure relates to the risk-return features of the projects. Accordingly, OECD (2014: 13)
classifies infrastructure projects into the following three types.
3. Fully self-sustainable projects : This category of infrastructure includes those that can
generate revenue that not only covers the costs of investments but also yields profits
to the sponsors over the project’s operational life. Examples of infrastructure that fall
in this category are power, energy, telecommunications and highway projects that can
generate high toll-revenues.
4. Partially self-sustainable projects: The revenue of these projects comes from tariffs and
fees paid by end-users that are controlled by the government. The prices are set on the
goods and services and are not high enough due to public welfare reasons. Since the
relatively lower prices and revenues make the projects unprofitable, the private sector
engages in these infrastructure projects if supported by other remedial options such as
grants, tax breaks or subsidies. The sectors that fall in this category include railways,
urban light rails, water and sewerage.
5. Financially unsustainable projects : This type of infrastructure does not generate any
revenue and, as such, is usually provided by the public sector. The social infrastructure
such as schools, hospitals and public housing fall in this category. The private sector