Infrastructure Financing through Islamic
Finance in the Islamic Countries
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can be involved in the construction of the facilities and would be paid by the
government accordingly.
World Bank and PPIAF (2017: 3) discuss the notion of private-sector participation (PSP) which
is broader than the concept of PPP which is used for large and costly projects. Some sectors
such as water and electricity may have lower-barrier forms and can be provided by private
participation of the SMEs, particularly in countries that are affected by fragility, conflict and
violence (FVC). Examples of small scale providers include water kiosks, takers and private
networks in the water sector; and solar home systems and isolated mini power grids in the
electricity sector.
For private sector investors, infrastructure represents a separate investment class with unique
risk-return features. Infrastructure financing can provide an attractive asset class for
institutions that are looking for investments with longer time horizons. This will include
institutional investors such as pension funds and infrastructure funds. One of the constraints
for considering infrastructure as a separate asset class is the heterogeneity of projects with
different contractual arrangements and risk-return implications (Ehlers 2014). One option for
dealing with this issue is to have a harmonized regulatory framework that produces similar
structures for projects belonging to different sectors. Furthermore, a sound rating system that
can provide useful information on the credit status and default risks of projects can also help
investors make decisions about investments.
2.2.1. Project Financing
One of the functions identified under PPP parameters relates to financing. Financing can take
the form of corporate or project financing. Infrastructure investments using a corporate
financing framework would take place when a project is developed by an existing company. In
this case, the financiers will assess the credit rating and cash flows of the corporation to decide
whether to invest in the project. Financing will appear on the balance sheet of the corporation
and the financiers will have recourse to the assets of the company in case of default (GIFR
2016: 261-62). However, corporate financing is not feasible for large projects and is usually be
done for projects that require relatively small amounts of investment.
For projects that require large investments, project finance is used to mobilize financing for
infrastructure projects under PPP arrangements (World Bank et al. 2017: 26). Project
financing is a specialized funding structure that involves the “creation of a legally independent
project company financed with nonrecourse debt for the purpose of investing in a capital asset,
usually with a single purpose and limited life” (Esty 2002: 6-7). Project companies are
established as a special purpose vehicle (SPV) by the project sponsors specifically for the
implementation of the project. Unlike corporations, the equity of project companies is owned
privately by a few shareholders that are usually few in number with the average being 2.7
(Esty 2002: 7). Once the project sponsors establish the SPV for an infrastructure project under
a PPP arrangement, it will typically raise debt to finance the projects.
Project companies use high leverage that can range from 60% to 85% with an average debt to
total capitalization ratio of 70% (GIFR 2016: 262; Esty 2002: 7). From the financiers
perspectives, project financing techniques require identification, mitigation and allocation of
project risks among various stakeholders. As indicated, unlike corporate financing in which the
debt is on the balance sheet of the corporation, in case of project financing the debt remains
off-balance sheet for the sponsors. As the SPV is a separate legal entity and owns the project,