Infrastructure Financing through Islamic
Finance in the Islamic Countries
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The financiers can also seek additional guarantees and credit support from the SPV or other
third parties. One option of lowering the costs of financing is for the governmental bodies to
provide either the financing or guarantees for the project. Another way to lower the costs of
debt-financing is by generating full or limited recourse financing by offering guarantees by
entities with better credit ratings. For example, an established company with a good credit
rating can provide a corporate guarantee for the debt that can lower the costs of borrowing. In
case of a default, the lenders will have recourse to the balance sheet of the guarantor company.
This will be done in relatively smaller projects to limit risk exposure of the corporations
providing the guarantees.
Hybrid
The hybrid instruments can include various structures and offer investors varied risk-return
investment profiles. Forms of hybrid instruments can include convertible bonds, preferred
shares or mezzanine financing. Convertible bonds represent junior claims relative to other
debt instruments and have the option of being converted into equity. While they provide
protection against downside, investors can benefit from the upside of a growing concern by
opting to convert bonds into equity. Due to the option of conversion, the coupon rates paid are
usually lower than other forms of debt. Preferred equity is usually with perpetual instruments
with debt-like features that can be issued by listed companies. Preferred stock holders have
claims to missed dividends and do not dilute ownership. While the investors are subordinated
to other debtors, they have priority in claims relative to the common stock holders. Mezzanine
financing takes the form of subordinated debt that can take the form of a loan or a bond. Since
the risks are higher, mezzanine debt provides yields that lie between senior debt and equity
(OECD 2015: 31).
The specific operational models used for infrastructure financing depend on the features of
individual projects. Furthermore, financing will also depend on the type of PPP structure used
and the relationship between different stakeholders. Thus, it is difficult to identify the best
default model for financing infrastructure projects and the choice of financing has to be
evaluated on a case to case basis (Pescon 2017).
2.2.3. Features and Risks in Infrastructure Financing
Being large and complex, infrastructure projects introduce a multitude of risks. A key issue
that determines the involvement of the private sector in infrastructure relates to the risk-
return features of projects. Being large and involving many parties, infrastructure projects
require complex legal arrangements that create various risks at different phases of
implementation. Risks in infrastructure projects can be broadly categorized as
political/regulatory, business and technical (OECD 2015b). Some of the specific risks that
appear in infrastructure projects are identified in Table 2.3.
The distribution of the risks between the private sector and the public sector depends on the
project features and contract type. Since the risks in infrastructure are numerous and complex,
the government has to provide some mitigation to certain types of risks to encourage the
participation of the sector through investments. In general, risks that can be controlled by the
private sector either by using risk management tools or insurance should be transferred to the
private sector (Ehlers 2014). The Project Company will use different mechanisms and
instruments to mitigate these risks which may also require the services of private financial