Infrastructure Financing through Islamic
Finance in the Islamic Countries
26
institutions and insurers that can provide coverage for various commercial risks. A key risk
that the government can reduce is political and regulatory risk by creating a stable and
conducive environment that can encourage long-term and large investments. The contracts
should identify clearly how the different risks will be distributed and the overall regulatory
system should ensure that the terms of the contract are implemented throughout the project
life.
Table 2.3: Risks Arising in Infrastructure Projects
Risk Types Explanation Project Phase
Construction risk Risks of design problems, delays in
construction and cost overruns.
Construction and warranty phase
Operational risk Risks arising from staff management,
maintenance and operations.
Operations phase
Demand and Revenue
risk
Risks of low demand and resulting low
revenues.
Operations phase
Network risk Risks arising from factors related to
other stakeholders/elements in the
network to which the project is related
or dependent
Throughout the project’s life
Technological risk Risk of technology malfunctions or it
becoming obsolete
Throughout the project’s life
Financing/investment
risk
Risk of the non-availability or higher
costs of financing
Throughout the project’s life
Environmental risk Risk of adverse environmental impacts
and hazards
Throughout the project’s life
Force majeure risk Risks arising from calamities and war Throughout the project’s life
Political, sovereign
(regulatory) risk
Risk of changes on regulations and other
requirements related to the
infrastructure project
Throughout the project’s life
Source: Chan et. al (2009: 15) and Grimsey and Lewis (2002).
The government can provide the right incentives to encourage the private sector to invest in
infrastructure projects. This can be done either by providing price support to ensure a stable
revenue stream or by providing guarantees to minimize risks. In the former, the government
would ensure supply of inputs and/or purchase of output at certain fixed prices either directly
or through providing subsidies (Ernst and Young 2008). Guarantees can also be provided to
financial institutions providing financing to infrastructure projects by national or multilateral
development agencies in the form of partial credit guarantees (PCGs) and partial risk
guarantees (PRGs). For example, the Multilateral Investment Guarantee Agency (MIGA) of the
World Bank Group provides political risk insurance (PRI) for both debt and equity (Matsukawa
and Habeck 2007). Some public national bodies provide additional guarantees and insurance
to cover equity and debt investments and trade. One of the benefits of guarantees and
insurance is the improvement in credit ratings which can lead to lower borrowing costs and
enable the securitization of assets. The distribution of risks among the public and private
sector stakeholders under the key contractual arrangements are shown in Figure 2.2.