Infrastructure Financing through Islamic

Finance in the Islamic Countries

Figure 2.2: Contractual Structures and Risk Distributions

Source: OECD (2014: 12)

In order to attract private sector investment in infrastructure projects, there is a need to have

risk mitigation techniques and instruments to reduce the risks of large and complex projects

and make them manageable. OECD (2015b and 2017b) identifies three broad categories of

policies and approaches that can be used to mitigate the risks in infrastructure projects. First,

governments can influence the political and regulatory risks by instituting a sound legal and

regulatory environment. Given the long-term nature of infrastructure projects, there is a need

to have a stable and predictable environment to enhance the confidence of the investors to

invest. Second, some of the business risks can be managed through contractual arrangements.

For example, the technical risks can be mitigated by subcontracting the construction and

operational aspects of the project to specialized and professional EPC and O&M companies that

have good knowledge and know-how. Finally, risks that are exogenous and related to

macroeconomic business cycles such as variations in interest rates and inflation can be

mitigated by being transferred to other parties using certain risk mitigation instruments. The

key instruments that can be used in this category include guarantees, insurance and some

derivative products.

2.2.4. Development Levels and Infrastructure Planning

While there is general agreement on the positive role of infrastructure on growth, the

importance of the type of sectors and their impact on the economy can vary at different stages

of development. It is likely that the impact of additional infrastructure investment on economic

development is higher in countries with lower infrastructure assets compared to those having

higher infrastructure stock (Estache and Garsous 2012). A study on different states in India by

Misra (2015) shows that social infrastructure (health and education) has a greater impact on

development than economic infrastructure (water, electricity and roads) which implies that

the former should be given more attention in developing economies. With the growth of