Infrastructure Financing through Islamic
Finance in the Islamic Countries
34
the relevant ministry to oversee and regulate issues related to water resources and set
guidelines on the quality standards, fees structures, etc.
Decentralization Legislation: The decentralization laws would be required to encourage
broader private sector participation including SMEs. The law would delegate the budgetary
issues and infrastructure management functions to local authorities to make dealing with
private sector participation more accessible and manageable.
Contractual Framework: Within the legal framework, contracts are drafted that outline the
roles, responsibilities, rights and obligations of different parties and safeguard their interests
and public interest. Other than general provisions such as contract duration, procedures for
dealing with changed situations and force majeure, procedures of dispute settlement, etc., the
contractual framework should cover various relevant issues related to the project that include
the following: obligations of the parties under the contract, rights of the operator and
customers, requirements of the quantity and quality of services provided, approved tariff rates
and formulas, insurance requirements, obligation to cooperate with the relevant government
bodies, compliance with applicable laws, respecting the environment, etc. A key aspect of the
contract is clearly identifying the allocation of different risks among different stakeholders
over the lifetime of the project. Given the long-term nature of infrastructure projects,
contractual designs should flexible enough to allow for renegotiations to reduce risks arising
from demand and other sources (Henckel and McKibbin 2010).
Regulatory Framework: The current risk-based capital adequacy and solvency regimes and
liquidity requirements can discourage financial institutions to invest in infrastructure projects
as these require holding higher amounts of capital for investments made in long-term debt
instruments (FSB 2014, Jobst 2018). For example, the Basel III liquidity framework would
induce banks to hold short-term liquid assets to match their liability structures. Furthermore,
the collateral in project-financing that may not be considered good quality may discourage
investments in these long-term assets as these would imply higher capital requirements. This
is particularly true for projects that, by their nature, do not have a credit history, thus making
assessments of risk difficult. One way to deal with this problem is for regulatory authorities to
identify infrastructure as a distinct asset class and clearly identify the conditions under which
the capital requirements can be reduced with mitigated risks.
2.4.3. Institutional Arrangements and Procurement Processes and Procedures
Given the complexity of PPP arrangements, there is a need to have a sound institutional
arrangement to implement them. The legislation must provide for an open, transparent and
competitive framework for procurement processes and procedures that allow for multiple
parties to bid for infrastructure projects. The procurement procedures should clearly outline
the criteria used for soliciting proposals and evaluate their qualifications and merits. While
institutional arrangements can be a part of the regulatory arrangement in some countries, it is
common to establish a PPP unit that deals with the implementation of the projects (World
Bank 2018f: 30). World Bank (2018f) identifies three main stages of the PPP project cycle that
the legal/regulatory system and institutions often set up.
The first is the preparation stage whereby the potential infrastructure projects that can be
procured for development as PPPs are identified. Given the large demand for infrastructure
and limited resources, selection of PPPs would depend on the priorities identified in an