Infrastructure Financing through Islamic

Finance in the Islamic Countries

World Bank (2018f) also identifies good practices related to Unsolicited Proposals (USPs) of

PPPs whereby a private sector entity proposes an infrastructure project without any request

from the government. Instead of the government initiating the projects, private sector players

provide the basic features of the proposed project and approach the government for approval.

The USPs are alternative, government initiated projects and have been increasingly in use

during recent years. Good practices for USPs include assessing the proposal’s alignment with

the government’s overall strategy and their investment priorities and, once selected, using the

competitive procurement procedure discussed above.

2.4.4.

Project Related Factors

Economic factors:

A key factor for private investments in infrastructure is bankability, which

implies that the projects have adequate cash flows to repay the investors.

Since infrastructure

projects are complex, investors are careful to assess the risks of variation of cash flow and

ensure that they remain within the expected margins. However, due to the limited number of

projects and the uniqueness of each one, there is a lack of historical data and information on

risk-adjusted returns, making decision-making difficult. Whereas investors would expect

higher risk-adjusted returns, in many infrastructure projects the returns may be low. For

example, tariff levels are usually low in water and energy sectors. Furthermore, enough

revenue cannot be generated in many developing countries due to leakage and the stealing of

water and electricity that limits the ability to maintain and expand the service. For instance,

McKinsey (2016: 3) reports that up to 70% of the water provided in sub-Saharan Africa is

unmetered, leaked or stolen.

Many sustainable infrastructure projects are capital intensive and that can drive up the up-

front costs. For example, transport investments require high upfront capital costs, have long

time lines, and produce relatively low financial returns (IDFC 2014: 5). Furthermore,

administrative costs can be high in the energy sector due to difficulties and delays in

procedures and approving concessions (IDFC 2014: 5).

Human capital

: Infrastructure projects are large and complex, involving many parties and

people with different skills and expertise. Structuring financial contracts for infrastructure

projects is complicated and requires not only financial expertise but also an understanding of

the project’s features along with the knowledge on risks and return. A key constraint is the lack

of professionals with the knowledge and experience of structuring and financing large

infrastructure projects.

2.5.

Infrastructure Needs and Financing Gaps in the OIC Member Countries

As indicated in Chapter 1, the global need for infrastructure financing needed to achieve

sustainable investment goals is huge and most countries will face funding gaps. Most of the OIC

member countries belong to the low income group and have weaker infrastructure. Chart 2.6

shows the status of overall infrastructure, the transport infrastructure, and the electricity and

telecom infrastructure for OIC MCs and different regions. Although the overall infrastructure

index of OIC MCs (3.6) is better than that of the Sub-Saharan Africa (2.9) and South Asia (3.4)

regions, it scores less than all other regions of the world. The transport infrastructure and

electricity and telecom infrastructure also reveal similar results.

PPP Reference Guide, Version 3.