Risk Management in Transport PPP Projects
In the Islamic Countries
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binding obligations which can cover the failure of the public sector party to meet specific
obligations within a PPP project. Guarantees represent risk mitigation products and can cover a
whole PPP market, a program or single PPP projects. Moreover, they can be full or partial,
depending on the proportion of the amount of the transaction or the financial obligation that is
covered.
If state guarantees fail to gain the market’s trust, MDBs can play a significant role as well by
offering risk mitigation tools, among which credit enhancement products (e.g. MDB-issued
guarantees). In fact, Jett (2018) empirically proves that when credit enhancement is used by
MDBs, it can be a significant factor in attracting investment, by improving the risk profiles of
projects. Through credit enhancement products, projects become attractive for risk-averse
investors and crowd in private financial resources for infrastructure. For example, sovereign
partial risk guarantees issued by MDBs are used to mitigate country risk by funding projects
under preestablished legally binding conditions on both the grantor (typically a state-owned
enterprise or government agency) and the concessionaire (PPP project company). In case of
noncompliance, MDBs can apply penalties. Jett (2018) identifies two advantages over traditional
insurance:
 Pricing: the agreement ensures that projects can be priced at a similar interest rate to
sovereign loans offered by MDBs;
 Time: the system enables payments automatically based on preestablished triggers
defined in the PPP contract.
Despite the high potential in reducing risks in infrastructure financing, however, MDBs still face
structural constraints which limit their ability to mobilize private resources to the levels
required to meet infrastructure investment needs. For instance, limitations imposed on MDBs
by their business models, legal status, credit ratings, and need to implement countercyclical or
acyclical measures for borrowing members have traditionally led MDBs to be conservative in
the capital adequacy and liquidity treatment of guarantees (Pereira dos Santos and Kearney,
2018).
In Islamic countries, financing has particular features. The term Islamic finance refers to
banking or financing activities and instruments adhering to Shariah (Islamic law) standards.
Among the characteristics of Islamic finance the are the ban on usury (“riba”), which prevents
the use of interest; the prohibition of trading of debt, which implies that transactions must be
directly linked to a real underlying economic transaction; an emphasis on risk sharing among
different parties (as opposed to risk transfer) and the discouragement of excessive risk
undertaking. risk sharing, in fact, is considered as the essence of Islamic finance (Maghrebi and
Mirakhor, 2015).
Since infrastructure projects involve real assets and PPPs allow risks to be shared between the
parties involved, the use of Islamic finance for their development is compatible with Islamic
principles. In fact, as emphasized by the following Table, principles of Islamic finance fit well
with features of infrastructure PPP projects. In short, the asset-based nature and risk-sharing
focus of PPPs make them an ideal investment opportunity for Islamic finance.