Infrastructure Finance Needs of IsDB Member Countries to achieve
SDGs and to Conform to Paris Agreement
BI-ADFIMI-KNKS Joint CEO Seminar on "Islamic Structured Finance: Cases of Infrastructure Project Finance in
IsDB Member Countries" 12 November 2019, Jakarta, Indonesia
Professor Habib AhmedSharjah Chair in Islamic Law & Finance
Durham University Business School United Kingdom
2
Presentation Plan
• SDGs, Climate Agreement & Infrastructure
• Financing Infrastructure
• Case Studies
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SDGs: Ambitious Vision for Transformation
MDGs (2000-2015) SDGs (2016-2030)
Goals/ Targets/Indicators
8/21/60 17/169/232
Priority Areas Human DevelopmentHolistic: Economic, Social,
Environmental
Scope Developing Countries UniversalSource: Moheildin (2019)
Pillars of SDGs: Economic, environmental and social sustainability
Paris Agreement 2015• Central aim is to strengthen the global response to the
threat of climate change – Keep global temperature rise this century well below 20C above
pre-industrial levels and to pursue efforts to limit the temperature increase even further to 1.50C
• Strengthen the ability of countries to deal with the impacts of climate change
• Reaching these ambitious goals would require – Appropriate financial flows – A new technology framework – An enhanced capacity building framework
• ‘Environmental Sustainability’ component of SDGs overlaps with the goals of Paris Agreement—use ‘green’ alternatives to achieve the SDGs 4
Infrastructure and SDGs• Infrastructure: Social overhead capital producing
public goods & services essential for functioning and growth of economies – provides basic and essential services to household
sector (power, water, health, transportation, etc.) – is an input in production, lowers the cost and
enhances productivity
• Empirical studies: Better infrastructure increases growth and reduces income inequality
• Achieving SDGs linked to infrastructure– Overall infrastructure: SDG 9– Economic infrastructure: SDG 6, SDG 7 & SDG 11 – Social infrastructure: SDG 3, SDG 4
5
Infrastructure & Climate Change• Estimated 60% of the world’s
greenhouse gases (GHG) emissions come from infrastructure
• SDGs and Paris Agreement requires using climate-smart and climate-resilient infrastructure
• Comprehensive definition of infrastructure– Traditional (grey) infrastructure – Natural infrastructure (forest landscapes,
wetlands, watershed etc.) 6Source: NCE (2016), Sustainable Infrastructure Imperative, p. 4.
7
Infrastructure Status of Regions & OIC Member Countries
0.01.02.03.04.05.06.0 4.9 4.4
3.85.1
2.9 3.4 3.64.6
4.03.4
4.5
2.9 3.4 3.5
5.1 4.84.2
5.6
2.9 3.3 3.8
Overall Infrastructure Transport InfrastructureElectricity & Telephony Infrastructure
Index Value (0-7 best)
7Source: WEF (2018), The Global Competitive Index Historical Dataset
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Presentation Plan
• SDGs, Climate Agreement & Infrastructure
• Financing Infrastructure
• Case Studies
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SDGs & Paris Agreement: Funding Needs & Gaps
• UNCTAD—achieving SDGs would require– US$ 5-7 trillion annual investment– Developing countries investment gap—US$ 2.5
trillion/per year
• Overall costs of implementing PA could cost 0.5 to 1% of GDP for 2oC target (1 to 1.3% for 1.5% target of 1.5oC)– Not doing anything will cost much more is terms of
damage to humans, natural infrastructure & economies
– Costs of health savings from reduced air pollution—1.4 to 2.5 times greater than costs of climate change mitigation
https://www.thejournal.ie/paris-climate-agreement-costs-health-benefits-3879180-Mar2018/
1010
Change in Infrastructure Spending Required for a 2oC Scenario (% change in exp. Over
2015-2030)Extraction of oil, gas and coal
Buildings, energy and transportation
Renewable energy, nuclear, CCS, low-carbon transport, climate-proofed water and sanitation, etc.
Standard water/sanitation, high-carbon transport (e.g. roads), energy production, and telecommunications10Source: NCE (2016), Sustainable Infrastructure Imperative
Global Cumulative Infrastructure Spending and Investment Needs 2016-
2040
020406080
10078.8 93.7
14.9
USD trillion
Source: GIH and Oxford Economics (2018) 11
12
Cumulative Regional Infrastructure Spending Requirements 2016-2040
- 5.0
10.0 15.0 20.0 25.0 30.0
4.3 5.2
19.7 12.8
1.7 8.5
26.5
5.6 6.0 7.8
22.4 14.8
1.9 12.4
28.4
7.2 1.7 2.6 2.7 2.0 0.2 3.9 1.9 1.6
Cummulative at current trends 2016-2040 Cummulative at investment needs 2016-2040 Infrastructure spending gap 2016-2040
USD trillion
Total Investment Needs per OIC MC per year USD 22.1 billion
Investment Gap per OIC MC per year USD 4.9 billionSource: GIH and Oxford Economics (2018)
Sources of Infrastructure Financing
Source: Adapted from Ahmed (2017) 13
Sources of Infrastructure Financing Estimates in Emerging Economies &
Developing Countries
Government Budgets ($500-550 bil)
Private Finance ($150-250bil)
NDBs ($70-100bil)
ODA/MDB Finance ($40-60bil)Other Developing Country Finance (<$20bil)
14Source: Bhattacharya A., Romani M. (2013)
• Bulk of financing (60%) provided by government
• Alternative sources to funds are sought due to − Increasing demands
on public funds, budget deficits, and increasing public debt
− Huge investments needs for infrastructure finance to meet the SDGs
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Total Infrastructure Investments & Private Sector Contribution (2011-
2015)
15Source: https://infracompass.gihub.org/compare_countries
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0%20.7%
14.8%14.7%
26.4%21.0%
46.0%17.8%
23.8%19.3%
37.1%9.8%
13.9%16.9%
0.37%3.01%
0.30%0.46%1.04%
8.26%3.13%
1.33%1.09%
1.91%14.04%
3.21%6.71%
2.79%2.73%
Total infrastructure investment (% GDP)Total value of private finance infrastructure (% of GDP)
Investment Horizon & Risk Appetite of Different Financial Institutions
Institution Investment Horizon
Risk Appetite
Commercial Banks Short term Low to medium Nonlife insurance Short term MediumInvestment Company Short to medium term Depends on funds
mandatesLife insurance and private pension
Long term Medium
Public pension Long term Medium Sovereign wealth funds
Long term Medium to high
Endowments and foundations
Long term High
Source: ADB (2018), African Economic Outlook 2018, African Development Bank, p. 109. 16
Nonbank financial institutions are more suitable for investments in Infrastructure financing
Global Infrastructure InvestmentEquity and PPP by Type of Owner
Source: PWC & GIIA (2017)
0%
10%
20%
30%
40%
50%
60%
70%
80%
52%
64%
32%
44%
76%
60%
46%50%
24%18%
45%38%
11%15%
39%32%
5%1%
14%
4% 2% 4% 7% 5%6% 5% 3% 6%2%
9%1%
5%13% 12%
6% 8% 9% 12%7% 8%
Corporate Infrastructure fund/investment firm
Pension fund Sovereign wealth fund/government agency
Other
% of total
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18
Total Islamic Finance Investments in Infrastructure Sector (2017-
2018)Sectors (2017-2018)
Total assets (USD billions)
Percentage going to
Infrastructure
Infrastructure Investments by Islamic
Finance (USD Billion)
Islamic Banking 1,598.9 4.74% 75.8Takaful 42.5 2.0% 0.9Sukuk 344.8 11.57% 39.9IDB Project Financing
3.12
Total 119.7
Average per member country 2.1
Source: COMCEC (2019)
Size of Capital Market Related Sectors
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High income
Upper middle income
Lower middle income
Low income
All countries
OIC Countries
- 50.0 100.0 150.0 200.0 250.0
68.1
62.5
34.7
60.6
44.2
42.7
23.8
1.8
31.9
16.5
2.3
1.8
0.9
2.0
1.1
76.3
14.4
2.9
53.1
6.8
42.2
14.7
11.4
9.2
27.9
11.0
Stock market capitalization to GDP (%)Outstanding domestic private debt securities to GDP (%)Corporate bond issuance volume to GDP (%)Mutual fund assets to GDP (%)Pension fund assets to GDP (%)
Source: World Bank Financial Development Database 2018
2020
Presentation Plan
• SDGs, Climate Agreement & Infrastructure
• Financing Infrastructure
• Case Studies
StakeholdersGovernment
Fin. Institutions
Fin. Markets
Social Finance
212121
Green and Sustainable FinanceSustainable
Development
Environment
Climate change
mitigation
Climate change
adaption
Other environment
al
Social Economic Governance
Low carbon
Climate
Sustainable
Green
Source: UN (2018), Greening the Rule of the Game
Governments: Indonesia Global Green Sukuk
Financing requirements to deal with climate mitigation and adaption activities
• Governed by Green Sukuk/Bond Framework (CICERO reviewed)—identifies sectors/projects where funds can be invested– Dark Green: Renewable energy, resilience to
climate change– Medium Green: Sustainable transport, waste to
energy & waste management, sustainable agriculture
• March 2018—World’s first Global Green Sukuk issued– Value: US$ 1.25bn – Tenor: 5 years– Financing mode: Wakala– Profit rate: 3.75%
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Estimated costs (2015-2020, $16.2bn/year)0
102030405060708090 81
55.1
US$ (bn.)
Indonesia Global Green Sukuk: Demand/Allocation
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35%
29%
20%
16%
Allocation based on type of investors
Asset manager/Fund managerBanks/Private BanksPension fund/InsuranceSWF/Central Bank
0%5%
10%15%20%25%30%35% 32%
25%
18%15%
10%
Allocation based on geography
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Islamic Financial Institution:Green Infrastructure Finance
• Alternative Energy Development Board (AEDB) provided 1,408 acres land in Sindh to MWEL on a 20 year concession period to establish a wind farm – Project consisted of 33 wind turbines to generate 50 MW of
electricity
• Total cost of USD 132 million– USD 32 million was sourced internally– USD 100 raised from external sources: Split between the US-
based Overseas Private Investment Corporation (OPIC) and a syndicate of Islamic banks (Meezan Bank Limited, Habib Metropolitan Bank Ltd. and Bank of Punjab)
• Islamic financiers and MWEL entered into a musharakah partnership
• After completion of the project, MWEL leased the assets of financiers under an ijarah contract and paid rentals on a quarterly basis 24
Master Wind Energy Limited Financing Structure
Islamic Financiers
AEDB
Investment PoolProject Company (MWEL)
Project Company (MWEL)
Musharakah
Project AssetsProject Assets
USD 100 million
GoP
GuaranteeConcession
OPIC OPIC
USD 32 million
[Chart 3.11] Source: Adapted from Ahmed (2017)25
Islamic Capital Markets: Khazanah Sustainable and Responsible
Investment Sukuk• Khazanah Nasional Berhad (Khazanah) issued RM100 ml SRI Sukuk in 2015 to fund schools under non-profit foundation Yayasan AMIR (YA) Trust Schools Programme
• Goal—improve accessibility of quality education in Malaysian government schools under PPP arrangement with the Ministry of Education
• The SRI sukuk was fully subscribed• Sukuk Features – SPV: Ihsan Sukuk Berhad (Ihsan) (plans to raise a total of RM1 billion through sukuk programme)– Lead Manager: CIMB Investment Bank Berhad (CIMB)– Structure: Wakalah bil Istithmar – Tenor: 7 years – Sukuk was priced with an expected return 4.30% p.a. – Key Performance Indicators (KPIs) to assess social impact assessed over a five-year timeframe– If KPIs fully met at maturity, effective yield reduced to 3.5% (as ‘Pay-for-Success’ for social
impact) – Sukuk also had option of converting the investment into a donation
• By the end of 2016, the Trust Schools Programme implemented at 83 schools in 10 states providing services to over 65,000 Malaysians students. 26
Khazanah SRI Sukuk Structure
27
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Islamic Social Finance: BAZNAS and UNDP Initiative
• BAZNAS (National Zakat Collection Agency) and UNDP initiated cost-sharing partnership with UNDP-Global Environment Facility
• BAZNAS channeled USD 350,000 zakat funds for providing power to people living in remote rural villages in Jambi, Sumatra
• Four micro-hydro power plants produce a total of 180kw of electricity – Provides power to 803 households, 7 schools, 4
mosques, 19 mushala (prayer rooms), one Islamic boarding school and other village infrastructure
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