Outline of the Presentation
▪ Global Islamic Finance Industry
▪ Global Infrastructure Finance, PPP and Islamic Finance
▪ Islamic Finance Modes & Tools for PPP Projects
▪ Deal book (showcase of some projects with Islamic finance)
Global Islamic Finance Industry
US$ 1.66 trillion of Islamic finance assets in 2013
Islamic banks US$ 1.21 trillion
Sukuk US$ 280 billion
Islamic funds US$ 51 billion
Takaful US$ 28 billion
Concentrated in the Middle East and North Africa
South and East Asia has significant assets
Global Islamic Finance Industry
Islamic finance assets are estimated to cross US$
2.0 trillion mark in 2015
Similar size to the GDP of Canada
The Sukuk segment is the fastest growth segment.
Global Sukuk outstanding volume expanded at a CAGR of
20.8% between 2008 and 2013
Stands at USD294.7 billion in volume as at end- 3Q14
Global Islamic Finance Eco-system
Islamic Finance Eco System
Accounting & Auditing
Organization of Islamic
Financial Institutions
(AAOIFI) Islamic Financial
Services Board (IFSB)
International Islamic
Financial Market (IIFM)
International Islamic Fiqh
Academy (IIFA)
Islamic International
Rating Agency (IIRA)
International Islamic Centre
for Reconciliation
and Arbitration (IICRA)
International Liquidity
Management Corporation
(IILM)
Global Infrastructure Finance, Islamic Finance & PPP
Global Infrastructure
Finance
Islamic Finance
(Sovereign direct borrowing, Sovereign
sukuk etc)
Islamic Finance
for PPP
Annually, the world spends approximately
US$ 9 trillion in infrastructure across all
the different assets classes, out of which
By 2030, the world will need US$ 60 – 70
trillion additional infrastructure capacity.
The gap is estimated to be nearly US$ 1
trillion every year
Islamic finance for PPP is a niche segment
of global PPP space
Islamic Finance for PPP Projects
▪ Equity
▪ Debt
▪ Ijara (leasing) and )stisna a (construction finance), restricted Mudaraba.
▪ Islamic resource mobilization efforts for PPP projects
▪ Co-existence with conventional lenders
PPP Project Structure – Single Lender Model
Project Company Equity Islamic Lender
O&M Contractor EPC Contractor
Government
PPP
Agreements
Direct
Agreement
Loan
Agreement Shareholders’
Agreement
EPC Contract O&M Contract
PPP Project Structure – Parallel Lender Model
Project Company Equity Islamic Lender
O&M Contractor EPC Contractor
Government
PPP
Agreements
Direct
Agreement
Loan
Agreement Shareholders’
Agreement
EPC Contract O&M Contract
Conventional Lender
Equity
▪ Equity is by definition Shariah compliant
▪ Investment is made through, either directly or by infrastructure fund
▪ With certain caveats:
▪ Majority of debt has to be Shariah compliant (e.g. 66%)
▪ Shariah compliant industry
Leasing (Ijara)
What is it?
▪ Asset owner (bank) sells a definite usufruct of the asset in exchange for a periodic rent.
▪ Suitable for equipment financing etc.
How does it work in PPP project context?
▪ Bank purchases an asset and transfers the right to use usufruct to the borrower (SPV) for a periodic rental payment throughout the lease life (loan life).
▪ At the end of lease period (loan life), the bank transfers the asset to the borrower (SPV) as gift.
▪ For example, in an IPP, the bank will be the owner of certain number of generators, leases those to the SPV.
Construction Finance ()stisna a)
What is it?
▪ A sale of asset is transacted before it comes into existence. Purchaser (SPV) orders a manufacturer (bank) a specific asset. Upon construction, bank delivers the asset at pre-agreed price, which is repaid by SPV in instalments.
▪ Suitable for contraction works, such as, roads, airports, hospitals etc.
How does it work in PPP project context?
▪ Bank appoints the purchaser (SPV) as its agent who gets the asset constructed by EPC contractor. Once asset is constructed and accepted by the purchaser, Bank transfers the title of the asset to the purchaser (SPV).
▪ The SPV pays the sale price of the asset in deferred payments.
▪ Since the sale price has to be known beforehand, )stisna a is fixed repayment type.
Restricted Mudaraba
What is it?
▪ A profit-loss sharing contract in which one party (Rab al-maal) provides capital and the other party (Mudarib) provides expertise to manage a business enterprise.
How does it work in PPP project context?
▪ Providing sector focus PPP lines of finance
IDB Modes of Financing at Glance
Mode of
Financing
Mark-up Legal Documentation Other Characteristic
Leasing Fixed or
Floating
- Leasing
- Agency
- Service Agency
IDB retains ownership of the leased
asset until repayment
)stisna a Fixed - )stisna a Agreement
- )stisna a Agency Agreement
Manufacturing/ construction based on
pre-determined price and fixed date of
delivery. Ownership transferred on
delivery/sale
Restricted
Mudaraba
Mudaraba Agreement Applicable to any project with cash flow.
Risk sharing, no guaranteed return
Project Specific Resource Mobilization
▪ Investment Management (Mudaraba)
▪ IsDB becomes lenders of record
▪ Acts as an investment manager
▪ )nvestors enjoys )sDB s preferred creditor status
▪ So far, IsDB has mobilized c 1 billion via Mudaraba toward PPP projects
19
Green field deep sea container terminal with 1 million TEU capacity First ever PPP style financing in Djibouti
30 years BOT type concession
Sponsors Dubai Ports World
Port Autonome International de Djibouti
Project Size US$ 400 Million
Conventional Lenders DIB, SCB, West LB, AfDB, Proparco
Islamic Tranche US$ 65 Million
Islamic Mode Leasing (Ijara)
Djibouti : Doraleh PPP Container Terminal
Ijara for Seaport
Gas fired 340 MW Combined Cycle IPP
22 year PPA with BPDB
Sponsors Summit Group (80%)
General Electric (20%)
Project Size US$ 300 Million
Conventional Lenders IFC, ADB
Islamic Tranche US$ 66 Million
Islamic Mode Leasing (Ijara)
Bangladesh : Bibiyana Power Plant
Ijara for Power
21
Modern hospital complex with 840 beds capacity Part of country wide healthcare PPP program
28 years BOT type concession
Sponsor YDA Construction
Project Size EUR 355 Million
Conventional Lenders EBRD, BSTDB, Siemens, Unitcredit
Islamic Tranche EUR 75 Million
Islamic Mode )stisna a
Turkey : PPP Hospital Project
)stisna a for Hospital
22
New terminal to replace the old terminal First transport sector PPP in the country
12 million passengers / yr handling capacity
25 years concession
Sponsor Aeroports de Paris
Joannou & Paaskevaides
Abu Dhabi Investment Company
Noor Financial Investment Company
Project Size USD 680 million
Conventional Lenders IFC and commercial lenders (under B)
Islamic Tranche USD 100 million
Islamic Mode )stisna a
Jordan : Queen Alia Airport
)stisna a for Airport
A Common Misconception
▪ Which burger is halal?
▪ Differences are in
▪ Dos and dons
▪ Structuring and execution
Issues for Further Discussion
▪ How does this mechanism work for parallel lending model?
▪ What are the legal documentations involved?
▪ How the following issues are treated in parallel lending? ▪ Pricing of Islamic tranche vs conventional tranches
▪ Fixed vs variable prices
▪ Hedging
▪ Disbursement and repayment
▪ Security sharing etc.
▪ What are NOT permissible in Islamic finance in the context of PPP projects?