Islamic Finance and PPP

Fida Rana Investment Lead, PPP Islamic Development Bank

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.

Leasing (Ijara) – single lender model

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.

Construction Finance ()stisna a) – Single lender model

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

Restricted Mudaraba

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?

Thank you