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Identifying Infrastructure Sectors for Islamic Public–Private Partnerships Projects

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Sustainable Development and Infrastructure

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Abstract

Success factors for Islamic PPPs in pursuit of sustainable outcomes Public–private partnerships (PPPs) should not be assumed as a panacea in development finance since, regardless of decades of infrastructure development by multilateral development banks (MDBs) and local governments, human misery in the form of poverty and hunger still persist throughout the world. From the perspective of Islamic finance, the success of PPP projects should be defined as the repayment of loans without recourse to public sector guarantees or tax revenues and the provision of public services without inflicting a direct or indirect burden on the poor with a fair distribution of risks and rewards for parties involved. The evaluation of PPPs from a Maqasid, Shariah compliance, and resource mobilization point of view indicates the suitability of the PPP business model for economic infrastructure, and for transport infrastructure projects in particular.

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Notes

  1. 1.

    World Bank (2015a: 1–2).

  2. 2.

    Bhattacharyna et al. (2015: 9) and Woetzel et al. (2016: 17–31).

  3. 3.

    Aijaz and Abayomi (2017: 11).

  4. 4.

    OECD Definition of Blended Finance: “Blended finance is the strategic use of development finance for the mobilization of additional finance toward sustainable development in developing countries with additional finance referring to commercial finance.” Available at http://www.oecd.org/dac/financing-sustainable-development/development-finance-topics/OECD-Blended-Finance-Principles.pdf. Accessed October 25, 2018.

  5. 5.

    Aijaz and Abayomi (2017: 24).

  6. 6.

    Gundogdu (2018b).

  7. 7.

    Marcus and Chen (2004: 14).

  8. 8.

    Kemal 2001: 267).

  9. 9.

    World Bank (2015a: 5).

  10. 10.

    As of 2015, the average tax-to-GDP ratio for developing countries is around 12%, which is only 3% lower than that of high-income countries (World Bank data).

  11. 11.

    Salti and Chaaban (2010: 11) and Songco (2002: 45).

  12. 12.

    Ahmed et al. 2015: 14–30.

  13. 13.

    Ong and Leonard (2002: 2).

  14. 14.

    World Bank (2015b).

  15. 15.

    Osei-Kyei and Chen (2017: 113).

  16. 16.

    World Bank (2015b: 8–9).

  17. 17.

    Ahmad et al. (2018: 3).

  18. 18.

    According to Ijara agreements, maintenance, repair, and insurance of project assets are the responsibility of the lessor, that is, the financier. As a general practice, Islamic banks delegate these responsibilities, as well as ownership tax responsibilities, to the lessee, SPV, via a “Servicing, Maintenance, and Insurance Agreement.”

  19. 19.

    Abdul-Aziz and Kassim (2011: 151).

  20. 20.

    The major obstacle for Islamic–conventional parallel financing is the pari passu clause. Unlike conventional banks, since Islamic banks own project assets according to most Islamic finance contracts, they would have debt seniority because of this ownership if the project fails. Conventional banks cannot have recourse to project assets. In practice, Islamic banks waive their seniority rights to ensure pari passu in parallel financing.

  21. 21.

    Beck et al. (2010: 3–4).

  22. 22.

    Ariffin et al. (2009: 153–163).

  23. 23.

    Islamic banks can tap into conventional funds using the Mudaraba structure to make more funds available for Islamic PPPs. The Islamic Development Bank employed Mudaraba contracts to make use of the OPEC Fund and Saudi Fund for Development (World Bank 2015a).

  24. 24.

    Gundogdu (2018a: 383).

  25. 25.

    Gundogdu (2016: 251).

  26. 26.

    There are asset-backed Murabaha practices, but only for trade finance. In the case of project finance, asset-backed structures can be established with Ijara contracts.

  27. 27.

    The case of PPP hospitals in Turkey. “Mobilizing Islamic finance for infrastructure public-private partnerships.” Available at http://documents.worldbank.org/curated/en/898871513144724493/Mobilizing-Islamic-finance-for-infrastructure-public-private-partnerships. Accessed October 30, 2018.

  28. 28.

    The case of PPP of Madinah International Airport. “Mobilizing Islamic finance for infrastructure public-private partnerships.” Available at: http://documents.worldbank.org/curated/en/898871513144724493/Mobilizing-Islamic-finance-for-infrastructure-public-private-partnerships. Accessed October 30, 2018.

  29. 29.

    Aijaz and Abayomi (2017: 25–39).

  30. 30.

    Osei-Kyei and Chan (2017: 113).

  31. 31.

    Kister (1965: 274).

  32. 32.

    Granado et al. (2012: 2234–2248).

  33. 33.

    Gundogdu (2018a: 389–390).

  34. 34.

    Abdul-Aziz and Kassim (2011: 155).

  35. 35.

    OECD (2016: 10).

  36. 36.

    Gundogdu (2019a: 17).

  37. 37.

    Ğaribu’al Hadis cited in Kayed and Hasan (2013).

  38. 38.

    Maghrebi and Mirakhor (2015: 85–115).

  39. 39.

    Cross et al. (2012: 4).

  40. 40.

    The government is not able to confer simple ownership of assets due to legal restrictions. In addition, there can be no lien on state property, so participating in certain ownership rights is a viable solution for financiers.

  41. 41.

    Gundogdu (2019a).

  42. 42.

    EPC refers to engineering, procurement, and construction. In infrastructure projects, these aspects are managed by defined guidelines based on decades of project experience.

  43. 43.

    Gundogdu (2018b: 4).

  44. 44.

    Gundogdu (2019a: 56–57).

  45. 45.

    OECD (2018).

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Authors and Affiliations

  1. Islamic Development Bank, Jeddah, Saudi Arabia

    Amadou Thierno Diallo

  2. Islamic Development Bank, Jeddah, Saudi Arabia

    Ahmet Suayb Gundogdu

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  1. Amadou Thierno Diallo
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Correspondence to Ahmet Suayb Gundogdu .

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Diallo, A.T., Gundogdu, A.S. (2021). Identifying Infrastructure Sectors for Islamic Public–Private Partnerships Projects. In: Sustainable Development and Infrastructure. Palgrave Studies in Islamic Banking, Finance, and Economics. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-67094-8_3

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  • DOI: https://doi.org/10.1007/978-3-030-67094-8_3

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