Islamic Finance and PPP

Fida RanaInvestment Lead, PPPIslamic 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

Annually, the world spends approximately US$ 9 trillion in infrastructure across all the different assets classes

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

Global Infrastructure Finance, Islamic Finance & PPP

Islamic Finance for PPP Projects

▪ Equity

▪ Debt▪ Ijara (leasing) and Istisna’a (construction finance), restricted

Mudaraba.▪ Islamic resource mobilization efforts for PPP projects▪ Co-existence with conventional lenders

PPP Project Structure – Single Lender Model

Project CompanyEquity Islamic Lender

O&M ContractorEPC Contractor

Government

PPP Agreements

Direct Agreement

Loan Agreement

Shareholders’ Agreement

EPC Contract O&M Contract

PPP Project Structure – Parallel Lender Model

Project CompanyEquity Islamic Lender

O&M ContractorEPC 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 (Istisna’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, Istisna’a is fixed repayment type.

Construction Finance (Istisna’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

Istisna’a Fixed - Istisna’a Agreement

- Istisna’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▪ Investors enjoys IsDB’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 WorldPort Autonome International de Djibouti

Project Size US$ 400 MillionConventional Lenders DIB, SCB, West LB, AfDB,

Proparco

Islamic Tranche US$ 65 Million Islamic Mode Leasing (Ijara)

Djibouti : Doraleh PPP Container Terminal

Gas fired 340 MW Combined Cycle IPP 22 year PPA with BPDB

Sponsors Summit Group (80%)General Electric (20%)

Project Size US$ 300 MillionConventional Lenders IFC, ADB

Islamic Tranche US$ 66 Million Islamic Mode Leasing (Ijara)

Bangladesh : Bibiyana Power Plant

21

Modern hospital complex with 840 beds capacity Part of country wide healthcare PPP program 28 years BOT type concession

Sponsor YDA ConstructionProject Size EUR 355 MillionConventional Lenders EBRD, BSTDB, Siemens,

Unitcredit

Islamic Tranche EUR 75 Million Islamic Mode Istisna’a

Turkey : PPP Hospital Project

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 ParisJoannou & PaaskevaidesAbu Dhabi Investment CompanyNoor Financial Investment Company

Project Size USD 680 millionConventional Lenders IFC and commercial lenders (under B)

Islamic Tranche USD 100 millionIslamic Mode Istisna’a

Jordan : Queen Alia Airport

A Common Misconception

▪ Which burger is halal?

▪ Differences are in▪ Do’s and don’ts▪ 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