Project and infrastructure funding is a sector that is becoming increasingly popular in Islamic finance. Providing the real assets required for Islamic investment and appealing to the socially responsible tenets of the industry, Shariah compliant finance could provide an answer to the pressing issue of infrastructure financing and fill the gap left by conventional banks unwilling to invest in development projects. REBECCA SIMMONDS examines the opportunities for Islamic infrastructure financing.
A recent report by The Economist noted an estimate by McKinsey of a funding gap of US$57 trillion needed for global infrastructure construction and maintenance between now and 2030 — yet failed to identify Shariah compliant finance as a possible source to meet this demand. This highlights a significant omission, which there is no question that Islamic financing has the potential to fill if it can raise its profile enough to appeal to a wider global audience. However, the industry has already established a considerable footprint in the sector through national and supranational agencies and operations.
IDB developmental funding
The Islamic Development Bank (IDB) has allocated millions in funding towards socio-economic development project in member countries and Muslim communities in non-member countries. Most recently the IDB board of executive directors approved US$490 million in support of projects in the energy sector.
The bank in 2014 to date, has committed to US$59 million of funding for a road project in Burkina Faso and in February approved US$630 million in new financing allocated to infrastructure projects.
Asia
Earlier this year, sovereign wealth fund 1Malaysia Development (1MBD) announced plans to issue RM2.4 billion (US$735.56 million) in unrated Sukuk to private buyers to finance the relocation of eight defense units. The proposed Sukuk will hold tenors of one to 10 years. 1MDB is also coordinating the development of the Malaysian Tun Razak Exchange project which has an indicative gross development value of RM26 billion (US$7.97 billion) and is expected to become a global center for international Islamic and conventional finance.
In Indonesia, the Indonesia Financial Services Authority (Otoritas Jasa Keuangan) recently announced the possibility of a study into regulations and procedures regarding the issuance of retail corporate Sukuk. Easing the way for retail corporate Sukuk could give a boost to the country’s Islamic finance market as corporates take the opportunity to gain funding for developmental projects. The finance ministry of Indonesia in March issued IDR461 billion (US$40.5 million) in Sukuk at auction but was unable to meet its intended target with six-year project-based Sukuk. The ministry has however decided to increase governmental projected-based Sukuk issuances in 2015, with a plan to issue up to IDR6.9 trillion (US$604.2 million) worth of Sukuk using seven infrastructure projects as underlying assets, including the double-track railway from Muara Enim to Lahat in South Sumatra, the monorail project in Surabaya, roads in Jayapura and Raja Ampat in Papua, as well as the renovation of Hajj dormitories in six provinces across the country.
Africa
In March, Islamic Finance news reported that Kenya has an infrastructure project in place with a budget of KES360 billion (US$4 billion) a year for the next 10 years and is hoping to augment this budget with Islamic project financing from Middle Eastern investors. Countries including Tunisia, Egypt, Nigeria and Libya are also increasingly looking towards Islamic finance as an alternate source of infrastructure funding.
Europe
Increased focus in the UK and Luxembourg in growing their Islamic finance provision and strengthening their respective existing industries, is benefiting other European countries as investor interest moves into new markets such as Germany, and EU countries such as Italy voice a desire to grow their Islamic finance provision. In Germany sectors including energy, healthcare and infrastructure are generating interest from Islamic investors, whilst Fiona Woolf, the Lord Mayor of London, on a recent trip to the Middle East promoted 35 infrastructure projects in the UK pipeline, that would also benefit from investment generated from Islamic finance.
Middle East
Much of the funding for upcoming infrastructure projects in Dubai and Qatar, given the impending Expo 2020 and FIFA World Cup 2022, is expected to be provided by the government and generated from private investment that will be a combination of Islamic and conventional investment. In February this year, it was reported that Qatar intends to spend up to US$205 billion on infrastructure projects between 2014 and 2018; projects include the Qatar Rail project, a 2400-megawatt Facility D independent water and power project and the Sharq road system.
In Saudi Arabia, the Saudi Electricity Company (SEC) in January issued an SAR4.5 billion (US$1.2 billion) Sukuk in order to fund power generation projects. SEC has plans to spend SAR622 billion (US$16.53 billion) between now and 2023 adding 40,000 megawatts of installed generating capacity and expanding transmission and distribution networks.
Outlook
The outlook for infrastructure and project financing in Islamic finance is positive as demand for funding in the Middle East and Africa grows. S&P expects Sukuk be increasingly used to fund infrastructure development by corporates as well as governments. Infrastructure funding is expected to drive Sukuk issuance in the GCC as the year progresses and more projects get underway.