Islamic Finance and PPP

1. Islamic Finance and PPP
Fida Rana
Investment Lead, PPP
Islamic Development Bank

2. 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)

3. 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

4. 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

5. Global Islamic Finance Eco-system

6.  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

7. 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

8. PPP Project Structure – Single Lender Model
Project CompanyProject CompanyEquityEquity Islamic LenderIslamic Lender
O&M ContractorO&M ContractorEPC ContractorEPC Contractor
GovernmentGovernment
PPP
Agreements
Direct
Agreement
Loan
Agreement
Shareholders’
Agreement
EPC Contract O&M Contract

9. PPP Project Structure – Parallel Lender Model
Project CompanyProject CompanyEquityEquity Islamic LenderIslamic Lender
O&M ContractorO&M ContractorEPC ContractorEPC Contractor
GovernmentGovernment
PPP
Agreements
Direct
Agreement
Loan
Agreement
Shareholders’
Agreement
EPC Contract O&M Contract
Conventional LenderConventional Lender

10. 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

11. 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.

12. Leasing (Ijara) – single lender model

13. 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.

14. Construction Finance (Istisna’a) – Single lender
model

15. 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

16. Restricted Mudaraba

17. 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

18. 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. 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

20.  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

21. 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 Istisna’a
Turkey : PPP Hospital Project

22. 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 Istisna’a
Jordan : Queen Alia Airport

23. A Common Misconception
▪ Which burger is halal?
▪ Differences are in
▪ Do’s and don’ts
▪ Structuring and execution

24. 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?

25. Thank you