Islamic finance can play a greater role in infrastructure financing via public private partnerships (PPP) to facilitate more sustainable developments, said the Securities Commission Malaysia (SC) and the World Bank Group at a joint conference held at the SC’s headquarters in Kuala Lumpur recently.
According to a World Bank study, annual global infrastructure investments are estimated at between US$2.65 to US$3.7 trillion with Emerging Markets and Developing Economies facing an annual infrastructure investment gap of US$452 billion.
Given the potential of Islamic finance to support infrastructure development in emerging and developing countries, the conference focused on how to best deploy Islamic project finance in public-private partnership (PPP) delivery frameworks and identify the relevant policy, legal, regulatory and institutional interventions necessary to successfully attract and expand Islamic financing for infrastructure development.
Themed “Islamic Finance and Public-Private Partnerships for Infrastructure Development”, the SC-World Bank Group Conference brought together development practitioners, policy makers, regulators, as well as stakeholders involved in Islamic finance and infrastructure to discuss policy, regulatory and institutional interventions that can offer solutions for global infrastructure development needs.
The conference also featured the sharing of Malaysia’s extensive experience in using Islamic financial instruments to support infrastructure development as data shows that 61% of the world’s infrastructure sukuk was issued out of Malaysia while the Global Infrastructure Investment Index 2016 ranks Malaysia as the second most attractive destination for infrastructure investment in Asia, and fifth in the world.
SC chairman Tan Sri Dato'Seri Ranjit Ajit Singh said at the conference that a critical imperative for infrastructure financing is to successfully bridge the gap between the demand for capital and the supply. “The Securities Commission Malaysia has long recognised the promising potential of the Islamic capital market as an alternative avenue for large-scale long-term fundraising. In this regard, Sukuk, given their asset-based and risk-sharing nature, are particularly apt for infrastructure financing,” he said.
Laurence Carter, Senior Director, Infrastructure, Guarantees and Public-Private Partnerships, World Bank Group said that the group strongly believed that Islamic finance had an important role to play in addressing the development challenges facing client countries. “The World Bank Group’s involvement in Islamic finance is directly linked to our objectives of reducing poverty, promoting financial sector development, broadening financial inclusion, and building financial sector stability and resilience in client countries,” he said.
The one and half day conference is the first collaboration between SC and World Bank Group on a multi-year engagement involving Islamic finance and infrastructure financing. The discussion on day one focused on the key issues in mobilising Islamic finance for infrastructure needs while the second day was a closed-door roundtable of experts to elaborate on technical matters, workable solutions and possible pilot projects.
SC’s Tan Sri Dato’Seri Ranjit in his address at the conference said infrastructure assets possess unique features which may make the matching of investment demand and capital supply a challenging task. Most infrastructure assets only begin to generate cash flows after some years, with earlier phases of the development bearing high risks which may include construction, operational, legal, regulatory and sometimes political risks.
They are also often complex in legal and financing structure. “A key concern for both governments and private investors alike is the configuration of PPP projects through legal contracts and financing structures which will distribute the relevant risks and returns in a manner which is fair for all parties involved and more importantly incentivises good operational performance.”
“The influence of these challenges is real, and is reflected today in the relatively low levels of private investor partnership in infrastructure projects. While there has historically been a strong uptake of publicly listed infrastructure stocks and bonds amongst investors, there remains significant headroom for the involvement of private capital, especially in the East Asia Pacific region, where private investor participation of around 0.1% of GDP falls well below the global average of 0.6% of GDP,” he said.
The PPP Knowledge Lab defines a PPP as "a long-term contract between a private party and a government entity, for providing a public asset or service, in which the private party bears significant risk and management responsibility, and remuneration is linked to performance". Typically it excludes turnkey and construction projects as well as procurement.
Tan Sri Dato’Seri Ranjit Ajit Singh said that reliable and well-functioning energy sources, telecommunication networks, clean water supply, and transportation connectivity, whether by land, air or sea, are basic essentials of a productive and competitive economy as well as that of a modern, civilised society.
Good quality infrastructure not only promotes economic and social development by cultivating and linking sources of supply and demand, but also lays the foundation for such growth to be shared through local and regional connectivity.
“The Organisation for Economic Co-operation and Development (OECD) estimates that over US$80 trillion of global infrastructure investments are needed up till 2030. The demand for infrastructure is particularly acute in Asia, where its estimated US$26 trillion worth of infrastructure investment is required from 2016 to 2030.
“In an environment where investors are searching for higher yields and there is a sharpening focus on alternative asset classes, the infrastructure asset class potentially offers consistent income streams, and diversification of opportunities through its low sensitivity to business cycles as well as low correlations to other asset classes,” he said.
Turning to Malaysia’s own experience in infrastructure financing, he said the utilisation of market-based financing was one way in which the country has managed its infrastructure development needs, with the first PPP project launched more than three decades ago.
“These projects were supported by the long-term financing capabilities of Malaysia’s established and vibrant bond market – the 3rd largest today as a percentage of GDP in Asia today. This has contributed to more than half of the private-sector infrastructure investments since the early 1990s.”
He added that over the decades, Malaysia has been able to diversify its market-based funding avenues through the development of its Islamic capital market segment. “The Securities Commission Malaysia has long recognised the promising potential of sukuk, given its asset-based and risk-sharing nature, as an alternative asset class for large-scale long-term financing. Coupled with its ability to be combined with support and guarantee features which allow for the alleviation and management of risk, sukuk structures are particularly apt for infrastructure financing.
“The SC has worked over the years put into place initiatives to create a facilitative ecosystem for the sukuk industry to develop, ranging from tax incentives, creating a facilitative approval process and supportive regulatory framework. These initiatives were intended to allow sukuk issuers to enjoy greater efficiency in costs and time-to-market, as well as creating greater flexibility in innovative structure,” he said.
“The Malaysian sukuk market accounts for 46.4% of the world’s sukuk issuances as well as 52.6% of outstanding sukuk globally. Our pool of institutional funds, as well as the growing Islamic fund management industry, which is the second largest in the world, provides ample liquidity for the sukuk market’s continued growth. The size and depth of Malaysia’s sukuk market has allowed it to carve a further niche – 61% of the world’s infrastructure sukuk was issued in Malaysia.”
He said the SC has embarked on further efforts to expand the range of sukuk structures as well as attract new market participants. “Initiatives such as the Islamic Fund and Wealth Management Blueprint as well as the first-ever SRI Sukuk Framework incorporate a focus on a growing trend – ethical and green investing – which is synergistic with the principles of Islamic finance and investment. Today, an increasing number of infrastructure project issuers are considering the issuance of green bonds and sukuk to tap into this emerging demand.”