The Chairman, Altra Capital United Kingdom, Professor John Davie in a recent presentation on the developments in Islamic Finance at a recent forum in Lagos, identified the reasons why Islamic Finance is deployed for Public-Private Partnerships (PPPs).
In his presentation, Altra's chairman said the use of Islamic financing for PPP projects is becoming more common for the following reasons:
Increase in Islamic Institution: The proliferation of Islamic banking institutions e.g. Islamic Development Bank
Dearth in Non-Islamic Finance: The reduced availability of non-Islamic financing across the globe.
Increase in PPPs: The increased number of infrastructure PPP projects being promoted in the middle east have acted as a catalyst for the use of Sharia-compliant project financing.
Completeness: Islamic financing can provide a complete financial solution or can be used in combination with other sources of non-Islamic finance.
The expert highlighted the sharia-compliant components in PPPs, which include;
The PPP model involves creative tension induced by private capital at risk
To mirror this simply by eliminating interest is missing an opportunity
Islamic finance is more than economic components; so is PPP Islamic finance carries ethical, social, political and religious dimensions that inform its structure Islamic financial institutions foster social justice as well as generate wealth: a common position with the wider objectives of many of the commissioning agents of PPP projects
Generally the infrastructure community bring a long-term mindset towards asset ownership
Willing to invest in assets throughout economic cycle and have a desire to engage with regulators to ensure public needs are properly met.
Of the capital raised by infrastructure funds since 2006, 48% has been by vehicles with a maturity of over 10 years.
According to Prof. Davies the asset-backed, ring-fenced , and project-specific nature of Islamic finance structures and their emphasis on sharing risks make them a natural fit for infrastructure public-private partnerships [PPPs].