Islamic Finance and PPP Fida Rana Investment Lead, PPP Islamic 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 banksUS$ 1.21 trillion  SukukUS$ 280 billion  Islamic fundsUS$ 51 billion  TakafulUS$ 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 Islamic Finance Eco System Accounting & Auditing Organization of Islamic Financial Institutions (AAOIFI) Islamic Financial Services Board (IFSB) International Islamic Financial Market (IIFM) International Islamic Fiqh Academy (IIFA) Islamic International Rating Agency (IIRA) International Islamic Centre for Reconciliation and Arbitration (IICRA) International Liquidity Management Corporation (IILM)

Global Infrastructure Finance, Islamic Finance & PPP Global Infrastructure Finance Islamic Finance (Sovereign direct borrowing, Sovereign sukuk etc) Islamic Finance for PPP  Annually, the world spends approximately US$ 9 trillion in infrastructure across all the different assets classes, out of which  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

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 Company Equity Islamic Lender O&M Contractor EPC Contractor Government PPP Agreements Direct Agreement Loan Agreement Shareholders’ Agreement EPC Contract O&M Contract

PPP Project Structure – Parallel Lender Model Project Company Equity Islamic Lender O&M Contractor EPC 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-upLegal DocumentationOther Characteristic LeasingFixed or Floating -Leasing -Agency -Service Agency IDB retains ownership of the leased asset until repayment Istisna’aFixed-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 AgreementApplicable 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 SponsorsDubai Ports World Port Autonome International de Djibouti Project SizeUS$ 400 Million Conventional LendersDIB, SCB, West LB, AfDB, Proparco Islamic TrancheUS$ 65 Million Islamic ModeLeasing (Ijara) Djibouti : Doraleh PPP Container Terminal Ijara for Seaport

 Gas fired 340 MW Combined Cycle IPP  22 year PPA with BPDB SponsorsSummit Group (80%) General Electric (20%) Project SizeUS$ 300 Million Conventional LendersIFC, ADB Islamic TrancheUS$ 66 Million Islamic ModeLeasing (Ijara) Bangladesh : Bibiyana Power Plant Ijara for Power

21  Modern hospital complex with 840 beds capacity  Part of country wide healthcare PPP program  28 years BOT type concession SponsorYDA Construction Project SizeEUR 355 Million Conventional LendersEBRD, BSTDB, Siemens, Unitcredit Islamic TrancheEUR 75 Million Islamic ModeIstisna’a Turkey : PPP Hospital Project Istisna’a for Hospital

22  New terminal to replace the old terminal  First transport sector PPP in the country  12 million passengers / yr handling capacity  25 years concession SponsorAeroports de Paris Joannou & Paaskevaides Abu Dhabi Investment Company Noor Financial Investment Company Project SizeUSD 680 million Conventional LendersIFC and commercial lenders (under B) Islamic TrancheUSD 100 million Islamic ModeIstisna’a Jordan : Queen Alia Airport Istisna’a for Airport

A Common Misconception ▪ Which burger is halal? ▪ Differences are in ▪ Dos and dons ▪ 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