CHOICE

New Straits Times - - Opinion - The writer is an in­de­pen­dent Lon­don-based economist and writer

con­junc­tion with the SDG process to co­or­di­nate and align ex­ist­ing and new in­fra­struc­ture initiatives. One of the “new” initiatives emerg­ing is recog­ni­tion of the pos­i­tive role of Is­lamic fi­nance and sukuk in in­fra­struc­ture fi­nanc­ing, in­clud­ing by G20 lead­ers.

Last week in Kuala Lumpur, the Se­cu­ri­ties Com­mis­sion Malaysia (SC) and the World Bank Group dis­cussed Is­lamic fi­nance and de­liv­ery frame­works in pub­lic pri­vate part­ner­ships (PPPs) in a con­fer­ence that looked at the pol­icy, reg­u­la­tory and in­sti­tu­tional in­ter­ven­tions needed that can of­fer such solutions for in­fra­struc­ture de­vel­op­ment.

“An im­per­a­tive for in­fra­struc­ture fi­nanc­ing is to suc­cess­fully bridge the gap be­tween the de­mand for cap­i­tal and the sup­ply of it. The SC has long recog­nised the po­ten­tial of the Is­lamic cap­i­tal mar­ket (ICM) as an al­ter­na­tive av­enue for large-scale longterm fundrais­ing. Sukuk, given their as­set-based and risk-shar­ing na­ture, are par­tic­u­larly apt for in­fra­struc­ture fi­nanc­ing,” ex­plained SC chair­man, Tan Sri Ran­jit Ajit Singh.

De­mand for in­fra­struc­ture is par­tic­u­larly acute in Asia, where the OECD es­ti­mates US$26 tril­lion worth of in­vest­ment is re­quired from 2016 to 2030. Con­trary to pop­u­lar mis­con­cep­tion, Is­lamic fi­nance has fea­tured ad­mirably in fi­nanc­ing in­fra­struc­ture over the years. The in­dus­try is ham­pered by its ca­pac­ity, which has a di­rect im­pact on risk fea­tures of such in­vest­ment.

The Is­lamic De­vel­op­ment Bank (IDB) Group has al­lo­cated fi­nanc­ing to­talling US$124.3 bil­lion since its in­cep­tion in 1975, of which the over­whelm­ing ma­jor­ity has been for in­fra­struc­ture fi­nanc­ing. It reg­u­larly ap­proves new fund­ing tranches, the lat­est of which was US$715 mil­lion in March for roads, ports, hous­ing, and SME projects in mem­ber coun­tries. Is­lamic banks, too, have fi­nanced in­fra­struc­ture projects over the years in many coun­tries and con­tinue to do so, al­beit not at the de­sired lev­els.

Malaysia has an im­pres­sive record of util­is­ing ICM in in­fra­struc­ture de­vel­op­ment led by Syarikat Prasarana Ne­gara, DanaIn­fra Na­sional Bhd (which is­sued the first ever re­tail sukuk to fi­nance a light rail ex­ten­sion project in Kuala Lumpur), Petronas Group, Te­naga Na­sional etc. The Bat­tersea Power Sta­tion Project in Lon­don de­vel­oped by SP Se­tia, Sime Darby and EPF would not have been pos­si­ble with­out a US$467 mil­lion Is­lamic fi­nance fa­cil­ity. Malaysia’s sukuk mar­ket ac­counts for 46.4 per cent of global sukuk is­suances and 52.6 per cent of sukuk out­stand­ing. Ac­cord­ing to the SC, 61 per cent of the world’s in­fra­struc­ture sukuk has been is­sued in Malaysia. The World Bank’s Global In­fra­struc­ture In­vest­ment In­dex 2016 ranks Malaysia as the sec­ond most at­trac­tive des­ti­na­tion for in­fra­struc­ture in­vest­ment in Asia, and fifth in the world.

The bur­den of fi­nanc­ing in­fra­struc­ture falls on state trea­suries with pri­vate in­vestor part­ner­ship in in­fra­struc­ture very low. In the East Asia Pa­cific re­gion, pri­vate in­vest­ment in in­fra­struc­ture is 0.1 per cent of GDP, well be­low the global av­er­age of 0.6 per cent. A re­cent re­port showed that out of US$163.6 bil­lion of pri­vate fi­nance mo­bilised, US$68.7 bil­lion went to in­fra­struc­ture in 2016 in Asia. “There is wide agree­ment,” stressed Lau­rence Carter, se­nior di­rec­tor, In­fra­struc­ture, Guar­an­tees and PPPs, World Bank Group, in Kuala Lumpur, “that in or­der to meet the SDGs, we need to lever­age more pri­vate sec­tor fi­nance. The G20 has just en­dorsed Prin­ci­ples for Crowd­ing in Pri­vate Fi­nanc­ing. We strongly be­lieve that Is­lamic fi­nance has an im­por­tant role to play in ad­dress­ing the de­vel­op­ment chal­lenges fac­ing our client coun­tries and can play a sig­nif­i­cant role in sup­port­ing in­clu­sive growth”.

PPPs have theirs mer­its, but they must be on the right terms, which put the in­ter­est of the tax­payer above that of the re­turn strat­egy of pri­vate in­vestors. The UK ex­pe­ri­ence in build­ing new hos­pi­tals showed the dan­gers of an ill thought-out PPP — lock­ing hospi­tal trusts to loan shark con­di­tions of fu­ture debt ser­vic­ing obli­ga­tions of up to 25 years. But, for PPPs in in­fra­struc­ture to flour­ish via sukuk, it will re­quire the right ecosys­tem to facil­itate such in­vest­ment. As one IMF/World Bank insider told me re­cently: “There are too many sukuk us­ing hy­brid and ex­otic struc­tures, which are com­plex and costly in terms of le­gal struc­tures and doc­u­men­ta­tion. We need to go back to is­su­ing vanilla sukuk, which are linked to new in­fra­struc­ture projects. In this way it would ben­e­fit the real econ­omy of the coun­tries.”

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