THE figures are mindboggling. The demand endless. One of the
pressing challenges facing humanity is infrastructure — the basic physical and organisational structures and facilities (e.g. buildings, roads, power supplies) needed for the operation of a society or enterprise. The correlation of poor or non-existent infrastructure to poverty, disease, joblessness, environmental issues, such as air and water quality, social ills, such as crime, mental illness, corruption, alienation and radicalisation, is proven.
The World Bank estimates annual global infrastructure investments at around US$2.65 trillion (RM11.5 trillion) to US$3.7 trillion with emerging markets facing an annual infrastructure investment gap of US$452 billion. The Organisation for Economic Cooperation and Development (OECD) estimates that more than US$80 trillion of global infrastructure investments are needed up till 2030.
Economists argue about the suitability of measuring economic and societal progress through the traditional gross domestic product growth indicator. In my experience, improvement in and sustainability of infrastructure including operations and maintenance can also be a useful way of gauging the progress of an economy, albeit dependent on the quality of political, economic and social governance. The United Nations’ sustainable development goals (SDG) aspire to attain sustainable, inclusive and high-quality infrastructure by 2030, which “is of cross-cutting importance to increasing economic growth”.
Infrastructure is a challenge to any country, irrespective of wealth and level of development.
US President Donald Trump strongly pushed this during his campaigning, pledging to invest US$1 trillion in renewing the country’s crumbling infrastructure. China, with aggregate sovereign wealth funds in excess of US$2.5 trillion, launched the Asian Infrastructure Investment Bank in 2014 as a development finance alternative to the World Bank.
The world’s multilateral development agencies last year set up the Global Infrastructure Forum in 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.”
MUSHTAK PARKER is an independent London-based economist and writer.