Financing The Infrastructure; What Islamic Finance May Offers _________________________________________________ Wiku Suryomurti, ST, MSi Wiku.suryomurti@gmail.com www.wikusuryomurti.com www.rasyidin.com

SEVENTH INTERNATIONAL CONFERENCE ON MULTI-NATIONAL JOINT VENTURE FOR CONSTRUCTION WORKS 2011

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Content

1.  Abstract

2.  Background

3.  Islamic Finance

v  Sukuk

4.  Project Example

5.  Conclusion

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Abstract v The lack of adequate infrastructure

capacity generally has hindered development and brought up issues that investment reforms are required. Infrastructure as part of construction is the basic physical and organizational structures needed for the operation of a society or enterprise, or the services and facilities necessary for an economy to function

v This paper explores issues and c h a l l e n g e s i n f i n a n c i n g infrastructure or construction and what islamic finance can offer to overcome the problem.

Background •  Overall economic performance of Indonesia has

improved, with an average growth of 5.5 percent (ISDB, 2010), while in 80s and 90s were about 7-7.5 percent

•  Reasons for this level of growth is the lower levels of investment in infrastructure of around 3.5 percent of GDP

•  Potential cause of low development in infrastructure (ISDB, 2010) –  Low-level of Public Investment in Infrastructure –  Weak Public-Private Partnerships –  Low-level of Private Investment in Infrastructure:

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Comparison of Infrastructure Development among South East Asia Countries

•  we can see that Indonesia has slightly low rank in providing quality infrastructure compared to neighborhood countries. Indonesia is just a little bit better than Vietnam and Philippines.

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Funding Requirement Projection •  Foreign direct

investment (FDI) will remain an important source of funds for the development of the infrastructure sectors.

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•  The development of domestic long-term capital markets will be critical for private sector investment in infrastructure, but these markets must have much better regulation as well.

•  So, then we must look into alternative sources of fund and funding mechanism

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Islamic Finance

•  The basic principle of Islamic Finance is –  the sharing of profit and loss, –  the prohibition of Riba (usury), Maysir

(gambling) and Gharar (uncertainty)

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Landscape of Islamic Financial System

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Mobilisation of Fund

Islamic  Money  Market

Takaful Solution for long term

fund & investment

Enhances of depth &

Liquidity of Financial Systems

Islamic  Financial      System

Sukuk

•  Sukuk is an Islamic financial certificate, similar to a bond in Western finance that complies with Sharia, Islamic religious law.

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Difference between Sukuk and Conventional Bond

•  Sukuk do not represent issuer debt, but represent an undivided ownership share in the spesific assets/projects/services

•  Asset backed/Asset based •  Claims

–  Sukuk holders have ownership claims on the specific underlying assets/projects/services

•  Security –  Secured by ownership rights in the underlying assets or projects in addition to

any other structured collateral enhancement mechanisms

•  Principal and return not guaranteed by the issuer •  Purpose

–  Must only be issued for purposes permitted by Islam (halal)

•  Tradability –  Sale of ownership interest in a specific asset/project/service

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SUKUK MARKET

•  global sukuk market is estimated to be US$18 billion and these funds could be utilized to increase liquidity in the Islamic world

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Islamic  Capital  Market

STRUCTURE OF SUKUK MARKET

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Sukuk  Market  

Important  mechanism  linking  

excess  funds  towards  produc;ve  

investments  

Structure  must  be  based  on  real  underlying  assets  

thereby    preven;ng  excessive  leverage  by  

issuer  and  over  exposure  of  the  financing   Syariah  principles  require  

financing  to  generate  real  economic  benefits  thereby  preven;ng  

financing  for  specula;ve  purposes  with  no  real  

economic  gains  

Sukuk Issuance

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Sukuk Issuance by Country •  Malaysia has the

highest sukuk issuance by country at 71.23%.

•  This is due to the strong regulatory framework that promotes the active and vibrant functioning of the system

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Main types of Sukuk •  Ijarah Sukuk

–  A security, the holder of which owns in common, parts of an asset that has been transferred on the basis of Ijarah contract. This security has a fixed yield and can be transferred to other parties in the secondary market.

•  Istisna Sukuk –  Sukuk that carry equal value and are issued with the aim of mobilizing the funds required for

producing products that are owned by the certificate holders. The issuer of these certificates is the manufacturer (supplier/seller), the subscribers are the buyers of the intended product, while the funds realized from subscription are the cost of the product

•  Musharakah Sukuk –  Musharakah Sukuk are securities in which its holders are owners of a specified property in

common. Sukukholders will gain (lose) from any increase (decrease) in the underlying asset prices.

•  Murabaha Sukuk –  The issuer of this Sukuk is the seller of the Murabaha commodity, the subscribers are the

buyers of that commodity, and the realised funds are the purchasing cost of the commodity. The certificate holders own the Murabaha commodity and are entitled to its final sale price upon the re-sale of the Commodity.

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Project Example

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•  Dubai Civil Aviation Authority Sukuk

•  Sukuk Profile •  Status : Matured •  Issuer Name : Dubai Global Sukuk FZCO •  SukukName : Dubai Civil Aviation Authority Sukuk •  Type of Structure : Ijarah •  Country : UAE •  Currency : USD •  Closing Date : 04Nov04 •  Tenor : 5 Years •  Issuer Size : USD 1,000,000,000

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Structure of Dubai Civil Aviation Authority Sukuk

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Structure of Tabreed 08 Sukuk

•  This sukuk issuance is being used to fund the construction of district cooling plants.

•  The structure of this transaction makes use of both an ijara (sale and leaseback) and istisna (construction and delivery) agreement

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Conclusion •  Sukuk or Islamic bond and equity participation

instruments are naturally suited for project finance •  Their potential should be explored through consultations

early on in the project development process so that the financing plan can be tailored to the specific requirements of Islamic finance.

•  Sukuks may offer the answer for several reasons: –  There is a growing awareness, interest and appetite for Sukuk

among non-Muslims, –  Billion dollar from middle east seeking for halal investment –  governments are supportive, and –  Sukuk offers structural flexibility; better asset/liability

management as well as refinancing options. 21

Conclusion (continued)

•  Further research reveals the existence and successful project infrastructure abroad that used sukuk as financial option.

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WIKU SURYOMURTI, ST, MSi Independent Financial Consultant

Lecturer, Book Writer

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