Innovative Financing for Infrastructure
Innovative interest-free financing can play a significant role in supporting development activities. During a panel discussion at the WIEF Roundtable Chennai 2018, four experts in alternative finance explored how interest-free financing can be used for infrastructure projects in India. Here’s a brief summary of what was discussed including the opportunities and challenges in manufacturing and real estate.
Four experts in alternative finance and its development discuss the opportunities and challenges of interest-free financing for infrastructure, manufacturing and real estate, particularly in Tamil Nadu, India. According to G20 Initiatives’ Global Infrastructure Outlook, the need for infrastructure development was expected to reach USD94 trillion by 2040. Asia, specifically, will require over half of the funding needs, which includes China, Japan and India. India’s funding needs alone is estimated to be a whopping USD0.5 trillion. How do we address this funding gap? Professor Dato’ Dr Azmi Omar, president and CEO of International Centre for Education in Islamic Finance (INCEIF), believed one of the ways to address that was to look at alternative finance as a source of financing to finance the infrastructure needed in India.
He listed a few examples of sukuk issuances that have been made in the past that India could emulate. ‘We have Djibouti port, in Djibouti, funded by the World Bank’s Multilateral Investment Guarantee Agency (MIGA), which provided guarantees of USD427 million from Dubai Ports World to accommodate the Islamic financing structure project. The second example was the Islamic Development Bank financing of USD100 million for Queen Alia International Airport in Jordan. The third example is a highway project in Malaysia’s Klang valley expressway, which was issued over a tranche of 22 years, equivalent to about USD250 million,’ he said.
Fintech for Infrastructure Financing
Founder of Finterra, a blockchain based financial services company, Hamid Rashid, explained how fintech could be used to support infrastructure financing. ‘Now, in fintech, there are different instruments used, it could be a digital sukuk contract, that is picked up at a small sum, but very high volume of users. So, it might be a USD10 sukuk, but picked up by 10 million people. It is picked up instantly, because it just goes out to mobile devices through the internet where users can review the portfolio and purchase it,’ he explained. It’s not threatening banks, but revolutionising how they’ve operated and helped them grow. Fintech is now reprocessing what has been happening in the past decade. ‘Fintech for large infrastructure projects is yet to come, but it’s already there for small and medium types of projects and is already being used in some countries,’ he said.
Hamid explained Finterra’s Galactic operating system and what it can do. ‘The original intent was to unlocking the locked liquidity in waqf assets,’ he said. He noted the that the limitations were as such that standard financial institutions did not want to collaterise, and if they cannot collaterise the asset itself, they cannot liquidate. Finterra wanted to revive the power of waqf through blockchain. ‘In the last 10 months, we have achieved over 700,000 donors registered on the platform in nine countries. Bahrain and the Ministry of Finance have endorsed this, and would like to pilot it under the Central Bank of Bahrain’s sandbox,’ he added.
Irman Boyle, executive vice president and head of the advisory group of Indonesia Infrastructure Finance, shared his experience of how Indonesia, the largest Muslim population country in the world, used Islamic finance to fund infrastructure projects. ‘The Ministry of Finance of the government of Indonesia is working together with our partners, the Asian Development Bank (ADB) and the DEG, which is a private arm of the German government-owned development bank (KFW), as founding shareholders to help accelerate infrastructure developments and services in Indonesia. I think it’s similar work to what has been done with the India Infrastructure Finance Company Limited (IIFCL),’ he said.
The IIF had a recent mandate in the infrastructure sector in power, roads, bridges, oil and gas, LPG terminals, airports, seaports, telecommunication, fibre optic networks and Base Transceiver Stations (BTS). ‘Acceleration [of funding] can be only done if the private sector involvement is encouraged. We have this funding need of about USD300 billion for five years, but the government can only provide 20 per cent. The government can assign state-owned enterprises to conduct the projects, but that contributes to no more than 30 per cent of the funding gap. So, the government will have to refer to the private sector,’ he said. This is how the government is accelerating the development through public-private partnerships (PPP). ‘For the PPP projects, sovereign guarantee is not issued by the Ministry of Finance, but issued by the Indonesia Infrastructure Guarantee Fund (IIGF),’ he said.
Extending loans was another aspect that helped the infrastructure project financing market in Indonesia. IIF was able to introduce new financing instruments, longer tenors, limited 3-course basis and some risk participation, such as government guarantees provided by IIF. ‘The longest financing we provided is up to 15 years,’ he said.
Tamil Nadu Funds and Developments
S. Krishnan, I.A.S., principal secretary of the Housing and Urban Development Department of the Government of Tamil Nadu in India, spoke about the opportunities and challenges in Tamil Nadu. Over 50 per cent of Tamil Nadu is urbanised with a GDP of USD150 billion, making it the second largest economy in India, but the challenges of housing developments remains. S. Krishnan explained how human resources was not a challenge, and that Tamil Nadu had the highest tertiary education enrolment in India. ‘The nature of human resources is one of the main reasons why most investors and industries come to Tamil Nadu,’ he said.
‘Though the Tamil Nadu Infrastructure Development Board is dedicated to taking care of this whole ecosystem, there is still a lack of innovative ways to finance this,’ S. Krishnan said. He noted that, in conventional financing, PPP was already tried and tested, so there were fresh opportunities opening up. ‘India is looking at financial intermediation,’ he said. ‘There have been successful government initiatives, but they have certain limitations from a regulatory perspective. We need to look at semi-regulated instruments,’ he said.
While innovate and interest-free financing could help tackle challenges of development activities and funding in India, the government was also promoting to build trust among investors. In 2015, the Tamil Nadu Infrastructure Fund Management Company was set up to do the job, linking both the talent recruitment and remuneration structures. The government promoted its work by building trust among investors, but their involvement was limited to 26 per cent government holding. ‘With our initial partners the Asian Development Bank (ADB) and Japanese International Cooperation Agency, we have set up two infrastructure alternative investments funds (AIFs) and raised USD300 million, which is in the process of getting deployed. In the case of social welfare fund, we have an initial commitment from the Tamil Nadu Housing Board,’ he said.
The Tamil Nadu Housing Board was targeting a USD2 billion asset base for infrastructure projects in Tamil Nadu. ‘It need not necessarily be in Tamil Nadu. It could be shipping coal from Indonesia to ports in Tamil Nadu for setting up power plants. That could be an infrastructure project which is linked to Tamil Nadu,’ he explained. For the shelter fund, a social impact fund, they were looking for slightly lower rates of return and shorter duration of funds, because the nature of the project would have a longer maturity period. S. Krishnan noted that Tamil Nadu could support investors, particularly through waqf investments structures and that, ‘Finterra can also play a part and adapt a model to attract such [waqf] investments,’ S. Krishnan concluded.