Islamic public infrastructure financing: an analysis of alternative financing instruments with application in developing countries
McNab, Robert M.
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This project examines the structure of public infrastructure financing in Indonesia and examines whether financing based on Islamic principles is a feasible alternative to current financing mechanisms. The structure of public infrastructure investment can be determined by comparing the amount of public saving or domestic resources relative to foreign debt resources. Typically, public infrastructure investment flows consist of 20 to 40 percent domestic investment and 60 to 80 percent foreign investment. This financing mixture, however, may lead to fiscal constraints when debt service occurs. If the investment funds are unproductive, then the infrastructure project may not generate sufficient revenue to offset debt service obligations. This problem is compounded in the presence of corruption, crime, and other forms of the absence of the rule of law. The funding constraint mitigates the dominant role of government and encourages private entities to provide and finance public infrastructure. Islamic project financing, through such vehicles as debt, hybrid, and equity instruments, may be able to respond to this challenge.
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