gif Project financing
Structure Features in Shari’ah-Compliant
Project Financing: Case Study-based Part I
Author: Farhad Reyazat, PhD in Risk Management Seyed Roohullah Razavi
Project financing structures naturally lend themselves to the principles of Islamic fi- nance. The project financing approach, in contrast with corporate financing ones, has unique features that make it a more appropri- ate structure for Shariah-compliant financial instruments. In part I of this article, we give a brief introduction to project finance, looking at why project financing is important for sectors such as gas and oil. We will then examine the different features of project finance such as its off-balance sheet and recourse financing characteristics. After that the article will focus on shariah-compliant project financing. We will evaluate the basic and synthetic structures of Islamic project financing in the context of three-stage project management. Finally, we will start an analysis of the role of sukuk in shariah-compliant project financing. Based on what will be discussed in part I, in part II of this article we will take a more in-depth look at Ijarah sukuk and how it is used within an Is-
12 GlobalIslamic Finance June 2010
lamic project financing structure. After a brief word about Islamic facilities and conventional loans, we will also examine two practical case studies of Shariah-compliant project financ- ing: Yanbu National Petrochemical and Ghadir 5000 project. Lastly, we will consider the fu- ture for shariah-compliant financing.
Introduction
Project finance is one of the most innovative financial solutions of the past two decades. It enables the financing of large, single and capital intensive projects through the crea- tion of legally standalone independent project companies. These companies are financed based on limited or non-recourse rights, with the financing paid back based on cash flows generated from the project itself. According to Thomson Project Finance International Data- base, since 1996 the number of infrastruc- ture projects using the project finance tech- nique has steadily grown.
Why is Project Financing Impor-
tant?
Looking at the new stories relating to project finance, one can quickly see how depend- ent the oil and gas industries are on it. Each month brings a multitude of new project fi- nance deals in the energy sector. Given the energy sector is one of the most important in the world, affecting each and every country whether they be supplier or buyer, it stands to reason that project finance is too important an issue not to study and discuss. But why is the energy sector so keen on project financ- ing structures? What are the advantages of such a structure? Project finance can be used as a tool for growth, be it through expansion of equipment resources, the pioneering of innovative processes or the leveraging of al- ternative assets in emerging markets. In all industries, project finance catalyses techno- logical progress. Furthermore, the larger the amounts of capital, the more project finance
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