Public works projects need financial kick-start

The government is making a bid for Islamic finance to prime major infrastructure projects, writes Dan Alderson

Having identified infrastructure projects as a chance to revive a flatlining economy, the government has made a bold reassessment of Islamic finance’s worth as a means to unlock inward investment from sovereign wealth funds.

The Treasury’s revised National Infrastructure Plan 2012 identifies more than 550 projects worth £310 billion running up to 2015 and beyond. This is a big increase from the UK’s previous yearly average – and a big shift in strategy.

“At the beginning, the government left money in its current budget and cut capital spending,” says Nigel Denison, head of markets and wealth management at Bank of London and the Middle East (BLME). “More recently, however, it has realised that it should spend money on infrastructure and create jobs.”

This means more inward investment must be found and Islamic finance offers another means of access.

The World Islamic Economic Forum (WIEF) visits London for the first time in October, giving the UK a prime opportunity to reassert its credentials as an Islamic finance hub. Moreover, the government believes it can use the event to showcase Chancellor George Osborne’s message from the March 21 Budget that the country is “open for business”, with exciting opportunities for investors.

A national infrastructure bank could jump-start immediate infrastructure projects

Still, there is no guarantee that major players in Islamic finance, like Saudi Arabia and Malaysia, will hand over their sovereign wealth on a plate.

However, the government is eager to promote its inclusive stance. “We want the UK to be the best place to invest in infrastructure in the world,” according to Commercial Secretary to the Treasury Lord Deighton, in an address to the International Project Finance Association. “The UK already attracts more foreign direct investment than any other European country, generating more than a thousand new jobs each week.”

As part of its initiatives, the UK aims to work with a variety of institutional investors to provide more capital-raising options for infrastructure projects. With the government’s launch last month of an Islamic Finance Task Force, the industry is clearly a priority.

The unit, which will be co-chaired by Treasury Minister Greg Clark and Baroness Sayeeda Warsi, Senior Minister of State at the Foreign and Commonwealth Office, aims to support the development of the sector in the UK as a means of strengthening investment and the economy.

Infrastructure will play a major role. Projects started since 2011 include road and rail networks, energy reform and setting up the Green Investment Bank, with up to £3 billion of funding to invest in sustainable projects. These kinds of investments fit well with Islamic principles, although other methods may fit better.

“The Middle East is drawn to income producing assets, which tends to mean property,” says BLME’s Mr Denison. “However, the bond markets are looking quite high so have downside risk. Infrastructure could potentially act as a proxy for that market, but a lot of accounts would look at this whether Islamic or not. You also need to have a big balance sheet. That makes it difficult for banks of our size to get involved, but we could certainly lend our experience as advisers on structuring sukuk [Islamic bonds] for infrastructure.”

It may prove a tall order to lure Middle-East and Malaysian sovereign wealth funds, banks and pension funds when hundreds of billions-worth of projects are closer to home. Some might want to diversify outside their own countries, however. The sukuk market also has very deep pockets, with a record £95 billion ($144 billion) of deals issued last year, according to EuroWeek’s Islamic Finance Information Service.

One suggestion is to create an infrastructure bank – perhaps similar to the Green Investment Bank – to fund the early, non-revenue generating stages of projects.

“The UK has pumped billions into quantitative easing that has failed to translate into lending to small businesses thus stagnating the economy,” says Fazl Syed, an Islamic finance consultant. “A better idea would instead be to put money into creating a national infrastructure bank to jump-start immediate infrastructure project construction activities, with sukuk issuances backed by such projects as a potentially attractive exit mechanism at the end of their construction phase.”

The funds raised could be rolled into another project and so on, creating a ripple effect in the economy. This, Mr Syed says, would spur new jobs, homes and more retail spending. The bank would not need to be Sharia-compliant as long as the assets were. “The sukuk mechanism can ensure the sustainability of such activities,” he adds.