International Journal of Business and Economy (IJBEC) eISSN: 2682-8359 | Vol. 5 No. 2 [June 2023]
Journal website: http://myjms.mohe.gov.my/index.php/ijbec
ISLAMIC PUBLIC –PRIVATE PARTNERSHIP MODEL FOR DJIBOUTI GEOTHERMAL PROJECT FINANCING:
CONCEPTUAL FRAMEWORK BASED ON MAQASID AL- SHARIAH
Kadra Ismail Mohamed1* and Salina Kassim2
12 IIUM Institute of Islamic Banking and Finance, International Islamic University Malaysia, Kuala Lumpur, MALAYSIA
*Corresponding author: [email protected]
Article Information:
Article history:
Received date : 20 May 2023 Revised date : 30 May 2023 Accepted date : 1 June 2023 Published date : 5 June 2023 To cite this document:
Ismail Mohamed. K., & Kassim, S.
(2023). ISLAMIC PUBLIC – PRIVATE PARTNERSHIP MODEL FOR DJIBOUTI GEOTHERMAL PROJECT FINANCING:
CONCEPTUAL FRAMEWORK BASED ON MAQASID AL- SHARIAH. International Journal of Business and Economy, 5(2), 54-68.
Abstract: In view of its strategic location at the intersection of the Red Sea and Indian Ocean, Djibouti has capitalized on its geostrategic position by specializing in transport and logistical operations. Due to that, Djibouti is experiencing steady economic growth, however, a long-standing issue facing the economy is the energy deficit and high dependence on imported fossil fuels. Despite Djibouti being rich in renewable energy, it does not have natural oil, gas, coal, and hydropower, for that reason, Djibouti mostly depends on energy imports from Ethiopia and fossil fuel from the international market. Accordingly, the cost of the electricity is very high which has impeded the socio- economic development of Djibouti. Thus, the Djibouti government has taken decisive action in exploring geothermal energy. The international experts have explored huge geothermal resources potential to meet the needs of consumption and commercially exportable geothermal reserve, nonetheless, the project is yet to be completed because of financial and technical constraints. Hence, there is a quest for a sustainable financing model that is cost effective, enhancing the fund accessibility, and helping successful completion of the project. The aim of this study is to propose for the development of Islamic Public-Private Partnership (PPP) financing based on Musharakah and Istisna. The combination between PPP and Islamic models is expected to accelerate sustainable investment for renewable energy, given the fact that Islamic PPP financing is based on Islamic principles, enabling the government to shift away from interest-based financing
1. Introduction
Djibouti is in a strategic location at the southern entrance to the Red Sea, marking a bridge between Africa and the Middle East, which is near to some of the world’s busiest shipping lanes (between Asia and Europe)1. The geopolitical location and its relative stability have made it a precious location for foreign military bases and ensured a steady flow of foreign assistance.
Djibouti hosts America's largest military base in Africa, China's first overseas military base and Japan's first military base since the Second World War2. Djibouti GDP growth reached its peak in 2018 as figure one indicates, it is moderately declining in 2019 to reach 7.7% GDP growth. In 2020, the country witnessed a sharp decline in GDP growth of 0.5%. Despite the impact of the pandemic, the country’s medium-term economic outlook remains positive.
Output growth is estimated to reach 5.5% in 2021 and average 6.2% over 2022 and 2023, as free zone re-exports, as well as economic activity in, and exports of transportation, logistics, and telecommunication services to Ethiopia rebound.
Figure 1.1: Percentage of Djibouti GDP Growth Source: World Bank
In spite of being rich in renewable energy, Djibouti does not have natural oil, gas, coal, and hydropower. For that reason, Djibouti mostly depends on energy imports from Ethiopia and fossil fuel from the international market. However, relying on imported energy has become an obstacle for developing the manufacturing and industrial sector (Oxford Group report, 2018).
In addition, according to the World Bank report the demand for electricity is increasing from rate 5% to 10%. The electricity supply in urban areas is moderately increasing, whereas the supply of electricity is dramatically decreasing in rural areas. Due to the huge infrastructure and maritime investment over the last decades, the government allocates electricity supply to urban areas (World Bank, 2018). The government spends a huge budget to meet the electricity
1 https://www.worldbank.org/en/country/djibouti
2 www.bbc.com/news/world-africa 0 5 10
2014 2015 2016 2017 2018 2019 2020 Djibouti GDP Growth%
and accumulated interest that just keeps growing and increasing the national debt burden which is among the highest in Africa. The research adopts Maqasid Al- Shariah theory to develop a conceptual framework for Islamic PPP financing based on Musharakah and Istisna in the context of the Djibouti geothermal project.
Keywords: Geothermal, Musharakh, Istisna, Maqasid Al-Shariah, PPP financing, Djibouti.
needs of the society; even International Islamic Trade Finance Corporation (ITFC) injected US$72.5 million Murabaha financing to support Djibouti’s energy importation (ITFC ,2019).
However, the population who has access to electricity is only 60% in 2020. Focusing on their renewable energy production will enable the country to move away from reliance on import of fossil fuel and hydropower energy to cheap and green energy.
Although exploration drilling has been performed since1980 in Djibouti, no power generation is at present active in Djibouti. The bottlenecks of geothermal resources development experienced by Djibouti are first, the lack of local technical and managerial skills. Second, the absence of infrastructures and logistic facilities. Third, an absence of inadequate financing in the initial stages of geothermal projects. Lastly, commercial banks reluctance to participate in the exploration phase and the need for more risk reduction opportunities, which facilitate the investment by both public and private operators (Battistelli, 2020). To overcome those challenges the international and regional organizations have attempted to harness the production of geothermal power through providing funds and technical assistance. The current Djibouti geothermal project initiated in 2013 relies on World Bank participants’, African development bank, Djibouti Government, French Development Agency, and OPEC Fund for International Development (Oxford Group Report, 2018). The World Bank project terminated in 2019. Nevertheless, the Djibouti geothermal project not been finalized yet. Thus, the Djibouti government and African development bank injected additional funds to finalize the project, but the project has been hindered by financial gap, technical and managerial issues.
Hence, deploying a traditional financing approach failed to bridge the investment gap, there is an urge for an innovative investment vehicle, which is cost effective, enhancing the fund accessibility, and helping successful completion of the project.
One of the financing models for renewable energy projects is public and private partnership.
There has been an upward trend towards Private-Public Partnership (PPP) as a common structure for the delivery of public infrastructure, especially for countries that are encumbered with huge debt (Nsouli,2022). PPP gives the private sector a chance to bring innovation to the design, construction, operation, and maintenance of public infrastructure, so it has become a financing vehicle to attain the 2030 Sustainable Development Agenda (Nsouli,2022, Mursaleen
& Iqbal, 2020, and Gundogdu,2019).
Public-Private Partnership (PPP) financing model as an investment vehicle for the energy sector is gaining momentum because it provides tremendous benefits against traditional financing. The peculiarities of PPP models are enabling the government to mobilize the private sector sources and gaining the private sector skills and expertise in managing the project. It also provides operation efficiency and cost effectiveness through sharing risk among large stakeholders, to some extent PPP model transfers the risk to the parties who can manage it well.
Consequently, it leads to faster delivery of the project (Sapr et al., 2016). Therefore, PPP models have the capacity to lift renewable projects to enhance the economic prosperity of the country. Some African countries such as Morocco and South Africa have fully benefited from PPPs over the past years in different sectors of their economies such as renewable energy sector (Awuku et al., 2021). The De Aar Solar Project of South Africa is an example of successful application of PPP. The first phase of the project started functioning in 2016 with capacity of 85MW and the second phase completed in 2016 with capacity 90 MW. The combination between PPP and Islamic models will be expected to accelerate sustainable investment for renewable energy. As argued by Nsouli, (2022) Islamic finance with its risk-sharing and asset- backed principles is a natural fit to accommodate various PPP investment projects. Islamic PPP
financing is based on Islamic principles, which prohibited Usury, Gharar, gambling, corruption and moral hazard and it promotes just and fair redistribution among parties as well as sharing risk and return between the contracting parties (Mursaleen & Iqbal, 2020). Due to the prohibition of usury, Islamic finance offers low borrowing cost (World Bank, 2017).
Furthermore, Islamic mode of financing is either asset-back or asset-based financing that incentivizes the capital provider to participate in real economic activities. Thus, it will help the government to shift away from debt- based financing, which is not asset-backed and accumulated interest that just keeps growing to asset-back or asset-based financing (Mohammed, 2015). Therefore, Islamic PPP financing is not only liquidity retrieval, but it also considers the use of the liquidity itself (Morea & Poggi 2016). Mostly used Islamic PPP financing are a combination of two separate structures in one transaction: istiṣnā ‘-ijārah (construction/procurement and leasing); wakālah-ijārah (agency and leasing); or mushārakah- ijārah (contractual partnership and leasing) (Nsouli,2022). Henceforth, this study proposes Islamic PPP financing based on Musharakh and Istisna for Djibouti geothermal project financing. Since the project is in the construction phase Musharakh cum Istisna is a suitable Islamic PPP financing model. The study uses the theory of Maqasid Al-Shariah to develop a conceptual framework for Djibouti geothermal project financing.
The remainder of the paper are as follows. The second section of the research provides a brief overview of the Djibouti financing sector and geothermal project. The third section of the study reviews the key concepts. Fourth section discusses the theory of Maqasid Shariah and develops the conceptual framework. The last section concludes the research and provides recommendations.
2. Overview of Djibouti Financial Sector
The Djibouti financial sector is exclusively under the regulation of the Central Bank of Djibouti. “A central bank was established in 1979 following independence and the Djiboutian franc is pegged to the U.S. dollar and trades at a fixed exchange rate. Hence, no currency devaluation due to a pandemic-driven withdrawal of funds can be reported” (BTI 2022). Based on that stable monetary policy, the government had liberalized the financial sector since 2006, and that policy led to the increase of the penetration in the banking sector. Between 2007 and 2017, the banking penetration rate increased from 10% to 25% of the population. The banking sector is a key driver of the financial sector with more than 99% of the total assets (World Bank and AFD, 2019). As Table 2.1 shows there are 12 banks in Djibouti, three out of 12 banks are Islamic Banks, and the remaining are conventional banks. In January 2011, the central bank of Djibouti introduced a law that allows the establishment of Islamic banks under conventional banking law. To provide further adequate environment for Islamic banking operation, in 2015 government “established National Shariah Committee (NSC) as an independent institution within BCD but directly under the leadership of the President, providing the basis for development Islamic finance governance, product and procedures compliance with Shariah and audit” (Pasha Asmad, 2020, P. 2). Islamic finance in Djibouti shows steady growth for the past two decades. With the birth of the first Islamic bank (SABA) in Djibouti 2006, the Islamic banking in Djibouti constituted 17% of the total market industry. This is significantly higher than Islamic banks assets in Africa, which are around 5% of the total banking assets (Pasha Asmad, 2020). Furthermore, the total number of bank accounts at Islamic banks approached 80,400 in 2017 just 1,500 fewer than conventional banks at 81,700(World Bank and AFD,2019). The current Islamic bank in Djibouti offers wide range of products such as Mudarabah, Murabaha, Musharakah, and Istisna.
Table 2.1: Commercial Banks in Djibouti
Banks Name Original TYPE
Bank of China China Commercial
Banque Coopérative Agricole et de Crédit (CAC Yemen and United Arab Emirates Commercial
Banque d'Afrique (BOA Red Sea) continental Commercial
Banque de Dépôts et de Crédits de Djibouti (BDCD)
Switzerland Commercial
Banque Exim de Djibouti (EBD) Tanzania Commercial
Banque pour le commerce et l'industrie - Mer Rouge
(BCIMR)
Djibouti/France Commercial
Banque Silk Road (SBI) China Commercial
Commercial Bank of Djibouti (CBD) United Arabic Emirate Commercial
East Africa Bank (EAB) Somalia Islamic bank
International Investment Bank (IIB) Bahrain Commercial
Saba African Bank (SAB) Yemen/continental Islamic bank
Salaam African Bank (SAB) Regional Islamic bank
Source: Djibouti Central Bank
Financial soundness of Djiboutian Banks as elaborated by the World Bank and France Agency of Development (AFD) are quite well (refer to the table 2.2). The ratio of capital to risk weighted assets at the beginning of 2019 was about 13.5%, above the regulatory threshold of 12%. However, non-performing loans remain high at 18.06% of the portfolio for non-Islamic banks. Islamic banks were an exception as they displayed NPL rates of only 3.15%.
Conversely, the overall profitability ratios of Islamic Banks were extremely low compared to the conventional banks.
Table 2.2 Financial Soundness Indicators Commercial
Banks
2013 2014 2015 2016 2017 2018
Solvency ratio 14.25% 17.28% 17.80% 16.60% 16.59% 19.32%
Non-performing loans
15.34% 18.73% 19.95% 22.67% 16.52% 18.06%
ROA 1.30% 0.84% 0.81% 1.08% 0.71% 0.74%
ROE 22.86% 13.12% 11.97% 15.39% 11.09% 9.44%
Loan to deposit ratio
38.50% 39.53% 36.84% 36.66% 32.51% 38.25%
Islamic banks 2013 2014 2015 2016 2017 2018
Solvency ratio 14.24% 10.69% 11.35% 13.48% 11.34% 15.96%
Non-performing loans
0.69% 2.50% 3.22% 3.95% 3.06% 3.15%
ROA 0.59% 1.16% 0.42% 0.29% 0.42% 0.54%
Source: Ernst & Young [2019]
2.2 Djibouti Geothermal Project
“Renewable energy commonly is defined as energy generated from solar, wind, geothermal, tide, wood, waste and biomass” (Fotourehchi, 2017, P.1) Renewable sources of energy are vital for mitigate climate change; build resilience to volatile prices, and lower energy costs for both developed and developing countries (Papathanasiou, 2022). For that reason, renewable energy should become the path, which all the countries take towards sustainable economic development. The Djibouti government has taken ongoing efforts to invest in geothermal projects since the independence of the country. From 2007 to March 2008 Reykjavik Energy Invest (REI) established a new pre-feasibility research in the Asal rift zone. The results of this study were conclusive, and REI planned to proceed to the next feasibility and development phases. Because of the financial crisis in Iceland, the company was not able to proceed with the plan. As a result, the project stalled until 2013 (Khaire and Ayed 2012). According to an Oxford Report in 2013, Djibouti partnered with the World Bank to start the Geothermal Exploration Project in the Lake Assal region, with the purpose of setting up a geothermal power station with an initial production capacity of 20 MW, which will eventually be increased to 50 MW. A total of US$13 million had been contributed by World Bank financial participants. The contribution of each participant is as follows: 1) a Credit of US$6 million from the International Development Association (IDA). 2) A grant of US$6.04 million from the Global Environmental Facility (GEF) 3) grant of US$1.1 million from the Energy Sector Management Assistance Program (ESMAP) (World Bank, 2020, P.11). Other foreign donors who also contributed to the development of Djibouti geothermal are African development bank (AFDB) (US$5.0 equivalent), AFDB Trust Funds (US$2.34 million equivalent), French Development Agency (AFD) (US$3.25 million equivalent), OPEC Fund for International Development Fund (US$7.0 million) and the Government of Djibouti (US$.5 million) (World Bank, 2020, P.11).
Similarly, some foreign partners have also given financial support to facilitate Djibouti’s geothermal development in the Lake Assal region, such as Kuwait Fund for Arab Economic Development that provided a $27m financing tranche in 2017 to help expand its drilling activities in Gale-Le-Koma. “Kenya, which has developed geothermal energy sources of its own, also offered technical support to Djibouti’s emerging geothermal energy industry”
(Oxford Report, 2018, P. 75). The World Bank project was concluded in December 2019. The estimated cost was US$31.32m, nonetheless, the most recent estimate expects the project costs to be US$56.82 million. Thus, AFDB and the Djibouti government provided additional financing to complete the project, but the project is still hurdled by financial deficit.
3. Review of the Key Concepts 3.1 Project Financing
Basel II framework, defining project finance as “a method of funding in which the lender looks primarily to the revenues generated by a single project, both as the source of repayment and as security for the exposure. In such transactions, the lender is usually paid solely or almost exclusively out of the money generated by the contracts for the facility’s output, such as the electricity sold by a power plant. The borrower is usually an SPV that is not permitted to perform any function other than developing, owning, and operating the installation. The consequence is that repayment depends primarily on the project’s cash flow and on the collateral value of the project’s assets.” By referring to the above definition the project financing is initiated to finance one project, thus the project is established as an independent entity. Hence, the lending decision in the case of the project financing is based only on the evaluation of the project without considering the corporate health of the sponsor (International
Bank and World Bank, 2017). Moreover, as indicated by Groobey et al., (2010) the debt raised for the project is usually non-recourse, sometimes-limited recourse, with regards to the sponsoring company. Additionally, project finance can maximize equity returns by moving significant liabilities off balance sheet and protect key assets and monetize tax financing opportunities (Groobey et al.,2010). Accordingly, project finance has become an efficient way to finance large infrastructure projects that might otherwise be too expensive to be carried on a corporate balance sheet such as renewable energy projects. Normally, project finance required project sponsor company or SPV that manage the operation of the project, the SPV then contracts with the engineering, procurement, and construction contractor to manage design and construction of the project, and another company for operations and maintenance (O&M) (International Bank and World Bank, 2017). According to Mohamadi (2021), renewable energy infrastructure whether it is private or public–private assets require a collaboration between a public entity and one or several private parties (consortium). Thus, there may be one or more equity investors, lenders providing debt capital and a group of financiers, including conventional and Islamic institutions. The basic structure of project financing in domain of the renewable energy projects is as follows:
Figure 3.1: Basic Structure of PPP In REPs Financing
3.2 Public and Private Partnership Model for Reps Financing in Case of Djibouti
An expert opinion commissioned by the German Federal Government in 2003 defined PPP as
“a long-term, contractual cooperation between the public and private sectors for the economic execution of public tasks under which the necessary resources (e.g., expertise, equipment and facilities, capital, staff) are bundled in a joint organizational relationship and any project risks are allocated appropriately to reflect the risk management expertise of the project partners”.
Thus, Public and Private Partnership model is collective effort between government and private sector for the provision of public service. PPP classified into social and economic infrastructure. Social infrastructure PPPs are broadly defined as the construction and maintenance of facilities that support social services such as health care whereas economic infrastructure PPPs are defined as the construction and maintenance of facilities and services which harness the process of production and distribution, such as power, transport, and communication (ISDB, 2020). In account to that large scope of PPP, a considerable number of African countries have included PPPs as a mechanism to finance large projects due to a constrained fiscus, which necessitate active participation of private sector (Tshombe ,2020).
East African region has established PPP units, legal and policy framework to provide enabling environment for the provision of public and private partnership model. Therefore, many East African countries have implemented PPP to finance different economic and social sectors.
According to African Development Bank Report (2017) Kenya and Uganda are leading countries in term of PPP implementation follow by Djibouti, the Seychelles and Rwanda.
Host government
Sponsor (company winning the bidder
Islamic financier
Construct company Islamic financing
instruments Special Purpose Vehicle
(SPV)
Suppliers
Conventional Banks Conventional debt Equity investors (equity
capital providers)
Public and private partnership (PPPs) model for renewable energy projects comprises both economic and social aspect of PPPs, this is because renewable energy generation will not only spur the economic growth, but it will also enhance the livelihood of the society. As denoted by Dmitriy et al., (2022) RE energy will help eradicate poverty, improve health, generate jobs, improve transportation, and help create more sustainable, inclusive, and resilient communities.
Hence, PPP become integral part for financing renewable energy projects, which is critical element in achieving Sustainable Development Goals (SDGs). Number of East African Countries such as Kenya that has invested in renewable energy sources (solar, wind and geothermal), it has put in place incentives for renewable energy generation, by promulgating the Public Private Partnerships Act, Number 15 of 2013 that provides a framework for combining public and private financing, and by creating a Feed in Tariff policy (Olufuson and Nduhiu, 2020). Moreover, Ahuya and Kiruja (2017) assessed the role of PPP on the performance of small-scale renewable energy projects in the case of Kenya and their study indicated that public-private partnerships have a significant role on the performance of small energy projects in Kenya. Furthermore, Burundi, Rwanda and the DRC are implementing a Hydropower PPP project. Likewise, Morocco and South Africa have fully benefited from PPPs over the past years in different sectors of their economies such as renewable energy sector (Awuku et al., 2021). The De Aar Solar Project of South Africa is an example of successful application of PPP. The first phase of the project started functioning in 2016 with capacity of 85MW and the second phase completed in 2016 with capacity 90 MW (Awuku et al., 2021).
In the context of Djibouti, the government has taken an action to structure legal framework for successful implementation of PPP model particularly in renewable energy sector. Starting from 2014 with help of the French Development Agency, the World Bank and European Union, the country modified the existing electricity law to grant licenses and concessions to private parties for energy projects as well as authorize IPPs in the renewable energy sector, including geothermal power project (Tetra and Arlington,2014). In 2017, the government of Djibouti has established a legal framework for the provision of public and private partnership mode, it has also setup PPP Unit to manage PPPs projects and other procedural decrees to ensure the success of these projects. Legal frameworks that govern PPPs in Djibouti consist of: PPP Law, decree setting up the PPP regulatory commission, decree setting up the organization and operation of the PPP directorate and decree establishing the procedures for the award of a PPP (Shah, 2021).
Article 2 of PPP law define the concessional PPP as “public-private partnership whereby a contracting authority entrusts, for a fixed period, the execution of works or the management of a public service or of public interest , which it is responsible, to a partner whose mission may relate to the financing, construction, maintenance and the operation at its own risk of the work or service in order, in the case of a structure, to transfer ownership of it to the authority contracting party on agreed term” (world Bank, 2021). In accordance with the 2017 Law on Public-Private Partnerships, award procedures are governed by the principles of freedom of access, equality of treatment for bidders, procedural transparency, and efficiency, as well as confidentiality of proposals and tenders (World Bank, 2021, Trade policy Review 2022, and Shah, 2021). There are mainly four methods for awarding a contract and selecting a private partner, which are open bidding processes, competitive dialogue, negotiated procedures and unsolicited proposals. Some of renewable energy projects realized in the form of PPPs model are Ghoubet wind farm, onshore windfarm, and a solar farm in the Grand Bara desert (World Bank, 2021).
3.3 Islamic Public –Private Partnership Model
Plethora literature has confirmed the potential Islamic financing instruments for project financing. For instance, Ayub (2019) confirmed that focusing on the area of project financing by the IBFIs for different sectors including communication means, energy, residential and commercial buildings, infrastructure, and socio-economic development projects will serve the higher objective of Shariah. Similarly, Rarasati et al., (2019) ascertained that Islamic project financing is estimated to be one of the viable financing alternatives in Indonesian infrastructure.
On the other hand, an article by Kociemska (2020) explores the theory of both mainstream finance and the Islamic moral economy (IME) to delineate cooperation between public and private market players from different legal and religious orders. The article proposed heterodox PPP to finance social development projects such as health, poverty, and renewable energy.
Furthermore, Gundogdu (2019) using qualitative technical review of real-life example, he confirmed that Islamic PPPs as viable to achieve Sustainable development goals. Gundogdu (2019) considered three determinants for Islamic PPPs success, which are Maqasid al-shari’ah, shari’ah compliance, and resource mobilization from Islamic capital markets. In addition, Zawawi et al., (2014) argued that Islamic financing structure as an ideal structure for public and private partnership model. This is because apart from being interest-free, it also entails the sharing of losses should they occur, an act conventional project financiers are highly averse to doing (Zawawi et al., 2014). Likewise, Chu & Muneeza (2019) proposed PPP model, which integrates conventional and Islamic institutions as a new avenue of generating funds for Belt Road initiative projects (BRI). Proposed structure was based on profit and loss sharing principle, allowing conventional and Islamic financial institutes to hold a certain percentage of the ownership of the project assets, proportionate to the initial capital investment as well as Istisna in construction phase and forward Ijarah (Chu & Muneeza ,2019). Pursuant to above research, Islamic PPPs model is viable investment vehicle to both social and economic infrastructure as it has been proven by many real case studies such as, LATAR Expressway in Malaysia; Co financed by IsDB and 147 MW Patrind hydropower IPP in Pakistan; Co-financed by IsDB) (ISDB, 2020). Nonetheless, widely suggested, and applied instrument for renewable energy financing is Green Sukuk or SR Sukuk. The application of Islamic PPP financing as an approach to mobilize private investment to finance renewable energy sector is yet to be considered in context of Sub-Saharan Africa region. Hence, this study intends to fill those lacunae by proposing Islamic PPP as a mechanism to incentivize the private investors to invest in renewable energy particularly geothermal energy project in Djibouti.
4. Theory of Maqasid Al-Shariah
Sagad et al., (2017) argued that he terms al-Shariah is Implicitly mention in numerous places in the Qur’an as in the verses, “Then We put the eon the (right) Way of Religion: so, follow thou that (Way), and follow not the desires of those who know not” (Surah 45: Verse 18) and
“To each among you have we prescribed a law and an open way” (Surah 5: Verse 48).
Similarly, Maqasid Al-Shariah began with the first revelation to the Messenger (PBUH) implicit in the text of Quran and Sunnah as it been argued by Sagad et al., (2017) among the clearest evidence of the Maqasid al-Shariah beginning with the verse of the prophetic mission as in the verse, “We sent thee not, but as a Mercy for all creatures” (Surah 21: Verse 107); and
“Verily this Qur’an doth guide to that which is most right (or stable), and giveth the Glad Tidings to the Believers who work deeds of righteousness, that they shall have a magnificent reward” (Surah 17: Verse 9). Al Raysuni as cited in Sagad et al., (2017) define Maqasid Shariah as “The goals set by the Lawgiver to achieve the interests of the servants”. Imam Ghazali
(Chapra 2000) as it cited in Dar (2004) and Meera and Larbani (2006) : The objective of the Shariah is to promote the well-being of all mankind, which lies in safeguarding their faith, their human self, their intellect, their posterity and their wealth. Whatever ensures the safeguard of these five serves public interest and is desirable”. Similarly, Oladapo Rahman (2016) as cited in Yaakub and Nik Abdullah (2020) confirmed that theory of Maqasid Al Shariah a comprehensive view of all aspects of human life and could be further classified into three levels of human needs: daruriyyah (essential), hajiyyah (complementary) and tahsiniyyah (embellishment). Thus, the human being as vicegerent of Allah in the earth must protect religion, intellect, life, wealth, and lineage.
4.1 Relating Renewable Energy Project Financing to Maqasid Al-Shariah
Maqasid Al Shariah gives comprehensive guidance to transform the concept of sustainable energy into action. For that the extant literature has considered the Maqasid Shariah as a performance appraisal for green projects including renewable energy projects. For instance, a study conducted by Julia et al., (2020) ascertained that sustainability of green firms is positively related to the Maqasid Al-Shariah. Similarly, Gundogdu (2019) and Nsouli, (2022) consider Maqasid Shariah as performance appraisal to assess the application and performance of Islamic PPPs model in green projects. In addition, Nur Hidaya et al., (2017) argued that renewable energy production and consumption will serve all five objectives (religion, intellect, life, wealth, and lineage). This is because firstly, the environment is created by God as a sign of trust in mankind. As such, it is the Muslim’s view that protecting the environment contributes towards the protection of the faith which is the first objective of Maqasid Al-Shariah.
Secondly, the usage of non-renewable energy threatens human life as it causes greenhouse gasses which leads to many environmental disasters such as the melting of polar ice caps and rising sea levels so investing in renewable energy will serve the objective of safeguarding life of mankind (Nur Hidaya et al., 2017). This in turn relates to the third objective which is protecting the intellect, because the environment is mechanism for the development of human civilization that can only be realized if mankind uses his intellect to the best of his capacity (Nur Hidaya et al., 2017). Moreover, if we consider the definition of sustainable development in the Brundtland Report the utilization of resources that “meet the needs of the present without compromising the ability of future generations to meet their own needs.” It is automatically related to the fourth objective of Maqasid Al Shariah in safeguarding the wellbeing of the future generations (Nur Hidaya et al., 2017). Furthermore, Allah S.W.T has stress on the significance of the natural resources, and he stresses on utilization and protection of the resources. This is because blatant exploitation of natural resources leads to catastrophic disasters, such as landslides, water pollution, soil erosion and flash floods (Nur Hidaya et al., 2017).
Consequently, relying on green energy will serve the objective of the Shariah by promoting the well-being of all mankind, which lies in safeguarding their faith, their human self, their intellect, their posterity, and their wealth. Hence it required the collective effort from all the stakeholders to bring the idea to fruition in the form of a successfully operating project. The government needs to mobilize the fund by creating bankable projects. Thus, a great deal of attention should be paid to enhancing the role of institutional investors as well as an expanded role for the private sector through public-private partnerships. PPPs and Islamic finance are enabler and guiding principles for renewable energy sector in context of the Muslim countries.
It is important to note that nothing in Shari‘ah prevents Islamic financiers from financing an infrastructure PPP project if conventional financing is also being used. One successful example was Djibouti Doraleh container port. The financial structure of the DCT project consists of a co-financing approach because, it combines both conventional and Islamic institutions. The
PPP model used in this case was development, design, construction, management, operation, and maintenance of a greenfield. The main Islamic institutions in that project are Dubai Islamic Bank (DIB), Bank of London and Middle East, Standard Chartered Bank, West LB AG and Islamic Development Bank, raised $1660 million. The conventional Tranche raised $103 million with main institutions being African development bank (Mohammed, 2015). Islamic project financing was constructed in such a way that met the Shariah principles and regulation as well as satisfying the commercial need. The financing for the DCT project was designed to reflect “debt type”. The transaction combines four Islamic finance instruments: Mushārakah, Istiṣnā‘, Ijārah, and Takāful. The project was successfully completed, and it has had a significant impact on the economic development of the country. Doraleh Container Terminal (DCT) project has also become an impetus of PPP and Islamic financing approach in Djibouti.
Currently Islamic Development Bank has developed public-private partnership (PPP) policy, this policy will be implemented in line with ISDB’s endorsement of the sustainable development goals (SDGs). Under the umbrella of public-private partnership (PPP) policy, IsDB intends to provide enabling environment development such as institutional capacity building, legal, regulatory, and institutional frameworks, and PPP policies to its member countries. It also provides project preparation and procurement as well as project implementation through financing, co-financing, insurance, and monitoring. IsDB has initiated that policy to unblock the private sector investment in socio-economic infrastructure, thus, solving the issue of infrastructure deficit. IsDB will attract additional Islamic co-financing from Islamic commercial banks, private sector, and pension funds, in addition to working with its traditional co-financing partners among MDBs and members of the Arab Coordination Group (ISDB report 2018).
On that ground, this study suggests that the government of Djibouti as member of IsDB can structure Islamic PPP model and get financing opportunities from Islamic Development Bank (IsDB) as well as local and other foreign Islamic institutions. Since Djibouti geothermal project is in construction phase, this study is proposing build, finance, maintain and operate structure based on Musharakh and Istisna. it also suggests co- financing approach that combines both conventional and Islamic institutions. As a result, the Djibouti government is expected to meet their financing needs and complete the geothermal project.
Figure 4.1: Framework of Djibouti Geothermal Project
Illustration:
1. World Bank and African development have provided concessional loan and Djibouti government had injected a fund to complete the project, that is the capital contribution of the government of Djibouti. Moreover, the geothermal project is in construction phase and needed funds cannot be met by foreign aid and public financing. Therefore, mobilizing additional funds from private sector and Islamic banks is crucial to the completion of the project. Accordingly, the government of Djibouti can establish Islamic public and private partnership model. The propose Islamic public and private partnership structure is Musharakh cum Istisna.
2. As it indicated in the above framework, in the following step the government of Djibouti and Islamic institutions enter Musharakah contract. Pursuant to its PPP policy, IsDB can provide project implementation for the geothermal project through financing, co-financing, insurance, and monitoring. The IsDB participation will give incentive for other private as well as local and foreign Islamic banks to invest in the project. Furthermore, Islamic financial institution will generate both monetary and non-monetary value from their investment in this geothermal project. From one aspect investing in clean and sustainable energy should be part of the Islamic finance agenda to ensure the fulfillment and attainment of Islamic objective of Shariah, also as world shift towards green projects this will give an opportunity for Islamic banks and financial institutions to diversify their portfolio and increase their return. The profit and risk will be shared between the government, Islamic institutions, and private investors.
3. The participants in geothermal project can establish SPV as an agent to carry out the operation of the project. The sponsor company or SPV that manages the operation of the project contracts with the engineering, procurement, and construction contractor to manage design and construction of the project, and another company for operations and maintenance (O&M). Thus, SPV will enter Istisna agreement with the construction company. Then after the completion of infrastructure SPV will transfer operation of the Geothermal power to IPP through power purchasing agreement.
Djibouti government Concessional loan (1)
Musharakah agreement (2)
Chapter 1 Islamic Banks Chapter 2 Islamic development bank Chapter 3 Private investors
Chapter 4 World Bank Chapter 5 African development bank Project company
(SPV) (3) IPP (independent
power producer) (5)
Istisna Agreement (4)
Community of Djibouti (7)
Construction company Chapter 6 Reduction of the
electricity price 1. Reduction of
consumption cost
2. Attracting SMEs and foreign direct investment
Serving higher objective of Shariah:
Religion Life Wealth Lead to
result
outcome
4. The IPP as an independent power producer will sell the utility to the community. The government will take feed in tariff as policy incentives to reduce the operational cost of IPP. This will assist IPP to provide affordable and sustainable geothermal energy for society.
5. The electricity price in Djibouti remains high for businesses, and domestic use, at US$0.26 per kilowatt-hour (kWh) in 2020—over seven times higher than the cost of electricity in neighboring Ethiopia and as well above the average cost in the Sub-Saharan Africa and MENA regions (World Bank,2020). Thus, generating geothermal power will be a game changer as it is estimated to reduce the cost of electricity by 63 % (Hjartarson and B.
Ólafsso, 2008).
6. The low electricity cost will reduce household consumption cost and it will also become an incentive for SMEs and foreign direct investment to invest in the country. Hence, exploiting and exploring geothermal power will positively impact socio-economic development of Djibouti and that will serve the objective of Shariah by protecting the wealth and enhancing the livelihood of the community.
5. Conclusion
Djibouti is experiencing steady economic growth, however, a long-standing issue facing the economy is the energy deficit and high dependence on imported fossil fuels. Djibouti has a huge untapped potential of renewable energy that is yet to be explore, thus, government has taken decisive action to develop renewable energy particularly geothermal energy.
Nonetheless, the generation of geothermal energy is constrained by financial deficit. Hence, the government needs to unblock the private sector participation in the geothermal energy project through partnership synergy. Accordingly, this study proposed Islamic PPPs as a viable financing mechanism to overcome the issue of investment gaps. Given the fact that Islamic PPP financing is based on Islamic principles, enabling the government to shift away from interest-based financing and accumulated interest that just keeps growing and increasing the national debt burden which is among the highest in Africa. The proposed framework considered the participation of IsDB in geothermal project to provide finance and co-financing by attracting other private and Islamic financial institutions to invest in the projects. Islamic financial institutions participation in this project will not only accelerate the geothermal energy production but also ensure the attainment of Islamic object of Shaiah. As a result, this study recommends that the government to provide enabling environment to increase Islamic banks participation in renewable energy financing.
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