Financing PF2 projects:Opportunities for Islamic project finance

AbstractRecently the popular Private Finance Initiatives (PFI) was reformed into what is now known as Private Finance 2 (PF2). The move came against the backdrop of the unpleasant experiences which have bedeviled the PFI model leading to huge public sector bail-out and in some cases expensive buy-back schemes. One of the Principal areas being reformed is the financing structure which has often had a large portion of bank debt. The cost of capital on this significant portion of bank debt, studies have shown, has been responsible for the higher capital costs on past PFI projects. The proposed ideal financing structure for PF2 must be low cost funds such as pension funds and insurance funds. While this paper does not go into detail on how to structure a PF2 project using Islamic finance, it however argues that Islamic project finance holds a better promise for the financing of future PF2 projects. 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