Financing build operate transfer (BOT) projects: an Islamic legal analysis

Abstract

The main purpose of the study was to establish a Shariah framework legal structure for Shariah-compliant Build-Operate-Transfer (BOT) projects and contracts as solutions for problems related to components of BOT contract and risk profiles. The doctrinal study was undertaken as a library research with combined approaches of descriptive, explanatory, analytical, historical, comparative and harmonization methods. Harmonization approach is conducted where compatible Shariah principles and conventional are synchronized to produce a new Shariah framework of legal structure for BOT projects and contracts. BOT is a conventional concept of financing that utilises the private investment in undertaking the public sectors infrastructure projects. It is a complicated process with multiplicities of parties, contracts, and sources of financing. It is a project finance mechanism with repayment of expenditure relies on the cash flow of the project. In practice, the success of BOT projects depends on sound privatisation policy and adequate legal framework which protects the parties involved. However, BOT projects may suffer failures when component of contract and risk profiles such as policy and regulatory framework, government support, project formulation and documentation, project priority, transparency, profitability and fair dealings were compromised by uncertainty in the terms and conditions of the concession contract, lack of transparency in the project application process, and inadequate project appraisal. Islamic BOT is deemed to be a viable solution. Though BOT is a new concept to Islamic law but with the structure, its contracts are common to the Islamic principle of muamalat. Islamic law is also pliable for all aspects of muamalat, including BOT projects. Therefore, the Shariah principles are applied in determining the Shariah compliancy of BOT projects and contracts. To make the study more viable, it will also frame the BOT contracts and projects from the maqasid perspective. The study has found that many of the BOT projects and contracts are Shariah compatible and therefore could be made more maqasid oriented. Nevertheless, the study reveals that the current practice of Islamic financing in BOT projects was still facing many constraints, due to limited use of Shariah principles, burdensome to certain parties and uncompetitiveness. The analyses elucidate the suitability of BOT with Shariah contracts, Ñuqud al musammah (nominate contracts) like al kafalah (contract of guarantee), ijarah (contract of lease), iqta (government awards) and istisna (manufacturing contract) as well as modern contracts like imtiyaz (concession contract), muqawalah (public construction contract) and siyanah (maintenance contract). In addition, BOT is discussed in the light of the development of waqf land. Then, the study examined the strengths and weaknesses of BOT projects that utilized the al bay bithaman ajil sale-based financing, the partnership based financing of sukuk musyarakah, the lease and profit sharing based financing of sukuk ijarah and mudarabah and the lease and time sharing based financing of sukuk ijarah and intifa. This study in sum made a proposal for an Islamic BOT framework of legal structure for consideration by the authorities in constructing BOT contractual structure and project appraisal.