We are happy to share an insight into ICIEC’s workings in our meet the team feature. Here we show you what key team members do with us, how and why. This quarter we introduce you to Miguel Kosasih, who is Country Manger at ICIEC’s Jakarta Office. We asked Miguel five questions to get a steer on his work in Indonesia, and wider Asia, and gain a view on the important role ICIEC is playing in Asia, particularly in the energy transition.
1.What is it you do at ICIEC, and how did you get here?
I’m currently serving as Country Manager for ICIEC’s Jakarta office in Indonesia. This position, which is a real privilege to have, is mainly a business origination and development role. I’m responsible for developing and expanding ICIEC’s de-risking interventions and portfolio for both inward and outward trade transactions and investments between ICIEC Member States in the South-east Asia (SEA) region, which includes Indonesia, Malaysia, and Brunei Darussalam.
I joined ICIEC in late October 2019, only a few months before the pandemic outbreak. Before that, I spent around 10 years working at PT Asuransi Asei Indonesia, which is Indonesia’s national Export Credit Agency (ECA). That was where I first got introduced to export credit and political risk insurance, and the ECA world in general. Prior to assuming the ECA role, I had a brief stint working on the legal staff at a private commercial bank, but I realised I wasn’t keen to pursue a career as a corporate or litigation lawyer, despite obtaining both my undergraduate and postgraduate degrees in international public law. I was initially drawn to becoming a public servant to the country either as a diplomat or trade attaché, but not long after I was immersed in this specialised industry, I realised that working for the national ECA offered the same level of contribution, given its strategic mandate to support the country’s exports through risk mitigation.
Having been assigned and rotated to various functions during my 10-year employment at the ECA, which included marketing, product development, reinsurance, underwriting, claims and recovery, I had the opportunity to acquire the technical know-how, experience, and operational oversight of how export credit and political risk insurance inquiries are managed and processed from front to back end. This is what prepared me for taking on this important role at ICIEC and made my transition to and familiarisation with ICIEC’s solutions and internal processes a lot easier.
2. What does your typical day involve/tell me about your team in Indonesia and how it works, and the markets you cover in Asia?
At ICIEC’s Jakarta office, I work in tandem with another colleague, Shaiful Kamarul, who is assigned as Senior Country Manager. He essentially led the establishment of the office and started ICIEC’s ground operations in the country and region in 2018, one year before I joined ICIEC. He is a Malaysian national, which makes our overall communication and coordination in distributing the tasks and responsibilities easier, given our similarities in culture and language. He focuses more on the Malaysian market, and I on Indonesia. Inquiries for (and from) Brunei Darussalam and other Asian markets such as Singapore, Hong Kong and China are distributed equally between us.
ICIEC’s Jakarta office is integrated within the Islamic Development Bank (IsDB) Group Regional Hub of Indonesia, which in total, comprises around 30 employees. The hub is led by an IsDB hub resident, who is supported by an IsDB country manager, several operation team leaders and supporting staff, all managing the interventions of the IsDB for the same SEA member countries as ICIEC. We also have colleagues from our sister entity, the International Islamic Trade Finance Corporation (ITFC), which is the trade financing arm of the IsDB group.
The IsDB Group synergy has been one of the key success factors for raising ICIEC’s brand awareness and expanding its interventions in Indonesia and the SEA region. We have an existing insurance policy with ITFC, where we provide them with non-payment/credit default risk insurance cover for Indonesian export clients that they finance, allowing ITFC to expand its trade financing interventions to support private sector Indone- sian exporters’ working capital requirements which eventuallycontributes to the member states exports.
We also work closely with our IsDB colleagues in identifying and originating potential transactions for joint intervention. As Indonesia is a direct borrower from the IsDB, our IsDB colleagues work closely with the government, especially at the ministerial level, which helps us at ICIEC identify potential pipelines of strategic projects where ICIEC could also contribute through its risk mitigation/de-risking solutions complementing the overall interventions of the IsDB Group to our member states.
All colleagues of the regional hub have formed a close bond with each other, which has created a family-like working atmosphere and makes coming to the office, while putting in the extra working hours to ensure smooth coordination with our HQ in Jeddah (as Jakarta is four hours ahead of Jeddah), even more enjoyable.
3. How does your role empower your clients – energy transition in Asia?
One of our key roles/functions as business development is to identify the financing and investment needs of our member states to support their national development plans and connect those needs to the resources that we/ ICIEC have in our own network. This is the same approach we apply when it comes to supporting our member states throughout their ‘net zero’ journeys in executing their energy transition plans as per their National Determined Contributions (NDCs) and commitments as signatories to the Paris Agreement.
As Asia is the highest contributor to the globe’s CO2 emissions (52%), there is an astounding $40 trillion estimated funding gap for Asia to achieve its net zero targets by 2050. If you include Central Asia, we have around 12 member states from the continent. Each one of these is economically (and politically) differently situated. Each has different energy transition blueprints, climate frameworks and policies, resources/means and timelines to achieve their net zero targets. Some member states have easier access to financing/liquidity than others.
Business development is placed at ICIEC’s front line for its member states; hence it’s our role to do any necessary canvasing, to conduct and participate in dialogues with key stakeholders involved in each country’s climate framework, to identify the gaps that our member states governments require support for and treat those gaps as opportunities for ICIEC to step in and mobilise its resources through our de-risking solutions.
Indonesia, for example, requires around IDR3.416 trillion/$221 billion to reach its NDC target in 2030 (reducing CO2 emissions by 29% or 41% with international assistance) and around IDR28.2 trillion/$1.8 trillion to become net zero in 2060. The government can only spend around 35% ($60 billion) of its budget to reach its NDC target in 2030 and is reliant on other sources to fill this funding gap.
Together with the IsDB Group, we have been in discussion with several key state-owned institutions that require financing to support Indonesia’s energy transition plan, which is included under the ‘SDG Indonesia One-Green Finance Facility (SIO-GFF)’, a platform devised by the Indonesia MoF to blend public and private financing (blended finance) aimed at channelling SDG-related infrastructure projects including energy transition, the first phase of which will mainly be focused on gradually decommissioning Indonesia’s coal-fired power plants and the second phase will be focused on developing new renewable energy assets.
4. What is the one thing about ICIEC that you think should be better understood by the wider world?
ICIEC’s role in our member states’ energy transaction and sustainable development, in general, is essentially catalytic. As an insurance provider, we may not be able to directly provide the financing to the projects, but we can mobilise resources by connecting those projects, and their stakeholders to the financial institutions that we work with that are already frequent users of our Political Risk Insurance/Foreign Investment Insurance policies, and that are also well familiarised with our internal due diligence and credit approval processes.
The financial institutions that are our policyholders not only benefit from the reduction on their risk-weighted assets, ensuring they obtain some degree of capital relief provided to them under our insurance policies but are also able to benefit from our Preferred Creditor Status (PCS) if, under a worst- case scenario, our member states borrowers fail to honour their financial obligations to our financial institution partners/insurance policyholders.
In addition to mobilising the financial resources, through our non-payment/contract frustration insurance programme, ICIEC can also bring in EPC companies that are well experienced in specific infrastructure sectors allowing our member states to get the expertise and technology transfer necessary to complete their strategic projects.
In essence, ICIEC offers a variety of de-risking solutions which enables us to support a particular project from different angles through different stakeholders.
5. What is your ‘superpower’?
If I were to define my own superpower as a unique quality or trait, it would be an innate drive to support those around me. I strive to assist my colleagues whenever they need guidance on work-related matters, believing that sharing knowledge and exchanging experi- ences strengthens our collective intelligence. This, in turn, elevates the standards of the entire institution and reinforces my commitment to fostering a culture of teamwork and support.
A focus on Indonesia from the perspective of how Indonesia engages with renewable energy and decarbonisation initiatives. Here we look at the themes emerging in export and project finance through the perspective of a funding strategy for Indonesia. How are the private sector, export credit agencies, development banks, and organisations such as ICIEC engaging with financing energy transition in this OIC Member State
Indonesia has been an active project and export finance market over the past five years. According to TXF Data, Indonesia was the second biggest user of ECA debt in Asia-Pacific, with a total volume of roughly US$80 billion since 2018, only second to Vietnam.
Deal volume was mostly driven by the power sector (around US$7 billion of export credits over the same period), followed by manufacturing & equipment (US$2.4 billion) and telecommunications (US$570 million).
Conventional power, from coal and oil to gas-fired power generation, accounts for 90% of baseload power in Indonesia. So, the world’s 16th largest economy has a long way to go before realising carbon neutrality by 2060, even with the government’s ambitious targets. That means significant long term financing will be needed.
Climate mitigation targets
The government of Indonesia has always had a strong commitment to tackling climate change and achieving the Sustainable Development Goals (SDGs). For example, in 2016, under its Nationally Determined Contribution (NDC) to limit global warming by 1.5 degrees Celsius, Indonesia ratified the Paris Agreement and pledged to reduce emissions by 29% under its efforts and by 41% with international support by 2030.
But more recently, in 2022, according to the latest Enhanced NDC document from the Glasgow Climate Pact, Indonesia has committed to increasing its targets to reduce greenhouse gas emissions. The target has now increased from 29% to 31.9% and from 41% to 43.2% with international assistance by 2030.
The energy sector, specifically, with a focus on the energy transition to new and renewable energy, is expected to reduce emissions by 358 million tons of CO2e with its efforts and 446 million tons of CO2e with international support.
Renewables capacity
Indonesian decarbonisation can be compounded by upping renewable energy generation – which stands at 3,000GW – given the favourable geography of the country comprising solar, hydro, wind, bioenergy, ocean, and geothermal.
But renewables as a sector have only been financed to the tune of US$540 million over the past five years, which is very small when pitted against the volume of conventional power finance over the same period. In short, there is real potential for agency finance – as well as Islamic finance – in Indonesia, especially for green projects, as ECAs and DFIs can provide significant comfort to both international and local banks eyeing this asset class.
And with ICIEC well placed to support this OIC Member State, given its ESG-related investments and Shariah-complaint product suites, there is real potential for greater ECA involvement in the Indonesia renewables market.
The TXF perspective
Winding down carbon-intensive assets is essential if the race to net zero is to be won. But accelerating the deployment of energy so that renewable energy comprises at least 34% of all power generation by 2030 means that green projects need to be top of the financing agenda.
International ECAs are no strangers to Indonesia, but there is an imperative to shoulder more green projects. This is especially key in fledgling renewables sectors, such as floating solar schemes.
A precedent financial template exists in Indonesia for a floating solar project deal. In 2021, the Cirata reservoir in West Java was used for the 145MW Cirata floating solar project, developed by PT Pembangkitan Jawa Bali Masdar Solar Energi (PMSE), a joint venture between Masdar and PT Pembangkitan Jawa‑Bali (PJBI), a subsidiary of Indonesian state-owned energy company PT Perusahaan Listrik Negara (PLN). PJBI holds a 51% stake in PMSE, while Masdar holds a 49% stake. The project benefits from a 25-year PPA with PLN at a tariff of US$0.0582/kWh.
While the Cirata deal reached close without ECA or DFI support, this nascent sector is expected to gain momentum over the coming years. Sunseap Group also signed an agreement in 2021 with local development authority BP Batam for the construction of a 2.2GW floating solar project at the Duriangkang Reservoir in Batam. The Cirata financing has been seen as a marker of the success of the burgeoning floating solar sector in several Asian markets.
Also, expect ECA support to emerge on the refinancing and reinsurance agreements, not just for green projects, but for conventical power too. Gas-fired plants in emerging market economies will be needed in the short term to help dovetail the energy transition. After all, gas is significantly less carbon-intensive than oil and coal plants. And while ECAs have retreated from supporting coal (unless ultra-supercritical technology is used), gas is very much a transitional fuel in the wake of the pandemic and the war in Ukraine.
Indonesia has been an innovator in financing its large sovereign Sukuk in 2021, with the dimension of the green Sukuk, an Islamic bond designed to finance green investments, and has recently issued its first SDG bond. We profile HE Suminto Sastrosuwito, Director General of Budget Financing and Risk Management at Indonesia’s Ministry of Finance and get his views on his role in financing and how Indonesia plans to finance the energy transition.
How do you view the role of the Ministry of Finance of the Republic of Indonesia in supporting Indonesia’s agenda on the energy transition?
Suminto Sastrosuwito: The energy transition is vital, given that the world is currently dealing with the consequences of climate change. It is also critical for Indonesia given that 90% of the country’s energy sector remains reliant on fossil energy, which is one of the main contributors to greenhouse gas emissions. Indonesia has considerable resources of renewable energy, more than 3,000 GW, comprising solar, hydro, wind, bioenergy, ocean, and geothermal.
The Government of Indonesia has a strong commitment to tackling climate change and achieving Sustainable Development Goals (SDGs). In 2016, Indonesia ratified the Paris Agreement (through Law No. 16 of 2016). In the Nationally Determined Contribution (NDC), in order to prevent global warming of 2oC, the Government of Indonesia has pledged to reduce emissions by 29% under its own efforts (business as usual) and by 41%, with international support, by 2030. In 2022, according to our latest Enhanced Nationally Determined Contribution (NDC) document, Indonesia has committed to increasing its targets to reduce greenhouse gas (GHG) emissions. The target has increased from 29% to 31.9% [by the country’s own efforts alone] and from 41% to 43.2% with international assistance by 2030.
The government even raised this target towards net zero emission (NZE) by 2060 or earlier in accordance with the Glasgow Climate Pact to limit global warming by 1.5oC. In particular, the energy sector, with a focus on the energy transition to new and renewable energy (NRE), is expected to reduce emissions by 358 million tons of CO2e with its own efforts and 446 million tons of CO2e with international support.
The target is quite ambitious and requires substantial financing, for which I believe the Ministry of Finance is playing a leading role in formulating a financing strategy. The commitment signifies the need for dedicated and long term financing, which is estimated to be worth at least 25% of Indonesia’s Gross Domestic Product (GDP), just to achieve the 2030 target. It is estimated that the government could only cover less than 30% of the financial needs through the state budget (APBN), while the private sector is expected to participate [to cover] 22% to 25% of capacity. Consequently, an additional 40%-55% of financing must be raised from other sources.
Therefore, the Government of Indonesia has issued a number of fiscal incentives or tax facilities to mobilise private investment in green projects and green industry, including tax holidays, tax allowances, as well as facilities on VAT, import duty, and property tax. In addition, the Government also provides facilities for green projects procured through the PPP scheme, such as the project development facility (PDF), the viability gap fund (VGF), and government guarantees.
We also develop innovative financing strategies through the optimisation of the state budget and mobilising funds from external sources. Various innovative financing instruments have been created to support the transition. The issuance of green Sukuk has been carried out since 2018 to fund the transition towards a low-carbon economy. Some Special Mission Vehicles (SMVs) have been established to mobilise and manage funds or develop sustainable projects, including the Indonesia Environment Fund (BPDLH), SDG Indonesia One (managed under PT SMI), and the Indonesia Investment Authority (INA).
We also encourage collaboration with development partners and optimising the role of SMVs, including PT SMI, IIGF, and Geo Dipa Energi, to contribute to the implementation of policies related to climate and energy transition. Furthermore, we coordinate with other core ministries and related institutions to ensure synergy and synchronisation of the climate policies taken by each institution. Lastly, we also actively promote these initiatives both in domestic and international forums to encourage collaboration and maximise opportunities to attract investment and financing from global communities and the private sector.
During Indonesia’s G20 Presidency, the government encouraged climate-related finance and sustainable infrastructure as being among the main agendas. Furthermore, as a concrete step forward in energy transition, in November 2022, during a side event of the G20 Forum, the Ministry of Finance proudly launched the Energy Transition Mechanism (ETM) Country Platform. The platform is aimed at mobilising international and private participation in financing ETM projects in a blended finance scheme.
Can you tell us about the path to success of the global Sukuk in 2021, particularly the green Sukuk? How are its proceeds being used?
Suminto Sastrosuwito: Indonesia has successfully raised over US$6.8 billion through multiple rounds of green Sukuk issuances in global and domestic markets. The proportion of green investors has also shown a trend increase, from 29% in the 2019 global green Sukuk to 33% and 57% in the 2020 and 2021 global green Sukuk issuances, respectively, and 36% in the 2022 global green Sukuk. These showcased how the global community is willing, if not committed, to take part in the green recovery movement. The shifting paradigm of investment towards a more sustainable preference has supported the green Sukuk market as a growing source of finance to address climate change even amid the pandemic. Hence, there is a remarkable momentum for public private financing of SDGs unfolding across the globe.
More governments are turning to public finance instruments to catalyse private investments for economic, social, and environmental goals. As a result, the number of thematic bonds and Sukuk (such as green, social, and sustainability bonds and Sukuk), and the size of the market, are growing, and green and responsible investors are getting more excited about the coming years.
Further to investing in projects reducing GHG emissions – projected to be up to 10.5 million tons of CO2e – proceeds from Indonesia’s green Sukuk have supported the construction of over 690 kilometres of railway tracks, an increase of 7.3 million kWh of electricity capacity, and improved solid waste management for more than 7.8 million households.
What are your plans for fundraising internationally in the Sukuk market in the future, particularly given international financial headwinds (and dollar strength) now? Do you plan to issue more SDG bonds?
Suminto Sastrosuwito: For Indonesia, international Sukuk issuance is intended to diversify the government’s financing instruments as well as broaden our investor base. It is not only part of our overall debt portfolio management strategy for achieving optimal cost and risk, but it also contributes to the growth of the Islamic financial market, specifically Sukuk.
We believe that as we head into 2023, the market backdrop will remain supportive for a new Indonesia Sukuk issuance. In line with this, we are confident that investors would be highly supportive given Indonesia’s strong credit profile and supportive supply and demand dynamics.
We expect the Sukuk industry to remain strong, given elevated oil prices and strong demand from Middle Eastern investors. Furthermore, given ample funding, GCC sovereign issuers are expected to issue fewer bonds next year.
As for the Sukuk structure, the current asset-light Wakala structure has already been widely accepted by Islamic investors globally and is aligned with the requirements of Islamic investors (including UAE investors, following the adoption of AAOIFI Shariah standards).
Indonesia is committed to tackling climate change issues through fund mobilisation, one of which is green Sukuk issuance.
As for thematic Sukuk, Indonesia has demonstrated thought leadership in pursuing Sukuk and green structures and unlocking liquidity in key investor hotspots such as the Middle East and Europe.
To further strengthen its leadership in green structure innovation, Indonesia will maintain its status among the world’s most sophisticated sovereign issuers through constant and consistent development in the thematic Sukuk markets.
What lessons can you share with other OIC Members planning to raise funding using Islamic finance (for instance, what have been the challenges and how have you managed to overcome them)?
Suminto Sastrosuwito: The enactment of Law No.19/2008 on Sovereign Shariah Securities, [namely Sukuk Negara] led to the government of Indonesia issuing IDR4.7 trillion in sovereign Ijarah Sukuk in that year alone. Since then, total issuance has now reached IDR1,919.77 trillion through various Sukuk structures and issuance methods (auction, book building, private placement), both in rupiah and foreign currency (US dollars).
With 13 years of growth, Sukuk Negara has played a vital role not only as an instrument of state budget financing, including funding infrastructure projects but also as a key driver of Islamic finance sector development in Indonesia.
Many supporting infrastructures for Sukuk Negara issuance have been established and improved, including the legal framework for its issuance and management, Sukuk structure and underlying assets, methods of issuance, and types of instruments, as well as the development of a domestic and international market and investor base.
Aside from the market infrastructures mentioned, the country needs to keep making progress and have a strong presence in the market in order to move forward.
To put emphasis on the challenges in our latest development of green Sukuk:
- Thematic bonds/Sukuk necessitate additional effort: framework preparation, framework review by a third party, impact reports, and report assurance (audit) by an external auditor.
- It’s important to have the right partners who are knowledgeable and trustworthy to help with framework development, issuances, including investor meetings, and impact reporting.
- The need for strong commitment and coordination from all stakeholders, especially line ministries,
- To encourage more parties to issue green/SDG instruments, incentives, particularly pricing benefits (‘greenium’), are required.
- There is still much work to be done to combine Islamic finance and social finance for efficiency and convenience of transaction, including providing incentives to encourage involvement.
How are you working with the private sector to help energy transition financing in Indonesia?
Suminto Sastrosuwito: To achieve the NDC commitment, climate change mitigation costs need to be around US$281 billion (according to the Third Biennial Update Report 2021). The state budget capacity could only finance about 20-27% of the total financing needs. Meanwhile, the private sector is expected to operate at 22-25% of capacity. Consequently, there is a funding gap of approximately 40-55%. The energy and transportation sectors have the largest needs, at around US$246 billion.
The roles of the private sector and global investors are very important to support the energy transition, especially to fill the financing gap. We also realise that aligning investment with sustainability goals is crucial as investors’ concern over sustainability issues tends to increase. Therefore, we have developed various schemes for involving the private sector.
As I mentioned, we launched the ETM country platform in November 2022. The ETM framework’s design allows for widespread investor participation, including the private sector. The country platform encourages blended finance to open financing opportunities from various sources, such as multilateral development banks (MDBs), climate funds, philanthropists, and the private sector. As the manager of the country platform, PT SMI is an SMV under the Ministry of Finance. PT SMI has gained experience in playing the role, as in 2018, a blended finance platform named SDG Indonesia One (SIO), managed by PT SMI, was established to mobilise funds for climate actions from philanthropists, donors, climate funds, green investors, MDBs, international institutions, commercial banks, sovereign wealth funds, and institutional investors.
Another scheme for private sector participation with a focus on infrastructure has been developed through Public Private Partnerships (PPPs). PPP in Indonesia has been applied to some green projects and will be further encouraged to support more similar projects, including new and renewable energy. As part of our commitment to promote sustainable infrastructure, we will implement Quality Infrastructure Investment (QII) and have formulated Environment, Social, and Governance (ESG) standards that will be applied to government support provided to infrastructure projects. It not only covers the PPP scheme but also other government fiscal support for infrastructure, such as government guarantees.
Also, a special fund called Dana Pembiayaan Infrastruktur Sektor Panas Bumi (Dana PISP or Geothermal Fund) has been set up to help the development of geothermal energy projects. The facility has a de-risking feature to reduce risk and cost in the exploration stage. The facility is eligible for government drilling, SOE drilling, and private drilling. The Geothermal Fund platform has also collaborated with several external sources of funding (loans and grants from an MDB). Therefore, a blended finance model has been established under this Geothermal Fund platform. PT SMI is mandated to manage the Geothermal Fund and collaborate with other SMVs in implementing the facility, namely PT GDE and PT PII/IIGF.
We believe that those comprehensive financing frameworks and government support – both established and under development – will engage the attention and enthusiasm of private investment.
How does Islamic financing sit within your Integrated National Financing Framework Assessments and the UN ASSIST programme on sustainable finance to bridge the SDG financing gap in Asia?
Suminto Sastrosuwito: Islamic finance offers the most viable solution because it is flush with capital, and the principles behind it are pretty much aligned with the core values of the SDGs. By 2024, the total value of Islamic finance is expected to reach US$3.5 trillion, and the volume is expected to rise even further. Islamic finance also tends to be less averse to risk, offering a more sustainable financing system that could be more robust and resilient than conventional financing. All of these factors combine to make Islamic Finance the best alternative source of financing for the SDGs. Concretely, Islamic finance has also increasingly adopted sustainability criteria and is thus well positioned to maximise social impact and address the SDGs.
And the green Sukuk initiative, which is supported by UNDP through the UN ASSIST Joint Programme, becomes one clear example of how this is achieved. Through the multiple rounds of Indonesia’s green Sukuk investments since 2018, over US$6.8 billion has been mobilised towards the country’s climate change action. This initiative has shown the Government’s commitment to addressing climate change and mainstreaming innovative financing to achieve the SDGs while also strengthening Indonesia’s position in the global Shariah market.
How optimistic are you about financing the energy transition in Indonesia, as these are undoubtedly challenging times in terms of international supply chain dislocations, inflationary pressures, and climate necessities? What does success look like from a five-year view?
Suminto Sastrosuwito: The government has drawn up a roadmap for the energy transition to achieve the target of net zero emission (NZE) in 2060. Among the strategies in the roadmap is the early retirement of Coal-Fired Power Plants (CFPP). It is expected that before 2025, CFPP and Gas Engine Power Plants will be replaced by New and Renewable Energy (NRE) power plants with a baseload of up to 1.1 GW, and another 1 GW until 2030.
In achieving that goal, the Government of Indonesia faces at least three challenges: (i) efficient usage of limited fiscal capacity, (ii) a just energy transition, especially for affected workers and communities, and (iii) non-NRE power plants tend to be more affordable to fiscal capacity and consumers. Therefore, we expect that the ETM framework can overcome these challenges.
The current challenges with high global dynamics also potentially affect the achievement of energy transition targets. But looking at Indonesia’s positive economic outlook and strong political willingness, we are optimistic that the energy transition in the country will stay on track. A promising market, a conducive investment climate, and economic performance will guarantee investors’ confidence.
What is the role of Islamic financing in terms of funding energy transition projects, particularly renewable energy? What are Islamic development finance institutions doing in this critical arena? Here is a briefing on the outlook and state of play in the Islamic development finance market, with a particular focus on Asia
A shared sense of social responsibility is embedded in both sustainable financing and Islamic finance, and there is a real symbiosis between the two areas. Islamic financing is estimated to exceed US$4 trillion by 2030, and a union of Islamic financing and sustainability could mark a key advancement in helping finance the global energy transition. Islamic finance should offer excellent potential regarding how non-interest-bearing structures could be used as tools for key transition energy issues, such as retiring old fossil fuel plants. However, combining the two streams of financing is not as easy as it would appear on the surface.
The similarities between Islamic and sustainable financing are plentiful. They are both subsets of the global financial market with ethical principles that require finance to be used in a very specific way. Islamic finance lawyers point out that protecting the environment in any context is enshrined in the principles of Shariah law.
In terms of financing projects, Islamic finance lends itself naturally to the energy transition as it has evolved to be entirely asset-based. In the past, finding a Shariah-compliant asset to tack onto financing was always a challenge for financiers and led them to develop creative structures. Now, energy transition projects abound that are centred around an asset that perfectly fit the requirements of Shariah.
Sustainable project finance – investor opportunities
There are certainly investor pools that could be engaged for sustainable project finance. For instance, in Indonesia, waqf and pilgrimage funds are pools of capital that currently represent IDR2180 trillion (US$146 billion) and IDR163 trillion (US$10 billion), respectively. The pilgrimage funds present an attractive option as they are largely invested in low-risk, short and long term government bonds. Their perpetuity principle makes them ideal for long term projects – although asset-based waqf and Sukuk have more freedom regarding value and risk.
Nonetheless, while these capital pools are promising, the Environment, Social and Governance (ESG) and green Sukuk market are certainly where investor appetite is picking up. According to Fitch Ratings, outstanding ESG Sukuk increased by 11.2% to US$19.3 billion in Q2 2022 from the previous quarter. That was a faster rate of growth than for the total Sukuk market. Notable deals in 2022 included Riyad Bank’s first sustainability linked AT1 US$750 million Sukuk and Infracorp’s issuance of Bahrain’s first green Sukuk at US$900 million.
Most significantly, Indonesia returned to the market in 2022 to raise US$3.25 billion in its largest global Sukuk offering, which included the world’s largest ever green tranche. This Sukuk received significant demand, tightening the coupon by an average of 37.5 basis points to 4.4% on the US$1.75 billion five-year tranche and 4.7% on the US$1.5 billion green 10-year tranche.
The Indonesian green Sukuk was targeted at the international market, with only 10% of its investors coming from the domestic market. The government specifically targeted the potential investment from the wider Muslim world and used the route of green and Shariah-compliant instruments to help deepen relationships.
This is one of the key reasons green Sukuk represents an attractive prospect for promulgating sustainable financing – it allows the largest Islamic investor base to invest in Shariah-compliant, sustainable products. According to Fitch Ratings, Sukuk is the preferred format in many cores Islamic finance markets, equalling 75.5% of outstanding hard-currency ESG-debt at Q2 2022 in the GCC region, 90.7% in Saudi Arabia, and 100% in Bahrain.
Progress remains slow
While Islamic finance ESG wheels are starting to turn and demands from funds that are traditional investors in Islamic finance for ESG compliant products is certainly rising, progress does remain slow. Hard-currency Sukuk have typically been oversubscribed, including green Sukuk, and undoubtedly investor interest in ESG products is growing. The marriage of sustainability and Sukuk in Indonesia’s 10-year green tranche helped make it oversubscribed by more than 4.8 times.
Yet whether badging the products’ sustainable’ adds to (or even detracts from) Sukuk demand is complicated by the numbers. In some cases, ESG Sukuk achieved a lower yield at issuance than their non-ESG counterparts, but only slightly. It is difficult to tell because, despite increased interest, ESG Sukuk still represents only 2.6% of the global outstanding total.
Demand from the Middle East for sustainable products may be behind the curve because it took some issuers time to offer ESG-related products. In part, this has been a result of differing standards imposed by regulators and a lack of politically driven incentives such as the green taxonomy framework established by the EU. Nonetheless, some say that this gives the region the advantage of learning from some of the early mistakes elsewhere that have led to accusations of ‘greenwashing’.
Project by project or looking wider?
One of the challenges for using waqf assets has been that issuers may need to be looking wider than simply on a single project basis. There is an argument that looking at innovation and looking to use underlying assets to issue financing instruments for sustainable projects on a broader basis can help.
While demand is slowly rising, there are still issues with supply. A mixture of nascent market infrastructures, underdeveloped local guidelines, and taxonomy – a persistent, global issue for ESG – shortages in qualified human capital, and regulatory constraints make for an unready global market. This is especially true of project financing. Analysts argue that while Islamic finance on its own fits from an ethical and moral perspective, getting an Islamic finance deal done in terms of the standardisation of documents and structures needed takes longer. That includes getting agreement from banks, other stakeholders, and then the final sign of a fatwa, if needed. As a result, seeing infrastructure fully financed by Islamic finance remains rare in the Middle East.
That is on top of policy issues depending on the jurisdiction and different expectations as to what security is required and whether financing will need government sovereign backing. Commercial disparities between Islamic and other parties can delay agreements and coordinating these in emerging markets are complex. Risk considerations such as these are where Shariah-compliant insurance institutions such as ICIEC could be ready to step in and help.
ICIEC is a signatory to the Principles for Responsible Insurance and is also the only Shariah-compliant multilateral insurer. This means that sustainable investment, climate action and finance, and Green Finance are at the core of ICIEC’s due diligence process, and ICIEC can link all new business and other queries with SDG and climate action indicators.
Lessons from the Malaysian experience
Malaysia is a market leader in Islamic ESG, as Fitch Ratings has highlighted. Malaysia created an ESG framework in 2014. Malaysian firm Tadau Energy issued the world’s first green Sukuk in 2017, and the Securities Commission issued guidelines on SRI funds in the same year. Unlike other core markets, the majority of its green Sukuk is in local currency, supported by the SRI Sukuk and Bond grant scheme that offsets up to 90% of the external review costs per issuance. This developed ecosystem is a long stretch from others and, as a result, Malaysia houses 91% of global ESG Sukuk issuances (175 of 192 as of Q2 2022).
Indeed, most new projects are financed by Sukuk rather than by conventional bonds. This is helping energy transition projects. For instance, for Large Scale Solar (LSS), a competitive bidding programme was used to drive down the cost of energy for large scale solar PV plants, where many of these projects have been financed by Sukuk.
Malaysia’s dominance of the Shariah-compliant ESG market also displays that, in practical terms, the preconditions for success are to have an ESG framework at the corporate level in place, with policies, procedures, and methodology for measuring targets. This is important before borrowing or investing in an ESG-compliant way can be considered.
The preconditions necessary for success
There is a lot to do before Islamic investors can and will get behind financing sustainable projects on a large scale. There are processes and regulatory frameworks that need development, and their absence will continue to curb accelerated progress.
On the demand side, interest in ESG Sukuk is growing – but the majority of Sukuk investors are still a distance away from actively seeking impactful projects. However, there are opportunities cropping up for higher impact infrastructure projects. One example to watch is the MoU signed between IsDB and PT Sarana Multi Infrastruktur (PT SMI), a special mission vehicle (SMV) of Indonesia’s Ministry of Finance and country ETM platform manager and collaborator on the Just Energy Transition Partnership (JETP) Investment and Policy Plan.
The agreement will support a partnership for the provision of a line of financing and co-financing for Energy Transition, Renewable Energy, and the Development of PPP-supported infrastructure initiatives. If this MoU were to lead to Sukuk being issued by IsDB for the ETM and JETP, it would mark a significant pathfinder for the wider market.
Let us introduce you to some of the diverse range of people who work with us at ICIEC and look at what they do, the how, and why.
Meet Dr. Salih Suwarelzahab, Chair of the Climate Change Taskforce at ICIEC. With a solid background in nature and biodiversity, from his base in Jeddah, we asked Salih five questions to get the measure of how he sees the importance of his role at ICIEC and the support ICIEC is giving to climate action.
1. How did you get from a PhD in International Natural Resources Law and Policy from the University of Dundee to your current role as chair of the Climate Change Taskforce for ICIEC?
The genesis of the taskforce itself was at COP22, the Paris Summit. It was a very momentous occasion. The President of the IsDB at the time attended and took the decision to pivot the IsDB Group towards prioritising climate. I was peripherally involved in wider discussions on environmental standards at the Group level.
I attended COP26 in Glasgow for ICIEC with our delegation headed by the CEO. The conversation has moved beyond simple questions about the existential threat of climate change. We are a multilateral owned by member states, and the member states themselves are asking ICIEC for help with climate finance.
The CEO has prioritised climate action as an issue. It is a transformation that is currently underway. And due to my qualifications, I was asked to be the chair of the taskforce. We are working on many fronts operationally and in training as well to transform the organisation to mainstream climate action.
Operationally, the Climate Action Task Force comprises seven of us. I am from the legal side, and there are underwriting and the business development zones, which are sub-Saharan Africa, the Eurozone, Asia, and the Middle East, and North Africa, and reinsurance are also involved.
Reinsurance helps us benchmark with our industry partners. We work with multilaterals, but we reinsure with Lloyd’s in London as well. I also do benchmarking exercises to try and optimise the transformation into something doable that does not affect the top line of the business but at the same time that prioritises this important issue.
2. How is ICIEC going to build to make a difference in climate action globally?
We have a significant role in climate action. The funding gap is huge. With the war in Ukraine, people are starting to rehash old questions about whether it is time to go back to dirty fuels and what the priority is. We do not see that argument as undermining the promise of renewable energy for many of our members. Many OIC member states do not have investment grade ratings or access to finance. A lot of them are in Africa and sub-Saharan Africa. Many do not have adequate electricity for basic domestic use, let alone industrial uses. We can help with de-risking and help contribute towards the development of electrification in rural and urban sectors.
We were at the International Federation Forum recently in Cairo, which was attended by Mark Carney, former governor of the Bank of England, and the UN (United Nations) special envoy on climate finance, and John Kerry, President Biden’s special representative on climate. Carney was specifically talking about the need for financing plus de-risking. That is the role I see for ICIEC.
There are several funds and initiatives we will be joining, such as the German-based InsurResilience, which is the platform for the world’s largest insurers.
Germany has the G7 presidency at present, and there is a lot of momentum going on and commitments made globally, such as the launch of an insurance-based ‘global shield’. ICIEC is galvanising that financing, helping the commitments to be translated into actual disbursements and projects on the ground, offering credit enhancement, and mitigating risks for financiers whilst always being led by member country needs. The focus will be on resilience and will be broadening out to countries most vulnerable to climate change of the designated ‘V-20’ (the 20 most vulnerable to climate change, 14 are ICIEC members).
Our role is de-risking and catalysing finance and translating these global commitments into actual disbursement and projects and transactions on the ground, which make a difference and contribute towards the achievement of the Sustainable Development Goals. In all member states where there is limited electricity, research and development is contributing to lower costs of renewables. So, we have an enormous potential role in climate action.
3. In light of this, how will you approach COP27, and what are you going to make your priorities for ICIEC?
COP27 is the largest global meeting of its kind. ICIEC has a chance to bring member states who are its shareholders, and policyholders, which are usually private sector companies around the table. We will be hosting several events with partners, including large international commercial banks and specialised funds, and InsureResilience itself.
We will also be having “spotlight on” sessions with officials and specialists from member states to outline how they see their priorities from a government perspective.
Under the Paris Agreement, there are nationally determined contributions, which is a blueprint of priorities for climate action, and it will be interesting to hear from the governments about their priorities and needs.
We will also be signing MoUs at the event. One of which is with Masdar – a leading R&D underpinned by a UAE sovereign wealth fund with a strong renewables drive. This will be a fantastic opportunity to bring the relevant stakeholders around the table and try to bridge the financing gaps.
4. Sounds like you have a fascinating role at ICIEC. Can you walk us through a typical day and its most exciting or frustrating moments?
It is quite eclectic in terms of what can show up on my desk. There’s work on the climate side and then there is the insurance operations work in export credit insurance and foreign investment insurance.
Also, because I am a French speaker, I work on transactions and projects in our Francophone African member countries. The breadth of work is always interesting, the pace is sometimes challenging.
The excitement is the constant learning curve and also the positioning of being in between member states governments on the one hand, with the way state machinery works, and then the results-driven private sector, and the way it works.
Climate action is a cross-cutting priority for the private sector and governments alike under ESG for the former and the SDGs (Sustainable Development Goals) for the latter. It is a real, sometimes existential, issue of how to cope with higher commodity prices, electricity prices and natural disasters which are precipitated by climate change.
5. That is a challenging and serious role. What does your leisure time look like, and what do you do to relax?
Being in Jeddah has given me the opportunity to learn to scuba dive on the weekends in the Red Sea. That gives me a very real insight into the natural world, as opposed to just watching David Attenborough, I get to experience marine life. And, of course, the oceans are one of the most threatened ecosystems by climate change. I have seen some coral bleaching over the years. But it is just always fascinating to be immersed in the natural world and to appreciate it.
In Jeddah, the King Abdullah University of Science and Technology has a focus specifically on marine biodiversity. I have dived with them, and you really see the vulnerability of the ecosystem in the warmest sea in the world. It really makes one appreciate the impact humans can have on living creatures.
In the runup to hosting COP27, we look at how Egypt is attempting to build a climate-resilient energy strategy towards achieving its Vision 2030 goals. In this, we look at both the power and petrochemicals sectors, with an eye on renewables such as solar, wind, and hydro. Here we highlight the themes emerging in export and project finance through the lens of Egypt’s funding strategy.
With the next United Nations Climate Change Conference (COP27) being hosted in Egypt from 6-18 November 2022, the focus on energy transition from policymakers, corporates, lenders, and export credit agencies (ECAs) has never been stronger. And the impetus and onus on COP27 have only been amplified by the heightened energy security issues in the wake of the pandemic, the war in Ukraine, and the race to net-zero.
Egypt, which suffered from an acute shortage of power between 2014 and 2018, with daily 10-hour blackouts at the peak of the crisis, has mapped out an ambitious power procurement plan to meet the country’s energy demand and the requirement of climate change challenges. ECA support will be paramount to the realisation of these targets, as development finance institutions (DFIs) stretch their capital to combat the climate crisis and COVID-19 – although Egypt itself has not set a net-zero target.
National Determined Contributions (NDCs) have been pledged by Egypt nonetheless. In June 2022, Egypt joined the global methane pledge. In its NDCs, Egypt pledged to reduce emissions from gas flaring in the oil and gas sector to less than half of 2015 levels and lists some unquantified measures in the waste sector.
However, it is unclear whether these measures are sufficient to reach the 2030 global goal of reducing methane emissions by 30% – especially given the country’s planned increase in oil and gas production. The agriculture sector, a large source of methane emissions, for instance, is not covered in Egypt’s NDC.
To be compatible with the 1.5°C limits of the Paris Agreement, Egypt may need further unconditional targets and policies that would at least stabilise emissions at today’s levels by 2030. Its conditional target would need to reduce emissions until 2030 by around 25% compared to current levels.
Gas: A transitional fuel
In 2015, the Egyptian government introduced an emergency plan to double power generation capacity by 2020. Big-ticket ECA-backed finance played a key role in pushing large-scale gas-fired projects over the financial line – for example, the $1.5 billion Euler Hermes-backed loan for the Beni Suef scheme, the first of three 4.8GW plants and SACE-backed financing for a 1200MW combined cycle gas turbine (CCGT) plant.
ICIEC, a member of the Islamic Development Bank, has underwritten the development of gas power plants in Assiut, West Damietta Port Said, Hurghada, and Sharm El Sheikh, with a total installed capacity of 2.67GW.
These projects provided viable financing templates, which have served as a seedbed for future deals, even more so now the debate around gas being a transitional fuel has dissipated. And, given Egypt’s need for grid stability, with more renewable projects coming online, these gas-fired turnkey projects are crucial to smoothing power output and baseload power.
Rapid growth in Egypt’s natural gas supplies, boosted by the discovery of the Mediterranean’s largest field, turned it from a net importer to an exporter in late 2018. Egypt exported 9.45 million cubic meters of liquid natural gas (LNG) in the first seven months of 2022, up 44% from a year earlier, according to Refinitiv data.
More recently, this summer, in the power sector, the Saudi Electricity Company sealed a $570 million ECA-backed project financing deal with Standard Chartered and SMBC to partially finance the Saudi-Egypt electricity interconnection project. The two countries signed an agreement to establish an electrical interconnection in 2012 for the purpose of being the main axis in the Arab electrical linkage, which aims to create an infrastructure for electricity trade between Arab countries. Saudi Arabia and Egypt last year signed contracts for a $1.8 billion electricity interconnection project to ensure an exchange of 3,000MW of electricity between both nations.
Renewable schemes tap agency support
Gas cuts to domestic feedstocks and power plants – as the government hopes to lower the amount of gas used to generate electricity by 15% – will reduce Egypt’s private sector competitiveness. Egyptian heavy industries will be hit in the short term, but renewable energy has the potential to recalibrate the country’s energy mix down the line.
The government of the most populous Arab country – with over 102 million inhabitants – has been pushing to up its renewable power generation in recent years. For example, Egypt’s Integrated Sustainable Energy Strategy aimed to ensure the stability of Egypt’s energy supply by targeting 20% of electricity generation from renewables by 2022 and 42% by 2035.
Two landmark renewable independent power producer (IPP) projects have closed heavily DFI-covered projects since 2019. These are the 200MW Kom Ombo solar PV deal, which closed last year, and the 250MW West Bakr wind farm, which had helped increase wind generation capacity to 18% by the end of 2021 (when it became operational). Both schemes are examples of the ongoing need for agency debt to realise renewable energy projects in Egypt. In short, DFIs are crucial to this nascent sector as they provide comfort to international banks to get such renewable projects completed. ECAs will eventually join the fold – but solar deals in MENA have been few and far between for ECAs to support so far.
Egypt’s petrochemical promise
Egypt’s state-owned oil refiner Assiut National Oil Processing Company (ANOPC) signed an innovative $1.5 billion SACE-covered loan to back the Assiut oil refinery expansion project at the beginning of 2022. ECA support was an integral feature of the financing, which mimicked the project’s predecessor, MIDOR.
The economic fundamentals behind the expansion project are sound: meeting Egypt’s growing demand for refined fuels while contributing to the country’s aim of achieving self-sufficiency in petroleum products in 2022 (petroleum imports reduced from $9.4 billion in 2019 compared to $6.38 billion in 2020 – a 32% year-on-year decrease).
The expansion aims to increase Assiut’s refining capacity from 4.5 million tonnes per annum (tpa) to 5 million tpa, helping to maintain the operation of new and future projects as part of the continuous expansion of the refinery which provides oil supplies and petrochemicals to the upper Egypt region. EPC contractors Technip, Enppi, and Petrojet are expected to complete construction by the end of 2024.
Petrochemical projects are carbon-intensive, given the process and feedstock, but the sector is also central to cleaning up plastics and reducing emissions for an industry synonymous with pollutants. Existing assets must be made more efficient. So, ECA debt will be used to upgrade facilities, as well as build greenfield schemes.
TXF Data: Egypt takeaways
Egypt is no stranger to ECA debt. From 2018-2022, the volume of ECA-backed finance in Egypt totalled $18 billion across 21 transactions, with the majority of those loans being accounted for by manufacturing and equipment deals. This was followed by infrastructure, oil & gas, and transport deals.
With power procurement and cleaner transport higher on corporate agendas, expect a raft of projects within those sectors going forward. Sponsors of phase one of the 1800km high-speed train line across the north of Egypt — Siemens Mobility, Orascom Construction, and the Arab Contractors — are expected to reach financial close on the roughly $2 billion Euler Hermes/SACE-covered financing backing the scheme by year-end, for instance.
ICIEC, via reinsurance or direct agreements, has the capacity to extend support to these types of projects, enabling ECAs to increase collaboration and better manage their capital. This product suite can dovetail with the promotion of climate crisis mitigation, with climate-resilient infrastructure as another important space requiring funding.
France’s ECA, Bpifrance, was the most active ECA in Egypt by total volume, followed by Sinosure and SACE. Meanwhile, Credit Agricole, BNP Paribas, and Societe Generale were the most active ECA banks, which is unsurprising given that Bpifrance is the ECA to extend the most support by volume, with the top three most prevalent commercial lenders to Egypt being French.
Hydro under threat
Meanwhile, extreme weather threatens dams, thermal power plants, and nuclear stations, according to a report by the World Meteorological Organisation (WMO). The WMO said a third of thermal power plants that relied on freshwater availability for cooling was already in areas of water stress, as were 15% of existing nuclear power plants and 11% of hydroelectric capacity.
About a quarter of the world’s existing hydropower dams, and almost a quarter of projected dams, were situated within river basins that already have a “medium to very high risk” of water scarcity, the WMO said.
The results affirm a study published in the journal Water earlier this year about flood and drought risks to hydropower dams globally. It found that by 2050, 61% of all hydropower dams in river basins would be at risk of “very high or extreme risk for droughts, floods or both”. Egypt was one of those countries highlighted as at high risk from flooding and/or drought.
The report modelled three scenarios, with the pessimistic scenario assuming an increase of 3.5°C by the end of the century and the optimistic scenario assuming a temperature increase of 1.5°C. Global temperatures have risen at least 1.1°C since the 1840s.
Jeffrey Opperman, one of the authors of the study and the lead global freshwater scientist for the World Wildlife Fund, said even under an optimistic scenario for limiting global warming levels by 2050, there would be an increase in drought risk and flood risk. There remains much work to be done by the international community to help finance climate mitigation.
Critical minerals are, as the name suggests, vital to many aspects of creating clean energy. OIC states are facing the need to shore up supplies of minerals such as lithium, nickel and rare earth. Financing critical minerals’ extraction and refinement will be vital in, for instance, key sectors such as electric vehicle batteries. OIC states such as Indonesia are already moving on apace in financing projects that rely on critical minerals for their energy transition. How are export credit agencies, development banks and organisations such as ICIEC leading the evolving role in this important space?
As energy prices soar and countries return to carbon to meet demand, it would be easy to assume that the commodity finance industry is as fixated on oil and gas as ever. The war in Ukraine has underlined the challenging reality of the world’s progress towards a green energy transition. However, it was not oil and gas that topped the list of most active sectors for commodity finance in the first half of 2022. According to TXF Intelligence’s data report, metals and mining investment deal volumes increased $11.9 billion in the year to end of H1 2022.
The reason? In a world that is looking to electrify all aspects of its supply chains, the precious metals required to make batteries become vital. Renewable energy sources, electric vehicles, and other forms of carbon-free infrastructure require battery storage. In this sense, global ambitions for sustainability rely upon the distribution of a finite resource of critical minerals.
Many ICIEC member states are still developing nations. It often appears that sustainability stands in opposition to prosperity when so many member states possess fossil fuel wealth, but the challenge for ICIEC is to mitigate the risks to its members on a pathway to sustainability. It has shown initiative in this regard. Oussama Kaissi, ICIEC’s CEO, has written for the Berne Union underlining the group’s commitment to ‘helping to drive investment for climate-resilient infrastructure in its member states. The benefits of this commitment have already been seen in a number of renewable projects. Around $68 million in coverage was provided to the Benban Solar Complex in Egypt, one of the largest photovoltaic plants in the world, and ICIEC was also heavily involved in the Sharjah waste-to-energy project, which aided the UAE’s efforts to divert 75% of solid waste away from landfill. However, for most OIC states, the physical infrastructure for an electrified society is still stranded in the future.
What is a critical mineral?
The definition of a critical mineral is not precise, and different countries have produced their own priority lists. Lithium, cobalt, nickel, graphite, and copper are among the best-known examples. It is unsurprising that governments around the world have put together strategy reports on their access to minerals and future opportunities to maximise supply. In 2018, the United States defined a critical mineral as a non-fuel mineral material that is essential to manufacturing and is vulnerable to disruptions in supply. A list of 35 was produced, 31 of which were minerals the US is more than 50% reliant upon importing. The Us objective now is to reduce that figure, or at least to ensure that supply chains are diversified among ‘allies and partners. That specific emphasis entails the global race for mineral security has become increasingly geopolitical.
At present, the dominant player in the critical minerals market is China. The strategy employed by the Chinese government is twofold: it has the most comprehensive domestic infrastructure for the processing of materials, and it invests heavily in extraction sites across the world to secure its own supply. Statistics from the International Energy Agency (IEA) show that China refines around 35% of nickel supplies, between 50% and 70% of cobalt and lithium, and as much as 90% of rare earth metals. Many members of the OIC will have received investment from Chinese companies, notably Indonesia, which has benefitted from close to $30 billion towards its nickel value chain alone. The most recent data from Benchmark Mineral Intelligence shows that Chinese cathode production quadrupled between 2018 and 2022, with as much as 87% market share predicted by 2030. If the political relationship between the US and China continues to suffer, the global trade in minerals could snarl up.
Conflicts between major international powers in the last decade have revealed the ways in which commodities can be ‘weaponised’. From Europe’s recent attempts to wean itself off Russian gas to the China-US trade war under the administration of President Trump, there are many ways to demonstrate the consequences of commodity dependency. ‘Optionality’ is, therefore, the watchword for states looking to secure their supply of critical minerals. In this light, it is important for industry players to be aware of both the key sites for mineral extraction and the financing tools that different institutions have used to gain access to them.
Strategic priorities and challenges
One problem with creating optionality is that, unlike oil and gas, mineral production tends to be highly concentrated in specific areas. According to the IEA, the DRC extracts roughly 70% of the world’s cobalt resources, Australia has around 50% of lithium, and Indonesia has around 30% of nickel. There are many areas of untapped mineral wealth, notably around the Arabian Peninsula. In May, leading OIC member, Saudi Arabia announced $32 billion in funding for mineral projects as part of an ambitious attempt to make mining a pillar of its industrial base by 2030. However, the discovery of new sources would not quickly ameliorate the problem. The process from the first discovery to the first concentration is arduous. OZ Minerals has recently taken a final investment decision on a $1.7 billion copper and nickel project called West Musgrave in Western Australia, but it does not expect the first concentrate until the second half of 2025. The initial scoping study took place in 2016. This is comparatively rapid when placed next to the IEA’s estimate of a 16-year average wait for mining projects to reach the first production.
The conundrum that must be solved by every country is how to secure a supply of limited minerals when demand is so high. Increasingly, state bodies, export credit agencies (ECAs) and development finance institutions are looking to, or are being called to, be more involved in this regard.
ICIEC has been supporting the Indonesian nickel mining sector through July’s PRI insurance for SIDRA Capital Financing. This will lengthen and deepen the amount covered in Shariah-compliant financing for SMEs to Indonesia’s PT MCT (Asia Trading). The $80 million one-year cover to SIDRA will help secure its Shariah-compliant loan facility to PT MCT, which will use the financing to fund transactions for suppliers and operators in the mining and nickel trading sectors.
As critical minerals continue to be a subject of international concern, increasing involvement from government institutions will be called upon. ECAs are already evolving to secure supply as part of a broader mandate to support domestic industries. Evidently, a sector that is so fundamental to the electrification process cannot be ignored. The immense difficulties involved in extracting and processing metals will necessitate change if the world is truly committed to the green energy transition. In this, ICIEC will continue to look to support member states in their financing through insurance support of institutions to help secure investment for climate-resilient infrastructure and clean energy generation, a key element of which will be access to critical minerals to underpin this demand.
In this profile feature, we introduce you to some of the broad range of people who work with us at ICIEC and take a look at what they do.
Meet Mr Alaa Mustafa, Country Manager, MENA Division at ICIEC. He is a Lebanese national who has been in this role since 2016 and has a particular focus on, and enthusiasm for, Egypt.
We asked Alaa five questions to showcase what makes him excited and engaged about his role for ICIEC, particularly his work in Egypt and its focus on meeting the ambitions of Egypt’s bold Vision 2030 Agenda.
1. What has been your journey to your current role at ICIEC? In particular, how did you get into insurance, especially trade and investment insurance, and what is it you do with ICIEC in Egypt?
I joined ICIEC a decade ago after working for two years in the general insurance industry at a Lebanese/KSA-based company covering insurance operations in the GCC. I joined ICIEC under the Young Specialist Program, designed to attract talented young candidates, and I was among the youngest ICIEC staff at that time.
I must confess that entering the insurance industry was a complete coincidence, but after becoming specialized in credit and investment insurance, I have to say that I am delighted to have taken that decision back then!
2. Please elaborate on the structure of your Egypt country team and how it fits into the MENA division at ICIEC. How do you work, and what do you do daily?
It is no surprise that Egypt is among the top 10 countries to have benefited from ICIEC products and services. Indeed, since its inception, the total value of ICIEC operations in Egypt has reached a massive $7.3 billion, covering areas related to import and export credits and the inflow of foreign direct investment.
We run the insurance operations from our headquarters in Jeddah under our MENA Division. This model requires frequent travel and follow-up missions to Egypt, particularly Cairo. We plan monthly visits to maintain our relationships with Egyptian stakeholders, to whom we deeply commit.
We have excellent daily communications with our in-country teams, exporters, banks, and clients/stakeholders. Our ultimate goal is to maintain and sustain this extraordinary partnership with such a great country as Egypt to provide de-risking solutions to the private and public sectors to benefit Egypt’s economic and social development.
3. How does your role at ICIEC help your clients in Egypt achieve the country’s Vision 2030 goals?
Under the framework of ICIEC’s efforts to meet the growing demand of its customers to provide export credit and investment insurance services in the Egyptian market, ICIEC has embarked on a strategic plan to expand in the Egyptian market both through direct channels and through specialized programmes such as the Islamic Development Bank’s Member Country Partnership Strategy (MCPS). I am delighted to represent ICIEC in this.
One of the critical pillars of Egypt’s 2030 strategy is underpinning the private sector through encouraging the inflow of FDI into Egypt, backing Egyptian exports, and mainly supporting the ability of Egyptian companies to penetrate new markets in Africa. This is where we have consolidated our relationships with Egypt through signing remarkable MoUs in the trade and climate sectors, conducting webinars and seminars and partnering with key private Egyptian companies.
4. What has been the most challenging project you have worked on in Egypt with ICIEC, and how do you think it has made a material difference to the country?
Every new project in Egypt is a new challenge because it is done with a lot of passion and attention from my side, as Egypt is far and away one of my favourite countries. I’d go so far as to say that my colleagues in other divisions sometimes joke that I am biased as I lavish hard work and attention on any new project in Egypt!
We feel proud of completing a significant number of transactions in Egypt. Probably the most important of these was the $300 million insurance support ICIEC provided to finance loan agreements to local banks in Egypt to support the SME sector in the light manufacturing industry. This project took much time but was measurably successful and has directly impacted smaller manufacturers in the country.
The other outstanding achievement is the successful execution of the IsDB Annual Meeting in Sharm El-Sheikh, which was held this June. This one is pretty indelible for me, not just because it was so recent, but because I’m proud of our team who worked so tirelessly, especially on the organization of the Private Sector Forum, which was up to the international standards as we had aimed it to be.
5. Tell me one surprising fact about yourself (you may not have told ICIEC before!)
I wasn’t joking when I said I have a personal affinity with Egypt and Cairo. It is the culture, the people and the fantastic vibes of experiencing Cairo. Even when I’m not on business, if my colleagues miss me for a weekend, the odds are I’m in Cairo visiting friends!
How can private sector actors use ICIEC for climate action, serving member countries’ ESG agendas? Here we highlight initiatives that will help Egypt, in particular, achieve its Vision 2030 goals concerning the environment.
Development financiers have long identified mobilizing private capital as a fundamental way to achieve the net zero goals in the Paris Agreement. While the developed countries are trailing behind their Nationally Determined Contributions (NDC) of $100 billion per year, multilateral export credit and investment risk insurers like ICIEC have a pivotal role in bridging the gap.
Private sector engagement in climate finance requires credit enhancement, which ICIEC is uniquely positioned to do through its sustainability policies and access to its member country’s national and subnational bodies, which engage with relevant climate action projects and transactions. Private sector development is one of the main pillars of the ICIEC’s strategy. Embedding commercial opportunities and helping corporates and banks make a material difference to support positive climate outcomes is something that risk mitigation tools can facilitate.
The swift response to the COVID-19 Pandemic has provided a roadmap to address long-term credit and political risk insurance solutions for climate mitigation and adaptation. While the Pandemic has elevated public health and infectious diseases as an immediate concern and risk, the long-term threat of climate change was overshadowed by the Pandemic in the last two years. With the war in Ukraine, the understanding of climate and political risk is again being re-evaluated, casting a spotlight on sustainable energy and energy security.
Spotlight on Egypt
Ahead of COP27 in Sharm El-Sheikh in November, all eyes are on Egypt, not only because it is the host for new climate negotiations but for charting out ambitious climate blueprints under Egypt’s Vision 2030 – aimed at building a diversified, competitive, and balanced economy, and the Integrated Sustainable Energy Strategy (ISES) 2035.
Egypt is a founder member of IsDB Group – total Group funding accessed by Egypt amounting to US$17.8 billion to date – and has seen several new climate initiatives being launched. Among the latest is a Memorandum of Understanding (MoU) between ICIEC and El-Sewedy Electric, which provides a framework for joint action in promoting climate action and water projects. Under the terms of the MoU, ICIEC, which is the insurance arm of the IsDB, will work with El-Sewedy Electric to identify, assess and manage climate and water risks and opportunities; exchange essential information, expertise, and resources; extend training and capacity-building opportunities, and organize joint seminars and workshops.
Private capital mobilisation
Counted among the top megatrends in trade and development finance, climate change is both a threat and a potential opportunity if looked at the right way. Private banks such as the Egypt-based Commercial International Bank are incorporating the climate agenda into all their financing mandates, fundamentally changing their business model to manage risk and moving away from the traditional path of seeking insurance to mitigate climate risk. To meet the SDG goals by 2030, an estimated cost of $5 to $7 trillion annually is required, which presents itself as a business opportunity for private capital looking to invest with impact and high returns in emerging and low-income economies.
Most member states of ICIEC are low-income and developing countries, so it is challenging to attract private capital. The hurdles are high-risk perception and a lack of bankable deals. ICIEC has been working on developing bankable projects and vehicles, serving the OIC member states’ climate agenda. For instance, ICIEC’s Green Sukuk Insurance Policy will allow Sukuk issuers to attract capital for ‘green’ projects better. The product will be particularly valuable for issuers in ICIEC’s low-income and developing country members who are susceptible to struggles with poor credit ratings and, consequently, attract less private capital for climate action.
Egypt presents itself as a positive case study, demonstrating a blueprint for sustainable development in the renewable energy sector in other OIC countries. ICIEC has facilitated several renewable projects in the country by providing much-needed insurance cover, which has the potential to crowd in private capital. Recently, ICIEC provided a seven-year Breach of Contract and Political Risk Insurance (PRI) cover under its Foreign Investment Insurance (FII) Policy to the UAE-based Alcazar Energy for its US$68 million equity investment in the Benban Solar Complex in Aswan. The complex involves constructing and operating four 50 MW solar power plants, providing the generated electricity to the Egyptian national grid under a 25-year power purchase agreement.
Central to Egypt Vision 2030 is achieving the net zero targets in the Paris Agreement. The country’s renewable energy strategy – particularly ICIEC’s bespoke insurance cover – has the potential to be replicated in other IsDB member countries, with factors such as maximization of local content, proactive government support, and generation of employment.
A ‘just transition’ is the need of the hour in MENA countries, in particular, where the impact of climate change will be disproportionately felt. Credit and political risk insurance is integral to enabling this transition, which also factors in the ‘S’ (social) in ESG.
This is a digest of a prestigious panel convened by ICIEC on June 3, 2022, at the IsDB Group’s Private Sector Forum, which ran at the IsDB’s 47th Annual Meetings in Sharm El-Sheikh, Egypt. The panel had representatives from Commercial International Bank, Indonesia Infrastructure Guarantee Fund, Africa Finance Corporation, El-Sewedy Electric, and UNDP Egypt.
To watch the entire panel, Credit and Political Risk Insurance in Facilitating Climate Action, view here:
The digital transformation megatrend can help developed countries meet their trade and investment goals in challenging conditions. This briefing digest explores how ICIEC and others are helping to bridge any digital divides in OIC and ICIEC member states.
Rapid technological advancement and digital transformation are among the five key megatrends affecting global trade and investment in the next few years, but they hinge on developing countries shifting towards a digital economy. This shift can aid better supply chain management – vital in a time of geopolitical change – and help improve transparency, combat bad practices and allow businesses to expand their reach into more remote markets. This is particularly true as the global economy attempts to bounce back from COVID-19 setbacks and geopolitical challenges. Digital technologies have immense potential to unlock enormous economic opportunities in trade, agriculture, investment, manufacturing, and services.
While the Pandemic has boosted digitization worldwide, a lot needs to be done to ensure that the gains made in the last couple of years are carried through in a post-COVID world. “Alongside advancing technology, the pandemic has also created a digital divide and inequalities,” says Oussama Kaissi, Chief Executive Officer of the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC). “For many OIC and ICIEC member states, digitization strategies remain in an embryonic stage.”
Digitization has been a longstanding goal of the ICIEC, but currently, it has amplified its investment in digital infrastructure in member states, with a sharp focus on reducing the divide between developed and emerging markets. So far this year, the corporation has provided nearly $419 million toward supporting infrastructure and $3.9 billion toward energy support, including €50 million in coverage for a telecommunications project in Indonesia that expanded access to 4G coverage from 40% of the population to 90%.
OBIC vision to fill the information gap
To foster an ecosystem of learning about digital advancement and trade technology, ICIEC, in partnership with the Statistical, Economic and Social Research and Training Centre for Islamic Countries (SESRIC), founded the OIC Business Intelligence Centre (OBIC). The vision is to develop a country-level credit reporting ecosystem (addressing four different tiers of credit maturity levels among OIC countries), improve cross-OIC credit data infrastructure, develop capability, and provide operational excellence with a sustainable business model.
The OIC member states exhibit the lowest levels of credit penetration globally, along with inadequate levels of credit reporting. Most OIC economies either have an inadequate credit reporting system or none. Credit information systems across the OIC measure far below global benchmarks. According to ICIEC CEO Mr KAISSI, OBIC will play a crucial role in mitigating this challenge by increasing OIC credit information’s transparency, reliability, and accessibility. OBIC’s mandate of delivering credit intelligence to end consumers – by way of credit reports – will help prospective trade partners and companies looking to expand into OIC countries and enable them to see the promise of doing business in such markets at a low cost.
“Data and digitalization will also drive MSME growth,” says Mr KAISSI. “MSMEs are the backbone of economies, accounting for over 50% of jobs globally and about 50% of GDP in developing countries.” OBIC will fill in the information gap that often cripples MSMEs in emerging markets. Credit data on companies, particularly MSMEs, or industries, can help drive trade, boost revenues, and drive foreign companies to invest and set up operations abroad. “Digitisation of MSMEs will also enhance financial inclusion and fill the gap between the formal and informal sectors,” says Kaissi.
To make the consumer more financially resilient and independent, digitizing access to finance is paramount. For instance, Egypt Post is working on enhancing e-commerce portals in the country in collaboration with the Central Bank of Egypt to make financial services more accessible to the youth and small businesses.
Overcoming cross-border regulatory hurdles
While technological innovation is finding unprecedented institutional, private and public investment, cross-border regulations and lack of standardization of documentation are significant impediments to technological advancements in trade. ICIEC and OIC have the potential to bring together their member states to build a cohesive regulatory framework, particularly in emerging markets.
Initiatives in Africa, such as the Afreximbank-led Africa Trade Gateway, seek to address the regulatory challenge. For example, any MSME in Egypt looking to grow its business in Africa and tap into new markets would encounter information opacity and a lack of transparency in the target markets. African Trade Gateway – an agglomeration of interrelated digital platforms – can potentially eliminate some of the challenges to intra-African trade. The focus is mainly on the complexities of payment transfers within Africa, the current low access to trade and investment information, and the costs associated with conducting Know Your Customer (KYC) checks on African entities.
The Central Bank of Egypt has a similar initiative – Regulatory Sandbox – to support technology start-ups navigating regulatory frameworks. The Regulatory Sandbox works as a live testing ground for Fintechs, developing new business models currently hindered by stringent authorization requirements and regulatory uncertainty. The Regulatory Sandbox aims to pave the way for faster and easier access to new financial solutions and embed compliance within the Fintech ecosystem at an early stage. This will not only allow Fintech innovators to focus on their core offering but also ensure that consumers and other players in the market are not adversely affected by the regulatory uncertainty of the disruptive Fintech activities.
Bringing these various initiatives together is vital for OIC countries looking to collaborate. The vision of ICIEC is to foster such networks and conversations and act as a catalyst for the digital revolution in the region.
This is a digest of a high-level panel convened by ICIEC on June 2, 2022, at the IsDB Group’s Private Sector Forum, which ran at the IsDB’s 47th Annual Meetings in Sharm El-Sheikh, Egypt. The panel had representatives from The Central Bank of Egypt, Afreximbank, Egypt Post, AlFaris International Group, Azentio Software, and DinarStandard.
You can watch the discussions in their entirety here: Digital Transformation in Support of Finance and Investment
https://youtu.be/Rf5WQaMLalc
