Combating Rising Energy Poverty with Sunnah-Compliant Orthodox Sukuk Finance

Abstract

There is a growing number of published peer-reviewed articles, government reports and investigations from civil societies reporting the poor performance of Public Private Partnerships (PPP)-provided utilities services. The purpose of this desk study is to explore the unreported connection between the source of financing for Public Private Partnerships (PPP) projects in the energy sector and the growing energy poverty across the globe. Energy poverty has become a growing threat to households in both developing and developed countries. Studies have shown that energy poverty results in poor health outcomes, discomfort, and poor economic and intellectual development. The causes of energy poverty have been attributed to rising energy prices, stagnated household incomes and poorly energy-efficient buildings. In response, there are growing calls in many countries for the re-nationalisation of energy companies. However, there is a dearth of studies exploring the connection between conventional interest-based debt finance used in financing PPPs which require tariffs to be designed to achieve cost recovery and overcome the growing energy poverty. Our intention is to show that beyond the private vs. public provision debate, there exists an unexplored third approach that mainstream experts seem to ignore or are oblivious about. We argue that the highly leveraged interest-based financing model currently used by PPP sponsors exacerbates energy poverty because of interest costs built into consumer tariffs. We argue that adopting orthodox non-interest equity-based sukuks as a medium of financing for energy PPPs will lead to a reduction in energy tariffs, and will enhance affordability, sustainability, value-for-money and reduce energy poverty. The emphasis on orthodoxy is derived from the fact that most of the current sukuks in the market violate the core concept of Islamic finance by promising a fixed return to investors.