The other principle supporting agreement that is entered into under an Islamic financing is the purchase agreement. Under this agreement, the PPP project asset reverts to the SPV at the end of the PPP Project term.

The SPV will use the unitary charge and/or user revenues it receives to make the ijara lease payments.

It is usual for a supporting agreement, known as a services agreement, to be entered into between the SPV and the Islamic funder.

An ijara is a lease of the PPP project asset, granted by the Islamic funder to the SPV. It is possible because under the istina’a, the Islamic funder has received title to the PPP project asset.

A procurement istina’a (‘procurement agreement’) is also an agreement between two parties, however the parties are the Islamic funder and the PPP project’s special purpose vehicle (SPV). Under the procurement agreement, the SPV is required to procure the PPP project asset by a specified date. The SPV will procure the asset by entering into a direct agreement with its construction contractor.

A traditional istina’a (‘istina’a’) is an agreement between two parties (the Islamic funder and the construction contractor) whereby the Construction contractor agrees at the outset to construct/manufacture a clearly described/specified PPP project asset for the Islamic funder. The price for carrying out the construction/manufacture will be determined at the time of entering into the agreement, as will the date of delivery of the asset to the funder.

Islamic financing of PPP projects is becoming more common for a number of reasons, including: the creation of Islamic banks (such as the Islamic Development Bank) that are able to provide Islamic financing products for PPP projects, the reduced availability of non-Islamic financing in the aftermath of the Global Financial Crisis, and the increasing number of infrastructure PPP projects being procured in the Middle East which have, in effect, acted as a catalyst for the use of Sharia-compliant project financing.

Financing infrastructure projects through the project finance route offers various benefits such as the opportunity for risk sharing, extending the debt capacity, the release of free cash flows, and maintaining a competitive advantage in a competitive market. Project finance is a useful tool for companies that wish to avoid the issuance of a corporate repayment guarantee, thus preferring to finance the project in an off-balance sheet manner.

There are three basic sources by which a PPP project can be financed: debt, equity and government support[4].

The concept of project finance requires the sponsors to adopt a unique organizational structure in the form of a stand-alone project company (that is, a special purpose vehicle, SPV) which will enter into a PPP agreement with the government to design, build, and operate the project. This SPV has a finite life that equals the duration of the concession agreement.