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PPP Introduction and Overview - Appendix B - Sharia Finance

1b3. Procurement Istina'a

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.

Once the asset has been constructed and effectively procured, the SPV will deliver it to the Islamic funder on the specified date and title to the asset will pass to the Islamic funder. The price that the Islamic funder pays the SPV for procuring the PPP project asset is pre-determined at the outset. It is calculated by reference to the total cost of the PPP project asset (that is, an amount which is the same value of the PPP project loan used in a traditional project financing). Payment of the price is normally made according to the achievement of milestones.

Both the traditional istina’a and the procurement agreement products have similarities with traditional project financing arrangements, such as the calculation of the price. Similarly, the use of milestone payments is, in effect, equivalent to the regular drawdowns made under a traditional project financing.

However, both the istina’a and the procurement agreement do not generate any income for the Islamic funder. As they require an income in return for providing the project finance, this means that an ijara needs to be put in place.

 

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