Islamic financing of a PPP project normally assumes an asset-based project financing that requires the transfer of tangible/real assets. However, there may be some situations where the transfer of tangible/real assets is not permitted. For example, if a PPP project asset is of cultural and/or strategic importance, then the procuring authority may not permit its physical transfer. If this is the case, then a variation of the combined use of the istina’a and ijara is used.
In this situation, the Islamic funder will enter into a procurement agreement for the assignment to it of the rights contained within the project agreement (that is, the assignment of the intangible project agreement rights by the SPV to the Islamic funder). In return for assigning its project rights, the SPV receives milestone payments from the Islamic funder to enable it to pay for the construction of the PPP project asset. Additionally, the SPV will enter into a services agreement with the Islamic funder. Under the services agreement the SPV will get paid to manage, maintain and operate the physical PPP project asset.
Under this arrangement, when the SPV receives its unitary charge and/or user revenues, it will deduct all of its outstanding liabilities from these monies leaving it with its profit. The SPV will then pay the profit to the Islamic funder.