Islamic Development Bank Is DB Use of Islamic
Islamic Development Bank (Is. DB) Use of Islamic Finance in PPP Hospital Projects (Case: Istisnaa for PPP Hospital ) Fida Rana PPP Investment Lead Hassan Idris Legal Counsel
Major healthcare reform, Turkey ▪ Health Transformation Program & Social Security System; vrehabilitating and strengthening the current healthcare infrastructure. vbringing together regional small hospitals under one campus. vincreasing service quality and efficiency. ▪ 2023 goal – 35 new PPP health with 40, 000 - 50, 000 beds. ▪ Integrated health campuses - hosting a number of specialized hospital departments, areas as well as R&D laboratories and centres, techno parks, social facilities, housing and parking lots.
Konya Integrated PPP Health, Turkey • Total bed capacity: 838 (General Hospital 420 & Child Hospital 418) • Project Cost: EUR 355 ml • 75: 25 debt to equity ratio
Funding by international banks ▪ Is. DB ▪ EBRD ▪ BSTDB ▪ Siemens Bank ▪ Uni. Credit Bank
Classical project finance structure YDA Construction (Sponsor) Sh are h old e r. A gre e me YDA Saglik (O&M Contractor) nt Project Agreement Mo. H Project Company O&M Contract O&M Subcontracts Service Provider no. 1 Service Provider no. 2 Service Provider no. 3 … Service Provider no. 20 Lenders nts gr a oan e eem L EPC Contract YDA Construction (EPC Contractor)
Revenue Structure
Construction Arrangement • Lump sum, fixed price, turnkey contract; on arms-length basis; • Full pass-down of all responsibilities related to construction period from Project Company to EPC Contractor;
O&M Arrangement • Full pass-down of all responsibilities related to operations period from Project Company to O&M Contractor. • Each service will be subcontracted to experienced service provider. • Procurement of medical equipment for relevant service will be passed down to O&M subcontractor.
CONCEPT OF ISTISNA’ ▪ As an Islamic mode of finance, Istisna’ refers to a contract whereby one party (the buyer) asks another party (the seller), and the seller undertakes, to construct/manufacture a specific thing/asset according to certain agreed-up specifications at a determined price and a specific date of delivery. ▪ It is mode of finance that serves to meet advance funding for construction and development projects. 9
Istisna' Structure for Konya PPP Hospital Beneficiary (Borrower) Istisna’ Procurement Agreement Is. DB as Project Co Project Agreement Mo. H (2) (1) Agency Agreement as Agent Delivery of assets EPC Contractor (1) Is. DB makes Stage Payments to the Borrower (as Agent) during the construction phase in consideration for the Agent procuring the construction and delivery of the Procurement Assets to the Borrower to fulfil Is. DB’s obligations under the Procurement Agreement. (2) The Borrower makes Deferred Consideration payments to Is. DB in consideration for Is. DB fulfilling its obligations to 10 procure IDB the Procurement Assets.
Istisna’ Procurement Agreement • Procurement Agreement mirrors the obligations of the Project Company under the Project Agreement (with the Ministry of Health) to design, engineer, procure, construct, develop, and deliver specified assets (the "Procurement Assets"). • Istisna’ Procurement Agreement covers: Ø Clear description of the Procurement Assets Ø Istisna’ Price and its components Ø Completion timeline Ø Compensation for delay in payment Ø Delivery of Assets: partial and final Ø Incorporation of CTA and ICA 11
Agency Agreement ▪ The Agent shall be responsible for selecting a qualified EPC contractor that has the ability to carry out the procurement obligations. ▪ Stage Payments to equal Is. DB’s commitment. ▪ Agency Agreement will cover: ØAppointment of Agent ØPartial Assignment of the EPC Contract; ØStage Payment Procedure ØCondition Precedent: CTA ØTermination: final delivery or termination date ØEvents of Default ØAgent’s Indemnity 12
Memorandum of Early Settlement ▪ Shari’ah does not permit the inclusion of the prepayment provisions for fixed-priced financing such as Istisna’. ▪ Reasons? : ØThe discounts not a right that is capable of being enforced. ØLevel of price uncertainty likened to “two sales in one”. Ødiscretion of the financier. ▪ The Mo. U spells out the mechanism for prepayment of Istisna’ Price as permitted in the Istisna’ Procurement Agreement. 13
Structuring Considerations in Islamic Project Finance § Selection of appropriate mode of finance. § Multiplicity of legal documentation. § Shariah Board clearance. Ø independent assessment and confirmation of Shari’ah compliance. § Ownership of Assets vs. Pari passu. § Treatment of certain fees. § Governing law. ØShammil’s case 14
Why Istisnaa? Why Not Leasing ? ? §Substantial construction and installation of assets involved. §The asset ownership challenge. §Limiting the ownership obligations to construction phase. §However, Leasing (Ijara) could be used during the operations phase with reverse Istisna’ for the construction phase. 15
Thank you ﺷﻜﺮ Merci IDB 16
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