Use of Islamic Finance in PPP Energy Projects (Case: Ijara for IPP) Fida Rana PPP Investment Lead Hassan Idirissi Legal Counsel Islamic Development Bank (IsDB)

Outline of Presentation  Case : Independent Power Plant (IPP) financed by both conventional and Islamic bank  Islamic finance modes (Ijara) used by Islamic bank  Elaborate Ijara modes of finance  Islamic finance documentation involved

The Project  340 MW gas fired IPP in Bangladesh  Build Own Operate (BOO ) structure, generated electricity will be sold to BPDB under a 22-year PPA  GoB Guarantee for BPDB payment obligations under the PPA

Lenders SourcesUSD Million Equity 85 (30%) Debt 200 (70%) Total 285 (100%) IFC USD 70 million Senior Facility AsDB USD 70 million Senior Facility IsDB USD 60 million Lease Facility

Project Structure SPV IFC AsDB IsDB Summit Group GE Energy EPC Contractor Equity Financing PPA LLA EPC O & M Contractor O&M GSA Transmission Government of Bangladesh Guarantee BPDBGTDSLPGCB Direct

Project Structure – Parallel Lenders Project Company Equity Islamic Lender O&M ContractorEPC Contractor Government PPP Agreements Direct Agreement Loan Agreement EPC ContractO&M Contract Conventional Lender

Leasing (Ijara) What is an Ijara?  In simple terms, a lease of an asset  Leased assets must be valuable, identifiable and quantifiable  Lessor remains liable as owner of the asset  The lease must be for a Shariah-compliant and defined purpose  Fixed or variable rental payments against an agreed index Some characteristics  Staged payments by Islamic banks in return for delivery of asset at commercial operation  Prior to commercial operation - “advance rentals”  After commercial operation - rentals  Capable of having long tenor

Key Features of Ijarah  In Ijarah, lease starts only upon the existence or completion of assets in line with Shariah.  Expenses under Ijarah are borne as follows:  Lessor- expenses relating to the corpus of the asset i.e. insurance, accidental repairs etc. will be borne by the lessor; and  Lessee- actual operating/overhead expenses related to running the asset will be borne by the lessee.  It is not permissible in Shariah to have two contracts into one contract, i.e, agreement of hire and purchase cannot be merged into one agreement.  Thus, the use of undertaking/promise to purchase the leased asset.  Penalty for late payments is not recognised as income due to financier. It is donated to charity.

(2) Title (1) Procurement Agreement to build project/stage payments Step 1 ‘during construction’ Purchase Undertaking (put option) (3) Lease Agreement to lease project assets (4) Rental payments Sale Undertaking (call option) Step 2 ‘post-construction’ (5) Service Agency Agreement Project Company Financier Project Company Application of Leasing

Islamic Facility Documentation Borrower Common Terms Agreement Islamic Bank Conventional Bank Lease Agreement Service Agency Agreement Procurement Agreement Sale & Purchase Undertaking Facility Agreement Intercreditor Deed Accounts Agreement Security Deed

Procurement Agreements (Istina’a)  The Project Company will agree to construct the Lease Assets, on behalf of the Islamic Bank, in exchange for the staged payments.  The staged payments will coincide with the funding requirement for the construction of the Lease Assets.  This covers for obligations during the asset construction phase and title to the Lease Assets will be delivered to Islamic Bank upon completion.  On the same date the Istisna’a /Procurement Agreement is signed, the Project Company shall execute a Forward Lease Agreement (Ijara mawsufah fi al zimmah ) in respect of the Lease Assets. Ijara Documentation

Lease Agreement (Ijara mawsufah fi al zimmah)  This covers the terms and conditions of the Lease between the Islamic Bank (Lessors) and the Project Company (Lessee).  This covers:  lease commencement date  lease term  lease rental and payments;  early lease payments;  asset specification;  maintenance and insurance obligations;  damage to or destruction of the leased assets;  asset replacement; and  late payments and assignments. Ijara Documentation

Service Agency Agreement  In compliance with Shari'ah principles, the Islamic Bank will remain responsible for maintenance and insurance of the Lease Assets, notwithstanding the lease of the assets to the Company.  The Islamic Bank will, appoint the Company (as Service Agent) to perform those obligations on behalf, and at the expense, of the Islamic Bank.  The cost of these services will be  added to the rental payments under the Forward Lease Agreement and set-off against the service payments due from the Islamic Bank; or  added to the exercise price under the sale and purchase undertakings if such undertakings are exercised. Ijara Documentation

Sale Undertaking  The Islamic Bank undertakes to sell the Assets to the Project Company at an exercise price equal to the aggregate lease term payments. Purchase Undertaking  The Project Company will sign a purchase undertaking to purchase the Assets at the applicable exercise price from the Islamic Bank subject to the Intercreditor Agreement and the Lease Agreement. Ijara Documentation

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