Public-Private Partnership: Contract

There are slight differences pertaining to the procurement methods in the PPP projects; BOT, BLT, BLMT and the like. Most Private Finance Initiative (PFI) projects under the PPP scheme do normally apply the Build-Lease-Transfer and Build-Lease-Maintain-Transfer methods. Although the basis of contract is deemed as Partnership (Musyarakah), the substance does not represent the form of contract where in the general partnership contract, the shares and benefits are based on capital investment by both parties; public and private. For instance, apportionment of fund or equity for the PFI project shall also be translated into equitable and sharing-based outcomes such as public provides land for development while private provides development monetary fund.

Instead, the contract signifies ‘sale and debt’ considering the payment charges that has to be borne by the public to the private. For instance, the Government wanted to develop an educational campus with facilities, at the initial cost of $300 million. Government (public) provides the land through acquisition or its own land while the Special Purpose Vehicle (SPV) on behalf of the private entity funds the project through its own internal fund or financing. Upon completion of the development, the public uses the leased facilities which are maintained (and also operated) by the private with charges; monthly or annuity. The payment comprises of two (2) components; repayment for the initial investment and maintenance charges of leased facilities. The payment is contracted throughout the concession period of 20-25 year long.

Thus, the issue of monthly and yearly commitment by the public to the private is significantly high so much so that it exceeds the original amount of capital, and it some cases three (3) times ie. $900 million for 20 year-period. Should the real partnership contract is practised, the payment collection shall be shared between the contracting parties, not considering the odd position of public (Government) making payments to the public themselves. As such, the excess of $600 million is merely a repayment of debt by the public to the private entity and this is considered as Riba al-Nasiah.

Wallahua’alam.

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