Saudi Water spawns exportable public-private partnership that defies the West

In the Eastern Province desert, near the sprawling desalination hubs of Jubail, a Saudi water venture is showcasing an exportable model of Shariah financial engineering that rewrites Western investing rules of public-private partnerships (PPPs).

The Saudi Water Partnership Company, a government entity fully owned by the Ministry of Finance and strategically anchored by the Public Investment Fund (PIF), has developed a quasi-Musharakah partnership where the state, financier and investor all have “skin in the game” throughout a project's life.

It is a sharp departure from the old guard of project finance, where builders, financiers and investors are left to shoulder the burden alone.

“While risk transfer remains central, there is greater practical acceptance of risk-sharing dynamics – particularly where sovereign-linked entities, PIF participation or strategic infrastructure priorities require alignment rather than pure offloading of risk to the private sector,” Ramesh Radhakrishnaraja, head of project finance at Saudi Water, shared with IFN Investor.

For decades, the global infrastructure playbook was written in London and New York, revolving around rigid transfer of risk from state to private sector. In such settings, a PPP is often a hand-off; once the contract is signed, the private sector carries the burden. When construction deadlines slip, banks simply keep charging interest.

But in the Shariah world, the clock cannot tick on a lease until the tenant actually moves in. This "discontinuity" creates a paradox within the project’s Istisna–Ijarah framework: The financier has spent millions on construction but cannot legally collect rent because the asset – or Usufruct – isn't ready for use.

Saudi Water’s breakthrough lies in a sophisticated "forward lease" structure known as Ijara Mawsufah fi al-Thimma. Unlike a standard lease, this contract allows the financier to start receiving "advance rentals" during the construction phase. These aren't just payments for the future; they are tied to a service agency agreement.

Under the arrangement, Saudi Water effectively appoints the project developer as its "service agent" to ensure the asset is built to specification. The payments made during construction are technically for the developer’s service in managing the construction, rather than for the use of the water plant itself.

To mitigate any remaining risk, Saudi Water integrates what it calls contingent liquidity support. If a delay in project delivery occurs, the developer – in this case, the agent – will be required to pay liquidated damages that mirror the lost rental income.

By "wrapping" the delay in a service-performance obligation rather than a pure debt obligation, Saudi Water ensures that the financiers stay whole without violating the Shariah prohibition on charging interest for time lapse.

With such service agency layers, Saudi Water has built a bridge over the "gap" that once made international Islamic project finance too risky for giga-scale ambitions, Ramesh said.

Moreover, with PIF and its asset base of US$1.15 trillion in the mix, the perceived sovereign risk drops, and the bankability of the Islamic tranche skyrockets, the Saudi Water executive observed. “Most importantly, this model is now reaching a level of scale, sophistication and execution capability that makes it increasingly exportable across OIC markets.”