When SGs are set-up to benefit the lenders to a PPP project, they can have a significant impact on the financing documentation and, in particular, the decision-making arrangements of the creditors of the PPP company. Put simply, as a result of its potential financial exposure to the PPP company (i.e. should the SG be called), the Government may face a series of choices when designing an SG, such as:
(i) whether the Government will want to have a say in the decisions made by the lenders before the SG is actually called, and if so, what sort of say;
(ii) what level of control the Government will want to have on the lenders' decisions once the SG has been called;
(iii) whether the Government will want to favour or to constrain the lenders' right to step into a non-performing project;
(iv) whether the Government will wish to participate in the security package (i.e. the rights over the assets of the PPP company) which the lenders to a PPP company normally have;
(v) when it guarantees the lenders, the Government should consider the position of the hedging counterparties4 providing interest rate or exchange rate protection to the PPP company. Hedges are prevalent in PPP transactions and can give rise to significant financial exposures when they need to be unwound.
The Government will therefore often need to be involved in long and intricate negotiations with the private sector.
Guidance: Integrating SGs into the typical project finance documentation can be complex. It is important that the Government mobilises competent staff and possibly advisers (e.g. legal and financial) when devising SG instruments and negotiating with the SG beneficiaries and other parties to the PPP contract. Such staff will need to follow clear governance rules and be able to make important decisions in short time frames. The interests of the hedging counterparties should be adequately taken into account as these can lead to serious bankability issues. Finally, when SGs are devised on a scheme basis, their terms and conditions should be sufficiently flexible to allow specific PPP transactions to benefit from them. Devising SG schemes too restrictively will compromise their application to the individual PPP project.
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4 Typically the financial institutions which provide instruments that insulate the PPP company from the risks of interest rate variations or exchange rate fluctuations.