PPP contracts normally include termination clauses which may be triggered at the initiative of the government or non-government partner. Termination rights may be exercised by the government when the non-government partner fails to comply with its obligations or when it decides to voluntarily end the contract. Termination may also be called by the non-government partner in the case of a public sector default. Finally, there may be termination of the PPP contract following the occurrence of force majeure type (no-fault) events.
Termination usually entails that the PPP assets are handed back to the government. Depending on the termination cause, the government may also be liable for the payment of part or all of the non-government partner's outstanding debt and/or the equity invested. The hand-over of the PPP assets to the government is usually justified by the "dedicated" nature of the assets (i.e. they have no, or a limited, resale value on the market) or the government's interest in retaining them. The compensation due by the government on termination is the application of the general principle at law that no party should benefit from an unjust enrichment.
Eurostat considers that termination provisions may have an impact on the risk allocation and should be considered when determining the statistical asset classification. Compensation may constitute legitimate reparation for the nongovernment partner but it may also have effects similar to other guarantees: the nongovernment partner (or its lenders) would recoup its investment under all circumstances. This will therefore have an impact on the risk distribution between the parties.
Termination provisions which provide that following a default of the non-government partner, the government is liable for compensation sums calculated on the basis of the capital or operation costs of the PPP assets (rather than the market value of the assets at termination) imply that most of the project risk is borne by the government. Therefore, these termination provisions should be treated as guarantees.
Equally, contractual obligations providing that, following a non-government partner default, the government is liable for the payment of part or all of the debt outstanding, should be treated as partial (or full) credit guarantees by the government.