To promote fairness, incentives for the private sector and bankability, the PPP contract should ensure that the PPP Company is not financially harmed if termination occurs as a result of default by the Authority or voluntary decision by the Authority. In these circumstances, both the lenders and the equity investors should be fully compensated. While calculating the compensation due to the lenders is relatively easy (e.g. debt outstanding, unpaid interest and fees and breakage costs as a result of the termination of the hedging agreement), defining the compensation owed to the equity investors can be complex. The following mechanisms are used:
• The net present value of what the future remuneration to the equity investors would have been if termination had not occurred. This calculation therefore looks at the predicted cash flow to investors from the date of termination to the expiry date originally envisaged in the PPP contract. Although the most conceptually correct method, the uncertainties surrounding the forecast make it rather complex to implement.
• Same as above, except that the calculation is made on the basis of the cash flow originally projected at the date of financial close. This method offers greater certainty than the one above.
• A payment which gives the equity investors the internal rate of return (IRR) they expected at financial close, based on all cash flow received by the investors from the beginning of the contract up to (and including) termination.