One of the matters of concern to the private sector is the risk of loss of the asset following early termination for contract breach.
The extent of this risk varies, depending on whether government owns the project land, whether the private party has the benefit of a government lease (and whether the lease terminates along with the contract), or whether the private party owns the land. If government owns the land, the project infrastructure technically constitutes an 'improvement' which - unless the contract provides to the contrary - will vest in government upon reversion.
Where the asset is to revert or be transferred to government on early termination, government accepts that it should not receive a windfall. Government's position on this issue is that, post-completion, fair market value less government's 'break costs' and compensation and other amounts payable or owing to government (which may include additional service costs, rectification costs, re-tendering costs and any balance in a maintenance sinking fund), is an appropriate basis for calculating an early termination payment.
If a default leads to termination during construction and government elects to take control of the facility under construction, a fair compensation payment would be calculated on the basis of compensating the private party for monies expended on completed works. The government's break costs together with any increase in costs to government to complete the facility above the original contract sum (including additional finance and transaction costs) would be deducted from the compensation amount.
It is important that there is an objective process for determining the level of compensation (if any) payable to the private party upon early termination. In this regard, the treatment is likely to be different depending on whether its termination results from government or private party default.
Irrespective of default, the contract should always give government the option of unilaterally terminating the project agreements, subject to an appropriate compensation formula.