It will be necessary to strike an appropriate balance between respecting the limited recourse nature of a privately financed public private partnership project, and ensuring that government has adequate recourse in the event of early termination. The private party special purpose vehicle will have no track record in service delivery, and, in early projects, the private party consortium may have limited experience in this method of service delivery. The contractor and operator will have been chosen for their experience in design and construction and in service delivery, whether or not they are experienced in public private partnership projects, and government must ensure that it retains a contractual link with those entities even if the project agreements is terminated early.
The optimum contractual link for the design, construction and operating contracts will be a direct agreement, under which the contractor or operator:
• warrants that it will properly carry out its duties under the relevant contract
• agrees not to amend the contract without government's consent
• agrees not to terminate the contract without first complying with notice obligations
• agrees to allow government, at its discretion, to step into the contract in the event of default by the private party, and to take over the private party's rights under the contract.
Depending on the financial strength of the company providing the direct agreement, it may be necessary to seek a guarantee from their parent company on the contractor or operator's obligations under the direct agreement. It is likely that step-in rights will have to take second place to the financiers' rights to step into the contracts, but it will generally be preferable for government to have the financiers step in and resurrect the project, if possible, rather than for government to exercise its step-in rights.