4.4.4.  Step-in arrangements: considered to be indispensable for the financing of PPPs

Question 13 of the PPP Green Paper

Few contributors consider "step-in" type arrangements to present a problem in terms of transparency and equality of treatment. No other standard clauses are considered likely to present similar problems.

Nearly all stakeholders who express an opinion on this issue explain that step-in clauses are of crucial importance for the financing of PPPs without raising particular procurement problems, as these clauses allow the parties to avert termination of the PPP contract or concession if the private PPP contractor is in breach of the contract. One stakeholder explains that step-in rights are particularly important to safeguard the investment of banks, when the operator is a Special Purpose Vehicle (SPV: a consortium established for the purpose of PPP award procedures) and the value of the bank's investment thus depends primarily on the income stream from that project.

Step-in clauses are considered a substitute for other, more expensive forms of guarantee, such as personal or collateral securities. Thus, they make the overall project cheaper. Apart from this, step-in clauses are considered to be advantageous to contracting authorities as the stepping-in lender could revive the project and therefore avoid disruption of the service.

Some stakeholders point to the alternative scenario to stepping-in by the financial lenders: the potentially badly performing project would have to be put out to tender again and it might be difficult to find someone who is interested. Furthermore, a new public procurement procedure is considered to be time-consuming, and time is particularly tight for projects which are already in a critical condition.

Conversely, the risk of financial parties misusing such clauses is considered to be low, particularly as actual recourse to step-in clauses - often viewed as a temporary crisis measure - is extremely rare in practice. Nevertheless, some stakeholders insist that clear procedures for stepping-in have to be set out in the initial contract, to ensure adequate transparency and to give local authority the possibility of keeping control over a private party stepping into the contract. It is reported that usually step-in clauses are supplemented by a direct agreement between the contracting authority and the lenders. Various stakeholders say that one of the reasons for step-in clauses not presenting a problem in terms of transparency and equality of treatment is the fact that they are concluded under full competition.

Some stakeholders fear that if the EC legislator questions the current form of step-in clauses, this might have negative impacts on the future financing of PPP projects.

On a more general note, some contributors say that cession clauses in PPP contracts should be allowed. Such clauses reflect a balance between the public interest in correct performance and the private interest in being able to treat the PPP contract as an asset, which should in principle be transferable to third parties. Against this background, public authorities should - according to two contributors - be allowed to object to cessions, but need to back any such objection with objective reasons. These principles, according to another stakeholder, should not only apply to a change in the public authority's contract partner, but also to a change in the principal shareholder of the contract partner. One public procurement expert adds that there is no reason for a new public procurement procedure in cases of a change in ownership on the private contractor's side. According to this view, the purpose of public procurement regulation is not to safeguard the authority's freedom of choice, but to limit the authority's freedom to choose its contracting partners to prevent discrimination. This objective is not in any way prejudiced by a decision by a private contracting partner to assign the contract for commercial reasons.