All PPP contracts could incorporate clear terms addressing termination, buyouts, and hand-back provisions, and define the roles and responsibilities of both public and private partners if such circumstances arise during the concession period. It is up to the state and its legal advisors to include provisions that protect the public interest.
The termination clause of a contract specifies how the PPP contractor will be compensated for work completed if the project or the contract agreement is terminated, depending on the reasons for termination, and any penalty clauses for early termination by the sponsoring agency (AECOM 2007b). The majority of the states responding to the survey agreed that these are "very important" concerns. Performance contracts that commit the private partner to specific results are held to be the key to successful risk allocation, and contractual performance guarantees and termination provisions are safe-guards that minimize the risk to the public of long-term contracts (Bloomfield 2006).
In the case of bankruptcy, the public sector may step in and take over operations of the facility, or contract with another private entity (Hedlund 2007). It also could allow the concessionaire to increase tolls or provide funding to avoid default (Stambrook 2005). In the case of the Indiana and Chicago long-term lease deals, the lenders have the opportunity to "cure the default," and they could take over the operation of the facility or assign a "successor," before the state could step in and regain control of the roadway (Foote et al. 2008). Ultimately, whether a facility immediately reverts back to the public sector as a result of bankruptcy will depend on the contract provisions that address this situation.
Buyback provisions specify the terms and compensation to the private sector of purchasing the rights to operate the facility before the end of the concession term. Typically, the state would pay "fair value" to the private operator in a buyback situation (Hedlund 2007). The "fair value" is estimated by calculating the net present value of net revenues over the remaining contract term (Poole 2007). This was the method used to estimate the buyback price for the SR-91 Express Lanes in California. Legislation in Texas (approved in 2007) allows the state to buy back profitable toll roads from private operators, with the buy-back amount based on the original estimates of toll revenues for the life of the project. According to Fitch Ratings (2006), a buy-back at fair value may lead to higher taxes or high toll rates to support a termination payment, especially if valuations are much higher in the future.