The Contract is likely to provide for the Authority to terminate at any time and without restriction on giving a certain period of notice to the Contractor. The Authority should have the option as to whether the facility transfers to it or remains with the Contractor.
In this scenario the Contractor will be entitled to payment of compensation which reflects the lack of fault on the part of the Contractor. The provisions dealing with the calculation of the compensation are complex but the broad nature of the calculation is that the compensation is sufficient to ensure the Contractor can pay:
a) the senior lenders in full (including any fees for early repayment of debt and the breakage of hedging arrangements);
b) Sub-Contractors breakage costs due to them for early termination;
c) any redundancy costs arising; and
d) compensation to equity investors for the returns lost as a result of the termination.
The Contract Manager should be aware that this sum will almost certainly exceed the value of the facility to the Authority and hence voluntary termination is unlikely to represent a value for money option for the Authority. It may potentially pose an affordability challenge if the compensation is payable as a lump sum without the option to pay in instalments60 and, under the Prudential Code it may not be able to borrow the full amount payable to the Contractor.
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Authorities should notify Defra as early as possible if voluntary early termination of the Contract is being contemplated. The Authority's entitlement to WI Credits will cease on termination of the PFI contract. |
The Contract Manager should therefore ensure that any decision to terminate is taken at the right level within the Authority and that the Finance Department is fully involved.
Some Contracts may provide for early termination at specified break points. If this is the case there will probably be a requirement to notify the Contractor a certain period before the break point. The Contract Manager must ensure procedures are in place, and documented in the Contract Management Manual, that ensure that the Authority does not lose the right to break the Contract simply by virtue of missing the deadline for notifying the Contractor.
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60 In the WIDP Contract, there is no automatic right to pay in instalments in this situation. However, footnote 110 to Paragraph 1.7 of Schedule 17, Part 2, states that where Authority Break Points are included in the Contract (as provided for by Clause 74A), Authorities should include SoPC4 drafting which allows payment by instalments. The relevant SoPC4 drafting is in Section 22.5.