5.5 Key commercial principles

Specific guidance on key commercial principles is provided in theGuidance Commercial Principles for Social Infrastructure.

Reflecting the risks identified above, a range of key commercial principles are applied to a PPP project. Specific examples include:

• payment mechanism and availability. An underlying principle of social infrastructure PPPs is that there is a unitary regular payment to the private party for making the infrastructure available and for providing the contracted services. Government should pay for the infrastructure only to the extent that it is available and should abate the fee to the extent that the services are not performed to the required standard;

• insurance. Consistent with the transfer of asset ownership risk to the private party, the private party is often responsible for obtaining and maintaining insurances required by law and the minimum insurance requirements specified in the project agreement. If a risk becomes uninsurable after financial close, the private party will not be required to procure insurance for that risk as long as that risk remains uninsurable;

• relief, compensation and force majeure events. The private party may be able to receive relief from its obligations and/or compensation if certain adverse events occur. Broadly such events may include: natural disasters; fire; certain breaches of contract by government; government-initiated modifications; changes in certain types of laws; certain industrial disputes/actions and certain legal proceedings or court actions;

• default events. Depending on its severity, a default may be subject to a project default regime, a persistent breach regime (only in some jurisdictions) or a termination regime. The default regime generally involves government giving notice of the occurrence of a certain default (for example, a serious service failure, fraudulent behaviour by the private party or the private party's right to draw down funds being materially restricted) and the private party using a cure period to rectify;

• termination events. Government may be able to terminate the contract should certain termination events occur. These might include: the private party abandoning the works, default events not being cured, breaching the change of ownership/control provisions or an insolvency event in relation to the private party. The private party may be entitled to compensation after termination;

• termination payments. The private sector will be entitled to a termination payment subject to a range of specific principles used to calculate this value;

• government step-in. Government may be able to step-in and assume all or some or the service delivery obligations of the private party in certain circumstances including when:

there is an emergency, a serious risk to the environment, the public or users of the facility or a serious risk of material damage to public or private property; or

step-in is necessary to discharge a statutory duty.

• end of term arrangements. The private party is often required to ensure that the project assets meet the government's return conditions at contract expiry. To ensure this contractual obligation is met, an independent assessor is usually appointed to inspect the facilities. The assessor may then notify government and the private party of the works to be carried out, a reasonable program and the expected cost of carrying out the works.

Specific examples of key commercial principles applicable to economic infrastructure include:

• force majeure. In economic infrastructure projects, the private party often bears a higher level of risk in relation to force majeure damage. In broad terms, it only has limited relief from its obligation to make available the infrastructure and provide related services. The private party generally does not have, for example, any right to terminate the project in the event that the effects of the force majeure are long-lasting and if it has no right to receive a termination payment from government;

• compensation events. There are generally fewer circumstances in which government is prepared to compensate the private party on a value for money basis in the case of an economic infrastructure project than is the case of social infrastructure. This is because the private party in social infrastructure projects is dependent on the service fee from government as its sole source of revenue. It has no ability to grow its market, increase prices or source other streams of revenue;

• default termination payments. The private party is generally not guaranteed any payment by government if the concession is terminated as a result of default by the private party. This is in contrast to the termination payment regime for social infrastructure projects; and

• default, cure rights and termination for default. The private party will typically have the benefit of more generous and/or flexible rights (such as extended or rolling cure periods) for the private party and its financiers to cure or rectify events of default before government will have a right to terminate the project agreement for default. This is due to the lack of default termination payments provided to the private party in an economic infrastructure project.