Under concession contracts lenders ask to be given 'step in' rights. This allows the lender to take over the project, and if necessary bring in a substitute concessionaire, in order to forestall a termination of the concession agreement following the concessionaire's default. The main purpose of 'stepping in' is to avoid a collapse of the agreement of the concessionaire and the basis by which the lender is repaid. Given this threat to its repayment, the lender is likely to ensure that it or a substitute project company appointed by it, has an opportunity to cure the default. This in effect allows the private entity to halt the government exercising its right to terminate. This right, however, can prove controversial to government entities that have not encountered them before and can lead to a number of awkward questions related to when the lender can step in, duration of the cure period and so on.
The recommendation is that the step-in clauses should identify the circumstances under which some party can step-in, and the compensation the parties are entitled to (Iossa, Spagnolo, Vellez, 2007). Regarding the public-sector party step-in rights, the contractual provisions allow the public partner to take over the private partner's obligations in the project for a period. These provisions differ from early contract termination clauses in that they apply to situations where the public-sector party is supposed to have advantages to deal with certain types of problems. Typically, the public sector executes the step-in rights as a matter of urgency to remedy a serious short-term problem, such as a safety risk, a health issue, or an environmental issue.
| Federal Law No. 11.079 published in 2004 establishes the Brazilian public-private partnerships and its contracts. The law states clearly the definitions and mechanisms under which the PPP operate in Brazil. Specifically it explicitly mentions the compensation schemes for early termination of contracts and payments made by the funds and state-owned companies acting as guarantors. Theses payments must be paid directly to the institution that financed the private part of the project. In addition, the law provides step in rights by allowing that the controlling interest of the special purpose company (SPC) may be transferred to its lenders in an event that default occurs. |