The nature of the PPP clearly shows that, regardless of a source of any distressful event affecting a contract, it is essential to manage the relationship with the different stakeholders to make sure that any solution analyzed -and eventually implemented- has an adequate level of consensus. In a way, the mechanisms used to make decisions to solve the crisis are as important as the concrete actions eventually implemented.
These mechanisms for participation are important both to prevent crises and to adopt measures aimed at solving problems once they have been identified because they have interfered with the normal operation of the system. In this regard, it is necessary to have systems adopted by consensus allowing early detection of the problems and the creation of contingency plans to deal with crises.
The mechanisms for consultation and participation, such as public hearings; consultation forms; and alternative dispute resolution methods such as arbitration, mediation, expert panels, etc. which are available during the regular performance of contracts are also useful to deal with a crisis, since they may help identify options and alternatives aimed at solving the crisis, while maximizing the project's monthly invoiced amount.
Nonetheless, in addition to the institutions and entities designed for the operation of the PPP in the normal construction and operation stages, other specific mechanisms are required, focused especially on the prevention and solution of distress situations. There are three of such mechanisms that are especially important: crisis committee, mechanism for the relation with creditors and vehicle to channel funds.
During a crisis it is important to have and follow clear crisis management rules and procedures since normal policies and procedures may hurt rather than help at first. This is why it is important that an appropriate structure be in place to manage a crisis effectively. Clear definitions must exist for a management structure, authority for decisions, and responsibility for implementation.
A Crisis Management Team should be in charge of coordinating the resources during the duration of the crisis to ensure all proper actions are taken. The objectives of this body are to save lives and reduce chances of further injuries/deaths, protect the environment, protect assets, restore critical business processes and systems, reduce the length of the interruption of business, minimize reputation damage and maintain customer relations.
BOX 26: Crisis Management Team
| Team Leader: responsible for managing the team. Ideally it should be a strong senior executive or manager who has the authority to act without fear of being second-guessed. The manager needs a long-term perspective and should be freed from other responsibilities to lead the crisis management team until the crisis ends. Environmental, Health and Safety (EH&S): Coordinates the EH&S response from the corporate level with the EH&S contact at the site. Should have a broad range of EH&S and product integrity experience or be able to contact appropriate experts. Public Relations: Assures accurate and timely public response is being made and is proficient in developing press releases and interfacing with the media. Human Resources: Assures human relations issues are being addressed. Should have a broad range of HR expertise or be able to contact appropriate experts. Legal: Provides legal counsel to the team. Participates in communication preparation and provides advice on securing incident scene for subsequent investigation. Security: Advisor to site or incident scene team and liaison with the various agencies and security contractor(s). Team Coordinator: This person stays in the crisis center and assures the members are working with the most current information. Tasks include • Records information and comments from the team • Makes team leader aware of new information • Records chronological events • Updates team members as they arrive or return to the command center • Assists team leader in managing CMT activities • Tracks/documents key phone numbers, contacts, etc. |
Source: Corporate crisis management - Center for Chemical Process Safety of the American Institute of Chemical Engineers
Depending on the nature of the crisis - affecting a firm, a sector, or the whole of the economy - different management strategies will be needed. Firm specifics crisis require actions at the level of the firm and usually do not need large support from the government (in economic or political terms). Sectoral crisis on the other hand will usually require a larger coordination effort an their resolution will depend on political support at the highest level (see BOX BB with the experience of Brazil).
BOX 27: Energy Crisis Committee - Brazil
| In 2001 Brazil suffered an energy crisis as a result of a severe draught which affected the country. To deal with the effects of the crisis the government created the Crisis Management Chamber ("Câmara de Gestâo da Crise de Electricidad" - CGE), an independent body in charge of coordinating the emergency program designed to deal with the critical situation of the Brazilian electricity sector. The main responsibilities of the CGE were: 1) manage the Energy Program for Energy Consumption Reduction (which aim was to match energy demand and supply avoiding unplanned service interruptions) 2) establish and manage a Strategic Emergency energy Program (which aim was to increase available supply), 3) Evaluate macro and micro consequences of the energy crisis and the measures adopted to deal with it 4) propose measures to attenuate the negative impacts of the crisis on employment, growth and income. The CGE was formed by a Chairman (Interior Minister), and eight ministres an top authorities from the energy agencies: a) Agencia Nacional de Energía Eléctrica - ANEEL (the federal regulator); b) Agencia Nacional de Aguas - ANA (water regulator), c) Banco Nacional do Desarrollo Económico e Social - BNDES (national investment bank) y d) Agencia Nacional del Petróleo - ANP (oil regulator). |
During the stages of normal operation of a PPP, creditors are not generally considered an important stakeholder in decision-making processes. However, during economic distress periods and -especially- in cases of financial distress, creditors clearly become stakeholders with definite rights, and must thus be made part of any decision-making process.
To minimize the financing costs through adequate risk distribution, most PPP grant creditors a clear right to step-in under certain distress conditions. These rights are closely related to the Project finance logic that prevails in certain PPP contracts. As such, these rights are recognized in the legal frameworks governing public-private partnership forms.
This is the case in the United Kingdom, where the parties to the contract have legal certainty as to how their relationships will develop during the project's construction and exploitation phases, which are agreed by the parties in advance. Actually, the parties accord subrogation or step-in rights in to financial entities, which are recognized and accepted by the Administration authorizing the project. Particularly, in the event of breach of the duties by the concessionaires, the law offers the following alternatives: a) transfer the ownership of the shares in the project company to the lenders or a trade buyer; b) appoint a receiver to take control of the project company and/or realize its assets to pay back the debt or c) exercise "steps in" rights under the direct agreement to either run the project or delegate the project to a trade buyer or the lenders.135
The approach adopted in Australia is slightly different. In the airport sector, there are tripartite agreements between the twelve major regulated companies, the Australian Government, and financial entities. These agreement -which establish step-in rights- set out the framework and the procedure to be followed by the Granting Authority in the event of bankruptcy of airport companies, and seek to balance the interest of creditors regarding the repayment of the credits granted and the interest of the Granting Authority of securing uninterrupted service.
BOX 28: Relation with creditors in Chile
| In Chile, Section 43 of the Law of Public Work Concessions (hereinafter, the Law) establishes a special lien that may be used to encumber public work concessions, which may be granted to the creditors funding the work, the operation of such works or the issuance of corporate bonds of the concessionaire, and may be levied on a) the public works concession; b) any payment owed by the State to the concessionaire; and c) the company's revenues. Pursuant to this section, lien holders have certain powers. Especially, they have the right to step-in and to interact with the Ministry of Public Works in different cases. For instance: 1. The concessionaire must request the authorization of the Ministry of Public Works to transfer its shares or rights during the construction phase. However, the MOP must always authorize the transfer to the lien holder when said transfer results from the enforcement of obligations secured by such lien in accordance with Section 43 of the Law. 2. Upon determination that there has been a serious breach of the concessionaire rights, any credits secured with the lien established in Section 43 of this Law shall become due. These credits shall be paid with the proceeds of the bid, and shall be paid before any other credit. 3. The concession shall be terminated by mutual agreement between the Ministry of Public Works and the concessionaire. However, the Ministry of Public Works may only terminate the contract if the beneficiaries of credits secured by the lien established in Section 43 agree to cancel such lien or consent to the early termination. 4. The beneficiaries of credits secured by the special public works lien have a right to demand information in connection with any controversy submitted to the consideration of the Conciliation Committee. In fact, they may be admitted as independent third parties to any procedure presided by such Committee, provided they have an interest in such procedure. 5. If the concessionaire incurs in fault constituting grounds for termination due to serious breach, the Ministry of Pubic Works may carry out a procedure prior to demanding the termination of the concession. There are two different ways for creditors to participate in this procedure. First, they are informed of the grounds and serious breaches of the contract. Second, they must give they consent to creditors regarding the report to be submitted to the Ministry of Public Works, which must indicate clearly the measures to be taken to cure the breaches or prevent them from reoccurring in the future. 6. In the event of bankruptcy of the concessionaire, the first ordinary meeting of creditors must decide -at the proposal of the receiver or two or more creditors jointly- to sell the concession in a public auction or to continue with the regular business of the Concessionaire. In turn, the Ministry of Public Works shall appoint a representative who shall work jointly with the receiver and the meeting of creditors to preserve the uninterrupted provision of the service or services subject to concession. 7. The Ministry of Public Works must consult with creditors the minimum number of bids required for a bidding process to be carried out if the ordinary meeting of creditors has voted for a public auction due to the bankruptcy of the concessionaire. |
Source: DECREE No. of the Ministry of Public Works
These step-in rights are a preventive mechanism which makes it possible for financers to intervene in the concessionaires' management before their financial position deteriorates completely. In fact, financial entities may take over control to salvage the company's finances, but also with the objective of recovering their credits. In this context, creditors become a relevant party in every consultation and decision-making process related to a crisis situation. Chile's laws and regulations for the transportation system go even further in terms of creditors' rights, since it establishes that they must be consulted by the Government under certain conditions.
During a crisis it is important to have and follow clear crisis management rules and procedures since normal policies and procedures may hurt rather than help at first. This is why it is important that an appropriate structure be in place to manage a crisis effectively. Clear definitions must exist for a management structure, authority for decisions, and responsibility for implementation.
A Crisis Management Team should be in charge of coordinating the resources during the duration of the crisis to ensure all proper actions are taken. The objectives of this body are to save lives and reduce chances of further injuries/deaths, protect the environment, protect assets, restore critical business processes and systems, reduce the length of the interruption of business, minimize reputation damage and maintain customer relations.
BOX 26: Crisis Management Team
Source: Corporate crisis management - Center for Chemical Process Safety of the American Institute of Chemical Engineers
Depending on the nature of the crisis - affecting a firm, a sector, or the whole of the economy - different management strategies will be needed. Firm specifics crisis require actions at the level of the firm and usually do not need large support from the government (in economic or political terms). Sectoral crisis on the other hand will usually require a larger coordination effort an their resolution will depend on political support at the highest level (see BOX BB with the experience of Brazil).
BOX 27: Energy Crisis Committee - Brazil
During the stages of normal operation of a PPP, creditors are not generally considered an important stakeholder in decision-making processes. However, during economic distress periods and -especially- in cases of financial distress, creditors clearly become stakeholders with definite rights, and must thus be made part of any decision-making process.
To minimize the financing costs through adequate risk distribution, most PPP grant creditors a clear right to step-in under certain distress conditions. These rights are closely related to the Project finance logic that prevails in certain PPP contracts. As such, these rights are recognized in the legal frameworks governing public-private partnership forms.
This is the case in the United Kingdom, where the parties to the contract have legal certainty as to how their relationships will develop during the project's construction and exploitation phases, which are agreed by the parties in advance. Actually, the parties accord subrogation or step-in rights in to financial entities, which are recognized and accepted by the Administration authorizing the project. Particularly, in the event of breach of the duties by the concessionaires, the law offers the following alternatives: a) transfer the ownership of the shares in the project company to the lenders or a trade buyer; b) appoint a receiver to take control of the project company and/or realize its assets to pay back the debt or c) exercise "steps in" rights under the direct agreement to either run the project or delegate the project to a trade buyer or the lenders.
The approach adopted in Australia is slightly different. In the airport sector, there are tripartite agreements between the twelve major regulated companies, the Australian Government, and financial entities. These agreement -which establish step-in rights- set out the framework and the procedure to be followed by the Granting Authority in the event of bankruptcy of airport companies, and seek to balance the interest of creditors regarding the repayment of the credits granted and the interest of the Granting Authority of securing uninterrupted service.
BOX 28
A third important element in cases of PPP contract crises is to count with adequate institutional mechanisms allowing -when necessary- to provide the carrier with the funds required to guarantee service provision or to allow for recovery after a catastrophe. In this regard, it is not enough that the State is willing to contribute those funds, but it is also necessary to have the legal and institutional devices required to channel those funds quickly and efficiently.
The case of Mexico in relation to this issue is very illustrative since the government has created a natural disaster fund that it uses to assist the Mexican states and Federal Agencies that render infrastructure services (ver BOX 29).
BOX 29 - Natural Disasters Fund - Mexico
| In 1996, the Mexican government created the Natural Disasters Fund (FONDEN) for the purpose of increasing its response capacity to the damage caused by natural disasters and dealing with such damage without altering the fiscal accounts. Indeed, the FONDEN was a program created to timely deal with the uninsurable damage caused on infrastructure by natural disasters. The FONDEN is a federal program responsible for providing the Mexican states and the Federal Agencies (in charge of the federal infrastructure) with the fund's resources to deal with the damage caused by natural disasters when their magnitude exceeds the response capacity of the states and Federal Agencies' own resources. Therefore, the FONDEN is a supplementary and subsidiary fund. In order to access the fund's resources, the Mexican states and Federal Agencies must justify that the economic costs of the damage caused by natural disasters exceed their financial situation and, therefore, that they have no sufficient resources available to repair such damage provided for in their ordinary budgets. The program rules provide transparency to the delivery of resources, and the possibility of incorporating technical improvements to the infrastructure that is rebuilt in order to reduce the likelihood of being damaged again upon the occurrence of subsequent natural disasters. |
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135 What next for lenders to distressed power assets in the UK? An overview of legal and security issues by Tony Hawkins and Bruce Johnston, LeBoeuf Lamb Greene&MacRae.