Bankruptcy is a process by which debtors are rehabilitated and given a chance for a new financial start. The underlying philosophy behind bankruptcy is that when debtors cannot possibly fulfill their financial obligations they and their creditors should accept the losses and begin anew.
One of the key elements of a bankruptcy procedure is that it shifts decision-making about crucial aspects of the company from management to a bankruptcy court. This means a new and important actor appears in the process. Even the powers of the regulator become limited by the decisions of the bankruptcy court.
PPP contracts usually contain specific provisions leading to the termination of the contract in case of the utility provider's bankruptcy or liquidation. These clauses intend to preserve the public sector's assets and avoid such assets from being liquidated as a consequence of the company's bad administration.
The rule may take different forms, depending on the format of the contract as regards assets ownership, whether they be built by the company or transferred as part of the PPP. With very few exceptions -electricity sector in Argentina- concessions and other PPP contracts do not transfer ownership of the assets, but lease them for use to the private sector.
Even if these specific clauses did not exist, the nature of the service in most infrastructure sectors - essential services of high social impact - imposes the need to take the general interest into account when reorganizing these companies. The experience in the US with utilities bankruptcy cases illustrates this fact (see BOX 49)
BOX 49: Utility Bankruptcy in the US
What did not happen is the lights did not go out. Moreover, the businesses continued to run, in at least one case the business was rationalized into a larger economic unit. Factories were not shut down, union contracts were not abrogated or terminated, there was no fire sale of assets resulting in vast loss of investment and earning power. These companies emerged from the process with assurance of profitability and looking very little different, operationally, in terms of their markets and in most other ways. It was a trip to the chiropractor or the fat farm, a long and expensive trip, but not to the oncologist. |
Source: On Utility Bankruptcy - M Parish - Standard & Poor 2002
Contracts provide for the public sector's right to designate an auditor or administrator to manage the company and ensure the service continuity while long-term entrepreneurial and institutional measures are taken (for instance: rebidding the concession in the water sector in Chile).