Market practice has shown that Lenders are not prepared to lend to PPP Projects without reasonable assurance that they will be repaid. In carrying out their detailed due diligence, Lenders are keen to ensure that their debt is protected on any early termination of the PPP Contract, regardless of fault and without having to rely on lengthy and potentially uncertain legal proceedings to determine the level of compensation. Equity Investors, similarly, will want to expressly protect their equity investment in circumstances where termination occurs through no fault of their own or of the Private Partner.
Although legal proceedings may ultimately result in termination compensation being payable by the Contracting Authority, it is the level of certainty provided by express contractual provisions which is key for Lenders in agreeing to commit funding to the PPP Project. Termination payments are therefore a key element of the risk allocation in a PPP Contract and are essential in achieving a bankable PPP Project. This applies across both established and less established PPP markets in both common and civil law jurisdictions, although the precise terms will vary according to the particular PPP Project circumstances.35
The grounds for termination and the consequent payments can be complex. They are included in the PPP Contract to give both Parties certainty as to the mechanics and effects of termination. This in turn enables the Lenders to price their debt based on a lower risk profile as regards repayment risk, which in turn feeds though into the price bid by the Private Partner for the PPP Contract.
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| EMERGING AND DEVELOPED MARKET DIFFERENCES Underlying the Lenders' analysis of their likely debt repayment will be an assessment of the strength of the Contracting Authority's covenant to pay (i.e. its ability to pay any termination payment). In cases of weak or uncertain Contracting Authority credit, additional credit support may be sought by the Private Partner and its Lenders. This may be the case, for example, in less stable regimes or emerging markets or where the Contracting Authority is not part of central government. Support may be available via multilateral or export credit agencies or central government. |
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35 See the Global Infrastructure Hub Report: Allocating Risks in Public/Private Partnership Contracts, 2016 edition - e.g. the Early Termination (including any compensation) entries in Risk Matrix 4: Heavy Rail (ROT) and Risk Matrix 5: Port (DBFO). See link in Appendix, Additional PPP Resources.