4.3.1  Market practice

If the PPP Contract is terminated on the grounds of Contracting Authority Default, MAGA, Change in Law or Voluntary Termination, market practice is that the Private Partner should be fully compensated by the Contracting Authority as if the PPP Contract had run its full course. This reflects the principle that these categories of termination event are considered a Contracting Authority risk and responsibility. It also reflects the likely position should the Private Partner instead have to sue for damages on these grounds under general law.

In these circumstances, the Private Partner will expect an amount which repays the sums used to finance the Project (equity and debt), as well as compensates for the equity return it had forecast (for a specified number of years to be negotiated between the Parties but typically for (and limited to) the remaining term of the PPP Contract). In order to be left in the same position as if the PPP Contract had not been terminated, the Private Partner will also expect the amount to include compensation for costs payable as a result of the early termination of specified financing agreements and Project Agreements, as well as related employee redundancy payments incurred. If the PPP Project has been funded in the bond markets or by fixed rate loans, a "make-whole" payment may be payable to the bondholders or relevant fixed rate lenders in these circumstances to compensate them for the early repayment of their investment. See Section 9.4.2, Bond Financing.

As mentioned in Section 2, Material Adverse Government Action, there may be scope for the Contracting Authority to negotiate a slightly reduced level of termination compensation for MAGA events which are less directly within its control (this payment would still cover at least outstanding debt and contributed equity).