As discussed in Section 1, Force Majeure, each Party should have the right to terminate the PPP Contract as a result of prolonged Force Majeure and compensation is calculated to reflect the principle that Force Majeure is considered a shared risk. In this case, the risk is shared by virtue of the Contracting Authority being liable for a less than full compensation payment and having the right to take over the relevant asset, while the Private Partner loses any return on its equity investment (i.e. the profit element which will have been at the heart of its decision to bid for and undertake the PPP Project in the first place) and possibly some of its invested equity. The potential consequences will incentivise both Parties to find a solution to a prolonged Force Majeure before termination occurs.
Subject to adjustments on a case by case basis, the principle is that the Private Partner is paid an amount representing:
(i) the amount of outstanding senior debt (based on the formula in Section 4.3.3.1 but probably not including a make-whole payment on any bonds); plus
(ii) the amount of equity invested (taking into account any distributions already paid), but not loss of profit (in some cases, for example in Australia, a haircut may also be applied to further reflect the shared risk principle); plus
(iii) an amount in respect of redundancy and sub-contractor break costs (based on the principles set out in Section 4.3.3.3)
A similar approach is usually followed in any termination for uninsurability. See Section 4.7, Sample Drafting 4, Schedule, Clause (3). It may also be possible for the Contracting Authority to negotiate no or reduced compensation in specific circumstances. See Section 1.2.4, Force Majeure.
While it may seem that the Lenders' exposure is more limited, this comes back to the issue of bankability, and the decision facing Lenders as to where to put their funds to best advantage. The Contracting Authority will want to weigh up the risk of a Force Majeure termination occurring (again why close attention to the definition of Force Majeure is so important) against the benefit of achieving the private finance it wants, at a reasonable price, having chosen PPP as its procurement method.