The method of payment of the termination compensation will also need to be considered by the Contracting Authority. Generally speaking, providing for payment by lump sum in the PPP Contract seems more typical market practice, but there are a number of factors to take into account, including the grounds for termination:43
• Payment capacity - the Contracting Authority will need to assess whether it will be able to pay a lump sum if such a large payment may not be budgeted for or have backing from its government treasury department. Payment over time may be preferable.
• Private Partner/Lender perspective - it is likely that the Private Partner and its Lenders will favour a lump sum payment. This is particularly the case on Contracting Authority default termination as the most likely cause is failure to pay. The Private Partner and its Lenders will typically want to close off their exposure to a terminated PPP Project and avoid Contracting Authority credit risk as soon as possible. The Contracting Authority should in any event try to negotiate a reasonable period of grace long enough to raise the necessary funds.
On Private Partner default termination Lenders are again likely to resist payments over time (and are likely to be the only party receiving compensation). They are also likely to resist payments over a period longer than the remaining life of the loan or bond, especially if to receive such payments on a longer schedule would cause additional break costs (as it might to non-bank funders).
• Interest - payment over time will incur interest costs for the Contracting Authority, usually from the date the payment is recognized as due until the final payment. If the Contracting Authority does select this method, it will need to consider an appropriate interest rate.
• Asset transfer - Lenders may be reluctant to release their security interests on PPP Project assets until compensation payments have been made in full. This may make the transfer of relevant assets back to the Contracting Authority difficult. In certain circumstances, the Contracting Authority may be able to negotiate an interim solution at the time of the termination, such as an arrangement pursuant to which the Contracting Authority has a right to access the PPP Project assets during the period from the termination date until all termination compensation is paid, so long as the Contracting Authority complies with the payment terms with respect to such compensation. This approach is unlikely to be agreed at contract signature and certain issues will need to be clearly addressed (such as liability for damage to the asset while in the Contracting Authority's use).
• Set-off rights - the Contracting Authority should try to negotiate the right to set off any amounts due to it from the Private Partner under the PPP Contract against any compensation it pays (unless these are already taken into account in the relevant formula). Lenders, however, will in general be reluctant to give the Contracting Authority any set-off rights, particularly where compensation is debt-based.
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43 These elements are not included in Section 4.7, Sample Drafting 4.