Following the market practice described in Section 4.3.1, Termination Payments, in a corporate financing the Private Partner is still likely to expect full compensation if the PPP Contract is terminated early for Contracting Authority Default, MAGA, Change in Law or Voluntary Termination. A form of financing-based compensation approach as described in Section 4.3.3 (consisting of senior debt plus equity plus third party cost elements) can be adopted, but will need to take into account that there is no senior debt. Options are set out below.
(a) As the equity element represents the full PPP Contract funding, if the Private Partner's sole business is the PPP Project, it is possible to choose any of the three Options described in Section 4.3.3.2 in place of the senior debt plus equity element. Third party costs (e.g. redundancy and sub-contracting break costs) should be added as described in Section 4.3.3.3.
(b) If the PPP Project is not the Private Partner's sole business, the Options in Section 4.3.3.2 will not be appropriate and one approach is to use the value of the PPP Contract as the basis for compensation - i.e. the amount which the PPP Contract could be sold on the open market (assuming no termination). Again, third party costs should be added. This reflects the approach described in Section 4.4.2(b).
(c) An alternative to (b) is to base compensation on the net present value of future payments which would have been due under the PPP Contract from the termination date, less future operating costs and capital expenditure (in each case as shown in the Original Base Case and discounted at the pre-tax Base Case Project IRR). Third party costs should again be added.
Approaches which are based on a market value may prove hard to implement in practice on the basis that a market is unlikely to exist in some of these termination circumstances, particularly in an emerging market with a limited market anyway. An estimated value may have to be used instead.
In a corporate financing, the Private Partner may be able to more effectively mitigate costs to the Contracting Authority, particularly on a Voluntary Termination, in a way which proves less expensive to the Contracting Authority than in a project financing. One reason for this is that, with reasonable notice, resources and investment may be capable of being redeployed in other areas around the group on termination, reducing break costs.
With any of these scenarios, the Contracting Authority will want to ensure that termination fees under any sub-contracts are not so disproportionate as to result in excessive compensation of intra-group companies who are sub-contractors.