One option which is perhaps dismissed too lightly is termination, either because the project will fail automatically through insolvency if not renegotiated, or because the Procuring Authority has a right to terminate.
Termination may be seen as a taboo subject, in particular due to the political fallout of such a step and the perception that the Procuring Authority has failed to deliver the outcome it promised, even though, in such a situation, it may be that the contract has done exactly what was intended. In most default termination scenarios, it can be expected that the private sector will have taken a significant financial hit - loss of equity and likely a loss of a material part of the senior debt.
A Procuring Authority should not accept a less favourable outcome than simply terminating the PPP contract and making the termination payment. Termination of the PPP contract is detailed in Chapter 7 (Default and termination).
EXAMPLE Project Company difficulties in obtaining finance The Project Company in one of the case studies in Brazil is facing financial difficulties with lower than expected toll revenue, and challenges in raising the required debt finance. The Procuring Authority is considering extending the period in which investment can be completed, as well as whether to take an alternative approach: • Terminate the PPP contract and retender the project • Replace the equity investors with new equity investors capable of raising the required debt finance • Require the existing equity investors to commit additional equity For more information, see the Brazil Toll Road Case Study. |