Where a PPP is project financed, the lenders may require some right to take over the project where the Project Company has failed to fulfil its obligations under the PPP contract. This can include in circumstances of insolvency as well as other serious breaches of the PPP contract. In this context, 'step-in' refers to the ability of the lenders, or a third party nominee of the lenders, to step into the role of the Project Company to give it the opportunity to rectify the issues.
These interventions are designed to give the lenders a chance to remedy the relevant breach of the PPP contract before it is terminated. In such cases, the Procuring Authority agrees under a direct agreement that it will not terminate the PPP contract until the lenders have had a chance to cure the breach.
Lender step-in therefore typically refers to the lenders exercising their rights under a direct agreement between the Procuring Authority, the lenders and the Project Company.
Another method by which lenders may exercise a similar right is embedded into the applicable insolvency laws of certain common law jurisdictions, allowing the lenders to appoint a receiver to take over the project. This has a similar effect to exercising a step-in right under a direct agreement.
Lender step-in events are not common in practice, and the study has not found any example of substitution in the sample of 250 projects globally. However, lenders played an important role in a number of Australian transport projects, most of which reached financial close prior to the sample period.
EXAMPLE Australian transport project insolvencies The Project Company on the Sydney Cross City Tunnel project in Australia became insolvent in 2006 and the lenders exercised their step-in rights. A receiver appointed by the lenders was able to sell the project assets to new equity investors, which enabled the lenders to be repaid and allowed a partial return of equity to the original equity investors. This was successful from the point of view of the Procuring Authority, as no additional funding was required from the government and tolls were not increased. Similar outcomes have been achieved on other PPPs in Australia that have experienced financial distress, such as the Lane Cove Tunnel project, the AustralAsia (Adelaide-Darwin) Railway project and the Brisbane Airport Link Tunnel project (though not all lenders involved were repaid in full). |
Lenders are not typically in the business of operating live projects, and they may also have concerns that by exercising too much control they may take on direct responsibility for the project's problems (e.g. environmental liabilities).
Although the granting of lender step-in rights for PPPs is quite common in the global context, there are several jurisdictions where it is not common, or where the underlying legal system (particularly in civil law jurisdictions) does not allow it.
Civil law jurisdictions face some different challenges from those faced in common law jurisdictions. For example, if the concept of 'economic equilibrium' exists in the jurisdiction's underlying legal system and an event materially alters the financial position of one of the parties, then a court might intervene to address the imbalance even though there was no contractual right for that to occur. This situation can affect the lenders' decision on whether to intervene with additional support in the time leading up to a potential insolvency.