It is important for the Procuring Authority to monitor the financial condition of the Project Company on an ongoing basis, as financial distress is not always easy to detect. Effective monitoring increases the likelihood of the Procuring Authority being alerted in sufficient time to address issues and ensure that public services are not affected. The Procuring Authority should also maintain clear communication lines with the Project Company to monitor key risks.
The Procuring Authority may require the Project Company's financial statements to be submitted each quarter, with its audited financial statements submitted annually. These financial reporting requirements will be set out in the PPP contract. The Procuring Authority should carefully review these financial statements.
The Procuring Authority may also have the right to inspect the Project Company's financial records by providing notice to the Project Company. If the Procuring Authority has concerns about financial performance, it should use this right to satisfy itself there are no significant issues.
Aside from financial statements, there are other early warnings of financial distress the Procuring Authority can look for.
The most obvious sign of financial difficulty is increasing delays in contractor payments, which indicate that the Project Company may have a cash flow problem. The following events are also notable:
• Financial distress of contractors, subcontractors and/or suppliers where replacements have to be found or different terms negotiated to avoid the failure of those parties
• Evidence of disputes with contractors, or a lack of labour and plant on site, which may suggest that the Project Company is struggling to pay its contractors
• Unexplained difficulty in maintaining progress of construction works
• Attempts to delay or reduce maintenance activities
• The lenders negotiating more stringent terms on the Project Company for technical defaults under the lending facilities
• Spurious claims or an overly aggressive attitude to disagreements over financial matters
Performance monitoring more broadly is detailed in Section 3.2 (Performance monitoring).