This chapter details specific guidance according to whether the financial distress of the Project Company was caused by itself or a third party, or was contributed to by the Procuring Authority.
The Project Company's financial distress may be caused by a range of issues, which can be directly related to the project or related to external events.
For example:
• Revenue issues caused by lower than expected demand (e.g. on a tolled highway where the Project Company took demand risk)
• Revenue issues caused by difficulties in collecting payment (e.g. due to fare evasion)
• Cost increases during construction (e.g. due to an increase in the price of raw materials)
• Cost increases during operations (e.g. due to inefficient management, or higher than expected maintenance costs)
• Issues with repaying loans where revenue is earned in a different currency from the loan and the position is not hedged
• Issues obtaining financing in a situation of economic crisis
• The Procuring Authority unfairly over-enforcing the PPP contract (e.g. using the 'letter of the contract' to squeeze the Project Company and retaining amounts due)
• Changes in government and/or policy
Where the Project Company is facing financial distress, the first step for the Procuring Authority is to make an assessment of the underlying causes and extent of the issue. It will then need to assess how the risk of those underlying causes was allocated in the PPP contract to inform the approach that the Procuring Authority takes.
It may not always be clear how a risk was allocated and appropriate legal, financial and technical expertise should be involved to make informed decisions. For example, this can occur where the risk of latent ground conditions on a tunnel project is shared.