The cause of the Project Company's financial distress may be due to the realisation of a risk that was clearly transferred to the Project Company under the PPP contract (e.g. because of lower than expected revenue on a project where the Project Company has taken demand risk), or due to the underperformance or mismanagement of the Project Company.
Where the Project Company is experiencing significant financial distress, the provision of services is put at a higher risk. Therefore, the Procuring Authority may need to consider the implications of the worst-case scenario of serious delay, insolvency and/or project termination against providing some form of compensation or relief. This is the case even where the risk was allocated to the Project Company.
The Procuring Authority should work with the Project Company to produce a recovery plan, where recovery is possible. This should be scrutinised by the Procuring Authority to assess its adequacy and if any further financing is required.
The Procuring Authority should also consider entering into a renegotiation of the PPP contract (or carrying out a rebalancing) to ease financial distress. This may include reducing the construction and/or operations obligations of the Project Company or extending the construction and/or operations phases. The approach to renegotiation is detailed in Chapter 4 (Renegotiation).
The Procuring Authority needs to calculate what the costs of the Project Company's insolvency would be, both monetary and reputational - including the cost of terminating and retendering the project as necessary - and then determine the best course of action. Project Company insolvencies also attract negative publicity and may affect market appetite for taking over a failing project.
In some jurisdictions, the Procuring Authority can become liable to third parties if the insolvency cannot be avoided and third parties are 'misguided' to continue business with the Project Company due to measures taken by the Procuring Authority.
Proceeding with termination, and hence paying termination compensation, should be fully considered by the Procuring Authority, but only after all other avenues have been exhausted, and the equity investors and lenders are not prepared to contribute additional capital. In some instances, equity investors and/or lenders may be willing to invest further equity to salvage the project. Termination 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 alternative steps such as: • Terminating the PPP contract and retendering the project • Replacing the equity investors with new equity investors capable of raising the required debt finance • Requiring the existing equity investors to commit additional equity. For more information, see the Brazil Toll Road Case Study. |
EXAMPLE Cross border insolvency The Project Company on a cross border rail project became insolvent due to significantly lower revenue than forecasted. In this case, the Procuring Authority stepped in to transfer ownership to an entity owned by the neighbouring countries to ensure continuity of service, with the majority of staff continuing on to the new operators. |