When a PPP contract is terminated, compensation may be payable by the Procuring Authority to the Project Company, even where the termination was the result of a Project Company default.
Terminations due to a Procuring Authority default or voluntary termination by the Procuring Authority are typically not favourable for the Procuring Authority, as the financial consequences are substantially worse than in the case of termination due to a Project Company default. Compensation will be based on the principle that the Procuring Authority should not unjustly benefit from the termination when the termination has occurred due to the Procuring Authority failing to comply with its contractual obligations (e.g. by failing to provide the required land access).
This is justified by the fact that the project assets are transferred back to the Procuring Authority upon termination, and the principle that the Procuring Authority should not unjustly benefit from receiving an asset early, given that the private partners will have contributed capital towards the asset. In the case of termination due to the Project Company's breach of contract, the Project Company's equity investors will typically receive no compensation. Some compensation is, however, typically available to the Project Company's lenders where an asset is being handed back to the government.
Several methods can be used to determine the compensation payment, as set out in the EPEC Guide on PPP Terminations1 and the 2017 version of the World Bank Guidance on PPP Contractual Provisions.2
This compensation may be provided for in the PPP contract, under the applicable laws or other agreement. In some jurisdictions, the courts will need to intervene to decide on the level of compensation payable.
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1 Available at http://www.eib.org/epec/g2g/iv-project-implementation/41/416/index.htm.
2 Available at https://ppp.worldbank.org/public-private-partnership/ library/guidance-on-ppp-contractual-provisions-2017-edition/.