Once the relevant termination procedures have been followed under the PPP contract or under the legal framework, if a remedial action is not possible or was not followed by the Project Company, the Procuring Authority may then have the right to terminate the PPP contract. This will require the Procuring Authority to provide a termination notice. Such a step is not a minor decision and the government should ensure it has considered the full implications of issuing the termination notice. A decision to issue a termination notice should only be taken after consideration of the financial and non-financial consequences of such an action.
There are several key issues that should be considered:
• The circumstances in which the PPP contract may be terminated ahead of its scheduled expiry
• The compensation payment (if any) that must
be made upon termination (either by the Procuring Authority to the Project Company or vice versa)
• The condition of the project when it is 'handed back' following termination, detailed in Section 3.1 (Transitions)
• How to ensure service delivery remains uninterrupted during the termination process (detailed further below in this section)
• The reputational impacts of terminating a PPP contract, including the broader market implications, particularly where equity investors, lenders or contractors are adversely affected
Common termination compensation principles are detailed in Section 7.1 (Background). The compensation calculation may be complex to implement and the Procuring Authority should engage legal and financial advisors for this process. Because the two parties to the PPP contract have conflicting interests in the calculation of termination compensation, there is the potential for disputes to arise.
The Procuring Authority needs to carefully ensure that no unjust enrichment or other claim can be made against it where the project assets have been handed back and the Procuring Authority has not paid adequate compensation.
In a case of potential termination, the Procuring Authority may be required to go to the ministry of finance or central government to request funds to finance a termination compensation payment (particularly in a scenario where it is not retendering the project). A termination shortly after completion of construction is likely to involve higher compensation amounts, because the Project Company's debt liabilities are typically the highest at this time. The bidders may have also required a government guarantee in order to enter into the PPP contract. In light of these challenges, the Procuring Authority should work with other relevant government agencies at an early stage to ensure there will be funds available to pay any termination compensation. Stakeholder engagement with other government agencies is detailed in Section 3.3 (Stakeholder management).
From a legal perspective, the Procuring Authority should be aware that when a Project Company default arises it may have to use the right to terminate or lose it. For example, in several common aw jurisdictions, a right to terminate may have to be exercised or be lost; it cannot be held over the Project Company in perpetuity. The more time that elapses after a default arises, the more likely it is that a court will consider that the Procuring Authority has elected to continue with the contract.
| 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. |