If termination becomes a real possibility, the Procuring Authority should communicate with lenders at an early stage, while being careful to comply with all applicable laws. For example, giving preferential treatment to a particular lender or class of creditors may breach insolvency laws.
Given the seriousness of a default and potential termination, lenders will closely monitor any event of default. This is broadly positive for the Procuring Authority, as the lenders are incentivised to intervene and help the project achieve its goals. Both the lenders and the Procuring Authority have strong drivers and incentives to want the service provided to the end-user to not deteriorate.
The research highlighted that sometimes the relationship between the Procuring Authority and the lenders was sometimes almost non-existent at the earlier stages of Project Company breaches of contract. The Procuring Authority may therefore not have much visibility of the lenders' involvement and actions at these stages.
In addition, it is common for the lenders to want a chance to step in to cure a Project Company breach of contract, as detailed in Chapter 6 (Insolvency). In these circumstances, there is typically a direct agreement entered into between the Procuring Authority, the Project Company and the lenders. Under this arrangement, the Procuring Authority will need to permit the lenders to take control of the PPP project under the step-in provisions, give the lenders a chance to remedy the breach, and not terminate the PPP contract until the lenders have had the chance to exercise their step-in rights. The direct agreement will typically set out a timeframe during which the lenders will have to cure the contract breach and the Procuring Authority may be required to go through an additional round of remediation plans with the lenders.
Lender step-in is quite rare in practice because of the lenders' reluctance to take over the role of the Project Company and the complexities associated with the execution of these provisions. In Brazil, lenders are not entitled to step-in to the project to take control without a prior authorisation by the Procuring Authority. In the study no examples of lender step-in were encountered.