It is important for the Procuring Authority to ensure that it carefully manages any potential default of its own causing, and does not find itself in a situation where it could be assessed to have committed a default in any way. Termination due to a Procuring Authority default, due to the actions of another government agency or due to the Procuring Authority's voluntary election to terminate in the absence of default, are typically the most costly to the Procuring Authority.
The Procuring Authority must monitor and assess the situation as soon as it becomes aware of any potential default which would trigger a termination right for the Project Company. The Procuring Authority obligations under a PPP contract (with which failure to comply may lead to a default) are principally payment obligations and approval rights, rather than detailed performance obligations. However, in some instances where the Procuring Authority retains land acquisition or permitting risk, any failure to fulfil these obligations is likely to render the Project Company unable to meet its obligations and may subsequently lead to a default. The Procuring Authority may also have positive obligations to complete interfacing infrastructure.
The occurrence of a Procuring Authority default, whether notified by the Project Company or not, must trigger an alarm at the highest levels of the Procuring Authority together with immediate action to avoid termination. The Procuring Authority contract management team needs to be well aware of the agreed defaults (whether provided for in the PPP contract, under the applicable laws, or another agreement) such that it can act before the Project Company serves the Procuring Authority with a termination notice.
Once the Project Company has served a default notice, the Procuring Authority will typically be given a cure period (that is, time in which to rectify the default, where possible) before contract termination can occur. This gives the Procuring Authority a final chance to avoid termination and its associated consequences.
All effort and resources should be applied to carry out whatever mitigation is required, although that mitigation should have started well before notice was served by the Project Company.
Another approach when a Procuring Authority default is inevitable is to work with the Project Company to make the arrangement work through a renegotiation process. Specific guidance on renegotiation is detailed in Chapter 4 (Renegotiation).
EXAMPLE Interfacing works At the time of signing the PPP contract for the Intercity Express Programme project in the UK, the parties agreed that the Procuring Authority should retain the risk for delays caused by delays in Network Rail delivering interfacing works. Network Rail was classified as an arm's length public body in 2014 and is a separate body to the Procuring Authority. Delay and cost caused by Network Rail's delay in delivering interfacing electrification works did cause delay and cost to the Project Company. This demonstrates the impact third parties can have on an overall program of works. For more information, see the Intercity Express Programme Case Study. |
EXAMPLE Renegotiation The lenders on the Segarra Garrigues Irrigation System project in Spain exercised their rights to stop providing debt to the Project Company when the credit rating of the Procuring Authority dropped below a defined level. This default caused delays to the project and forced the regional government to renegotiate the financing for the project as well as the PPP contract. For more information, see the Segarra Garrigues Irrigation System Case Study. |