PPP projects are generally spread over a long project life typically of over 15- 20 years. As such, there is significant probability for the project to face financial, political, physical contingencies. These contingencies will affect the risk-return ratio of the private partner and in extreme cases might even lead to failure to meet agree upon terms. Such a failure by the private partner could lead to severe reputational damage to the public entity and possible delays/extension in the operationalizing the PPP project. As such, it's a good practice for the public entity to identify and detail major contingencies and the response to the same. This would also provide an exhaustive list of key stakeholders/ paradigms to be considered while drafting a solution. Contingencies can be majorly broken into 3 categories:
1. Contingencies that involve default by Private Partner but cause no interruption of service delivery. For example, When the Private party defaults on its insurance payments, there is no loss to the service obligations but the Authority has the right to recover the premium payments from the Concessionaire.
2. Contingencies that interrupt service delivery but do not involve default by Private Partner. For example, Change of Scope, Force Majeure events, etc.
3. Contingencies that interrupt service delivery and involve default by Private Partner. For example, Non- adherence of private party to meet the service obligations as per the Concession Agreement, in ability to finish project in time and request for extension, request for refinancing/ restructuring of project costs, etc.
MCA for development of National Highways provide detailed list of all major contingency and force majeure events. Major contingencies and rare events include change In scope, change In law, renegotiation, force majeure and termination.
More on management of Committed and Contingent liabilities by the public entity has been discussed in Module 12 on "Pre-Procurement Activities"