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1.4.6 Private Perspective – Early Termination Risk

From the perspective of the public partner, early termination risk is mainly a budgetary risk (in addition to the concern of how the service will be provided after the termination, at least until the private partner is replaced by a new contractor) which relates to the ability to meet the obligation to pay termination compensation when due. Proper risk management for the public sector is to assess this risk and include it in the affordability analysis, before approving the project tender. Good or bad approaches in this sense relate to the framework (fiscal management) taking into account the convenience of having adequate regulations in place to account for and report on liabilities (including, as in this case, contingent liabilities).

From the perspective of the private partner, this risk relates to the potential insufficiency of the termination compensation to meet the financial obligations with third parties and the investors — noting that the expectation shall not be the same depending on the cause of the termination.

Ultimately, this risk is assumed by the private partner as part of its assessment in terms of commercial feasibility under its own parameters.

However, this should not prevent the authority mitigating the risk, as perceived by the private partner, by means of a clear description and definition on how the compensation sum will be calculated in each termination scenario, and when it will be paid.

The risk of the availability of funds to pay for the compensation is a clear risk allocated to the public party. This implies the need for the contract or the legal framework to allow the private partner to sue the government in the case of not paying when due, as well as the clear provision of cost protection against a delay in the payment. In this latter sense, it is bad practice to calculate the accrued interest calculations (in the case of delay) based on "official interest rates" or on a public debt benchmark. Instead, the calculation should take into account the financial costs to be suffered by the project company in its entirety.

Section 9.9 of this chapter deals further with the provisions of termination.

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