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Operations and Handback

89. Managing Expiry, Default, and Early Termination Processes

Early termination of a PPP contract is truly a last resort and must follow a whole range of processes, commencing with an act of default by one of the parties or some continuing force majeure.

From a contract management perspective, the focus should be on avoiding termination by managing performance adequately, identifying and mitigating risks that might lead to a default, dealing with defaults in good time and in accordance with the PPP contract, and managing disputes in accordance with the Dispute Resolution Process (DRP).

9.1. Processes for Different Ways of Ending a PPP Contract

9.1.1. Expiry of the PPP Contract

The expiry of a PPP contract is inevitable and yet the lack of preparedness by many governments in managing this expiry leads to difficult and costly transition periods at the end of the PPP. At least three years prior to the expiry of the PPP contract, the government should start to examine its options. Should it re-tender the PPP? If so, on what terms? What services will be required and what capital investment is required to enable those services? All of these questions need to be answered in a rational manner in the same way as the original feasibility study was done prior to the Tender Phase. This must be followed by the preparation of tender documentation for the preferred solution.

At the same time, the contract management team should begin to assess the asset’s condition, comparing it to the residual life required in the PPP contract for assets that continue to be part of the PPP. If the condition of the asset is below that required, a remedial plan including the calling of asset condition security must begin.

The operational standards of the private partner must also be assessed so that a new operator can step in at the expiry date. A Transition Program must be devised to ensure continuity of services.

The performance management regime will also require close attention as the private partner will not be focused on the long-term sustainability of services. At this late stage in the life of the contract, termination is not a useful remedy for breach of obligations and the lender oversight will have disappeared once the debt is paid off by the private partner.

Transfer of all intellectual property rights that belong to the government on expiry will also be necessary, particularly in cases of PPPs with high-technology requirements or unique technology solutions, such as fare collection systems in rail and toll road projects.

Transfer of employees may also be required, be it from the private partner to a new operator or to the government. As such, legislation governing such transfers must be followed. This can be time-consuming and should be initiated in a timely manner so as to provide adequate time for staff consultation before the expiry date.

9.2. Reasons for Early Termination

9.2.1. Government Default

Termination for government default indicates a severe failure of the contract management system. It triggers substantial compensation payments from the public purse and leaves the government with an asset for which it may have no operator.

The events that are considered as government default are those events that are so severe that they completely frustrate the private partner’s ability to perform its obligations under the PPP contract. These include non-payment of monies owed to the private partner, expropriation of the right of use of the assets, and actions that prevent the private partner from performing its obligations.

Government default is triggered by a breach notice from the private partner and would have a remedy period. Such a notice must trigger alarm at the highest levels in the government together with immediate action to avert termination.

9.2.2. Private Partner Default

It is essential that the government is highly aware of and monitors all potential events of private partner default. There are a large number of potential defaults, which range from performance defaults to insolvency of the private partner and even cross-defaults under the loan agreements. The government need not be caught unawares provided it monitors the performance and financial indicators of the private partner.

Private partner default will lead to termination if the government is not satisfied that the steps taken to remedy the defaults are adequate. This may be avoided by the government being explicit about its requirements for remedial plans in such events, and then the close monitoring of such plans.

Lenders should be given every opportunity to step in and even to exercise preemptive rights to dispose of the private partner rights and re-tender these to a new private partner.

The government should thus carry out continual assessments of the likelihood of termination and, if termination becomes a real possibility, communicate with lenders and government stakeholders, including the relevant ministry/department. Decisions to terminate the PPP contract should be taken after consideration of the financial and non-financial consequences of doing so.

9.2.3. Force Majeure

Termination for force majeure would arise from events beyond the control of either party. Upon occurrence of the force majeure event, both parties must mitigate the losses and attempt to keep the PPP contract intact.

If the force majeure event continues for a period of time specified in the contract (typically 6 or 12 months), then either party may terminate the agreement.

The amount of insurance proceeds is also an important consideration, and care must be taken in lodging the insurance claims and receiving the maximum proceeds from such a claim.

9.2.4. Unilateral Termination

Unilateral termination or “termination for convenience” has the same effect and financial consequences as government default because the government causes it. The process is, however, different because it involves the government making a conscious decision to terminate the PPP contract early, to pay the significant compensation, and to assume the operational responsibility for providing the services.

Unilateral termination would have to be carefully planned in the same way, as would the case of expiry of the PPP contract with consideration of assets, operations, intellectual property, and continuity of services. In addition, it would require the budgeting for the compensation payments that would become due on termination.

9.3. Effects of Termination

The effect of termination is that the contractual relationship between the parties comes to an end, as does the provision of the services. Assets are divided between the two parties, and there is a settling of all outstanding obligations and a calculation of the compensation payable on termination.

In such a case, the following should be governmental priorities.

.  Continuity of service by (if appropriate in the circumstances) securing continued obligations of the private partner and its operating sub-contractors and the continued payment of these contractors.

 

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