Early termination (including any compensation) risk

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Description (What is the Risk)

The risk of a project being terminated before the expiry of time and the monetary consequences of such termination.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

Either party under the power purchase agreement will have the right to terminate the power purchase agreement if the other party has committed a breach of the power purchase agreement, and has failed to remedy such breach after it has received a written notice from the non-defaulting party. However, if the contracting authority is a defaulting party, there may be no pre-determined termination payment under the power purchase agreement. The Private Partner will have to claim for damages under the general principles of law.

Mitigation Measures (What can be done to minimize the risk)

Depending on the type of the project, the lenders may be able to enter into an agreement with the contracting authority giving the lenders step-in rights in the case of the contracting authority calling a Private Partner default. The lenders would typically be given an opportunity to remedy the breach of the Private Partner to prevent the power purchase agreement from being terminated.

Government Support Arrangements (What other government measures may be needed to be taken)

The Contracting Authority will assume the risk of early termination for its default and this may extend to termination which has been caused by the actions by other public bodies.

Comparison with Emerging Market

In general power purchase agreements in developed markets do not include specified levels of compensation payable upon termination and the parties will have the ability to claim damages the losses suffered as a result of early termination.

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Description (What is the Risk)

The risk of a project being terminated before the expiry of time and the monetary consequences of such termination.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

The level of compensation payable on early termination will depend on the reasons for termination.

For termination as a result of a Contracting Authority default, the Private Partner would be compensated for debt (due and payable) and equity (including a level of equity return) taking into account credit balances on bank accounts, insurance proceeds received as a result of the default, hedging gains and the realisable market value of specified assets.

Mitigation Measures (What can be done to minimize the risk)

A key mitigant is to make sure the termination triggers are not hair triggers and that there are adequate well-defined routes for each party to remedy any alleged default.

The lenders will be able to enter into direct agreements with the Contracting Authority giving the lenders step-in rights in the case of the Contracting Authority calling a Private Partner default. The lenders would typically be given a grace period to gather information, manage the project company and seek a resolution or ultimately assign the project documents to a suitable substitute concessionaire.

Government Support Arrangements (What other government measures may be needed to be taken)

The Government stands behind payments as a result of breach by the Contracting Authority.

The Government agreements do not terminate and shall remain in force for so long as any payments are due but not yet paid by the Contracting Authority in relation to termination for Government default.

Comparison with Developed Market

The Private Partner will generally be protected if the power purchase agreement is terminate due to a reason beyond the control of ?the Private Partner. The levels of compensation payable will differ depending upon the event.

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