(a)        Liabilities and indemnities

The concessionaire is expected to assume broad responsibility for the majority of contract risks relating to its project activities. To achieve this, broad indemnities are usually given to keep the government protected from harm from the impact of death, personal injury, property damage and third party claims arising from the carrying out of the project. These are not normally contingent on proof of breach or negligence, but merely that they were caused by the project activities themselves. This may seem harsh, but it reflects the intent that the concessionaire should take all risks similar to private ownership when in full control of the facility.

These indemnities are often structured on an uncapped basis and, in practice, the majority of such risks will be covered by standard insurance policies but there can be a strong push for uninsured risks to be the subject of a financial cap to avoid the concessionaire being put at risk of insolvency.

“Injurious affection” is the term used to describe land being made less valuable as a result of construction activities, and it is sometimes termed more broadly to describe the risk of third parties bringing claims for interference with business as a result of the carrying out of the project. If the development of the project is likely to have such an unavoidable impact for which compensation can be claimed, it may not be fair to pass the risk of such third party claims on to the concessionaire, in which case any broadly-drafted indemnity provisions may need to be limited in this regard.

(b)        Insurance

The PPP concessionaire is typically obliged to maintain:

• “construction all risks” or “material damage” insurance for the full reinstatement value of the project assets during construction and operation; and
• third party liability insurance for a specified level of cover.

The concessionaire is usually also obliged (and would wish) to maintain “advance loss of profits” or “business interruption” cover to protect it against loss of revenue due to any insured events arising under the material damage insurance.

The contract is likely to make assumptions about the existence of such insurance. If the concessionaire has business interruption cover then it does not need contractual revenue protection from the government. The lenders will likely be indifferent as to who bears the risk (which could also be covered through a reserve account held by the concessionaire in a controlled account) but the lenders will expect the issue to be properly considered in order for the project to be bankable.

As the underlying or reversionary owner of the project assets, the government has an interest in making sure that the insurances are used properly to retain the assets and it may sensibly call for all material damage proceeds to be paid into a jointly controlled account. Proceeds will only be paid out of the account to fund a reinstatement programme agreed with the government. This prevents the lenders from taking the money and “heading for the hills” (i.e. paying off their debt and leaving the concessionaire in default).

The concessionaire takes the principal risk in relation to the cost of insurance premiums throughout the contract period, but in many developed countries PPP contracts contain a risk sharing mechanism which protects the concessionaire against excessive market fluctuations. This is a basic risk trade-off, if the government pushes more risk onto the private sector then they will simply price the risk and the cost of this will be taken into account when calculating the cost of the project.

If insurance terms become unavailable (either generally in the market, or because they are generally seen as unaffordable by the market) then this presents a problem for the concessionaire. Faced with the lack of a key insurance term, a prudent board of directors may conclude that the project can no longer be operated legally or safely, which would be problematic for the concessionaire as it would be put in breach of the concession agreement. In some jurisdictions this is addressed by passing the risk of uninsurability back to the government who has the option to take on the risk itself (self-insure) or terminate (as if an extended force majeure has occurred).