There are certain events which are beyond the contractor’s control. PPP contracts often divide these into the following categories:

• Compensation events / political force majeure;
• Relief event / non-political force majeure;
• Excusing causes;
• Changes; and
• Changes in law / stabilisation provisions.

This section addresses each category in turn.

(a)        Compensation events / political force majeure

These events give the contractor full relief (in time and money) which will put it in a “no better, no worse” position. These events will usually consist of government breaches (or other events solely within the government’s control) and any other events that the private sector is unable or unwilling to “price for” when bidding for the project.

These events might include the existence of latent defects in existing assets which the concessionaire is obliged to take over, or the provision of government warranties as to ground risks (such as contamination and the discovery of archaeological remains) that may be very difficult to identify or verify from surveys before contract signature. This might also include risks which the government is better placed to manage, such as the obtaining of certain approvals (e.g. planning) or “political” events for which the government is entirely responsible for, such as expropriation of assets or imposition of capital controls.

Overall, such events may sometimes be termed “Political Force Majeure” or “Material Adverse Government Action”, but ultimately it is the stated contractual remedy that defines the relief, rather than the title.

(b)        Relief event / non-political force majeure events

This refers to events which provide the contractor with relief from breach or termination, and typically they do not allow for any financial compensation to be received and, on availability-based projects, the contractor will usually not receive any relief from availability deductions that may be levied as a result of non-provision of the service. A relief event or force majeure list may be open-ended and non-exclusive, or it may be a prescribed list of no-fault events. These usually include events such as natural disasters, fire, accidental damage and strikes.

Where physical damage is caused, these events are likely to be insured by the concessionaire and therefore business interruption insurance should be available to cover the subsequent loss of revenue. It is for this reason that these events typically do not attract compensation from the government. Alternatively, the risk may be able to be passed to suppliers, although it would be included in the price of the contract and this may not present value for money.

However, even if insurance is available it is usually limited in time. Where insurance is not available (such as for non-damage events like labour strikes), the government may expect the concessionaire to bear this risk to some degree and lenders may therefore require the concessionaire to put in place a debt service reserve account to manage the risk. Six months debt service coverage would be common. If the force majeure continues beyond this and the project remains uneconomic, then lenders can no longer manage the risk and, for this reason, most PPP contracts will provide for a no-fault termination to occur at this point.

(c)        Excusing causes

In an availability-based project, the concessionaire may not require positive compensation but it may simply wish to have its availability fee protected from the occurrence of certain events. These events may be very similar to those discussed above but in this context they are often termed “excusing causes”. The list may include additional events which sit below the insurance claim threshold but which should not be treated as penalising the contractor, e.g. extreme weather.

An alternative approach to creating a long list of protections is to ensure that the performance mechanism acknowledges that a certain element of disruption within the project is inevitable. For example, a light rail project may seek a reliability threshold of 98% rather than an unrealistic 100%; this would allow a 2% buffer for day-to-day problems that are unlikely to be endemic or long-lasting, such as passenger emergencies, electrical faults or adverse weather conditions.

(d)        Changes

Given the long duration of a typical PPP contract, it is inevitable that there may be a need for the government to change its requirements and the PPP contract should facilitate that, as long as the concessionaire is kept in a “no better, no worse” position.

That said, it is fair to have some limits on the nature of such changes and lenders will often insist on this as a bankability issue. For example, they may wish to veto any change that would require the concessionaire to materially change its risk profile, which may include a variation to increase the size of the project by a material amount. Similarly, the concessionaire should not be required to carry out a change that may be impossible to implement or which would cause it to breach legislation.

The outcome of the change procedure is that the concessionaire should be compensated for the change, either through direct payment or by adjusting the revenue-sharing mechanism under the contract. It may also be fair to require the concessionaire to use reasonable endeavours to find additional external funding, as long as the revenue stream from the project can bear this.

The concessionaire may have the right to propose changes itself, but typically the government will be under no obligation to consent to these changes unless the change is necessary in order to comply with a change in law and there is no cost increase to the government. The government may consider requiring a share in savings made as a condition of giving consent.

(e)        Changes in law / stabilisation provisions

PPP contracts often make distinctions between the following categories of “changes in law”:

• Discriminatory changes in law (discriminatory against the concessionaire or similar concessionaires);
• Specific changes in law (specific to the respective project’s sector as opposed to other sectors); and
• General changes in law (all other changes in law).

Discriminatory and specific changes in law are invariably treated like “change orders”, so as to leave the concessionaire in a “no better, no worse” position. This is fair as it is difficult to see how the concessionaire could meaningfully predict and price against such changes.

For general changes in law, practice differs. If the change in law affects the market as a whole then inflationary increases to tariffs or availability fees may cover the risk, or the concessionaire may have flexibility within the tariff structure to make non-inflationary adjustments. In these cases, the concessionaire may be able to manage its risk. In some jurisdictions, the governments give protection against general changes in law which require new capital expenditure on the grounds that such changes are difficult to predict and could create significant costs.

Predictability of changes in law may also affect the risk allocation. In a country with a transparent law-making process, it may be fair to require the concessionaire to take the risk of change in law during the construction phase on the basis that it is well-placed to see what changes in law are likely to come into force during that period. In an emerging market context however, this is probably not a realistic risk allocation and the concessionaire may expect to be protected against changes in law that occur after the bid date.

If the law is changed in such a way that the performance of the project has become impossible, it would be reasonable to require the government to issue a “change order” to adjust the scope and make it feasible again. If it does not, it would be reasonable for the concessionaire to have the right to terminate the project and seek compensation.