Insolvency is the inability of a company to meet its financial obligations as and when they become due. A PPP contract typically defines Project Company insolvency as a default event giving rise to termination. The Procuring Authority will need to manage these challenges, including contemplating the possibility of terminating the PPP contract. Termination is detailed in Chapter 7 (Default and termination).
Due to the long-term nature of PPP contracts, it is possible for a Project Company to encounter some form of financial distress during the contract term; however, insolvency is rare. During the construction phase, difficulties can arise due to increased construction costs or difficulty in accessing financing, while in the operations phase it can be due to lower than expected revenues and consequent difficulties in repaying lenders. Where these difficulties continue, the Project Company is at risk of becoming insolvent, jeopardising the delivery of the services the project was designed to provide.
Contractors are also at risk of insolvency for various reasons, including factors outside the project. While contractor insolvency is not expected to lead to Project Company insolvency, it does put the delivery of services at risk, especially in the short term.
It is in no party’s interest for the Project Company to fall into insolvency. In such an event, the Procuring Authority will need to finish the project with little leverage for negotiating favourable terms with a replacement Project Company.
Across the 204 projects with data covered by the study, 3% of Project Companies had gone insolvent and 7% of key contractors (including suppliers) had gone insolvent. The timeframe of the projects studied (i.e. those that reached financial close between 2005 and 2015, inclusive) means that most of the projects are still ongoing, so these numbers could increase.
There is no one-size-fits-all solution to dealing with a Project Company that is experiencing financial distress. PPP projects are unique, with bespoke contractual arrangements, and there are different applicable laws according to local jurisdictions. This guidance therefore sets out the principles that should be followed and some common circumstances. However, in the case of Project Company or contractor insolvency, each Procuring Authority will have to analyse its situation and weigh up all available options.
This chapter provides a background to issues around insolvency of Project Companies and key contractors Section 6.1 (Background) and provides guidance on managing insolvency and financial distress. The key elements to successfully managing insolvency are summarised below and detailed in Section 6.2 (Guidance).
A. Monitor the financial performance of the Project Company to prepare for issues
B. Monitor the financial performance of the key contractors whose failure could affect the project, and ensure the Project Company is complying with its payment obligations
C. Assess the cause of the Project Company's financial distress, as it may affect how to best proceed
D. Even where the financial distress is caused by the Project Company, the Procuring Authority should consider the full financial and non-financial implications of allowing the Project Company to fall into insolvency
E. Where the financial distress is not caused by the Project Company’s failure, work with the Project Company
F. Seek legal advice in the case of insolvency or near insolvency of the Project Company
G. Consider the potentially conflicting interests of the Project Company’s directors
Section 6.3 (Summary data analysis) provides a summary of data analysis with respect to insolvency of Project Companies and contractors.