Risk Management in Transport PPP Projects
In the Islamic Countries
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The main possible drivers for early termination are three (The World Bank et al., 2017):
 Default by the private party;
 Termination by the public party (for reasons of public interest or due to default);
 Early termination because of an external reason (force majeure).
Under each option, the public authority makes a payment to the private party and takes over the
ownership of the project assets, which may be subsequently re-tendered through a new PPP
process. Crucially, the PPP contract should specify the process of claiming, determining, and
implementing the compensation (APMG, 2016).
Such provisions ensure that, should the basis of the PPP contract be challenged by events, an
orderly process can be conducted and thus uncertainty can be reduced (EPEC, 2013).
The rationale behind compensation payments lies in the consideration that, whenever a
termination event occurs, the party negatively affected is entitled to be compensated in order to
offset the loss (material or potential) suffered, such as for instance forgone revenues. Further,
compensation to the private party is granted in order not to undermine the business
environment and not to disincentivize lenders to PPP projects. However, it is key for the
compensation not to be too high, as this might generate additional risks related to moral hazard.
Three main approaches to compensation can be outlined (APMG, 2016; EPEC, 2013):
 Market value: typical approach in common law countries, where the compensation is
determined by reference to the market value of the PPP contract at the date of termination.
Alternatively, the public authority may decide to replace the private party by tendering out
the position of equity. This approach is considered fair as it is strictly connected to what
the impaired contract is effectively worth. It also avoids contract cancellation and does not
devote public resources to the compensation;
 Debt based compensation: the compensation equals the value of the outstanding senior
debt. This approach, however, as it is more favorable to the government, may create
incentives to terminate early the contract. Moreover, this mechanism may undermine
lenders’ incentives to conduct thorough due diligence and careful project monitoring;
 Book value: typical approach of civil law countries, where the compensation is based on
the book value of the asset, i.e. considering the sums invested by the private party to build
the project and focusing on the value of the project assets rather than the value of the
contract, in contrast to the market value approach.
Follow up
Marcelo et al. (2017) highlight that experience in dealing with PPPs reduces the probability of
contract cancellation. In addition, the benefits of learning are found by the same study to be
mostly concentrated in the first PPP arrangements: after a country closes a relatively low
amount of PPP contracts, the likelihood of contract cancellation rapidly declines. This finding
particularly holds for transport PPPs.