Second of two parts
Loan agreements typically grant lenders the right to “step in” and take corrective measures if the private partner defaults. This may include appointing a new operator or, in extreme cases, assuming temporary control of the project company.
Lender step-in rights are an identified mechanism for contract termination under the PPP Code.
The conditions and procedures for exercising step-in rights must also be specified in the PPP contract, as required under the IRR.
Step-in rights are critical because PPP assets are imbued with public interest. A power plant, toll road, water system, or hospital cannot simply cease operations.
Banks, through these contractual rights, help ensure continuity of essential services while protecting their financial exposure.
Thus, the “silent partner” may, when necessary, become the private party or operator of the project.
Financial closure and disclosure
No PPP project proceeds without financial closure. Financial closure signifies that all financing agreements—such as loan agreements, security documents, and equity commitments—are finalized and that all conditions precedent have been satisfied.
This transparency mechanism safeguards public interest and ensures that funding structures remain aligned with project obligations.
Under the PPP Code, financial close refers to the specific milestone in a PPP contract where the private partner successfully secures all necessary project and financing agreements.
The achievement of this milestone confirms that all prior conditions have been met, allowing the private partner to draw down the financing and commence work on the PPP project.
All PPP contracts must prescribe a period within which financial close must be achieved by the private partner.
Failure to achieve financial close within such period, without fault on the part of the government, shall subject the private partner to the penalties provided under the PPP contract. The PPP contract, however, shall remain in force unless terminated in accordance with its terms.
Rate of return and risk
Banks carefully evaluate the project’s internal rate of return and risk allocation.
Interest rates reflect the project’s risk profile, tenor, and creditworthiness. If revenues fall short or obligations are breached, default may occur triggering penalties, restructuring, or enforcement of security.
Default does not merely affect the private partner; it can jeopardize project continuity, investor confidence, and public trust.
Hence, proper structuring and risk allocation are indispensable.
The quiet pillar of PPP success
Banks may not cut ribbons or build bridges with their own hands. Yet by providing capital, imposing discipline, ensuring due diligence, and safeguarding continuity through step-in rights, they make PPPs financially viable.
In every PPP contract, beyond the visible contractual parties, stands an indispensable, cautious, yet often silent partner: the banks.
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