Compensation approaches for early termination of PPP projects

Abstract

Even though a lot of successes had been achieved since the PPP model was applied to deliver public works, many projects were terminated earlier before the expiry date due to the complexity of the nonrecourse financing method and a variety of risks and uncertainties related to project finance. In early termination, fair, effective and operational compensation approaches were required to relieve both parties from the rights and obligations within the concession agreement. This paper introduced two popularly applied compensation approaches including Compensation based on Financial Statement (FS) and Compensation based on Discounted Value of Future Cash Flow (DVFCF). Those approaches were analyzed through four simple cases and their characteristics were various by different allocation strategies of long-term risks. Finally, this paper provided implications for how to choose the most suitable compensation approach in different scenarios. © 2014 Springer-Verlag Berlin Heidelberg.