PPP Law, 3-Airport High Speed Rail: Financing and Financial Close by Concessionaire



China and Japan are set to join hands, in a rare cooperation of international financing, together with a group of Thai banks to provide a substantial part of the massive funding for the 224-billion baht (USD 7.5 billion) high-speed railway Public and Private Partnership (PPP) project, connecting Thailand’s three major international airports: Don Mueang, Suvarnabhumi, and U-Tapao, running though the Eastern Economic Corridor, the country’s industrial hub.

Lenders’ Right Recognized in Concession Contract

The concession contract, signed October 24, 2019, just as any other concession contracts, fully recognizes the need to balance the interest of the government project owner against protection for the lenders and the concessionaire, with the lenders being granted a right to step in into the PPP concession in an event of a major breach of contract by the concessionaire.

In such event, the project owner would need to suspend its right to terminate the concession and give the lenders and their representative an opportunity to remedy the default to return the project to normality.

On the other hand, if the owner defaults, such as when it fails to deliver the land at the project site, a significant obligation of the owner, this default would enable the concessionaire to terminate the concession contract. The termination right by the concessionaire is likely to be inhibited by a financing agreement with banks, who will try to enforce their right to become a party to the concession contract in place of the concessionaire as well before the concessionaire can terminate the concession contract.

When Does the 50-Year Concession Commence?

The obligation of the concessionaire to start the design and construction work, the so-called design and build, generally must be accelerated and performed no later than one year from the signing date of the contract.

All things are interwoven and the obligation of the concessionaire to start work links back to and largely depends on how quick the government project owner can clear all the land of trespassers and state utilities, a daunting task, and deliver it to the concessionaire.

How much land needs to be delivered? A minimum delivery amount of 50% of the work site is normal for an initial delivery. The deadline for the owner to provide the concessionaire with access to half of the construction site could be one year from the date the parties signed the concession contract, extendable if both sides agree.

A week or two after delivering the site, the owner is expected to issue a notice to proceed to the concessionaire, instructing it to start the design and construction work on a fixed date, that date marks

the commencement of the 50-year concession period, divided into five years for construction and 45 years for commercial operation.

And so roughly about a year after signing, the ground will break for the civil work, the same day as the beginning of the long concession period.

Failure to Deliver Land Was Force Majeure in RFP

The government project owner originally allocated most of the land delivery risk to the concessionaire in the request for proposal, or RFP, and has made clear that it will not pay any damages for its failure to deliver the land on time.

To the surprise of many, in the draft concession contract attached to the RFP, the owner classified its failure to deliver the construction site within the deadline as a force majeure event, an act of god not controllable by either party, instead of designating it as a customary breach of contract. The unique approach was introduced so that the owner did not have to pay any damages to the concessionaire.

This meant that under the draft contract, the concessionaire could terminate the contract if the one-year deadline for land delivery was not met and there was no agreement to extend it. And the concessionaire could terminate on the grounds of force majeure only, not default. The concession termination over force majeure would have granted the concessionaire a limited compensation under the contract for assets that the owner took over, but prevented it from claiming damages.

Signed Concession Says Land Delivery Failure Is Default

In the signed concession contract, the draconian provision to exonerate the owner from a breach disappears!

As it stands, the actual concession allows both parties to agree on an extension of the deadline; in the absence of a mutual agreement the concessionaire can terminate the concession contract over default by the owner—a standard provision in any PPP or construction contract. It’s worth noting that the signed contract does not block the concessionaire from claiming damages from the owner’s default either.

The general right of the concessionaire to claim damages comes on top of the contractual requirement for the owner to pay for useful assets, capable of being transferred from the concessionaire to the owner, at book value that appears on the concessionaire’s accounts as determined by an accounting firm both sides agree to appoint. Plus the financing costs the concessionaire is obligated to pay to the banks for securing the loan for the project.

Credit Facility Agreement Heralds Success

While the duty to deliver the land belongs to the owner, the obligation to attain financial close is imposed on the concessionaire.

The financial close for any PPP project will be one of its most significant milestones, highlighting its early success and sending the signal to the government project owner and the public that the concessionaire has materialized its solid business reputation by demonstrating its tangible financial capability to fully fund the ambitious infrastructure.

First, a credit facility agreement will have to be signed with a syndicate of lenders, wrapping up a bunch of the debt portion of the entire project cost that consists of debt and equity. The signing of the financing agreement is a major project milestone in itself and will start to bring in cash from the financial sector, in addition to capital funding by the concessionaire and financial support from the government.

But the signing of the lending agreement is no relief to the project owner until it can see that the first drawdown of a loan is proceeding successfully and is on the verge of being disbursed.

How Is Financial Close Done?

The realization of the first loan drawdown can be confirmed by the agent of the syndicate dispatching a letter to the government project owner certifying that all conditions precedent to the first drawdown have been fulfilled or that if any such conditions precedent have not been met, they are waived by the lenders—the receipt by the government project owner of the banks’ confirmation letter is commonly called the financial close.

The failure of the concessionaire to reach the financial close within the deadline is considered a major breach of the concession contract, which entitles the government project owner to terminate the contract and the banks to step in before such termination.

The deadline for the financial close can be as long as nine months after the commencement of the 50-year concession period and the start of the design and build work, on the date specified in the owner’s notice to proceed, and ordinarily a month from the date of the signing of the lending agreement with the syndicated lenders.

Termination Can Be Intercepted by Banks

Termination of the concession contract by either the concessionaire or the project owner will not be easy as Thai banks and foreign financial institutions also have a high stake in the project.

Soon after signing the credit facility agreement, the banks will sign a tri-partite direct intervention agreement with the government project owner and the concessionaire to grant the banks the right to step in before the owner or the concessionaire can terminate the concession contract over a breach by the other.

The concession contract and the direct step-in agreement often cover only termination by the owner over the concessionaire’s fault, and forget to deal with the situation where the termination is carried out by the concessionaire over the owner’s breach. This missing element can be reinstated by changing the draft direct step-in agreement to address both situations, following the actual signatures in the credit facility agreement.


Wirot Poonsuwan is Senior Counsel and Head of Special Projects at Bangkok law firm Blumenthal Richter & Sumet and can be contacted at wirot@brslawyers.com.

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