After the government and the preferred bidder have signed the PPP contract (sometimes known as commercial close, there are usually several additional steps before financial close occurs and project implementation can begin. The PPP contract includes completion of all or some of these elements as conditions precedent, which must be met for the contract to become effective.
PPP contracts often specify a final date by which the contract terminates, and/or a bid bond is forfeited, if the conditions precedent are not met. Failing to specify requirements and stipulate a period for financial close can hold up project implementation for years.
Finalization of financing agreements
Financing agreements are often not finalized until after the contract has been awarded. In most cases, interested lenders are identified at the proposal stage. However, before those lenders will commit to provide finance, they often carry out detailed due diligence on the project and PPP agreements. There are risks associated with this process—lenders may require changes in the PPP agreements before agreeing to finance the project, or financing terms may change from what was assumed in the proposal. One way to mitigate these risks can be to ask for firm financing commitments at the proposal stage (an underwritten bid)—but this can be difficult and expensive to procure, and risk reducing competition.
Finalization of project agreements
The preferred bidder will need to finalize and sign all project agreements and contracts with other parties in the PPP structure—for example, sub-contractors and insurers.
Implementation agency obligations
The implementing agency will also have tasks to fulfill, such as finalizing permit and planning approvals, commencing or completing project land acquisition, and securing final approval from relevant government entities. Detailed contract management protocols and manuals are often also developed during this period.
Financial close occurs when the all project and financing agreements have been signed, all conditions precedent on those agreements have been met, and the private party to the PPP can start drawing down the financing to start work on the project.