Dissecting and understanding PPP contracts No. 4: MAGA – Material Adverse Government Action
One of the most desired boilerplate provisions of public-private partnership (PPP) contracts today, the absence of which can be a deal breaker for some private-sector proponents (PSPs), is the Maga—Material Adverse Government Action. Having a Maga is one way by which PPP arrangements, typically long-term contracts, become robust and “future-proofed”.
- What does Maga seek to address? Every time this columnist gives a lecture on PPPs, participants identify political risk as one of the top risks in the country. One such political risk is regulatory risk where future actions of government adversely affect a PPP project. Broadly, this is successor risk whereby the next (successor) administration changes policies made by the previous administration.
- Action by which government agency? Typical Maga provisions only extend to action by the national government that is not the signatory to the PPP contract. To be more exhaustive, government action should be made by any government agency or public office. This includes the Executive and Legislative branches, government corporations and instrumentalities, regulatory bodies and local government units.
- What is the form of the action? The usual clause on Maga touches on laws. A layperson may construe this as only statutes or national laws enacted by Congress. If the breadth of Maga will cover the whole government bureaucracy, the courts excepted, then action here, to avoid confusion, would embrace ordinances, executive orders, other executive issuances, rules, official interpretations or any government or administrative policy.
- When is the action materially adverse? Any future government action that could harm, prejudice or impair the rights and will reduce the benefits of a PSP under the PPP contract, or any action which could disrupt the operations of the project and would unfavorably affect the PSP’s ability to comply with its financial and contractual obligation would be the subject of Maga.
For example, if the implementing rules of the build-operate-transfer law is amended, which henceforth bars the grant of government subsidies, and that rule is given retroactive effect would definitely affect a subsidy stipulated in the PPP contract. This is a classis example of a successor-regulatory risk.
- What will the affected PSP do? When a PSP feels that a government action post-PPP contract signing will adversely affect its entitlements and obligations, it must first notify its partner-government entity. It has the burden of proving that said government action would have that material adverse effect. The government may dispute the claim or assert that the effect is not adverse.
- What are the remedies? The PSP, after negotiations or arbitration, may be excused from performance or its obligations and/or compensated depending on the breach. The compensation or mitigation may take any of the following forms: toll-rate adjustments, extension of contract life, rescheduling of milestones and payment of damages, among others.
The insertion of a Maga clause in PPP contracts is intended to assure the business community that, if and when government changes its position after PPP contracts are executed, there are available remedies. For PSPs, this contractual warranty is essential. PSPs just hope that such assurance will be honored by the next administration.