Green Urbane

Role of escrow agreements in PPPs in boosting investor confidence

Investors have always found it challenging to invest in a particular project. When the question comes about a large-scale project such as a public infrastructure project, the stakes for an investor go even higher. Since the world has transformed from the industrial to the information age and today towards a better transformation of social change, there has been one primary concern for investors, and it has been about the safety of their investment.

Despite the crucial need for investments in numerous areas, notably infrastructure development, there has been a global fall in PPP transactions in recent years. Risk allocation and dispute resolution techniques in PPP contracts have been recognized as factors for losing confidence in PPPs. The decline is not in all countries the world over, but overall the rate of PPPs is decreasing, and it is becoming a matter of concern for authorities. Because PPPs have been a stepping stone for infrastructural development in developed and developing nations.

There are several explanations for this reduction. Among other problems, the government believes that PPPs do not provide value for money. In contrast, the private sector believes that the risks connected with PPP transactions have grown excessive and unpredictable. Economists, public authorities, and even private companies have been searching for measures to boost investor confidence in PPPs. One of the ways that can help in boosting investor confidence in a PPP is by using Escrow agreements. At Green Urbane, we have compiled this article to study how the role of escrow agreements can help boost investor confidence in the case of a PPP.

Let Us First Study What an Escrow Agreement Is

One first needs to get an escrow account to get an escrow agreement. An escrow account can be called a temporary legal arrangement between two transacting parties in which a third party holds the financial payment. Typically, the third party can be a bank or an escrow agent. The use of an escrow account decreases the possibility of non-payment. It is a temporary account that is only active till the transaction is completed. The account is closed after all of the criteria between the buyer and seller have been met. Escrows often involve the deposit of a monetary-valued document. These documents might be deeds, written instruments, payment pledges, licenses, patents, checks, bonds, or mortgages.

When you hire a public-private partnership consulting firm in Dubai and have doubts about a particular transaction, the consulting firm will suggest various measures. One of the measures can be to enter an Escrow agreement. When an escrow agreement is backed by some kind of surety, such as a mortgage, bond, check, or some form of a written pledge, the investor gets a guarantee that his payment will be made in one form or the other.

Escrow Agreement Enable Special Considerations Between Two Parties

When two parties enter a commercial transaction, there may come a moment during the said transaction when it will be in the best interests of one party to proceed only if the other party can fulfill its obligations with perfect confidence. This is when an escrow agreement comes in handy. And this is true even for large-scale projects such as public infrastructure projects carried under PPP.

For example, a company acquiring products from another country must know that the other company can deliver the items. In contrast, on the other side, the seller wants to ensure that it is paid if the products are provided to the buyer. Both parties might enter into an escrow arrangement to secure delivery and payment. They can agree that the buyer will place the monies in escrow with an agency and give irrevocable instructions to the seller to distribute the funds once the products arrive. The agreement also binds the escrow agent in this agreement, who is most usually an attorney. Most PPP consulting firms in Dubai, including Green Urbane, suggest their clients consider the option of Escrow agreements when the stakes are high, and the investor is in doubt about the safety and security of his investments.

Benefits of Escrow Agreements

Escrow agreements have one significant benefit: it gives both parties surety that their agreement will be fulfilled and their investments are safe. This surety of the safety of investment is enough for most entities to put their anxieties aside and start working on building projects that churn out profits for the firm while simultaneously benefiting the public at large. When you hire PPP Advisory Services in UAE, they always suggest you have safety first and everything else second. Escrow agreements ensure the safety of everybody involved.

Escrow Agreements in PPP

In PPP projects that are not self-sustainable or financially feasible on a stand-alone basis, there exists some kind of grant support or an annuity which shall be payable by the government to the private sector partner to make the project sustainable. In such cases, escrow agreements are created for projects such that the government’s payments to the private sector partner are made through the escrow accounts. In highways/ expressway projects requiring the private sector partner to share a percentage of the revenue or a fixed concession amount with the government, escrows are created to protect the government’s interests against defaults in concession payments. All payments received to and paid from the project are routed through an escrow account. The private sector is secured from the payments promised to it under PPP agreements because of escrow accounts.

In addition to enhancing investor/ private sector confidence in investment in PPP projects, creating an escrow account brings transparency and accountability to the parties to a PPP agreement. It keeps the transactions clean and hassle-free, enabling the stakeholders to focus on the performance of other obligations under the contract.