Equity investors may seek to change their equity interest in a Project Company as the project’s risk exposure changes over time. For example, a project will be significantly de-risked once construction is complete, defects are rectified and the revenue from the project assets during operations has had time to ‘ramp up’ and normalise. This de-risking has an impact on the type of equity investor the project is suited to.
The risk exposure of a project at financial close may be well suited to an equity investor that has construction expertise (such as the construction contractor). However, it may be less suitable to that same equity investor once construction completion has occurred and the project is several years into its operations. Similarly, a project that is several years into operations may be better suited to a more risk averse equity investor and such an investor may not have been interested in investing at an earlier stage of the project.
The following circumstances are three examples in which a change of ownership may be appropriate (though there will be additional circumstances which are not adverse to the interests of the Procuring Authority):
Procuring Authorities are well advised to understand the different drivers and objectives of the prospective equity investors at the time of procurement and agree appropriate restrictions in the PPP contract.
Change of ownership can be addressed in several ways under a PPP contract. They can include provisions requiring the Project Company to seek prior written consent from the Procuring Authority for a change of ownership and/or restrictions on the timing of when a change of ownership can occur. For example, the PPP contract may specify that a period of time must lapse before any disposal is permitted without the Procuring Authority’s approval. The Procuring Authority’s approval may also contain a positive obligation on the Procuring Authority that its consent will not be unreasonably withheld or delayed. This positive approval obligation may contain a specific timeframe in which the Procuring Authority will need to respond. Any timeframes must be followed to ensure the Procuring Authority is not in breach of its obligations under the PPP contract. A change of ownership may also require approval by the Procuring Authority under the applicable laws.