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):
- The construction contractor (in addition to having interest in a project as construction contractor) may also be an equity investor in the Project Company. Following construction completion and the initial period of operation, the construction contractor investor may wish to exit the project as its involvement is now limited; its experience no longer required; and its interests are no longer aligned with the interests of the other equity investors. Allowing the construction company to sell its equity interest may enable it to invest in a new project with a construction element. As the Project Company is typically an SPV with few or no assets (other than the project assets) and limited full-time staff, the Procuring Authority will want to ensure that the relevant expertise of the equity investors who control the Project Company is retained through the construction period and likely for some time into operations, particularly if there are concerns about the quality of the construction works or remaining defects. A typical waiting period may be 18 months or more after completion of construction.
- Equity investors’ interests can change over time. For example, an equity investor may wish to reduce its overall exposure to a region by diversifying into other regions. When a purely financial equity investor wishes to sell its equity interest (and if the financial equity investor does not bring any particular special skills to the project) its replacement with another equivalent equity investor may not introduce any new risks to the project or diminish the public benefit. In addition, many infrastructure funds are ‘closed end’, meaning that the fund manager must sell assets and return the investment to the original investors at a given time, which may not align with the end of the PPP contract.
- An equity investor may wish to recycle its capital into new investments, which can be beneficial to the government as more capital will be available for new projects being tendered.
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.
