The following guidance outlines the key issues that should be considered when consent of the Procuring Authority is required for a Project Company change of ownership.
A request for a change of ownership made to a Procuring Authority should be allowed, provided that such a change does not increase the risk to the government or diminish the public benefit. As described in Subsection 3.6.1 (Background), there can be benefits for the Procuring Authority, the Project Company and the government more generally in allowing changes of ownership, but these benefits must be balanced with the risks associated with such changes..
The following are some examples of how a change of ownership may adversely affect the Procuring Authority and should be considered along with any specific provision in the PPP contract or under the applicable laws:
a) Does the change of ownership adversely impact the ability of the Project Company to carry out its obligations under the PPP contract without the expertise of the relevant equity investor?
b) Is the proposed new equity investor solvent and reputable? Has it fulfilled all of its equity commitment obligations (i.e. has it contributed all of its required equity capital to the Project Company)?
c) Does the change of ownership affect the Procuring Authority’s or another government department’s liabilities (including contingent liabilities) under the PPP contract or some other applicable law?
d) Does a conflict of interest arise between the Procuring Authority and the proposed new equity investor or another relevant stakeholder? Can it be effectively managed?
e) Is it in the public interest to approve the change of ownership and the introduction of a new equity investor? (For example, public interest may be related to any adverse impact on national security, or in regard to the integrity of the proposed new investor.)
Any matters of a sensitive nature related to the Procuring Authority’s decision to withhold its consent to a change of ownership (e.g. on the basis of public interest) may be dealt with in a confidential side letter.
There are many instances where the expertise in managing a project’s assets are provided by third parties (such as a specific management company) rather than the equity investors themselves. It is important that those arrangements are carefully reviewed and that the required resourcing and expertise to continue to manage the project’s assets in an effective manner is maintained through any change of ownership.
Example – Considerations for a change of ownership
The Project Company for the anonymised hydropower plant project in Brazil went through a variety of changes of ownership guided by changes in the equity investors’ legal structure and ownership. The changes had to be reviewed and approved by the Procuring Authority. When granting its approval for a change of ownership in the Project Company the Procuring Authority’s main concern was to ensure that the new equity investors were financially stable and technically capable to continue the operation of the project.
For more information, see the Hydropower Plant Case Study.
The Procuring Authority should ensure that it has the necessary financial, legal and technical capabilities to assess a request for a change of ownership. As will be clear from the range of factors described above that need to be considered when assessing a request for change of ownership, substantial efforts may need to be undertaken to achieve this. Similarly, some aspects of the approval process may need legal input, such as what is meant by ‘unreasonably withholding’ approval of a change of ownership. A technical assessment will need to be made on whether the Project Company will still be able to comply with its obligations under the PPP contract with the new equity investor. If the Procuring Authority does not have the relevant financial, technical or legal expertise in-house, it should appoint external advisors to assist. The use of external advisors is detailed in Section 2.1 (Contract management team set-up).
Lenders also have an interest in changes of control of the Project Company and they may also require a commitment from the equity investors to maintain their financial stakes in the project for some minimum period.
Consent from the lenders to a change of ownership is often linked to consent from the Procuring Authority. The Procuring Authority should consider these interests and not use its approval right in a way that will interfere with the ability of the lenders to protect their interests (e.g. by causing unnecessary delays). The interests of the lenders and the Procuring Authority are typically aligned in this situation, as both parties require a financially stable and technically capable Project Company to deliver the project.
View our list of previous questions and answers or submit a question to our PPP Contract Management team.