(a)        Control over shareholdings

The government has been assured at bid stage of the quality of the entities proposing to provide services, however the actual PPP contract is likely to be entered into with a special purpose vehicle. The entities which make up the bidding consortium (construction company, operation company, equity investors, etc) are the commercial glue holding it together and the government would wish to keep them locked into the project for a reasonable period of time.

It would be common to see the initial equity investors locked into the equity of the project for at least 18 months, and in some cases substantially longer. For their part, the equity investors will usually want to retain the right to sell their equity stake freely after this period. Once the project is self-sustaining the government should not be too concerned provided that reasonable controls over the nature of any replacement equity investor are maintained. The government will always want to have the right to prevent “undesirable” investors from taking an interest in the project (e.g. for national security reasons).

Even during the lock-in period, it may be justifiable for the equity investors to be able to transfer their stake within their own corporate group or within their own managed funds. The government should be comfortable with this in principle.

(b)        Control over financing documents

As previously discussed, the government is likely to have contingent liability for the senior debt in the project, which may be realised on an early termination.

For this reason, the government has an interest in ensuring that the finance documents are not amended in a way which unfairly increases the government’s contingent risk. This could be achieved by requiring all changes to finance documents to be approved by the government prior to being implemented. However, in practice government consents can be time-consuming to obtain and so this is likely to be too restrictive for the concessionaire and lenders. A usual compromise is to provide that changes can be freely made to the financing documents, but no such changes will affect the government’s contingent liability for the debt unless express approval has been obtained.

Some changes to the financing documents may be beneficial to the shareholders. If market conditions have changed or the project is perceived to have become less risky, a lower margin may be achievable on the debt. If the government had to bear the original cost of financing at the point the project started (e.g. through the calculation of the availability fee), it may be fair for the government to benefit from any subsequent reduction in finance costs. A starting position in many jurisdictions is that the benefit of such refinancing (called a refinancing gain) should be shared 50:50 between the parties.

(c)        Control over project documents

The government will expect to see and approve the final copies of the contracts entered into with the principal supply chain partners (EPC and O&M contractors) and any subsequent replacements. Not only does this give comfort that the concessionaire has put adequate arrangements in place to manage its obligations but the government has an interest in potentially stepping in to these contracts on an early termination of the concession agreement.

This right of approval should however be subject to a test of reasonableness. The concessionaire will wish to retain the ability to terminate and replace the sub-contractors where this is justified in the best interests of the project in order for the concessionaire to manage its ongoing obligations under the concession agreement.

(d)        Step-in rights

The project assets are likely to comprise an essential piece of public infrastructure and, as such, the government should always expect to have the right to step in and take control of the asset at any time when this is reasonably necessary (e.g. if there is an emergency or a need to satisfy statutory obligations).

The concessionaire will usually be accepting of this, provided that the government keeps the concessionaire in a “no better, no worse” position during the step-in period. If the reason for the step-in was brought about by a concessionaire breach then the concessionaire can expect to bear the additional costs incurred by the government to take the step-in action.

However, the penalty should be moderate: once the project is taken out of the concessionaire’s control it is no longer able to rectify the original breach itself and so it would not be justified to continue to penalise the concessionaire indefinitely for this. Similarly, if the project is a revenue-generating project, one would expect the government to be under an ongoing obligation to continue to operate the project prudently and maximise revenues, which would need to be turned over to allow the debt to continue to be serviced.