Spanish public-private partnership structures – Roca Junyent

 

The scheme to be followed in Spanish public-private partnerships (PPPs) as a way to privatise infrastructure in Spain will inevitably depend on the nature of the infrastructure itself. If it is to be used or built to provide public services (those which provision the Government or local Administration have declared reserved to themselves), such infrastructure is qualified as public domain infrastructure and, thus, cannot be sold to private investors, but they can be contracted to build and operate them. However, the public entity which holds this infrastructure can contribute to a company and transfer a stake of its equity to a private investor. If the infrastructure is not to be used to provide public services, it can be sold to private investors or contributed to a company, and such entity sold to those investors. There are inevitably variables between the diff erent types of structures, many of which require careful consideration by constructors and financiers alike.

PPP and Privatization

I. Introduction. 1

II. Public services infrastructures or public domain infrastructure privatization: PPPs. 2

1. PPP contracts. 2

2. Forms of SPV in PPP. 3

a. SPV wholly owned by the private partner 3 

b. Mixed SPV. 3 

(i) Capital structure and corporate purpose.- 3 

(ii) Incorporation and investment of economic operators in Mixed SPVs. 3 

(iii) Relevant provisions. 4 

3. Some relevant economic and financial provisions in public works concessions. 4 

a. Shift of risks to the private company. 4 

b. Infrastructure finance. 5 

c. Payments to the SPV. 5 

(i) Tolls. 5 

(ii) Commercial area operation yields. 5 

4. PSCA rules for concession awarding and selection of private partners for PPPs. 6 

III. Liberalization and privatization. Partial privatizations and partnerships. 6  

1. Sale of a State owned company. 7 

2. PPP in these cases. 8

3. Finance. 8

I. Introduction

The purpose of this article is to provide a brief overview on the use of public-private partnerships (PPPs) as a way to privatise infrastructures in Spain.

The first thing to bear in mind is that the privatization scheme to be followed will depend on the nature of the infrastructure. If the infrastructure is used or will be built to provide public services (those which provision the governments have declared reserved to them), such infrastructure is qualified as public domain infrastructure and, thus, can not be sold to private investors, but they can be contracted to build and operate such infrastructures. However, the public entity which holds this infrastructure can contribute it to a company and transfer a stake of its equity to a private investor. If the infrastructure is not used to provide public services, can be sold to private investors or contributed to a company, and such company sold to those investors.

II. Public services infrastructures or public domain infrastructure privatization: PPPs

1. PPP contracts

As mentioned above, the granting of administrative concessions or public contracts is the only way to privatize such public domain infrastructure.  These contracts are granted to private partners that usually take the form of (or incorporate) a special purpose vehicle (“SPV”) (especially if the private partner is formed by a consortium of companies).

The contracts established by the Public Sector Contracts Act 30/2007, 30^th October (“PSCA”) that can be considered PPPs are the following:

(i) Public Works Concession.- The public works concession is a contract that aims at the realization by the concessionaire of works for the construction of an infrastructure and, sometimes, the designing of the project, including the restoration and repair of existing buildings and the conservation and maintenance of the built elements, and in which the consideration for it consists either solely in the right to operate the construction or in this right together with the right to perceive a fee. This concession can last up to forty years.

Under this kind of contracts, the government transfers to a private company the construction risk (and, sometimes, design risks), and the demand risk and/or the disposal risk.

This is the most widely used PPP in infrastructure projects that require large up-font investments such as highways, railways, airports, seaports and hospitals.

(ii) Public-Private Partnership contract (“PPP Contract”).- In the PPP Contract a public administration entity entrusts a private partner, for a specified period of time, for the realization of an integrated overall performance, that, in addition to the financing of intangible assets, works or supplies to carry out certain public service objectives or related activities of general interest, includes one of the following features: a) The construction, installation or transformation of works, equipment, systems, and products or complex goods and maintenance, upgrade or renovation, its operation or its management; b) The integrated management of the maintenance of complex installations; c) The manufacture of goods and services that incorporate technology specifically developed for the purpose of providing solutions most advanced and economically more advantageous than the existing market; d) Other services related to the development by the Administration public service of general interest or action that has been given.

(iii) Public services management concession.- This is a concession pursuant to which the public administration that holds the entitlement to render certain public services entrusts (or delegates) a private company the management of those services.

2. Forms of SPV in PPP

The SPV in PPP usually is incorporated as a public limited company (sociedad anónima) and its equity can be entirely owned by the private partner or by both the private partner and the granting authority.

a. SPV wholly owned by the private partner

This is a concessionaire company to which a public works concession is granted. The public administration usually requires for a private company that enters into a public works concession contract that incorporates an SPV (controlled or wholly owned by a private company) which corporate purpose is limited to the building and operation of the relevant project.

This type of companies is subject to the Capital Companies Act, but the granting authority has certain control over it, which in most cases is achieved by means of change of control and lock-up provisions, among others.

The articles of association of this SPV use to contain provisions such as a right of first refusal, provisions concerning the SPV’s equity (reserves), and the right of the granting authority to appoint a representative in the SPV. The duration of this SPV is usually linked to the duration of the concession it operates.

b. Mixed SPV

(i) Capital structure and corporate purpose.-

This SPV is a company which equity is owned by a public administration and a private partner. This SPV is used to provide public services under a public services management concession, its corporate purpose being limited to it.

(ii) Incorporation and investment of economic operators in Mixed SPVs

Mixed SPVs are usually incorporated by a public administration, who selects the private partner though the procedures described below in Section III.4. After selecting a private partner, the granting authority enters into a subscription agreement with such partner, in case the latter is going to acquire newly issued shares, or enters into a share purchase agreement with it, if the private partner is going to acquire existing shares previously held by the public entity.

These two possibilities are admitted by the Spanish jurisprudence and the Green Paper on public-private partnerships and community law on public contracts and concessions.

The public administration uses to contribute the public services management concession to this SPV, and can also contribute rights over public domain assets. The private partner usually contributes its know-how to the SPV and the project by means of an ancillary commitment, which is usually remunerated. This type of SPV has been most used recently in the water services sector.

(iii) Relevant provisions

Some provisions that are usually included in the articles of association of mixed SPVs are the following: (i) the appointment of the general manager by the public administration, (ii) qualified voting majorities for the general shareholders’ meeting and the board of directors (however, the Rulings of EU Court on golden shares have limited this possibility),  (iii) pre-emption rights (generally a right of first refusal, although a right of first offer could be accepted) in favour of the public administration in case the shares held by the private partner are transferred, (iv) lock-up provisions, and (v) procedures concerning the amortization of the capital stock owned by the private partner. The duration of Mixed SPV is usually limited to 40 years (its duration is linked to the duration of the concession). The transfer of the SPV shares owned by the private partner uses to need the previous authorization of the public administration.

3. Some relevant economic and financial provisions in public works concessions

a. Shift of risks to the private company

One of the key objectives of the regulations of the public works concession is, as mentioned before, the transfer to a private company of the risks related with the infrastructure. This is a major advantage for the public administration in terms of public deficit since the assumption of the private partner of the construction risk and the demand or disposal risks allows the public administration not to consolidate in its accounts the investments related to the public works concession.

b. Infrastructure finance

The private partner in a public works concession is responsible for getting the funds for the SPV to finance the infrastructure. The SPV can be funded with equity, with banking finance (usually by means of a project finance structure) and with funds from the public administration, although the latter funds can only be ancillary.

As regards banking finance, the Spanish Sustainable Economy Act of March 4^th, 2011 has introduced some novelties in relation to the contracts granted by public administration and PPP finance in order to boost banking lending. Some of these novelties are: (i) the possibility to include in the public works concession contract some provisions concerning the guarantees that the SPV or its shareholders may grant in order to seek finance from the banks, (ii) in case an early termination event occurs, the granting authority can offer the creditors the possibility to subrogate in the concession contract, provided that they meet the requirements of the grantee. The Sustainable Economy Act also establishes that financing deals must be notified to the granting authority. It should be noted that the SPV can not grant a mortgage over the public works concession to secure any debts that are unrelated to such concession.

As regards public finance, it must be ancillary because it must respect the principle of assumption of risk by the SPV which holds the concession title. The amount of public finance has to be fixed on a case by case basis. Public funds can be provided to the SPV by means of (i) monetary or non-monetary contributions, (ii) subsidies, (iii) loans, and (iv) equity loans. Funds can be provided by governments and international organizations such as the European Investment Bank.

c. Payments to the SPV

The SPV can be paid by the following methods:

(i) Tolls

This is the most relevant payment. It can be paid by the users of the infrastructure, the granting authority or by both. In any case, as the SPV has assumed the infrastructure risks, the tolls must be related to the volume of use of such infrastructure.

(ii) Commercial area operation yields

The SPV can also be paid with the yields that it can obtain from the operation of the commercial area of the infrastructure. These payments must always be ancillary with respect to tolls.

4. PSCA rules for concession awarding and selection of private partners for PPPs

According to the PSCA, the procedures for the awarding of concessions or public contracts to economic operators or selecting a private partner for a Mixed SPV, are:

(i) Open procedure.- Procedure whereby any interested private company may submit a tender.

(ii) Restricted procedure.- Those procedures in which any private company may request to participate and whereby only those economic operators invited by the contracting authority may submit a tender.

(iii) Negotiated procedure.- Procedure whereby the contracting authority consults the economic operators of their choice and negotiates the terms of contract with one or more of these.

(iv) Competitive dialogue.- Procedure which is used in case of particularly complex contracts. In this procedure any economic operator may apply for its participation and the contracting authority conducts a dialogue with the candidates admitted to that procedure, with the aim of developing one or more suitable alternatives capable of meeting its requirements, and on the basis of which the candidates chosen are invited to tender. This is the compulsory procedure to be followed in case a PPP Contract is procured.

According to PSCA, the usual procedures to be applied are the open and the restricted ones, but the competitive dialogue in compulsory in case a PPP Contract (as defined in the PSCA) is procured.

III. Liberalization and privatization. Partial privatizations and partnerships

The infrastructures used to provide non-public services or general interest services and the infrastructures that have been liberalized can be operated by private investors.

Privatization of infrastructures not used to provide public services can be done by (i) contributing those infrastructures to a company and selling (all or part of) its shares to a private investor or (ii) selling all or part of the shares of such company in the capital markets to institutional and minority investors (free float). Subscription of newly issued shares is also used.

1. Sale of a State owned company

The sale or privatization of a State-owned company requires the authorisation of the Council of Ministers and may be carried out by means of a public offering in capital markets or a bidding procedure or an auction.

(i) Bidding procedure or auction

The bidding procedures and auctions are subject to the provisions of the Law on Public Sector Assets. Subsidiary, the rules of administrative law –including public sector procurement regulations-, will apply. Private law will apply to all other aspects.

A similar process (subject to the Spanish Contracting Procedures in the Water, Energy and Transport Sectors Act, 31/2007, 30^th October)  is being followed in the privatization of the Airports of Madrid and Barcelona, held by the Spanish Airport Authority called Aena, for the selection of a private partner that will operate those airports under a new type of concession (subject to private law) created by the Royal Law-Decree 13/2010, 3 ^rd December.

(ii) Initial public offerings (going public)

The Government can decide that its company goes public, in which case it will offer its shares in the primary market by means of an initial public offering, also known as privatization initial public offering (“PIPO”). The main reasons for going public are the following: (i) generate significant cash for the Government; (ii) provide incentives for employees through the use of stock options; (iii) provide liquidity for investors; (iv) have access to the public market for future financings (though follow-on offerings or share subscription offers); (v) enhancement of the company’s market value. PIPOs can be used to (i) place new shares among the public, obtaining a significant free float, and (ii) to place shares among institutional investors, hence the PIPO having both institutional and retail tranches.

PIPOs require that the company has a certain volume and that shares that are going to be offered to the public are not subject to transfer restrictions. They also require the filling of a prospectus within the National Securities Commission (Comisión Nacional del Mercado de Valores) for its approval.

This procedure was being followed in the privatization of the Spanish State-owned bidding company “Loterías y Apuestas del Estado, S.A.”, but it was cancelled because the current market conditions do not guarantee a proper price.

(iii) Control bodies in privatizations

The privatization of a state-owned company is controlled by the following bodies:

• Consultative Board for Privatizations (Consejo Consultivo de Privatizaciones), which issues a non-binding report about the fulfillment of the publicity, transparency and competition principles before the Council of Ministers authorizes the privatization.

• State Controller (Intervención General de la Administración del Estado).

• National Antitrust Commission (Comisión Nacional de la Competencia).

2. PPP in these cases

In the sale of government-owned companies to private investors, the government can retain a stake in the company. In these cases, a joint venture deal is agreed between the government and the private investors. In this case, although this deal can not be considered one of the PPP formulas established in the PSCA, can be considered a PPP deal because its structure can be quite similar. In this cases, as mentioned before, the joint venture or PPP contract will not be subject to the PSCA but to private law, although the selection of the private partner will be made by means of a public bidding procedure or auction. The fact that these contracts are subject to private law means that, in case a concession is granted to the private partner for the operation of an infrastructure, the tariffs to be paid for the use of such facilities are no longer public but private and, thus, more flexible.

3. Finance

The finance of PPP deals in these cases can be structured as a project finance deal, like in the public works concession projects. But, since the contracts between the public and the private partner are not public and, thus, any concession agreement will not be subject to the PSCA, the concessions granted to the SPV can not be mortgaged.

Joan Roca Sagarra Manuel J. Silva Sánchez

Partners of the Infrastructure practice group ROCA JUNYENT, S.L.P.