Infrastructure listings and change in control restrictions in PPP contracts

By Steven Murray and Donna Vella.

Key Points:
The rationale behind these provisions is understandable, but they arguably restrict the ability of equity investors in PPP projects from floating their equity interests on a stock exchange.

The Australian Stock Exchange (ASX) recently requested the Federal Government to hold an inquiry to consider ways to encourage more listed investment opportunities for public infrastructure projects. The ASX issued a paper to Canberra in late October 2004 recommending that the most effective way to encourage infrastructure investment is to create a separate market for infrastructure listings.

A possible impediment to the ASX's objective is the restrictive change in control provisions often found in contracts for Public Private Partnership (PPP) projects. The Victorian Department of Treasury and Finance (Victorian DTF), in consultation with the Governments of the other States and Territories, is currently working on developing standardised contracts to be used in PPP projects. This project is outlined in the Victorian DTF's paper, Standardisation of Contractual Terms in Partnerships Victoria Projects, and if successful, the restrictive change in control provisions are likely to become more common.

Mitcham-Frankston Freeway

The recent example of an infrastructure listing is the Mitcham-Frankston Freeway (MFF) project vehicle, ConnectEast.

On 14 October 2004, the Victorian Government awarded the concession for the MFF project to ConnectEast to finance, design, construct and operate the MFF (which will be a 39 kilometre toll road through Melbourne's eastern and south-eastern suburbs) with a concession period comprising four years of construction and 35 years of operation. As a result, ConnectEast listed on the ASX on 23 November 2004.

In order to partly fund the $3.8 billion project (which is estimated to comprise $2.5 billion in construction costs and $1.3 billion in financial costs), ConnectEast made an Initial Public Offering (IPO) of $1.12 billion to retail investors before floating on the ASX. The structure of the IPO was divided between three offers, namely institutional offers, broker firm offers and public offers. This was Australia's largest IPO in 2004 and has further developed Australia's PPP industry. Approximately 70 to 80 percent of the IPO was allocated through Australian and overseas institutions, with the remainder through broker firms and general retail offices.

ASX approach

The ASX argues that by placing investments in such projects as the Mitcham-Frankston Freeway (MFF) on a separate infrastructure listing market, it will preserve the liquidity of Australia's market, while still meeting the needs of infrastructure projects. In doing so, there would be no (or limited) restrictions on transfers of equity interests, which will encourage the flow of funds and ensure that financing of projects is not as restricted as is currently the case. Also the risk to the financial sector will be shared between both individual investors and managed funds.

Victorian DTF approach

The Victorian DTF, on the other hand, presently favours a more restrictive approach in respect of project equity.

The Victorian DTF is presently developing standardised contractual terms for PPP projects with a view to reducing bidding costs for PPPs and encouraging increased participation and investment in Australian infrastructure.

The approach being taken by the Victorian DTF in its standardisation project is to attempt to "lock in" the initial equity investors through change in control provisions. This reflects the commercial and political desire of Governments that project sponsors should hold equity in these infrastructure projects for longer. Restrictive change in control provisions are sometimes seen by Government as a way of ensuring that project sponsors and initial investors have sufficient "ownership" in a project beyond contract or financial close.

The provisions presently proposed by the Victorian DTF would:

prohibit changes in control of the private party or any holding company of the private party (and, for some projects such as defence or prison projects, major sub-contractors of the private party and their respective holding companies) without Government's prior consent;

require the private party to notify Government of any change in control caused by the transfer of listed shares or interests. If Government rejects the change in control, the private party must procure that the relevant person ceases to have voting power or control or to hold the share capital or other equity interest, within a specified time;

give Government the right to terminate if the private party breaches the above requirements; and

only permit Government to withhold its consent to change in control in certain limited circumstances, including:

• where the change is to take effect prior to the second anniversary of final completion of the construction phase; or
• Government is of the reasonable opinion that:
  • the proposed entity who will control the private party following the change is not solvent or reputable; has a conflict of interest; or does not have the same or greater financial or technical capacity as its predecessor;
  • the proposed change is against the public interest; or
  • the proposed change would adversely affect the ability of the private party to perform its contractual obligations.

In the MFF project, for example, the project deed allows the Government to withhold its consent to a change in control, where the change:

• would have a material detrimental effect on the freeway or its users; or
• would increase the liabilities or risks assumed by the State Government.

The rationale behind these provisions is understandable, particularly in the context of defence and prison contracts, however such provisions may arguably restrict the ability of equity investors in PPP projects from floating their equity interests on a stock exchange and inhibit the ability to preserve a liquid market.

In light of the debate surrounding the move to use standardised contracts and restrictive control provisions, some parties to PPPs have given commitments to Government that they will hold their equity for longer to ensure more stability in equity for PPPs. It will be interesting to see whether this trend is followed on future projects and whether the restrictive change in control provisions has an impact on investments in PPPs.

For further information, please contact Steven Murray.