Joint Ventures / Government Shareholding in Project Company
Photo Credit: Photo: John Hogg / World Bank
Joint ventures between the public and private sectors in PPP arise when:
- a contracting authority may require to have an equity stake ("shares") in the project company/ operator. This approach has advantages and disadvantages and this section highlights some of these.
- when an existing public utility or SOE sells a stake in the utility to a private company. In the water sector in civil law countries, a model for public-private infrastructure projects that has been used extensively is "empresas mixtas" (joint venture enterprises). This section also provides examples of empresas mixtas and includes sample legislative frameworks for such entities.
This section does not focus on the relationship between consortium members bidding on a project where they may decide to form a special purpose company, although the issues covered in the Joint Venture Checklist and the Joint Development Agreement Termsheet. See also Sources of Financing. It explores key issues to consider when establishing joint ventures
It is also possible to have a joint venture in the form either of: It is therefore recommended that for joint ventures between the public and private sectors that this take a corporate form. Before a public entity enters into a joint venture it will need to check that it is empowered to do so under law - this can be restricted at law. Governments cite a number of reasons for why they would prefer to take a substantial stake in a project company or maintain a substantial stake in a utility involved in a PPP. However, as the public and private sectors work in very different manners and have different processes and priorities, in practice this can cause challenges: Advantages: However, as share ownership alone does not necessarily guarantee these advantages, attention needs to be given to the shareholder agreement – see Joint Venture checklist below. Indeed, a public party can achieve a number of these advantages with a much smaller shareholding if the structure is properly designed. Disadvantages: A minority shareholder is a shareholder that does not have control of a company. Typically, a party or parties holding (collectively) over 50% of the issued ordinary shares of a company are in control and so any party with less than 50% has limited protection. Minority shareholders typically benefit from some limited protections at law – such as against fraud. A shareholder that owns over 25% of the issued share capital is also typically under law granted powers of veto over issues such as changes to the constitutional documents of the company. If a minority shareholder wishes to be protected further, these protections will need to be agreed in the shareholder agreement. Some typical protections to consider would include: for more, go to Joint Venture Checklist Joint Development Agreement Termsheet - Short-form term sheet covering key issues that need to be established between parties to a consortium before they start developing a project/ preparing response to tender documentation for a project. Click to download the Joint Venture Checklist, which covers key issues to consider when putting together joint venture arrangements. The checklist covers questions regarding funding, division of equity, corporate governance, and other issues. Empresas Mixtas, a type of legal entity that receives financial funding from both a private company as well as a government –at a country, city or municipal level, hence the term a mix enterprise. HM Treasury Guidance prepared by Partnerships UK: "A Guidance Note for Public Sector Bodies forming Joint Venture Companies with the Private Sector" (PDF) Mixed Private-Public Ownership Companies “Empresa Mixta" (2011) This review of the empresa mixta model was undertaken to better understand its structure, applicability and strength in mitigating risks in the water and sanitation sector. The last decade has provided many lessons on empresas mixtas, particularly in Latin AmericaOverview of Public Private Joint Ventures
Advantages and Disadvantages of Government having a stake in a Project Company
Key Considerations for Minority Shareholders
Joint Development Agreement Termsheet
Examples of Shareholder Agreements for PPP Projects
Checklist of Issues Related to Joint Ventures/Empresas Mixtas
Further Reading