When establishing a project consortium under a privately financed public private partnership project, the sponsor(s) generally establishes a special purpose vehicle to contract with government. The special purpose vehicle itself has no historical, financial or operating record government can assess. Government therefore relies on the historical performance of the consortium members to fulfil the project obligations.
The special purpose vehicle is supported by external equity contributions often provided by portfolio investors with no relationship to the project beyond their commitment of equity and expectation of financial return. The special purpose vehicle also raises debt or debt/equity (hybrid) finance. The debt providers are concerned with ensuring repayment of the debt plus interest and other returns as agreed. They provide term sheets offering finance subject to conditions precedent that must be fulfilled before the financing can be drawn down. Sponsor and financial risks stem from the complex structure of these arrangements.
Upon contract execution, the special purpose vehicle becomes the 'vital centre' of the project, coordinating and overseeing the work of the sub-contractors, providing the formal liaison with government over contractual issues, and ensuring that the financiers receive their revenue returns. Incompetence or a lack of probity in the special purpose vehicle is therefore a key risk for all parties and one all parties have an interest in managing. Both the project financiers and government will scrutinise the special purpose vehicle, lifting the corporate veil to ascertain which persons or companies have controlling interests in it.
Special purpose vehicles are likely to have little substance, particularly during a Bidding Phase. This is not necessarily a negative issue, as long as:
• it is relatively clear that equity providers and financiers are in place, understand the project and, given the stage of the project, have demonstrated an acceptable level of commitment
• the sub-contractors nominated by the special purpose vehicle to perform key aspects of the project have the requisite level of skill, expertise and financial capacity to perform their role in the project.