There is no UK requirement to obtain public sector consent and/or to profit sharing when PPP equity is sold, although it is required when PPP projects are refinanced. The standard PPP contract imposes a restriction on the sale of equity prior to the completion of construction and commencement of the service. Once operational, shareholders in a PPP project company can sell equity and are only required to inform the authority within 30 days of any change of ownership.
The Treasury has regarded the sale of PPP equity as a transaction solely between companies in which the government has no involvement. It claims a change in the equity ownership of the project is part of the normal takeover or merger of companies and is different from refinancing projects. The National Audit Office (NAO) position is summarised in their evidence to the House of Lords investigation into PPP projects and off-balance sheet finance:
"In general, the shareholders of a project company are allowed to trade their PFI shares freely, as they would any normal shares of a limited company. Only occasionally would a public authority have a say in such trades, such as a right to consent (not unreasonably withheld) in certain Defence contracts. The public authority is not a party to such trades and does not share in any proceeds. It is therefore important that the expected return to the shareholders over the course of the whole contract be carefully scrutinised during the contract tendering" (House of Lords, 2010b).
This view is shared by Local Partnerships, the PPP support agency for local authorities:
"Holders of shares in Contractors will not want their ability to transfer their investment to be restricted. This is because allowing them to transfer their investments in Contractors extends the availability of capital for projects, makes the market more liquid and, as a consequence, can help improve value for money" (Local Partnerships, 2004).
The NAO believes that the sale of PPP equity has, in theory, "…had a positive effect on the availability and cost of equity capital in the primary market. The secondary market provides some confidence to primary market investors that they will have an exit opportunity and that they will not be tying up capital for the full length of the contract. This confidence could mean more investors and more capital in the market, which in turn drives competition and reduces the cost of equity finance" (ibid).
The NAO recognised that the risk of the consolidation of PPP equity could lead to "…disproportionate market power, and particular asymmetry of power over small public authorities tendering and managing single PFI contracts. We would be concerned if we started to see a few consolidated owners dictating contract and commercial terms. We do not have evidence that this is happening" (ibid). It concedes, "…the lack of visibility over the secondary market it is difficult to ascertain the effects that the secondary market has had to date" (House of Lords, 2010b).
They believe that changes in the share-ownership of a SPC "…has few direct effects on the operational aspects of the project. The contractual terms are unchanged, and the organisations and people delivering the project will rarely change. The project company will remain responsible for the delivery of the project, but will seek to pass as much of the risk associated with that delivery to sub-contractors. Consequently, the key relationships between the public authority as client and the Project Company's sub-contractors will remain unchanged" (House of Lords, 2010b).
The NAO assumes that the growing secondary market will have little or no effect on PPP projects, services users, staff and public bodies. However, the sale of PPP equity and growth of the secondary market infrastructure funds has very significant implications (Whitfield, 2010 and 2012).