Insolvency rights: The new rules for Spanish PPPs

In recent years, a number of projects in the Spanish infrastructure sector have had to deal with the spectre of insolvency, the most significant being the insolvency of several toll road concessionaires. At the time of writing, eight toll roads are subject to insolvency proceedings. This has prompted changes to both Spanish public law procurement and Spanish insolvency law, as this article will describe.

Since 6 September 2015, amended insolvency legislation has been in force: public authorities are now permitted to standardise the restructuring of all concessions, and concessionaires undergoing insolvency proceedings can be referred to a specialist judge in a dedicated insolvency court, with standardised restructuring arrangements in place. When dealing with an insolvent Public Private Partnership (PPP) project, three of the main issues which need to be considered are as follows:

• what restrictions will apply to new financial contributions made by the Government post-contract award;
• what impact the insolvency will have on the granting of new security, in addition to that granted in the original financing; and
• what compensation will be payable by the Government to the sponsors of the project in the event of a termination of the concession agreement (termed as the “financial liability” of the Public Administration, or RPA).

As a consequence of uncertainties surrounding these three issues, in October 2015 the Spanish Government passed Law 40/2015 which modifies Royal Legislative Decree 3/2011 on Public Sector Procurement.^[1] This law was published in the Official Gazette on 2 October 2015 and amends various articles of the Public Sector Procurement Act, as well as introducing new articles 61.bis, 271. bis and 271.ter. The main purpose of the amendments have been to clarify the position of the Government in the event that a concessionaire becomes insolvent.

These new rules will have a major impact on the distribution of risk in Spanish PPP projects, especially in relation to their financing, as described below.

Restrictions on new financial contributions by the government post- contract award

In the past, if a PPP concessionaire experienced financial difficulties, the Government generally stepped in to provide additional funding, in order to save the project. The main incentive for the Government to make contributions before a default situation arose was to avoid paying an RPA indemnification to the sponsors of the project if the project went into default. This approach did not sit well with public opinion, however, particularly when it related to high-profile projects.

The new regulation has amended article 254 of the Public Sector Procurement Act to restrict the making of new contributions by the Government. The new wording states that the Government is not permitted to make new contributions in excess of a maximum limit set out in the tender conditions for the concession agreement.

Paragraph three of article 254 states that the possibility of the Government making new contributions to the project must be foreseen at the time of the concession award, and that the tender conditions must specify this amount, which then cannot be increased post-contract award. This restriction applies to various types of securities, guaranties (avales) and other measures intended to support the financing of the concessionaire.

New rules on securities

Before this legislative reform came into force, article 261 of the Public Sector Procurement Act stated that all assets and rights linked to a concession could be subject to a mortgage, provided that the mortgage had been previously authorised by the government body in charge of the procurement (órgano de contratación). The new clause retains this provision but adds a new third paragraph, which foresees the possibility of granting a pledge over all credit rights arising from the termination of a concession (i.e. a pledge on future credits).

According to the new regulation, in order to grant a pledge over the credit rights arising from the termination of a concession agreement, the following requirements must be met:

• the pledge can only be granted in order to secure obligations which are connected with the concession;
• the government body in charge of procurement must authorise the pledge; and
• the granting of the pledge must be published in the relevant state’s Official Gazette or in other regional official gazettes.

Consequences of the termination of the concession agreement

The most significant amendment introduced by this new regulation is the one contained in article 271, relating to the consequences of the termination of a concession agreement. When a concession is terminated, that may give rise to a financial liability on the part of the public administration or RPA.

For the purpose of calculating the RPA indemnification which the Government must pay to the sponsor, different rules apply depending on the cause of termination of the concession agreement (i.e. whether the cause is attributable to the Government or not).

1. If the concession has been terminated for a reason which is attributable to the Government, the concessionaire has the right to be indemnified under the following heads of entitlement: (i) the investment made for the expropriation of land; (ii) the cost of the construction works; and (iii) the cost of acquisition of the necessary properties to enable the project to In order to calculate the value of the acquired properties, the Government applies depreciation on a straight-line basis.

   In order to compensate the sponsor for the investment it has made, the Government uses its own criterion, known as a “recognised investment” (inversión reconocida). The Government’s “recognised investment” will not necessarily be the same

   figure as the actual investment which the concessionaire calculates it has made: in practice it is actually very common for these two figures to differ. In order to calculate the investment for the purpose of the RPA indemnification, the Government uses a straight-line depreciation basis, taking into account the time elapsed between the end of the construction works and the overall term of the concession.

   In addition, there are three situations in which the concessionaire will have the right to compensation for damages, which will then be added to the compensation figure as calculated above. These three cases are: (i) bail-out compensation (rescate); (ii) public interest cancellation; and (iii) impossibility of exploiting the project due to other agreements executed by the Government post-concession.

   This additional compensation is calculated by taking into account all future benefits that the concessionaire would have earned (calculated on the basis of the average pre-tax profits made by the concessionaire over the remaining years of the concession period) and the loss in value of all works and infrastructure which are not due to be returned to the Government.

2. If the concession has been terminated for a cause that is not attributable to the Government, the concessionaire will still have the right to be indemnified for the cost of land expropriation, the carrying out the constructions works and acquiring all necessary properties. However, this indemnification is not capped at the value of the concession, but rather calculated in accordance with the rules of article 271.bis, which has been introduced by the present reform.Article 271.bis states that, when a concession is terminated for a cause which is not attributable to the Government (in other words, a cause which is attributable to the concessionaire), the government body in charge of procurement must initiate a new process to award the concession to a new concessionaire. The concession will be awarded to the highest bidder provided that this is in excess of a minimum bid figure, which is calculated according to rules set out in article 271.ter. The value given to the concession – and thus the value of the indemnity cap – is the amount for which the new concession agreement is being awarded. In the event that there are no bidders, the government body in charge of procurement will call for a second process in which the minimum bid figure will be 50 per cent of that of the first process. If there are still no bidders in the second process, the value of the concession will be the minimum bid figure for this second process.In any case, if the concessionaire becomes insolvent, it will be deemed to be a cause of termination which is not attributable to the Government.

Entry into force of the new rules

The new amendments of the Public Sector Procurement Act entered into force on 22 October 2015. The RPA regime applies to all concession contracts whose tender procedures (expediente decontratación) started after the entry into force of the Act. Note that those concessions awarded prior to 22 October 2015 – or whose tender procedures began before 22 October 2015 – will be governed by the previous legislation and are therefore not affected by these changes.

_{This article is part of our InfraRead (Issue 7) released in March 2016. To download the full PDF publication, please click here.}

_{Notes
[1] Real Decreto Legislativo 3/2011, de 14 de noviembre, por el que se aprueba el texto refundido de la Ley de Contratos del Sector Público (the Public Sector Procurement Act).}