Guidelines for Acquisitions of Infrastructure Assets

A Colombian firm gives merger and acquisition insights to assess risks in the purchase of potentially tainted assets.

Acquisitions of Infrastructure Assets

Posse Herrera Ruiz

May 4, 2020 08:00 AM

During the last 10 years, Colombia has been taking legislative and economic measures, seeking to improve existing infrastructure and to build much needed new projects, such as toll roads, ports, airports, and social infrastructure, among others. Worth mentioning is the implementation of the fourth generation toll road program to construct 19 infrastructure projects (4G Projects) promising to modernize the country’s highway system (to be followed this year by a fifth generation program). The thriving of this industry was facilitated with the expedition of Law 1508 of 2012 (PPP law), which allows private and public entities to propose infrastructure projects, as well as the sophistication of the legal and financial tools for project financing.

Amidst this context, corruption scandals emerged in Colombia and Latin America, resulting in some cases halting the expected continuity in the implementation of certain infrastructure projects and harshly tainting the assets related to them. As a consequence, players including lenders, sponsors, and buyers are cautious in the assessment of risks they would be willing to assume when investing in infrastructure projects. Nonetheless, infrastructure continues to strongly contribute to economic growth, and it is expected to continue boosting investment opportunities, notwithstanding slowdowns triggered by the COVID-19 sanitary emergency.

This article seeks to briefly explain certain main aspects of Colombian common structure of infrastructure projects, generally, focusing on how risks are customarily allocated among different key players, to then explain how potential buyers of shares or assets in these projects may better asses and thus mitigate risks and exposure as from due diligence through execution of transaction documents.

Anatomy of common infrastructure projects

Infrastructure projects customarily have a group of sponsors that have obtained the concession agreement (made available to bidders by way of governmental or private initiative) to build and operate an infrastructure project. Such a group of sponsors will then incorporate a Special Purpose Vehicle (SPV) that will execute the concession agreement with the relevant governmental authority, obtain the required financing for the project (that will be handled in a trust), and assume all covenants related to the financing documents and the concession agreement. This way, sponsors will develop the project “out of balance” and the financing institutions will have limited recourse against sponsors (as in any other non-recourse project finance structure).

The risk matrix of these projects would reflect that government would assume most aspects of the real state, force majeure, and regulatory risks. On the other hand, the sponsors would assume all design and construction risks, having to cover for any overhead expenses. Usually, during the construction phase, shareholder participation cannot be changed, and any and all distribution would be subordinated to the senior financing.

Corruption risk

In addition to the above, for any potential buyer of a minority or majority stake in infrastructure projects, another additional risk to be balanced is the risk of the asset being tainted due to a potential corruption investigation, either directly in relation with the awarding of the concession or due to an investigation against a particular sponsor who may contaminate the project or the SPV. If this risk materializes, this could imply the forfeiture of the concession agreement, acceleration of the financing, impossibility of contracting again with the government, and potential reputational damages for such buyers.

How to mitigate the corruption risk during the M&A process

Thorough due diligence is generally recommended, in some cases not only from a legal perspective but also from a compliance point of view. It is worth noting that when investors purchase participations in SPVs, SPV itself has no value; the true value comes with the acquisition of the rights to exploit and benefit from the concession agreement. Therefore, a detailed review of how the concession was awarded becomes crucial in determining if the project later could potentially be tainted and affected by corruption.

Alongside the due diligence, the negotiation of strong indemnities in matters such as reputational, ethics, and compliance mattersaimed to guarantee that sponsors have conducted the project in a clean and legal mannershould be put in place. Analysis of sellers’ substance and parent company guarantee is also common.

Purchasing an asset already affected by corruption claims of the sponsors

Recently, congress passed Law 2014 of 2019 in an effort to increase the effectiveness of measures against corruption. This legislation included new legal provisions in relation to the effects of sanctions of these conducts and established the mandatory need of reassigning any concession agreement when the sponsors have been sanctioned of corruption acts, without the need for indemnifying the affected party. This means that the governmental entity shall start a new procurement process and select a new investor to which assign the concession agreement without contemplating any negotiation among SPV and assignee. The “no indemnification” shall mean that the state will not be required to pay compensation for the assignment of the agreement, but the asset still must be purchased by the investor at a fair market price.

A definitive ban for contracting with the government shall also apply in the foregoing cases to all companies that are part of a company conglomerate when it has been evidenced that the conduct corresponds to a criminal group policy.

The government is looking to continue the efforts in modernizing Colombia´s infrastructure system and establish new guidelines to fight against corruption in public procurement. In turn, as the corruption scandals start to be resolved, new investors shall see in Colombia a good opportunity to invest, notwithstanding the necessary precautions that must be taken to prevent purchasing tainted assets that will later affect the reputation and financial objectives of the buyer.

Gabriel Sánchez is a partner at Posse Herrera Ruiz. His practice focuses on Mergers and Acquisitions and Corporate law. Daniel Delgado is an associate. His practice focuses on M& A and corporate/commercial law.

Related Articles

Brick to Click

by Lindsay Mesh Lotito

Trends in commercial real estate have been fast-tracked by the pandemic. Here’s what lenders and borrowers must do to ensure their viability in a rapidly changing world.

Online Shopping Shifts Commercial Real Estate

Announcing the 2022 Best Lawyers: Real Estate and Infrastructure Publication

by Best Lawyers

Featuring the top legal talent from The Best Lawyers in America, Best Lawyers: Ones to Watch in America and "Lawyer of the Year" recipients for real estate and infrastructure as well as thought leadership from some of the nation's top lawyers.

Real Estate and Infrastructure Publication

Announcing the 2022 Best Lawyers in Colombia™

by Best Lawyers

The results include an elite field of top lawyers and firms.

Announcing the 2022 Best Lawyers in Colombia™

Summer Voting Season Is Here!

by Best Lawyers

Summer 2021 voting is open to all lawyers listed in Best Lawyers in Chile, Colombia, Peru, Brazil, Mexico, Portugal, South Africa and Spain.

How To Vote On Your Best Lawyers Ballot

Morrison & Foerster Attorney Randy Bullard’s LGBTI Advocacy

by Greg Sirico

Randy Bullard, a Best Lawyers® listed attorney practicing at Morrison & Foerster, is an LGBTQI advocate and pioneer for change around the world.

Morrison & Foerster Attorney Randy Bullard's

Announcing the 2021 Best Lawyers in Chile, Colombia, and Puerto Rico

by Best Lawyers

Find the top legal talent in Chile, Colombia, and Puerto Rico.

Best Lawyers in Chile, Colombia, Puerto Rico

Working With Changes

by Best Lawyers

Carolyn Pugsley, the Joint Global Head of Practice for Corporate, Australia at Herbert Smith and Freehills, discusses policy changes affecting the M&A market in Australia as well as the impact of the pandemic on the practice.

An Interview With Herbert Smith and Freehills

Too Good to Fail

by Best Lawyers

Sandro Abegglen discusses new regulations after financial crises, corruption, and more.

An Interview With Niederer Kraft Frey

From Russia, With Law

by Best Lawyers

The bite of U.S. sanctions aside, Cleary Gottlieb partner Yulia Solomakhina sees great promise for commerce and the law as Russia increasingly embraces markets and technology.

An Interview With Cleary Gottlieb

How This Firm Is Shaping the Economic Future of Ukraine

by Best Lawyers

Denis Lysenko discusses how AEQUO has helped build a new business environment.

An Interview With AEQUO

How Russia's Global Policy Is Impacting Mergers and Acquisitions

by Best Lawyers

Alexei Zakharko and Mathieu Fabre-Magnan disscuss how they are preparing for emerging trends in the next couple of years.

An Interview With Dentons Russia

How Corporate Law in France Is Navigating the Trade Wars

by Best Lawyers

Bertrand Cardi and Cyril Bonan discuss M&A, protectionism, and the trade wars' impact in France.

An Interview With Darrois Villey Maillot Broc

A Sea Change on Land

by Linda A. Klein and Suneel Gupta

Autonomous vehicles will revolutionize almost every area of the law. Here’s a look at what’s rapidly approaching.

Legal Considerations for Autonomous Vehicles

Hengeler Mueller on How German Firms Can Compete in the Global M&A Arena

by Best Lawyers

Germany's 2020 “Law Firm of the Year” honoree in Mergers and Acquisitions Law

An Interview With Hengeler Mueller

Merging Business and Responsibility: Gilbert + Tobin

by Best Lawyers

Attorneys Costas Condoleon and Sam Nickless from the Australian firm Gilbert + Tobin discuss the firm's 2020 award, how Australia’s Corporate Law practice is preparing for the world’s transforming economic landscape, and the international community’s demands of its businesses.

Gilbert + Tobin 2020 LFOTY Interview

Protecting Your Legacy With Estate Planning

by Tripp Wiles

You're careful with your finances; do you still need asset protection?

Protecting Your Legacy With Estate Planning

Trending Articles

Johnny Depp and Amber Heard: The Best Lawyers Honorees Behind the Litigation

by Gregory Sirico

Best Lawyers takes a look at the recognized legal talent representing Johnny Depp and Amber Heard in their ongoing defamation trial.

Lawyers for Johnny Depp and Amber Heard

The Real Camille: An Interview with Johnny Depp’s Lawyer Camille Vasquez

by Rebecca Blackwell

Camille Vasquez, a young lawyer at Brown Rudnick, sat down with Best Lawyers CEO Phillip Greer to talk about her distinguished career, recently being named partner and what comes next for her.

Camille Vasquez in office

Announcing The Best Lawyers in The United Kingdom™ 2023

by Best Lawyers

The results include an elite field of top lawyers and firms from the United Kingdom.

The Best Lawyers in The United Kingdom 2023

Announcing The Best Lawyers in France™ 2023

by Best Lawyers

The results include an elite field of top lawyers and firms from France.

Blue, white and red strips

Announcing The Best Lawyers in Germany™ 2023

by Best Lawyers

The results include an elite field of top lawyers and firms from Germany.

Black, red and yellow stripes

Education by Trial: Cultivating Legal Expertise in the Courtroom

by Margo Pierce

The intricacies of complex lawsuits require extensive knowledge of the legal precedent. But they also demand a high level of skill in every discipline needed to succeed at trial, such as analyzing technical reports and deposing expert witnesses.

Cultivating Legal Expertise in the Courtroom

Announcing the 2022 Best Lawyers® in the United States

by Best Lawyers

The results include an elite field of top lawyers listed in the 28th Edition of The Best Lawyers in America® and in the 2nd Edition of Best Lawyers: Ones to Watch in America for 2022.

2022 Best Lawyers Listings for United States

Announcing The Best Lawyers in Belgium™ 2023

by Best Lawyers

The results include an elite field of top lawyers and firms from Belgium.

Black, yellow and red stripes

Announcing the 2022 Best Lawyers™ in France

by Best Lawyers

The results include an elite field of top lawyers and firms, including our inaugural Best Lawyers: Ones to Watch recipients.

Announcing the 2022 Best Lawyers™ in France

We Are Women, We Are Fearless

by Deborah S. Chang and Justin Smulison

Athea Trial Lawyers is a female owned and operated law firm specializing in civil litigation, catastrophic energy, wrongful death and product liability.

Athea Trial Law Female Leadership and Success

Choosing a Title Company: What a Seller Should Expect

by Roy D. Oppenheim

When it comes to choosing a title company, how much power exactly does a seller have?

Choosing the Title Company As Seller

What If Johnny Depp and Amber Heard Had a Premarital Agreement?

by John M. Goralka

Oh, the gritty details we’re learning from the latest court battle between Johnny Depp and Amber Heard. This unfortunate airing of dirty laundry may have been avoided with a prenup. Should you think about getting one yourself?

What If Johnny Depp & Amber Heard Had Prenup?

Announcing the 2022 Best Lawyers™ in Germany

by Best Lawyers

The results include an elite field of top lawyers and firms, including our inaugural Best Lawyers: Ones to Watch recipients.

Announcing the 2022 Best Lawyers™ in Germany

U.K. Introduces Revisions to Right-to-Work Scheme and Immigration Rules

by Gregory Sirico

Right-to-Work Scheme and Immigration Rules in

What the Courts Say About Recording in the Classroom

by Christina Henagen Peer and Peter Zawadski

Students and parents are increasingly asking to use audio devices to record what's being said in the classroom. But is it legal? A recent ruling offer gives the answer to a question confusing parents and administrators alike.

Is It Legal for Students to Record Teachers?

Destiny Fulfilled

by Sara Collin

Was Angela Reddock-Wright destined to become a lawyer? It sure seems that way. Yet her path was circuitous. This accomplished employment attorney, turned mediator, arbitrator and ADR specialist nonpareil discusses her career, the role of attorneys in society, the new world of post-pandemic work and why new Supreme Court Justice Ketanji Brown Jackson represents the future.

Interview with Lawyer Angela Reddock-Wright