PUBLIC PRIVATE PARTNERSHIPS

IN THE LOCAL GOVERNMENT SECTOR

TECHNICAL NOTE: 4

Guidance on PPP Joint Venture Companies

Guidance on the adoption of a

Joint Venture Company approach for a Public Private Partnership in

Ireland

This guide is NOT a legal interpretation and as such, legal advice should be sought where Joint Venture are proposed

This Guidance Document contains 77 pages

January 2004

Contents

1 Introduction 1 1.1 Introduction to Public Private Partnerships 2 1.2 Joint Ventures 3 1.2.1 Joint Venture Company 3 1.2.2 Joint Venture Agreement/Arrangement 4 1.3 Why use a JV Company as the PPP procurement option? 5 1.4 Ministerial Approval 7 1.5 Issues covered in this Guidance 7

2 Establishment of Joint Venture 9 2.1 Procurement 9 2.1.1 National Guidelines on Public Procurement (Public

Procurement, 1994 edition) 9 2.1.2 Procure ment Principles 10 2.1.3 EU Public Procurement Directives 10 2.1.4 EU Public Procurement Thresholds 11 2.1.5 Contracts not covered by the GPA (covered by EU Directives

only) 13 2.2 Selection of Partner 13 2.2.1 Value for Money 14 2.2.2 Confidentiality 15 2.3 State aid 15 2.4 Competition Rules 17 2.4.1 Anti-Competitive Arrangements 17 2.4.2 Abuse of a Dominant Position 17 2.4.3 Mergers and Acquisitions 17

3 The Joint Venture Process Flowchart 19

4 Management of Risks 20 4.1 Risks to JVCo 20 4.1.1 Categories of Risks 22 4.2 Risks to the Local Authority 22 4.2.1 Return on Investment 23 4.2.2 Reputation 23 4.2.3 Future Developments and Fund Raising 23 4.2.4 Minimising Risks 23

5 Structure of the Joint Venture Company 25 5.1 Company structure 25

5.2 Legal form 25 5.2.1 Memorandum of Association 26 5.2.2 Articles of Association 26 5.2.3 Shareholders’ Agreement 27 5.3 Corporate Governance 27 5.4 Role of Directors 28 5.4.1 Board of Directors 29 5.4.2 Public Servants as Directors 30 5.4.3 Company Secretary 31 5.5 Assets 32 5.5.1 Valuation Process 33 5.6 Industrial relations issues 34 5.6.1 Stakeholder Consultation 34 5.6.2 Options in relation to staff transfers 35 5.6.3 Other issues concerning the transfer of staff 36 5.7 Intellectual Property Rights 37 5.8 Exit Strategies 39

6 Joint Venture Classification 41 6.1 Public or Private Sector Classification 41 6.1.1 The 50% Shareholding Rule 42 6.1.2 The impact of a public or private company classification 43 6.1.3 The advantages and disadvantages of a Public classification 47 6.1.4 Examples of Joint Venture Companies 49

7 Financial Issues 52 7.1 Taxation Issues 52 7.1.1 Corporation and Capital Gains Tax 52 7.1.2 Stamp Duty 52 7.1.3 Value Added Tax 53 7.1.4 Commercial rates 53 7.2 Debt 53 7.2.1 Impact of JVCo Debt on National Accounts and General

Government Balance 54 7.2.2 Borrowing by the local authorities 54 7.2.3 Local authority involvement with capital projects that are

outside the remit of the DoEHLG 55 7.3 Guarantees 55 7.3.1 Letters of Comfort 56

8 Financial Affairs 57 8.1 Funding 57 8.1.1 Initial funding 57 8.1.2 The issuing of shares in the Joint Venture company 57 8.1.3 Additional funding 59 8.2 Protection of Investment 61 8.2.1 Types of additional protection 61 8.3 Commercial Insurance 61

9 Conclusion 63

10 Appendix 1 – Further contact Points 64

11 Appendix 2 – State Aid 65

12 Appendix 3 – Approvals Procedure 67

13 Appendix 4 – State Authorities (Public Private Partnership Arrangements) Act, 2002 70

1 Introduction The State Authorities (Public Private Partnership Arrangements) Act, 2002 provides for State Authorities entering into Public Private Partnership (PPP) arrangements, and empowers them to form companies for the purpose of PPP arrangements. Local authorities are included as State Authorities under the Act.

Section 3(2) of the Act provides that a State authority may set up a company by itself or with any other body, including another State authority. The consent of the Minister for Environment, Heritage and Local Government is required prior to the establishment of a company under the Act by a local authority.

For the purpose of this guidance we refer to a Joint Venture [JV] arrangement as including both the setting up of a JV company and the entering into a JV agreement.

Public Private Partnerships usually involve a State Authority contracting with a private partner to provide works or services. The State Authority may, however, decide to enter into a JV arrangement as an alternative approach for undertaking works or services. This guidance is intended to address a range of issues that arise where a local authority decides to follow the JV route.

The purpose of this guidance is to provide general information for a local authority considering entering into a JV arrangement. It is not a substitute for obtaining legal/financial advice which will be required in all cases.

Throughout the guidance the new joint venture company is referred to as “JVCo”. It is assumed that JVCo has only two shareholders (a local authority and a private partner) and that it is a limited liability1 company. While we use the example of a JV company with just two shareholders it should be noted that possible JV companies could take many forms. A JV company can involve more than 2 parties and does not necessarily have to include a private partner. For example, several local authorities may decide to form a company to provide infrastructure over a wide area.

It is also possible for an Irish local authority to form cross border arrangements (whereby local authorities from either side of the border may form a joint venture company together) or form a joint venture company with a foreign private partner. A result of these arrangements could be that non-Irish law governs JVCo. However this guidance focuses on Irish law only and assumes that JVCo will be governed by the Irish legal system. In order to investigate the implications of incorporating JVCo in another jurisdiction with a foreign public or private partner, further advice should be sought.

1 An unlimited liability company, whereby the owners have unlimited liability for the debts of a company, is not recommended and unlikely to be approved by the Minister due to exposure of the local authority to a higher level of risk.

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Before the State Authorities (PPP Arrangements) Act 2002, local authorities had the power to form companies under the Local Government Act, 2001 and the Planning and Development Act, 2000. However the PPP Act gives the clearest legislative authority to the local authority to form a company and should be used where a PPP arrangement exists. For such an arrangement to exist there must be a relationship between the State authority and a partner for the performance of certain functions (e.g. variations of a Design / Build / Operate /Finance contract or a service contract relating to an asset). It would not appear to be sufficient for a project to come under the Act if the local authority was to form a company, which itself would award contracts, even if these contracts were of a PPP nature.

This guidance should be read in conjunction with the May 2000 report issued by the Department of Environment, Heritage and Local Government, entitled “A Policy Framework for Public Private Partnerships” which provides detailed guidance notes on the PPP process in general. In addition, reference should be made to the Department of Finance’s “Framework on Public Private Partnerships” and to additional guidance and directions issued by the Department of Finance from time to time including in particular “Interim Guidelines for the Provision of Infrastructure and Capital Investments through Public Private Partnerships: Procedures for the Assessment, Approval, Audit and Procurement of Projects”, July, 2003.

Of relevance also is this Department’s Circular IPPP 4/03 of 19 December, 2003 regarding ‘The policy framework for the development of Public Private Partnerships within local government’ and the accompanying two part Policy Framework Document.

These documents are available on either the national PPP website or this Department’s website.

1.1 Introduction to Public Private Partnerships A Public Private Partnership is a partnership between the public and private sector for the purpose of delivering a project or a service traditionally provided by the public sector. The benefits of a PPP are that both parties bring to the project different strengths, and these strengths can be exploited so as to deliver a superior project in the most economically efficient manner. There are various contractual forms of PPP such as:

Design, Build & Operate contracts are where the facility is financed and owned by the public partner. The private sector contractor designs and builds the facility to meet certain local authority specifications and is also responsible for operating and maintaining the facility for a predefined period, at the end of which the facility is transferred back to the public sector partner.

Design, Build, Operate & Finance contracts are where the private sector contractor is responsible for the designing, building, operating and financing of the asset. The private partner recovers its costs out of annual payments from the public sector and after a predetermined period the facility commonly reverts back into public sector ownership.

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Operational Contracts are contracts that are between 5 and 20 years plus which allow for the operation, maintenance and possibly capital replacement of existing plants during the period of the contract.

Concession Contracts are DBOF contracts except that the private partner recovers its costs through direct user charges or through a mixture of direct user charges and public subventions.

Before embarking on a potential PPP project it is recommended that a feasibility study be carried out. Issues such as value for money, commercial viability, market and financial projections should be explored. The study should examine the advantages and disadvantages of the various forms of PPP and a JV company should only be set up when it is considered to be the best available option.

1.2 Joint Ventures Increasingly joint ventures are being used to exploit the commercial potential of many public sector assets. Joint ventures are established where the public and private sector wish to share in the risks and rewards associated with a particular project, and each party undertakes the role where it has particular skill and expertise. A joint venture can simply be an agreement between two or more parties to determine what each will bring to and gain from the project. A joint venture company goes a step further in setting up a company in order to procure the project.

1.2.1 Joint Venture Company

A Joint Venture company is a new company that is set up by two or more individuals or bodies so as to undertake a new trade or business with independent third parties. By these two or more parties coming together and transferring their resources (i.e. assets, knowledge, personnel) into the new Joint Venture Company it is planned that this new company will be more competitive than if the parties had worked independent of each other. In return for transferring resources into the JV Company these parties get a shareholding in the new company and ultimately a share of the JV’s profits.

A joint venture company is a distinct form of Public Private Partnership. When a JV company is established, it has a separate legal identity and it is through this company that the common enterprise of the public and private partners is carried out. The local authority and the private sector partner will own the shares of JVCo and there will be a board of directors, usually made up of representatives of the shareholders.

A JV Company is defined by the Accounting Standards Board as, “an entity in which the reporting entity holds an interest on a long term basis and is jointly controlled by the reporting entity and one or more other ventures under a contractual arrangement.”

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1.2.2 Joint Venture Agreement/Arrangement

A Joint Venture agreement is one where two or more separate parties come together so as to provide a service or create an asset but a separate legal entity is not formed. A joint venture agreement, whether or not subject to joint control, does not constitute an entity but is more a “once off” arrangement that is established for the mutual benefit of one or more parties. This arrangement is generally undertaken in a company that existed before the arrangement was agreed and in some cases the arrangement can be carried out in one of the JV parties’ companies. Examples of such arrangements would include a joint distribution network and shared production facilities.

A JV arrangement can be perceived as a JV company, and the following indicate a company rather than an agreement/arrangement:

Own Trade JVCo carries on a trade or business of its own, independent of the founding parties.

Independence JVCo has some independence to pursue own commercial strategy with agreed objectives

Market Access JVCo has either access to market in own right or trading with participants on market terms

Cost or risk sharing

Goes beyond mere cost or risk sharing

Continuing activity

Continuing activity with repetition of buying and selling activities.

The Balbriggan Business Park is an example of a JV agreement between a local authority (Fingal County Council) and a private developer. It is not a JV company, as a new legal entity, in which both parties were shareholders, was not set up. The developers set up a company, wholly owned by them, specifically for the purpose of this project. In this arrangement Fingal County Council will sell land to the end user and will provide finance for the development. The developer will build the commercial development and bear all the risks associated with construction. In return, the profits on the sale of the commercial buildings are being split 50/50 between Fingal County Council and the property developer.

JV agreements can take very many different forms and as such are not dealt with specifically in this guidance.

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1.3 Why use a JV Company as the PPP procurement option? JV companies are usually formed because the parties have complementary objectives and by joining their strengths in a JV company there is a greater chance of success than if the parties worked independently.

Under a normal PPP contract the local authority specifies the required outcome and the private partner is responsible variously for designing, building, operating or financing the asset to the local authority requirements. Additional risks are transferred to the private partner who will price these accordingly in the contract. At the same time the local authority will seek to obtain the best possible value for public money from the overall project.

In some situations, however, the local authority may prefer to have greater input regarding the ongoing direction and outcome of the project, and a shareholding in a new JV company might provide this input. The local authority may also require a share of the commercial returns and would be prepared to accept the risks associated with these returns. Finally, the local authority may feel that it has some expertise to add to the project, and therefore would be capable of contributing to the successful day-to-day running of JVCo.

One of the key differences between a JV company and other PPP options is that it creates a new business by using the complementary resources of both the private and public sectors. Other PPP options are methods of procuring a particular asset or service. When this asset or service has been completed the contractual arrangement is over. However a JV company will continue to provide a service indefinitely until the partners decide that it is no longer necessary or desirable.

By establishing a JV company a new business is being created which can interact and trade with other third parties and the JV Company has the flexibility to change in order to reflect market conditions.

When deciding whether a JV company is the preferred option all aspects should be examined with particular emphasis on the following points:

Local authority issues in relation to establishing a JV company Chapter/ Paragraph Reference

The setting up of JVCo is likely to expose the local authority to some degree of risk; in the event of JVCo being unsuccessful the local authority may not receive full or any value for the assets they transferred to JVCo at its inception. In order to minimise potential risks it is important that they be identified at the beginning and that responsibility for these risks be established along with the development of a contingency plan. If properly managed the setting up of JVCo should

4 Management of Risks

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actually decrease rather than increase risks as each party is contributing their own complementary qualities. In addition, while the local authority may face greater risks as a shareholder of JVCo there is also the possibility of greater financial and non-financial rewards if JVCo is a success.

There will be costs to the local authority in terms of time and resources needed in order to set up and be actively involved in a JV company. The local authority should assess if it is equipped to deal with the added demand on current resources and how best to manage them efficiently and effectively.

5.5 Assets

5.6 Industrial Relations

The local authority may have greater control and power over a project if it sets up a JV company rather than entering into a contractual arrangement with a private partner. However, it is important to avoid potential conflicts of interest, e.g. a local authority employee serving on the board of JVCo may have a conflict of interest between his fiduciary duties to JVCo and his responsibilities to the local authority.

5.4.2 Public Servants as Directors

There may be reputation concerns for the local authority entering into a JV. Therefore the local authority should be mindful of choosing a partner that has a similar cultural and commercial outlook.

4.2 Risks to the Local Authority

If the JV Company is classified as a private sector company it may face advantages such as a higher level of commercial freedom and confidentiality, with only the public resources involved in the JV being subject to public scrutiny. A private company may not be subject to Irish and EU procurement rules, as it will not be a contracting authority in itself.

6 Joint Venture Classification

2.1 Procurement

JVCo would have its own legal form separate from its founder members or bodies. This means that JVCo shareholders would be responsible for the company’s activities in its own right. However, any public involvement would be subject to public scrutiny.

5.2 Legal Form

Forming a PPP JV may give the local authority a greater access to the resources, skills and expertise of the private sector than under other PPP options.

5.5 Assets

5.6 Industrial Relations issues

5.7 Intellectual Property Rights

JVCo would have its own management team independent from either the private or public partners although under the direction of the founder

5 Structure of the Joint Venture

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shareholders. JVCo would also have the flexibility to introduce incentives to encourage greater productivity from its own staff.

Company.

Alternatives to forming a JV company include service/supply/works contracts, licensing arrangements, distribution agreements (including royalties), research & development/co-operation contracts or a corporate body formed by a public body.

1.4 Ministerial Approval Local authorities should note that the approval of the relevant Minister is required before forming companies or taking shares in a company for the purposes of PPP arrangements. The letter from the local authority seeking Ministerial approval to the establishment of or taking shares in a JV company should be signed by the appropriate Director of Service or City/County Manager. Before entering into firm commitments, local authorities should seek such approval, by writing to the PPP Unit with full details of the proposed arrangements.2

1.5 Issues covered in this Guidance The purpose of the guidance is to introduce all the issues that would concern a local authority in forming a joint venture company and the main sections covered in the remainder of the guidance are as follows:

Section Contents

Establishment of a Joint Venture company

Advice on how to select a partner, summary of EU and national procurement rules and how to comply with state aid and competition rules.

Management of Risks Possible risks to JVCo and the local authority itself, and how best to deal with these risks.

Structure of the JV Company

This section deals with the general considerations when setting up a company such as the legal form, directors, corporate governance, transfer of assets, industrial relations issues, intellectual property rights and exit strategies.

Joint Venture Classification

Explores the implications of either a private and public sector classification for JVCo.

2 See Appendix 3 for details.

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Financial Issues Explains various financial issues in relation to joint venture companies such as debt, taxation and guarantees

Financial Affairs Explains the possible funding arrangements of JVCo, how the local authority should protect their investment and the need for commercial insurance.

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2 Establishment of Joint Venture

2.1 Procurement The purchasing of works, services and supplies by contracting authorities are governed by EU and Irish Public Procurement rules. Contracts awarded by a contracting authority (e.g. a local authority), which exceed a specified EU threshold, are subject to EU Public Procurement law while contracts below those thresholds are governed by national guidelines.

The selection of a partner by a local authority for the purposes of forming a JV company is unlikely to be subject to EU or Irish procurement rules, as it constitutes an agreement between the parties rather than a contract for goods, works or services. However, even if there is no legal requirement to follow EU procedures, it may be advisable to follow the rules voluntarily. In structuring a procurement exercise, the procurement of the partner is seen as being similar to the award of the contract to that partner; one procurement exercise may be used to select the partner and award the contracts. Another reason to follow procurement rules is that by following an open, transparent and non-discriminatory competition the most suitable partner and the most favourable terms and conditions will be obtained by the local authority. It will also decrease the likelihood of the joint venture inadvertently containing state aid, as market conditions will be respected.

JVCo itself may be subject to EU and Irish procurement rules, depending on a number of factors such as the level of public funding involved, the nature of the activity and the amount of control exercised by the local authority. Professional legal advice should be sought where uncertainty exists regarding the obligations and requirements of the local authority and JVCo in this area.

2.1.1 National Guidelines on Public Procurement (Public Procurement, 1994 edition)

The basic principle of public procurement is that a procedure based on competitive tendering should always be used, unless in exceptional circumstances.

The national procedures that should be used for competitive tendering are:

OPEN Open advertisement and all interested parties may tender

RESTRICTED Invitation for tenders from firms on a list or selective tendering where a pre-qualification procedure may be adopted.

Every effort should be made to ensure adequate competition, and the contracting authority should aim to receive at least three realistic tenders in each case. In evaluating the tenders, the contracting authority may decide which bid to accept based on either the lowest suitable

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tender or the most economically advantageous tender. If the contracting authority intends to use the latter method, it should state in the contract documents, or in the notice, which of the criteria it intends to apply to the award and if possible in order of their importance.

2.1.2 Procurement Principles

Even where there is no strict requirement for local authorities to apply the EU procurement rules to the selection process of a strategic partner basic EU Treaty principles must be followed. These principles are:

Transparency Procurement should be carried out with a degree of transparency.

Equal Treatment All tenderers should be treated in an equal manner.

Mutual Recognition Mutual recognition of technical, educational and other qualifications and specifications across the member states.

Proportionality Requirements must be proportional to the needs to be met.

2.1.3 EU Public Procurement Directives

The EU public procurement market is a fundamental part of the Single Market and is governed by rules intended to remove barriers and open up competition between the member states. Once transposed into law, EU directives have legal force in Ireland and therefore must be followed where applicable. Under the relevant EU Directives, all contracts fall into one or other of the 3 following categories3:

Works Building and civil engineering works.

Supplies Procurement of products.

Services Provision of services including engineering, architectural and other professional services.

3 A separate Directive covers works, supply and services contracts awarded by entities operating in the water, energy, transport and telecommunications sectors (Utilities Directives).

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The EU Public Procurement Directives require all public contracts are over a certain value to be procured through a competitive process and to be advertised in the Official Journal of the European Communities (OJEC). The EU Directives recognise three tendering procedures:

Open All interested parties may submit tenders.

Restricted Only parties invited by the Contracting Authority may submit tenders.

Negotiated Contracting Authorities can consult parties of their choice and negotiate the terms of the contract with them. The instances where this is permitted are limited and the procedure should only be used in special circumstances.4

As with the National guidelines, the Contracting Authority may accept a bid on the basis of either the lowest price or the most economically advantageous tender.

2.1.4 EU Public Procurement Thresholds

Under the EU directives and the Government Procurement Agreement (GPA) of the World Trade Organisation, there is a two-tier threshold system. Amending Directives, 97/52/EC for the general public sector and 98/4/EC for the utilities sector were adopted to bring the Directives into conformity with the GPA. The two-tier system arises from the slight differences in coverage between:

- contracts which come within the scope of EU directives and the GPA, and

- those that are covered only by the EU directives.

The Directives and the GPA apply to the vast majority of contracts and these attract slightly higher thresholds. The main exceptions are service contracts for public bodies for research and development and for certain telecommunications services, as well as contracts of entities in certain utility sectors.

4 However, in the case of the Utilities Directives, any of the three procedures can be used, provided that a call for competition has been published in the OJEC.

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These thresholds as advised by the Department of Finance for contracts covered by the GPA and EU Directives are as follows5:

Works Directive 97/52/EC

Contract Notice/ Prior Indicative

Notice6

€5,923,624 Threshold applies to Government Dept’s & Offices, Local and Regional Authorities and

other public bodies outside the Utilities Sector.

Supplies and Services

Directive 97/52/EC

Contract Notice €154,014 Threshold applies to Government Dept’s & Offices

Contract Notice €236,945 Threshold applies to Local and Regional Authorities and public bodies outside the

Utilities sector.

Prior Indicative Notice

€750,000 Threshold applies to Government Dept’s & Offices, Local and Regional Authorities and

other public bodies outside the Utilities Sector.

Utilities Directive 98/4/EC

(Works)

Prior Indicative Notice/Contract

Notice

€5,923,624

For entities in the Utilities sectors.

(Supplies and services)

Prior Indicative Notice

Contract Notice

€750,000

€473,890

For entities in the Utilities sectors.

5 These thresholds are the revised thresholds applicable from January 2004. They are revised every two years. See also EU public procurement website http: // simap.eu.int which can be accessed via a link on www.etenders.gov.ie 6 A PIN (Prior Indicative Notice) is an advertisement of the total procurement that the local authority intends to award in a particular area in the same year.

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2.1.5 Contracts not covered by the GPA (covered by EU Directives only)

For Government Departments & Offices, Local & Regional Authorities, and other public bodies (principally for R&D and certain telecommunications services) - a threshold of €200,000 for Service Contract Notices;

For entities in some utility sectors (gas, heat, oil and railways) - a threshold of €5,000,000 for Works Contracts and a threshold of €400,000 for Service Contract Notices;

For entities in the telecommunications sector - a threshold of €5,000,000 for Works Contracts and €600,000 for Service Contract Notices.

2.2 Selection of Partner The selection of a suitable partner is key to the successful relationship between the local authority and the private partner, and ultimately to a successful joint venture arrangement. From the outset the local authority must lay out the objectives to be met, and decide how best to obtain a partner who can help with the achievement of these objectives.

The local authority should determine the impact of the Government’s Value for Money approach and whether EU and Irish Procurement rules should apply to the selection of a partner. (for more detail see sections 2.1 on Procurement and 2.2.1 on Value for Money). Even if the local authority is not compelled to follow the EU Directives, it is preferable to select a partner through an open competition where possible. Through testing the market, the local authority will be in a better position to achieve the best value for money, successfully negotiate the transfer of risk, attract a higher level of innovation and achieve a fairer value for its contribution to JVCo.

Whether using an open competitive or a targeted approach, the process would be similar. The first step is to investigate the market and identify the main players. The local authority should then develop evaluation criteria, shortlist the potential partners and identify and negotiate with the preferred partner. The timetable and conduct of the selection process will depend on whether EU procurement rules are to be followed, which selection process is used and the time and resources available to carry out the process.

At an early stage in the selection process the local authority should decide what qualities, characteristics and assets it desires in a joint venture partner. According to procurement rules, a contract should be awarded on the basis of either the lowest suitable tender or the most economically advantageous tender. In selecting a partner for a joint venture company additional factors will also have to be taken into account. These are likely to include:

- Technical knowledge and capability

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- Relevant experience and past performances

- Economic and financial standing

- Marketing skills

- Market share and potential access to these markets

- Organisational strengths

The local authority should also consider “softer issues” that are more difficult to evaluate, such as:

- Cultural fit

- Relationship management

- Reputation

- Potential conflicts of interests

It should be stated in the contract notice or the contract documentation the method to be used, and, where relevant, the criteria by which a tender is to be measured. These criteria should be listed in descending order of importance if it is proposed to attach a different weighting to each of the criteria. While the local authority is not obliged at present to make the actual weighting marks available to the bidders, to do so is recommended in order to allow for greater transparency, fairness and objectivity.

2.2.1 Value for Money

General government policy requires that all public bodies achieve value for money in expenditure of public monies. Value for money can be understood as follows7:

Economy ‘Getting the right quality of resources at the best cost’

Efficiency ‘Convert resources into a desired product in the most advantageous ratio’

Effectiveness ‘Ensuring that the output from any given activity achieves the desired results’

Even if the private partner is providing most of the financial investment, there is still an obligation on the public body to extract best value possible from the asset which is being exploited.

Value for money considerations should include the following:

7 Internal Audit Guidance Handbook for Local Authorities, April 2001, Value for Money Unit, DoEHLG

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- Which partner is most able to provide the required assets in a manner most suitable to the local authorities objectives;

- How risks are handled;

- How much value is being placed on the local authority contribution to JVCo; and

- Prospects for long-term revenue generation.

2.2.2 Confidentiality

Tenders, and all information relating to the processing of them, should be treated as strictly confidential and remain so even after the contract is awarded.

While confidentiality should not be used to hide the commercial nature of a resulting idea, confidentiality agreements may form a part of the selection process. If the local authority is issuing detailed information about the proposed business of JVCo it should consider making anyone privy to that information sign a confidentiality agreement. A confidentiality agreement should include the following:

- A stipulation that the information provided is only used for the intended purpose;

- Obligations to keep the information confidential;

- Identification of who in the organisation should have access to the confidential information; and

- Arrangements to return any sensitive documents at the end of partner’s involvement in JVCo.

Confidentiality also applies to the local authority itself. For example, it may be approached by a potential private partner with sensitive information (such as a new technology) and because of this may be required to sign a confidentiality agreement.

It should be noted that as a public body, the local authority is subject to the Freedom of Information Acts, 1997 and 2003 (see section 6.1.2.5).

2.3 State aid According to Article 87 of the EC Treaty, “any aid granted…. which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods, shall, in so far as it affects trade between Member States, be incompatible with the common market”.

Therefore, a local authority should be careful to ensure that any financial aid given to the newly formed joint venture company does not constitute state aid under EU regulations. As the application of the rules can be complex, legal advice on state aid issues should be taken in any case where uncertainty exists.

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In order for a measure to be deemed to contain state aid, all of the following four tests should be met:

1 The measure distorts or has the potential to distort competition.

2 The advantage must be granted by the state or through state resources.

3 The measure must affect competition and trade between the Member States.

4 The measure should favour certain undertakings or the production of certain goods.

In the context of JV companies, state aid occurs when the public sector partner confers a financial advantage on JVCo, or the private sector partner in JVCo, that would not have been received in the normal course of business. This can be a direct aid (e.g. a government grant) or more indirect aid (e.g. consultancy advice or deferral of tax).

Any potential state aid activity must be notified to the European Commission and must receive prior approval before being put into effect.

While the general principle of the EU is that state aids are prohibited, there are several exemptions to this principle. Aids listed under Article 87(2) of the EC Treaty are considered compatible with the common market, while aids listed under Article 87(3) may also be compatible. Therefore aid to promote the economic development of areas with economic or social problems may be compatible with the common market. Exemptions from the ban on state aid are listed in Appendix 2.

The implications of State Aid in forming a JV company should be considered on a case-by-case basis, paying particular attention to the following areas:

Possible aid to the Private Sector partner; which may be avoided by using a fair and open selection process.

Possible aid to the new joint venture company; which may be avoided by ensuring that all assets that are transferred from the local authority to the new company are fairly valued.

Possible aid to the ultimate customer; which may be avoided by ensuring that the finished product/service is sold at a fair and commercial price.

The local authority should also be aware of the Commission Directive 80/723/EEC (amended by Directives 85/413, 93/84 and 00/52) on the transparency of financial relations between public enterprises and member states. These Directives make the financial relations between the national public authorities and public undertakings more transparent to ensure that any aid granted is not incompatible with the common market. Therefore if JVCo can be classified as a public undertaking (e.g. if the local authority has a dominant influence either through ownership or control) then the local authority should ensure transparency regarding any public funds made available to JVCo, and the subsequent use of these funds.

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2.4 Competition Rules Regardless of its classification, the newly formed Joint Venture is likely to partake in commercial or economic activities and be seen as an “undertaking”, and therefore is subject to EU and Irish Competition law. EU law will apply when trade is potentially affected between Member States while Irish law will apply when trade is affected within Ireland. In Ireland the Competition Act, 2002 has replaced the Merger and Takeovers (Control) Acts 1978-1996 and the Competition Acts 1991-1996. This Act consolidates and modernizes the existing statutory arrangements for competition and mergers.

2.4.1 Anti-Competitive Arrangements

This practice is dealt with in Section 4 of the Competition Act, 2002 and Article 81 of the EC treaty.

It is unlawful to have an arrangement between two or more operators in the market where the object of the arrangement is to prevent, restrict or distort competition in Ireland. An example of anti-competitive arrangements includes price-fixing, market sharing and imposing minimum resale prices.

2.4.2 Abuse of a Dominant Position

This practice is dealt with in Section 5 of the Competition Act, 2002 and Article 82 of the EC treaty.

Assuming there are no exemptions in place, if an undertaking is in a dominant position in Ireland or in a substantial part of Ireland, it may not abuse its dominance. It is important to note that this prohibition only refers to the abuse of a dominant position rather than the holding of a dominant position.

2.4.3 Mergers and Acquisitions

From 1 January 2003 the merger control function transferred from the Minister of Enterprise, Trade & Employment to the Competition Authority. The Authority is now responsible for examining and deciding upon any mergers, with the one exception of a merger or takeover involving a media business, where the Minister retains a role. The turnover (the annual turnover of each of the two or more of the enterprises involved) threshold that triggers the requirement to notify a merger has been increased to €40 million and the gross assets threshold has been abolished under the 2003 regime.

The EC Merger Regulation (4064/89 as amended) is applicable to large-scale mergers or acquisitions, which have a “community dimension” as defined by the Regulation. The Regulation specifically applies to “full function” joint ventures where the parties concerned exceed the relevant EU financial thresholds. While these thresholds are somewhat complex,

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essentially the Regulation applies to large-scale transactions which impact across the EU. Transactions that are subject to regulatory clearance by the EU Commission under the Merger Regulation do not require clearance under national merger law.

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3 The Joint Venture Process Flowchart

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4 Management of Risks In the DoEHLG guidance document “A Policy Framework for Public Private Partnerships” a risk is defined as any factor, influence or event that may threaten the successful completion and/or operation of a project. These effects can be measured in terms of cost, time or quality of the outcome. The scale or size of any risk depends on both the probability of it occurring and its likely impact. Therefore the most significant risks are those with a high probability of occurring, and are likely to have a severe impact if they do occur.

One of the principles underlying PPP’s is that risk should be allocated to the party best able to manage it. Cost effective allocation of risk between the local authority and a private partner will result in lower construction and operation costs, and therefore increased value for money. The degree of risk transfer will depend on the nature of the project and will vary from project-to-project. Risk should be assessed at the very beginning of a project, in order to choose the most appropriate form of PPP and to facilitate negotiation between the public and private partners.

By forming a JV company, the local authority will be exposing itself to more risk, in return for a greater share of the rewards. The two main categories of risk that the local authority should be aware of are;

- The risks facing JVCo itself and its management, and

- The risks facing the local authority as a shareholder in JVCo.

4.1 Risks to JVCo JVCo is a joint venture company and it has been established to run a new business idea. The Joint Venture differs from other PPP’s in that the local authority is a shareholder of JVCo, and therefore should be aware of the business risks that it will face on a daily basis. These risks can be classified as follows8 :

8 Michael Porter

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These are categories of risks that will face JVCo on a daily basis and some may have a greater impact than others depending on the industry in which the company is operating. As the local authority will be a shareholder in JVCo they will have an influence in the daily running of the company through management representation.

JVCo management should be aware of the current and future potential risks and have operating plans in place so that it can effectively manage these risks and be competitive. The manner in which risks are managed will impact on other areas of the business such as profitability, cash flow, staff issues, production, product demand, competitive advantage etc.

1.Threat of New Entrants This is the risk of new entrants entering your market and competing against JVCo. This risk may be reduced if there are strong barriers to entry such as high start up costs or a complex distribution network required. With free movement within the EU, JVCo must be aware of new competition from foreign rivals. 2. The Bargaining Power of Suppliers

This is the level of control that suppliers can exercise over JVCo. If there are numerous suppliers that can supply JVCo then the risk of control is reduced. If JVCo is operating in a specialised market then it must be aware of the risks that are associated with only a few suppliers dominating the market. 3. Rivalry from Competitors

If JVCo is operating in a market with a strong number of competitors then there is a risk of not achieving sufficient market share so as to be profitable. JVCo may need continuous capital and marketing expenditure so as to increase and maintain market share 4. Bargaining Power of Customers

Depending on the industry, JVCo must be aware of the demands of the customers and the associated risks based on the bargaining power of the customers. If JVCo is competing in a market with similar end products to those of their competitors, it must create brand loyalty through product differentiation. 5. Threat of Substitutes

JVCo must be aware of risks that substitute products have over their own products and the entry of a new product to the market may have significant impact on it’s product sales.

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4.1.1 Categories of Risks

JVCo may be set up in order to construct and operate infrastructure projects, and risks that are prevalent in this area include:

Planning There is a risk that planning permission will not be received, and even if it is that the whole process will take longer than anticipated and there may be certain conditions attached.

Design The design process may take longer and cost more than anticipated, and the design solution adopted may not be suitable.

Construction Factors, such as changes in labour and materials costs, adverse weather conditions and the failure of contractors to perform, may lead to time and cost overruns.

Operating Factors, such as high demand volumes, shortage of skilled labour, poor cost management and poor public relations, could lead to higher than expected operating costs and inferior standards of performance being met.

Demand The usage of the service may be lower than expected, and therefore revenues will also be lower.

Financial Factors, such as fluctuations in exchange rates, variations in financing costs and residual value risk (where the value of an asset at the end of a specified period of time is different to that anticipated at the start of the period), may lead to operating or capital losses.

Legislative Legislative or regulatory change may change the ability of JVCo to meet its obligations.

In order to manage risks effectively they should be identified and allocated to those best equipped to deal with them. In a traditional PPP project, the risks will be divided among the public and private partners according to who can best manage them to achieve value for money. In the case of a JV company the risks will be shared among the partners, both parties bringing expertise to their particular area. For example, the local authority staff may have more expertise in dealing with planning issues, while the private sector partner may have more technical expertise to deal with design risks.

4.2 Risks to the Local Authority When establishing a joint venture company the local authority may contribute assets in return for a shareholding in the company. These assets can be tangible, such as land or cash, or intangible, such as intellectual property. The risks facing the local authority itself include

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a low return on investment, the activities of JVCo leading to problems with the reputation of the local authority itself, and the risks associated with future funding.

4.2.1 Return on Investment

As an investor and shareholder in JVCo there is a risk that the return on the assets transferred into the company may be lower than envisaged. A more serious risk is that JVCo will go insolvent as a result of prolonged trading difficulties and this may result in the assets contributed by the local authority becoming worthless, or being valued at a significantly reduced rate. There is also the scenario where these assets may have to be sold so as to meet NERCO’s debts. This situation would be highly unfavourable and may lead to a public outcry against perceived poor management of public funds. However, as a limited liability company, the liability of the local authority will be limited to its investment in JVCo.

4.2.2 Reputation

The local authority must ensure that it protects its reputation, and be aware of situations where there may be potential for JVCo to make decisions or act in a manner contrary to the public interest. Due to its involvement in new company any issues regarding the reputation of JVCo could impact on the reputation of the LA itself.

4.2.3 Future Developments and Fund Raising

After an initial period of time, JVCo may change its commercial direction from what was originally planned at the time of its creation. Factors that could cause the commercial direction to change include changing environmental, macroeconomic or social trends and regulations9. There is also the possibility that additional funding will be required later in the life of JVCo, and the various options of providing this funding can present risks for the local authority. For example, future share issues could dilute the local authority shareholding in the company or a further borrowing by the local authority on behalf of JVCo could lead to financial difficulties in the future. For further information see Section 9.1.3 ‘Additional Funding’.

4.2.4 Minimising Risks

The first step in minimising the risks facing the LA is to carefully select the proposed private partner. If the private partner has different commercial objectives and/or views on how these objectives should be obtained, there is potential for disagreement at a later date. It is therefore important to find a private partner that will culturally fit with the LA (see section 2.2 - Selection of a Partner).

9 In order to minimise any changes in the commercial direction of the company, clauses to this effect should be added in the Memorandum and Articles of Association.

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To protect its investment from the outset, the local authority should ensure that any public finance and/or assets transferred to JVCo are properly valued and well protected. It is also important that the local authority can monitor and exercise control over any changes in the direction of JVCo so that potential conflicts of interest do not arise between public sector personnel acting in both their roles as company management and as public employees. Control can be maintained in the company through the percentage shareholding, governance arrangements (e.g. board membership) and the governing legal documents (e.g. the shareholders agreement). Clauses should be written into the shareholders agreement contract to prevent loss of control and to prevent JVCo from entering into commercial contracts which are not in the best interests of the LA.

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5 Structure of the Joint Venture Company

5.1 Company structure Where a JV company is set up the control of the company is generally proportional to the percentage of shares held by each party, which in turn reflects the investment made by the public and private sectors respectively. At an early stage a local authority should decide the level of control it wishes to exercise over JVCo, based on the level of risks it is prepared to bear in return for an increased share of the control and rewards. Even if the local authority does not have a majority shareholding in JVCo, it can protect its interests through placing additional controls in the shareholders agreement.

The control and percentage of shareholding attributed to each party will also determine the classification of the company. This issue of public or private classification is discussed in more detail in Section 6.

5.2 Legal form There are three legal documents that will govern the legal form and operation of JVCo. These are:

o Memorandum of Association,

o Articles of Association, and

o Shareholders Agreement,

In order to be incorporated, an entity must prepare two documents known as the Memorandum of Association and the Articles of Association. These documents must be sent to the Registrar of Companies with the application form for company incorporation. When the Registrar is satisfied that the necessary formalities have been complied with, the Registrar issues a certificate of incorporation, which is effectively the birth certificate of the company. The company has corporate status with effect from the issue of this certificate.

Once a company has complied with the formal requirements contained in the legislation (the Companies Acts 1963-2001), and has been issued with a certificate of incorporation by the Registrar of Companies, it has its own legal identity. In this guidance we refer to a limited company, by which we mean that the liability of a shareholder of the company is limited to the amount, if any, unpaid on the shares which are held by him or her.

A joint venture company should also prepare a shareholder’s agreement, a contractual agreement between the parties involved that sets out the ownership and management details of the newly formed company. Unlike the Memorandum and Article of Association the Shareholder’s agreement is confidential and its contents do not need to be made public - it is not delivered to the Registrar of Companies for registration.

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5.2.1 Memorandum of Association

This is a statement of the company’s objects and powers. It must also contain the name of the company and a liability clause. If the company is limited by shares, the memorandum should also have a capital clause and list the names and addresses of the subscribers and the number of shares taken by each subscriber. If the company is limited by guarantee, not having a share capital, it should contain a guarantee clause and the names and addresses of the subscribers. The First Schedule of the Companies Act 1963 sets out the statutory forms of Memorandum of Association for different company types. The Companies Acts require the form of memorandum to be in accordance with the forms set out in the First Schedule to the 1963 Act or as near thereto as circumstances admit. For example, a private limited company should have its memorandum in accordance with the form set out in Table B, whereas a company limited by guarantee, not having a share capital, should adopt the form contained in Table C. It should be noted that the latter company type is a public company for the purposes of the Companies Acts 1963-2001, as a private company must by definition have a share capital.

Provided that the name of the company limited by shares or by guarantee ends with the word ‘limited’ or ‘teoranta’, a company is free to choose its own name. However the chosen name should not be undesirable in the opinion of the Registrar of Companies, or so similar to the name of another company that it causes confusion. The Registrar will refuse to register any name that he considers is offensive, misleading or otherwise objectionable.

The object clause in the memorandum states the purpose for which the company is formed. The memorandum will also set out the powers of the company, e.g. the power to enter into contracts or to borrow money. Where a company enters into a transaction, which does not further its objects, that transaction is ultra vires i.e. beyond the company’s capacity. This transaction will generally be null and void, but if the third party acted in good faith and was not actually aware that the transaction was not within the powers of the company, then the transaction will be effective in terms of the third person relying on it. The director or officer of the company who is responsible for the transaction will be liable to the company for any loss or damage suffered by it as a result (section 8, Companies Act 1963.)

5.2.2 Articles of Association

Articles are publicly registered rules by which the members of a company agree to be bound. This document regulates the internal administration and management of the company. It sets out the rules of the company in relation to conduct of director’s meetings, voting at members’ meetings, any restrictions in relation to share transfers etc.

Where a private company limited by shares does not voluntarily register its own articles with the Registrar of Companies, the model articles set out in the First Schedule to the Companies Act, 1963 will automatically be deemed to be the articles of association of the company, as if they had been duly registered by the company. In addition, even where such a company does

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register its own articles, the provisions of Table A of the First Schedule will apply save insofar as they have not been excluded or modified.

The Articles of Association should give a DoEHLG Inspector of Audits the rights to inspect the accounts of the JV Company, in order to ensure that local authorities are accounting for the separate entity correctly. All Articles of Association should incorporate the following article “The Local Government Auditor shall have full inspection rights into the financial affairs of JVCo to ensure that the monies have been expended for the purpose for which they were authorised”.

5.2.3 Shareholders’ Agreement

A Shareholders agreement is a contract between the shareholders of the company and supplements the items in the Memorandum and Articles of Association. It is advisable to have a shareholder’s agreement where there is more than one member of a company and the particulars of the agreement will depend on the nature of JVCo. Its main purpose is to lay out how certain matters are to be governed in a company, and will typically include rules concerning the business of the company and its management, e.g. who is to be on the board of directors, how disagreements are to be handled, and what is to happen in the event of one shareholder leaving. A shareholder cannot unilaterally amend the terms of the agreement.

One advantage of the shareholder’s agreement is that it can deal with more sensitive matters than the Articles or Memorandum of Association (e.g. directors’ remuneration or internal management matters), as the agreement does not need to be registered with the Registrar of Companies.

Other matters dealt with in the shareholders’ agreement can include the distribution of dividends, the future financing of the company and the transfer of shares. The agreement can also be used to give rights to shareholders that they might not normally have, such as giving restrictive veto rights to a minority shareholder. However, care should be taken to avoid passing excessive control to the minority shareholder by these means.

5.3 Corporate Governance Corporate Governance is the procedure by which a company is directed and controlled. It is important to put in place corporate governance arrangements to provide protection for companies that are partly funded with public money. The corporate governance of State bodies and their subsidiaries should be to the highest level and be in accordance with the Code of Practice for the Governance of State Bodies issued by the Department of Finance.

State bodies and their subsidiaries are required to adopt this code of practice and to confirm to the relevant Minister that this has been done. These procedures relate to both internal practices and external relations with the Government, the relevant Minister and the Minister for Finance and their Departments. Companies must comply with company law, which lays

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out the ground rules for corporate governance and this practice is supplementary and does not affect obligations imposed by the Companies Acts or any additional legislation.

5.4 Role of Directors Every company must have a minimum of two directors. The first directors will be named at the formation of the company, and any subsequent directors will be appointed in accordance with the provisions of the articles of association. Certain parties, such as bodies corporate, undischarged bankrupts, the auditors of the company and disqualified persons are ineligible to act as company directors. The directors of the company are collectively known as the ‘board of directors’.

The main function of a company director is to manage the affairs and activities of the company on the shareholders’ behalf. There are no specific qualifications required to act as a director, but directors are required, inter alia, to exercise skill and diligence. The articles of association usually provide for the delegation of certain of the members’ (shareholders’) powers to the board of directors, and many of the director’s functions are also set out here. The director only has the powers to do what the company itself is legally entitled to do, and should avoid anything that is ultra vires (i.e. outside the powers of the company). The statutory duties for directors arising from the Companies Acts 1963-2001 and related legislation e.g. EU Regulations etc are, in summary, as follows:

o To comply with his or her obligations under the Companies Acts and to ensure that the requirements of the Companies Acts are complied with by the company;

o To maintain proper books of account;

o To prepare annual accounts;

o To have an annual audit performed (subject to certain exceptions);

o To maintain certain registers and other documents;

o To file certain documents with the Registrar of Companies e.g. the Annual Return;

o To disclose certain personal information such as interests in shares of the company or related companies or directors’ service contracts with the company;

o To convene general meetings of the company as required;

o To discharge certain responsibilities and obligations where they enter into transactions with the company of which they are a director;

o To assume certain responsibilities in the event of insolvency or liquidation;

More detailed information on the duties of companies, company directors and company secretaries can be obtained from the Office of the Director of Corporate Enforcement (web address: www.odce.ie). It is strongly recommended that, in advance of accepting

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appointment as a company director, individuals apprise themselves of their obligations and responsibilities as directors.

The primary duty of a director is to the company in question and the director holds a special ‘fiduciary position’, which means putting the interests of the company ahead of their own. Therefore the director’s duties are owed in the first instance to the company, and only then to the other parties involved. However, where a director expressly undertakes certain obligations to shareholders, he or she may stand in a fiduciary relationship to them and owe them fiduciary duties. Where a company is insolvent a director will owe a duty to the company’s creditors and a director is also obliged to have regard to the interests of the company’s employees (a duty that is owed to the company).

A director of a company is expected to account for all benefits that he receives by virtue of his position and a register should be kept of the director’s interests. The duty to account for all benefits is not limited exclusively to contracts but also to loans and quasi loans given by the company, any credit transactions and any guarantees or security given by a company for loans given by third parties to directors. Directors are also under duty to notify the company in writing of their interests in company shares or debentures, and dealings in the company shares or debentures (this includes the interests of spouses and children in same).

5.4.1 Board of Directors

As mentioned above, the directors of the company are collectively known as the ‘board of directors’, and they are legally responsible for the supervision and management of JVCo (except for those matters that are decided by shareholders- such as the removal of a director).

It should be decided from the outset what role the board should have, a supervisory/strategic role or an active role in the management of the company. The composition and structure of the board will be determined by this decision. If the board is to be actively involved in the management of the company it will need to include people with the necessary skills. However, if the board is to have a supervisory role it will consist mainly of representatives of shareholders and an executive management committee will take over the responsibility for the day-to-day running of JVCo.

Irrespective of whether it is decided that the board is to have a strategic or management role, the responsibilities of the directors are the same. Where the board chooses to delegate certain of its functions to an executive management committee, it will have a corresponding obligation to ensure that the committee acts in accordance with the board’s directions/policies etc. It must also ensure that the committee is discharging the board’s responsibilities on its behalf e.g. that the committee is ensuring that proper books of account are being maintained. The board of directors will still have a legal and fiduciary responsibility for managing JVCo although authority will be delegated to this committee. It is important to establish the role and authority of the committee at the beginning of JVCo.

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As part of the negotiations for JVCo, the public and private sector partners will need to decide the following:

o How many directors each shareholder can appoint to the board, along with any particular voting rights;

o Whether the board itself can appoint additional directors (to be allowed for in the articles of association);

o Whether the board should include independent non-executive directors (who are not involved in the day-to-day running of JVCo, and therefore can bring an independent perspective to the board);

o Whether the board is actively involved in the management of JVCo or whether it will delegate authority to the executive management committee (see above);

o The frequency of the board meetings (no more than 15 months should elapse between each annual general meeting, and it may be necessary to call extraordinary meetings to deal with matters outside of the normal business of an AGM);

o How board decisions are to be taken and recorded;

o Whether a board can appoint an alternate director (substitute) to act in the absence of a director; and

o How the chairman’s role is to be filled (a key role as he/she may have to resolve disputes and guide the management through difficult times).

5.4.2 Public Servants as Directors

If a member of a local authority intends to become a director of JVCo, they should be aware of the fiduciary duty to JVCo, and that his or her primary duty is to the company and not to the shareholder. A director may feel a conflict between acting in the interests of JVCo or in the interests of the shareholder where such interests are not the same. This may be particularly strong where the director is an employee of the local authority, the shareholder who nominated them. It is therefore important that any potential director of JVCo, who is also an employee of the local authority, is aware of the duties owed to each party and seeks to avoid any conflict in the carrying out of these duties. (It should be noted that these conflicts of interest could also arise when the private sector shareholder nominates an employee to the board of JVCo).

Where a conflict of interest does arise, this should be disclosed to the company (normally by declaring it at a meeting of the board). A director should not participate in any board decision in which he or she has a potential conflict of interest (the declaration of this and the non-participation in a particular decision should be recorded in the company’s minutes). Where a potential conflict of interest arises, the director should also give consideration as to whether it may be necessary to resign as a director of the company.

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In addition, the director must always exercise independent judgement on behalf of JVCo, and should not be restricted by the local authority as to how he/she should vote. Clauses can be entered into the shareholders’ agreement to avoid such a situation. For example, the shareholders rather than the board can decide on certain matters (where conflict is likely to arise).

Before committing to the directorship of JVCo, a public sector employee should be aware of the legal responsibilities and obligations attaching to the position. They should also be aware of the various duties they are responsible for, and how time-consuming they may be. In addition, while a director is only expected to act according to the knowledge and skill they possess in the area, the director will be liable for any losses that result from their own negligence and for this reason commercial insurance should be considered (see section 9.3).

According to the Ethics in Public Offices Act, 1995, anyone from a State body who holds designated directorships and positions of employment must make an annual statement or declaration of those interests (as defined in the Act), which could influence them in the performance of their functions and prevent them from exercising such functions in accordance with the Act.

When appointing public representative directors to the board, local authorities should be aware that a member of a local authority is an elected member and members themselves can only appoint members. However, a local authority officer is not a member and a local authority manager can appoint officers. Therefore when local authorities appoint officers as directors so as to provide expertise, this is a non-reserve function of the local authority but when local authority appoints members as directors, this is a reserve function and, as such, a separate meeting is required.

Local authority officials and elected members acting as Directors of Joint Venture companies on behalf of the local authority may not be paid additional remuneration in respect of this role.

5.4.3 Company Secretary

Every company registered under the Companies Acts, 1963-2002 is required to have a Company Secretary (“The Secretary”). It is possible for a Director of the company to also act as the Secretary of the company. A body corporate can also act as Secretary to a company (but not to itself). The Secretary of a private company is not required to have any formal qualifications but the Company Secretary of a public limited company (a PLC) must meet certain requirements.

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A Secretary’s duties are mainly administrative and are laid down by the Directors of the company. These duties may include the following10:

o Provision of legal and administrative support and guidance to the board of Directors;

o Responsibility for communication with shareholders when required;

o Ensuring that the board’s decisions and instructions are carried out and communicated properly;

o Convening of meetings of members;

o Ensuring that statutory forms are completed and filed in time with the Companies Registration office.

5.5 Assets As part of the agreement to form a new joint venture company, the local authority may be obliged to transfer assets in return for a share of equity in JVCo. These assets could include the following:

Tangible Land, buildings, equipment, buildings and finance

Intangible Intellectual Property Rights.

It is important that these assets are valued correctly; if the assets are undervalued then it may be seen as a form of state aid (for more detail see Section 2.3 – State Aid). The local authority must ensure that it receives a share in the equity of JVCo that is proportional to its contribution, and therefore achieves the best value for public money.

If the local authority acquires land by way of a CPO it must state the purpose of the acquisition and any subsequent disposal must be within that scope.

The importance in the correct valuation of the assets is shown in the following example:

A local authority (LA) decides to set up a Joint Venture company with ABC property developers called “Newhomes Ltd”, which will construct and sell 300 houses in the area. After consultation with their advisors, the LA decides that they want Newhomes Ltd to be classified as a private sector company with the LA owning a 40% shareholding. The LA agrees to transfer 40 acres of zoned land into the company with a current market value of €40m, in return for a 40% shareholding in Newhomes Ltd. This puts a value on Newhomes Ltd at €100m (40% shareholding equals €40m, therefore 100% shareholding equals €100m). Therefore in order to

10 For more detailed information refer to The Company Secretary, Information Leaflet No.16 issued by the Companies Registration Office.

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ensure that value for money was achieved for the LA’s transferred assets, ABC Ltd needs to transfer assets to the value of €60m into Newhomes Ltd.

The assets transferred by ABC Ltd could take many forms, such as additional land or finance, but it is the responsibility of the LA and its advisors to ensure that any assets contributed are to the value of €60m, and are therefore proportional to its shareholding in Newhomes Ltd.

As can be seen from the above example, to achieve the best value for money of any assets transferred into a joint venture company, the local authority should:

o Decide from the outset how it wishes JVCo to be classified and what percentage holding it desires in the company;

o Seek specialist advice regarding the valuation of tangible and intangible assets;

o Ensure that the same methods are used to value assets contributed by both the private and public sector parties, that assets are valued accurately and that the percentage shareholding in the company is in direct proportion to these assets.

5.5.1 Valuation Process

If the local authority is considering transferring state land to JVCo in return for a shareholding in the company, then a detailed valuation of this land is required to be obtained by the local authority. A valuation assessment should be undertaken by either the Department of Finance Valuation Office or by a private sector assessor. This is to enable the Open Market Value of the land being transferred to be ascertained. This Open Market Value is the amount that the land would sell for if it were sold on the open market. By ascertaining the Open Market Value of the land, transparency is achieved in ensuring that value for money can be ensured. State land should be put to its best use so as to maximise its value. If proposed transferable land is zoned for a particular use, then the local authority and the valuation should take account of this fact. However, the valuation should also have regard to the possibility of the land being rezoned to a more valuable use. This should prevent residential zoned land being transferred for recreational use at a recreational open market value or a recreational zoned area being transferred at a value reflecting that use when the land will probably be used for residential use. The valuation of the land must take into account the use to which the JV Company is planning to put it and the potential for a re-zoning of this land after it is transferred to the JV Company.

One must also consider the time involved for the selection of a partner and any potential delays that may occur. It is important that the valuation is determined at the time of the setting up of the JV Company so that a correct Open Market Value is achieved. Where a significant land transfer is involved, it is recommended that two separate valuations be obtained from two separate bodies so as to achieve value for money.

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5.6 Industrial relations issues

5.6.1 Stakeholder Consultation

Stakeholder Consultation is a key element of the Framework for PPPs agreed with the Social Partners, and therefore when establishing a joint venture company it is important that the views of all those affected by its establishment are taken into account. Stakeholders include employees and their unions, service users, lobby groups and public representatives. Structures should be in place to ensure consultation and open communication between the local authority and stakeholders.

In particular, the involvement and co-operation of employees should be secured in advance and employees should be kept informed from the outset of the progression of JVCo, particularly if there are issues regarding the transfer of staff from the local authority to JVCo.11

The Framework for Public Private Partnerships agreed by the Social Partners states that all the parties involved to a PPP must have regard to the appropriate industry norms in terms of pay and conditions, and of prevailing national and/or industry-wide agreements including health and safety regulations. It also states that “such an approach should be consistent with protection provided under the Transfer of Undertakings (Protection of Employees) Regulations and the Acquired Rights Directive. PPPs should be approached on the basis that no less favourable terms than the Transfer of Undertakings Regulations apply.”12 The European Communities (Safeguarding of Employers’ Rights on Transfer of Undertakings) Regulations, 1980 & 2000, protect the employment rights of employees who, in the context of a PPP contract, move from a public to a private sector employer. While the applicability of these regulations may not be universal it is generally safer to assume that they do apply. For more information on these regulations consult Guidance Note 8, ‘Stakeholder Consultation’, of the DoEHLG report.13

As stated in the Introduction to this document, two further documents which are important in this context are the Interim Guidelines issued by the Department of Finance in July, 2003 and the Policy Framework Document issued by the DoEHLG in December, 2003.

11 DoEHLG; Briefing Number 12, Consultation with Stakeholders, August 2002. 12 Public-Private Advisory Group on PPPs; Framework on PPPs, May 2001. 13 DoEHLG, A Policy Framework for PPPs, May 2000.

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5.6.2 Options in relation to staff transfers

When forming JVCo, a decision should be made as to the staffing of the new company and if any employees should be transferred from the local authority to JVCo (in order to transfer expertise and knowledge). The various options for the transferring of staff from the local authority to JVCo are described below.

Resignation from current employer and re-employment by JVCo

This could occur where JVCo is a completely new business and staff transfer is voluntary. There should be mutual consent between the employee and the employer and the contract with the old employer is terminated while the employee enters a new contract with JVCo. An advantage of this is that the contract is tailored to the needs of JVCo. Some statutory protections may apply where JVCo is an “associated company” (e.g. current employer has control of JVCo)

Secondment

The employee continues to be employed by the local authority and is paid by the local authority but is seconded to work in JVCo under a contract for an agreed term. Issues to be considered under this arrangement include:

The terms of employment;

Where the liability for the employee’s actions lie while on secondment;

Ownership of any intellectual property rights created by the employee while on secondment; and

The confidentiality of the employee.

The issue of JVCo’s authority over seconded employees should be resolved at an early stage, as this could lead to industrial relations problems at a later date.

Automatic Transfer

If the local authority is transferring existing business or a part of an existing business to JVCo, an employee who works in that section will be transferred to JVCo (other options include redeployment).

The Regulations of 1980 (S.I. 306 of 1980), and the amending Regulations of 2000 (S.I. 487 of 2000), implement EU Directive 77/187/EEC aimed at safeguarding the rights of employees in the event of a transfer of undertaking, business or part of a business to another employer as a result of a legal transfer or merger. This Directive was amended by Directive 98/50/EC, and both Directives have since been consolidated into Directive 2001/23/EC. The

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Department of Enterprise, Trade & Employment is currently transposing the outstanding terms of Directive 98/50/EC into Irish Law.

The main aspects of the regulations are as follows:

o Protection of Employment; terms and conditions of employment are transferred to the new employer

o Information and Consultation; employees must be consulted on the transfer.

The amending Regulations of 2000 provide for the right of complaint for employees to a rights commissioner, in the absence of a trade union, staff association or accepted body, where an employer contravenes Regulation 7 (information and consultation of employees). It also provides increases in the levels of fines for offences. The explanatory booklet on these regulations is available on www.entemp.ie.

‘Novation’ of contract

This is a transfer of the employee’s existing contract over to JVCo, if agreed to by all concerned parties. It would also be open for the parties to negotiate certain changes to the contract of employment.

Consultancy

The local authority staff can work as consultants for JVCo, but are still employed by the local authority.

Leave

Local authority staff could take unpaid leave from the local authority in order to work for JVCo.

5.6.3 Other issues concerning the transfer of staff

Incentives

When forming a new company it is important to identify the key persons in the local authority who are essential to this company and then to make sure that sufficient incentives exist to persuade them to move to JVCo. An example of an incentive would be an equity stake in the new Company

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Pensions

Pensions are an important part of the overall remuneration of the staff in the public sector, and private sector companies may not be in a position to offer equal benefits. The local authority must consider the ways they would safeguard their staff’s situation should this issue arise.14

Confidentiality

Confidentiality clauses should be included in employee’s contracts so that no sensitive information from either the local authority or the private partner is leaked.

Directors

The directors of JVCo may be officials of JVCo. The role and duties of directors of the new company need to be understood by the individual taking up the directorship.

5.7 Intellectual Property Rights Intellectual Property Rights (IPRs) serve to protect the results of invention, innovation and creativity and are divided into the following categories:

PATENTS To protect inventions which are products or processes that provide a new method of doing things or a technical solution to a problem.

TRADE MARKS A sign that distinguishes a Company’s goods or services from those of its competitors. They can include logos, colours, words, images, symbols or even musical sounds.

INDUSTRIAL DESIGN

Concerned with the appearance of a product such as its shape, contours, colour or texture.

COPYRIGHTS The exclusive rights which prevents the unauthorized copying or use of literary, musical, dramatic or artistic work, films, sound recordings,

14 There is no obligation under current employment legislation to provide for future pension entitlements for public service employees transferring to the private sector. Only pension entitlements to date of transfer (i.e. accrued benefits) are protected.

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broadcasts, cable programmes, typographical arrangements of published editions and original databases.

The Intellectual Property Unit in the Department of Enterprise, Trade & Employment drafts legislation and develops policy in the areas of copyright, patents, industrial designs and trademarks. The granting of patents, the registration of industrial designs and trade marks and the provision of information in relation to patents, designs and trademarks, together with certain limited functions under the Copyright & Related Rights Act, 2000 in relation to copyright disputes, are assigned to the Controller of Patents, Designs and Trade Marks in the Patents Office. Further information on IPRs can be obtained form the Patents Office (www.patentsoffice.ie) and the Intellectual Property Unit (www.entemp.ie).

It should be noted that not all intangible assets can be protected. For example, IPRs do not cover know-how and expertise.

If the local authority is contributing any IPRs to JVCo, it will have a number of issues to consider. Initially the local authority should identify any IPRs that it will be contributing to JVCo and establish their ownership. If they are not owned by the local authority, but by a third party, the local authority should ensure that they have the right to make this asset available to JVCo, and if they do, under what type of agreement and at what cost this will be in terms of compensation to the third party.

The local authority will have to decide how these IPRs will be made available to JVCo - either through a licence agreement with JVCo or by assigning the ownership of the asset to JVCo.

Licence Ownership of the IPR remains with the local authority, but JVCo will have use of it for a limited duration in return for a fee paid to the local authority.

Assignment Control of the IPR is transferred to JVCo in return for a one-off lump sum or a share in the equity stake of JVCo. JVCo will have the rights of an owner but the asset may revert back to the local authority, depending on the terms of the shareholder agreement.

As with any asset being transferred to JVCo (see section 5.6.1) the local authority must ensure that the IPR is properly valued in order to achieve the best value for public money and to comply with state aid rules (see section 2.3). In order to achieve an accurate valuation, independent professional advice should be sought. The following are common IPR valuation methods:

The Cost Approach The IPR is valued in accordance with the costs associated with it, such as research & development.

The Market Approach The value depends on amount that would be received for the IPR on the open market, by comparing it to a similar IPR that has

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recently been sold in the open market.

The Net Present Value (NPV) Approach

Estimates the economic benefit that might derive from the IPR less any costs or risks associated with it.

Apart from the transferring of IPRs to JVCo there are a number of other issues to consider. The local authority should consider what would happen to any IPRs created by JVCo itself and how would IPRs be dealt with on any winding up of JVCo or if a shareholder decides to leave the company. These issues should be dealt with in the Shareholder’s Agreement, and legal advice should be sought.

5.8 Exit Strategies When setting up a joint venture company provisions for the exit of shareholder(s) should be included in the Shareholder’s Agreement (or the Articles of Association). The LA should seek legal advice in this area to ensure that investments are protected in the event of one or more parties leaving the company.

A shareholder may leave the company voluntarily, or they could be forced to sell their shares in JVCo. Likewise, the shareholders of JVCo may decide to wind up the company, or a situation such as insolvency may force them to do so. Whatever the scenario it is important that any or all of the shareholders leaving JVCo receive a true and fair value for their investment in the company.

Reasons for wind up or sale of shares, whether compulsory or voluntary, are numerous and include the following;

o Intractable deadlock at board level;

o Objectives of JVCo have been achieved;

o Both parties no longer sharing the same objectives for JVCo;

o Material default or insolvency by either party;

o Change of control of the private company;

When forming provisions in the Shareholders agreement (or articles of association) concerning the realisation of investment the following issues should be considered:

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What mechanism should be used to calculate the value of shares? (e.g. net present value of future earnings, underlying asset value, break-up value or use of expert valuer);

Will provisions be added to the shareholders agreement to restrict the departure of the shareholders, e.g. a lock-in period?

To what extent could JVCo exist without one of its founders? Could the local authority continue to run JVCo successfully without the input from the private partner?

Is JVCo being set up for a specific task or duration and therefore what provisions should be in place for wind up after this task or duration?

What provisions should be in place to deal with any management disputes or deadlocks? (and therefore avoid sale of shares or wind up unnecessarily)

In what situations should a change in shareholders be required or not permitted? What provisions should be put in place to restrict the sale of shares to anyone or to a particular third party? How should new shareholders be approved?

To what extent will the departing shareholder be bound by obligations of confidentiality or restrictive covenants?

What will happen to any of the assets, shared assets, loans, guarantees or indemnities provided to JVCo by the departing shareholder?

Will the departing shareholder have any rights to use the intellectual property rights owned by JVCo?

What will happen to any of the staff seconded to the JVCo by the departing shareholders?

What will happen to the subsidiary contracts between the outgoing shareholder and JVCo?

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6 Joint Venture Classification

6.1 Public or Private Sector Classification A publicly classified company is one in which the State holds the majority control, and therefore it is subject to government accounting and auditing rules. This categorisation should not be confused with that of a “public limited company” or plc formed under the Companies Acts, 1963-2001. The term “publicly classified” may be applied to any of the types of company, public or private, that are capable of being incorporated under the Companies Acts. In deciding whether a company can be so classified, the key feature is the amount of control exercised by the public sector or local authority over the actions of the company. Whether a JV company is publicly or privately classified, it still has to comply with the requirements of the Companies Acts, 1963-2001 as to, for instance, incorporation, annual return filing, preparation of accounts etc.

Control Shareholding Investment

Before the selection process for a Joint Venture partner commences the local authority should decide on the level of control that it wishes to exercise over the proposed JV Company. The principle of whether the public or private partner has control of the company i.e. the level of influence over the day-to-day decision-making and how JVCo is run, will decide whether JVCo is publicly or privately classified. Control, defined as the ability to determine general policy, is an essential criterion for sectorisation. This decision of control will impact on the shareholding that the local authority will subscribe to in JVCo.

If the local authority desires majority control in JVCo then the local authority will take up a majority shareholding and the company will be publicly classified. If the local authority prefers a minor role in the running of the new company and wishes the private partner to exercise majority control, the local authority will take a minority shareholding and JVCo will be privately classified.

The level of control that the local authority desires in JVCo will impact on the shareholding that the local authority will subscribe to, and therefore impact on the level of investment that the local authority will contribute to JVCo. The levels of control, investment and risk that each party assumes should be a direct correlation to the percentage share holding allocated to each partner in JVCo. The local authority must perform a detailed assessment of what the public and private partners are contributing to the company and what that should represent in shares in JVCo. For example if the local authority desires a 40% shareholding and therefore a minor role in the daily running of JVCo then the private partner should be contributing sufficient assets so as to merit 60% of the shareholding and majority control in JVCo. (See section 5.5)

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When deciding on the classification of JVCo a number of key issues such as public sector responsibilities, public accountability and Ministerial responsibilities as well as various issues like directors’ liabilities and insolvency legislation will have to be addressed. The local authority will have to decide whether JVCo can be managed and operated more efficiently and effectively either by the public or private partners with a respective public or private classification.

The local authority should also consider the impact of whether JVCo is publicly or privately classified will have on the potential interest from the private sector. If the local authority desires the Joint Venture to be publicly controlled and therefore publicly classified, this may reduce the level of potential interest from the private sector. This may result in potential private partners not wishing to enter into a minority position in a publicly classified JV company with the public partner due to the public company requirements that would be needed to be complied with, such as local authority audit regulations. With a reduction in private sector interest the viability of the JV Company may become questionable.

Local authorities must also consider the issue of whether JVCo will itself have to abide by the EU public procurement rules. If JVCo is classified as a public company then JVCo itself may be deemed a “contracting authority”. If JVCo is classified as a “contracting authority” as defined in the EU directives, it would have to adhere to the EU public procurement rules for entering into contracts with third parties and this may restrict the commercial freedom of JVCo. There would be additional time required for entering into new contracts and the day-to-day running of the company would be impacted by compliance with EU procurement rules. (see section 2.1 Procurement).

The area of whether a the Joint Venture company is a “contracting authority” in itself is complicated, and it is recommended that legal advice be sought in early stages of the establishment of the Joint Venture so as to prevent future confusion.

6.1.1 The 50% Shareholding Rule

Based on the control exercised by the local authority over JVCo and on the percentage of overall JVCo shares held, a classification can be made as to whether JVCo is a publicly or privately classified company.

If the local authority own more than 50% of the voting shares of JVCo, the local authority will generally be able to exercise majority control over JVCo (however 75% control is necessary to pass special resolutions). JVCo, based on local authority control will therefore be classified within the public sector and will then be subject to certain Companies Acts 2001, requirements and also to Government accounting policies and regulations as set out by the Local Government auditor.

If the local authority own less than 50% of the voting shares of JVCo, the local authority will not be able to exercise majority control over the company and thus JVCo will generally be classified under the private sector. JVCo will be subject to the

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Companies Acts 1963-2001 but will not be required to comply with certain Government accounting policy requirements. It is still possible for the local authority to protect its interests and investment in JVCo through clauses entered in the shareholders’ agreement when it is a minority shareholder in JVCo. In the situation where there are two or more bodies there can be a split whereby the public sector owns 40% of the shares and two separate private sector bodies own 30% respectively. In this situation the company is a private sector company, as the private sector shareholders own 60% of the company.

If the local authority own 50% of the voting shares then the question of ownership is based on which partner exercises majority control over the Joint Venture Company. If the private sector exercises the majority of control over the Joint Venture and bears a higher proportion of risks and rewards, then JVCo will be deemed to be a private sector company. Similarly, if the public sector exercises the majority control, JVCo will be deemed a public sector company. One of the ways in which control can be determined is through the shareholders agreement. One of the problems that can occur in a 50/50 split is that deadlocks can occur. Dispute resolution measures should be put in place at the outset so as to be able to break such deadlocks.

(See further information in relation to the issuing of Joint Venture shares in section 7.1.2.)

6.1.2 The impact of a public or private company classification

As noted in the above section the principle of control indicates whether the Joint Venture Company is publicly or privately classified. Control is the ability to determine the general (corporate) policy or the ability to appoint appropriate directors or managers if necessary. Owning more than half the shares of a company is a sufficient if not a necessary condition for control.

6.1.2.1 Impact of JV Company Classification on the General Government Balance

Local authorities should be aware that when the State becomes shareholders in any company this may impact on the General Government Balance (GGB) or the General Government Debt (GGD) (See section 7.2). The distinction as to whether JVCo’s income and expenditure will be contained in the GGB or its debts form part of the GGD depends on whether JVCo will be classified within the commercial sector or the general government sector. This distinction between the two will depend on whether JVCo is a market or a non-market company.

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C o n t r o l

P u b l i c l yC o n t r o l l e d

P r i v a t e l yC o n t r o l l e d

C o m m e r c i a l" M a r k e t "

N o nC o m m e r c i a l

" N o n - m a r k e t "

C o m m e r c i a l" M a r k e t "

J o i n t V e n t u r e C o m p a n yC l a s s i f i c a t i o n

As the above diagram shows, the nature of the control of the company indicates whether JVCo is publicly or privately classified. If JVCo is privately controlled there is an indirect assumption that it is a commercial company and as such operates in the “market”. Therefore, none of JVCo’s assets, liabilities or income and expenditure will be included in the Government Sector in the National accounts or impact on the GGB or GGD.

If JVCo is publicly classified it can either be a “market” or “non-market” company. The distinction between the two is the idea of commerciality. A company is commercial if its sales revenues cover more than 50% of its operating costs. Most sales revenues should come from third parties i.e. the general public, households, other companies etc. The higher the percentage of revenue that comes from the government the less commercial the company is. If a high percentage of sales revenues come from the government the more the issue of economic reality should be used for classification purposes i.e. does the company act in the same way as a private company. Any injection of equity into a company is, as such, a financial transaction and has no impact on the general government balance as this is translating one kind of financial asset (cash) into another type of financial asset (equity). Examples of public companies that are market companies would include CIE and Bord na Mona. State companies/agencies that are non-market companies include the IDA, FAS and Enterprise Ireland.

Therefore, the decision as to whether the income, expenditure, assets and liabilities of JVCo should be classified within the Government Sector and affect the GGD or GGB, is dependent

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on the nature of the transaction of the company i.e. is the planned transaction commercial or not. The nature of the transaction is more important in relation to classification on the GGB than in relation to whether the company is publicly or privately controlled.

Non-market companies are required to have their assets, liabilities, revenue and expenditure classified on the National accounts and on the GGD/GGB while market companies do not. This is as set out in the ESA 95 Manual on Government Deficit and Debt compiled by Eurostat.

The decision as to whether JVCo will be considered market or non-market is initially a matter for the Department of Finance in consultation with the Central Statistics Office.

6.1.2.2 Attractiveness to the Private Sector

The local authority should be aware of the impact the classification decision will have on the potential private partners, as the level of private sector interest may be a critical factor to the success of a Joint Venture. The participation of the private sector may be to ensure the partnership of funding, specialist personnel and equipment, etc. The opposite is true when the local authority is aware that there are numerous potential partners that will tender for the position no matter how JVCo will be classified. Therefore, when the local authority is compiling the feasibility study for a Joint Venture method of procuring the PPP, the feasibility study should assess the range of private interest would there be at different levels of control exercisable by the local authority and with the local authority having different percentage shareholdings. The local authority should assess the impact of these scenarios so that an informed decision can be made in relation to the level of control, shareholding required and ultimately the classification of JVCo. The use of a market survey exercise may be useful in order to assess the level of market interest.

6.1.2.3 Accountability of results

Regardless of its classification, it is a requirement of the Companies Acts 2001 that JVCo, as a limited liability company, is independently audited.

If JVCo is classified under the private sector it will be subject to the Companies Acts 2001, as well as private sector accounting and taxation requirements. This means that private sector auditors will be appointed to audit the accounts, to ensure that the accounts are reported on a true and fair view. JVCo will be required to file independently audited accounts with the Companies Registration Office on a yearly basis.

If JVCo is classified within the public sector, it will be subject to the accounting practices as set out by the Local Government Audit Service (LGAS) in addition to certain Companies Acts requirements.

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In accordance with the “Code of Practice for the Governance of State Bodies” where State bodies, their subsidiaries and/or any State body joint ventures have a combined holding in any company exceeding 30% of the entire issued share capital of such company, the State bodies concerned should notify the relevant Minister and the Minister of Finance of such shareholdings. These shareholdings and proportioned results are then included in the State accounts and also in the DoEHLG accounts as an investment in subsidiaries.

Local authorities are required to identify any interests they have in companies in their annual financial statements. In accordance with the Accounting Code of Practice, where a local authority as a body corporate or its members or officers by virtue of their office have an interest in a company certain disclosures should be made for each entity in their Annual Financial Statement (AFS). These are reflected below with Wexford Heritage Trust used as an example:

Disclosure Example

1 Name of the company. Wexford Heritage Trust

2 Principle activities of the company Visitor Attraction

3 Share ownership (beneficial)

4 How the local authority is represented on the Board of the Company

5 Officials & 2 Members

5 Amount and nature of any guarantees, underwritings, loans, grants or borrowings given by the local authority in respect of borrowings of the Company.

Underwritten operational losses for 10 years. Loan Guarantee £500,000

6 The extent to which the local authority has any security for moneys advanced to the Company.

Wexford County Council has title

7 How and where the results of the company have been reflected in the accounts of the local authority.

£40,000 allocated 1999 to co-fund loan repayments. Classified in ‘Promotion of Interest’ section of the Local Government Account.

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6.1.2.4 Accounting Policies

Local authorities should be aware that the accounting policy used in Government Departments is now becoming similar to the policy used in the private sector. Accounting in Government Departments was formerly operated on a cash-based receipts and payments system but is currently being replaced by an accruals-based system whereby all annual financial statements will be prepared on an income and expenditure basis with complete balance sheets.

It should be noted that with effect from the 2003 Annual Financial Statement (AFS), local authorities will be producing accounts on an accruals basis and will therefore be aware of the new Government Accounting System.

A local authority, when it is a shareholder in a JV company, must disclose the results and level of investment in the JV Company in its Annual Financial Statement in accordance with the Accounting Code of Practice.

It is recommended when the shareholders agreement is being drafted that the local authority ensures that a clause is inserted into the shareholders agreement which allows the Local Government Audit Service) LGAS access to the accounts of JVCo and any reports that its external auditors prepare on the JVCo. With the LGAS having access there is scope for disclosure in the local authority accounts of all activities and interests that they are engaged in and ultimately a higher level of transparency in the use of public funds.

6.1.2.5 Freedom of Information Acts, 1997 and 2003.

The Freedom of Information (FOI) Act, 1997 states that members of the public should have access “to the greatest extent possible consistent with the public interest and the right to privacy, to information in the possession of public bodies”. JVCo itself will not be subject to FOI unless it is added to the schedule. However, the Act does apply to local authorities – and therefore any information about the company, regardless of its classification, which is the possession of the local authority can be the subject of an FOI request.

6.1.3 The advantages and disadvantages of a Public classification

The following table outlines some advantages and disadvantages of a public classification for JVCo i.e. where the public partner can exercise majority control and is the majority shareholder in JVCo:

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Advantages Disadvantages

Local authority can exercise control over the day-to-day running of JVCo.

A Joint Venture Company where the local authority holds the majority shareholding and exercises majority control may reduce the level of interest from the private sector to become a new partner in JVCo.

The local authority will represent the majority of the board members/senior management of JVCo and therefore will be the main decision maker in the commercial activity of JVCo.

The level of management experience from the public sector may not be as high as if specialised private management personnel are brought in by the private sector that would have experience of managing this type of Joint Venture operation.

The local authority would have access to the majority percentage of the earnings attributable to the shareholders that are made by the Joint Venture company.

The local authority may have to contribute to the majority of the initial investment in JVCo and accept a higher portion of risks. In addition, there may be more pressure on local authority resources such as staffing.

The local authority will be in a stronger management position so as to operate JVCo in the local authority’s best interests.

The commercial freedom of JVCo may be lower; as JVCo would have to comply with Local Government policies and procedures than if it was privately classified.

JVCo may be subject to EU or national procurement procedures in relation to contracts that it enters into with third parties as it may be classified as a contracting authority in its own right.

Financial, trading contracts and other information regarding JVCo may be subject to the Freedom of Information Acts, which could create a competitive disadvantage.

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6.1.4 Examples of Joint Venture Companies

For illustrative purposes, a number of hypothetical examples have been prepared highlighting how classification is affected by the local authority’s level of control and the share structure in a Joint Venture. The names of the private sector firms in the examples are fictitious and do not refer to actual companies.

Privately classified company – Private Partner is a majority shareholder.

JV Limited is a PPP Joint Venture company established by a local authority and Recyclix Limited in order to manufacture recycled paper to be sold to the Irish and International paper market. The local authority is providing a 20-acre site and delivering 40,000 tonnes a year of used paper to the premises of JV Limited. This investment has been calculated to be worth 40% of JV Limited. Recyclix Limited a private company is investing €50 million towards the capital and running costs for an agreed 15-year period. Recyclix investment is worth 60% of JV Limited. The management team of JV Limited will consist mainly of Recyclix employees who will exercise majority control over JV Limited.

The share structure of JV Ltd is as follows:

Shareholder Ordinary Shares in JV Limited Percentage Shareholding of JV Ltd

The Local Authority 40,000 of €1 each 40%

Recyclix Limited 60,000 of €1 each 60%

Therefore JV Limited is a private sector company as the private partner exercises majority control over JV Limited. This control is based on the level of control the private partner exercises over the daily running of JV Ltd and based on its shareholding. JV limited will thus be regulated by private sector accounting guidelines and can enter into contracts without the requirement to use the EU procurement procedures. The local authority has 40% control over the company and can exercise sufficient control over the current and future direction of the company so as to protect their interests through both their shareholding and the shareholders agreement. The local authority can now avail of the benefits and commercial advantages associated with a private sector company in the paper re-cycling industry.

Publicly classified company – Public Partner is the majority shareholder.

JV Limited is a PPP Joint Venture company established by a local authority, Agricon limited and Green Logistics limited, in order to mine sandstone, grind it down, package and distribute it to the construction sector in the Irish market. The local authority is providing a 300-acre un-mined site for 10 years and €5m capital investment to JV limited. This

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investment has been calculated to be worth 65% of JV Limited. Agricon Limited and Green Logistics are private companies who are investing €15 million each towards the capital and running costs of JV Ltd in return for 12.5% of JV Ltd respectfully. The management team of JV Limited will consist mainly of local authority employees who will exercise majority control over JV Limited.

The share structure of JV Ltd is as follows:

Shareholder Ordinary Shares in JV Limited Percentage Shareholding of JV Ltd

The Local Authority 650 of €100 each 65%

Agricon Limited 125 of €100 each 12.5%

Green logistics Limited 125 of €100 each 12.5%

Therefore JV Limited is a public sector company as the public partner (the local authority) exercises majority control over JV Limited through the control it exercises over the running of the company and its percentage shareholding. JV Limited will therefore have to comply with the local government auditing requirements and JV Limited will be required to comply with the EU procurement procedures in relation to contracts that it enters into. Through this Joint Venture company structure the local authority can retain control over the running of the company and utilise the knowledge, experience and funding of the private partners in order to establish a competitive advantage over their competitors.

Privately classified company – Equal Shareholding

JV Limited is a PPP Joint Venture company established by two local authorities, Radionics Ltd, MBR systems Ltd and Datatec Ltd in order to develop an advanced radio communications network for mountainous and rural areas. This system is planned to be developed and patented so that it can be sold across the world. The local authorities are providing access to install new radio beacons on their existing masts and will build 15 additional key masts in designated local authority land areas. Radionics are providing the Intellectual rights to their developing radio communications system. MBR and Datatec are proving €8m in capital and 10 electrical engineers. The advisors to the local authority have calculated these respective investments and after a negotiation process it was agreed the share structure would be as follows.

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Shareholder Ordinary Shares in JV Limited Percentage Shareholding of JV Ltd

Local Authority 1 250 of €1 each 25%

Local Authority 2 250 of €1 each 25%

Radionics Limited 200 of €1 each 20%

MBR Systems Limited 150 of €1 each 15%

Datatec Limited 150 of €1 each 15%

In this example both sectors have an equal shareholding in the company and as such neither party will have overall control. In this company it was decided between the parties that the private sector would look after the day to day running of the company and the public sector would take a smaller role in the running of the company. In this manner the company is privately classified as the private sector exercises control over the day to day running of the company

Conclusion

o These examples highlight that the main criterion for the classification of a company is the principle of control, and the implications of this principle on the running of JVCo.

o The level of shareholding held does not mean the exercise of control but generally is a reflection of control held by the respective parties.

o Joint Venture companies can be established to procure a wide range of business opportunities.

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7 Financial Issues

7.1 Taxation Issues Whereas local authorities themselves are afforded various tax exemptions under the relevant legislation, this will not be the case for JVCo as it is a separate legal entity. It is important, therefore, that professional tax advice be sought when planning to enter into a joint venture. JVCo could be liable to tax under the following headings:

o Corporation Tax

o Capital Gains Tax

o Stamp Duty

o VAT

o Commercial Rates

These taxes are discussed in general outline below:

7.1.1 Corporation and Capital Gains Tax

Income of a trade carried on by JVCo is liable to corporation tax. The rate of corporation tax on trading income is 12.5%. Income earned by JVCo from making investments is liable to corporation tax at a rate of 25%. Where JVCo makes a gain on disposing of investments it will be liable to corporation tax at an effective rate of 20%. It should be noted that where JVCo makes a gain disposing of development land, it will be liable to tax under the Capital Gains Tax code.

7.1.2 Stamp Duty

A number of transactions involving JVCo may give rise to an exposure to stamp duties. The transfer of assets into the company may, depending on the nature of the assets, mean that JVCo will be liable to pay stamp duties. For example, the transfer of non-residential property to the company will mean that JVCo will be liable to pay stamp duties on the market value of the property, typically, at the rate of 6%.

Upon the formation of the company, a charge to Companies’ Capital Duty - a type of stamp duty - may arise, which JVCo would be liable to pay. The charge to Companies’ Capital Duty is based on 1% of the value of any assets contributed to the new company.

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7.1.3 Value Added Tax

State and local authorities are generally outside the scope of VAT and do not charge VAT where they collect fees or payments for the provision of a service. However, if they engage in transactions where their treatment as taxable persons would lead to significant distortions of competition, they may be required to register and charge VAT in respect of the supply of the particular service. The VAT treatment of local authorities cannot be amended without appropriate national legislation.

In order to come within the provisions of VAT law, any legal entity must be engaged in supplying goods or services in the cause or furtherance of business. However certain activities are either exempt such as financial services (as defined in the VAT Act, 1972) or are not taxable under Irish VAT law such as the supply of public transport or water. The economic activity of JVCo will therefore have an important bearing on its VAT status. There may also be issues relating to the sale, letting or leasing of immovable property to or by the JVCo, either from or to the private sector, state and local authorities. VAT may also arise in respect of domestic or foreign services either received or provided by JVCo. Therefore, the VAT implications of any project would need to be examined in detail before any final decisions are made.

7.1.4 Commercial rates

Under the Valuation Act, 2001 commercial and industrial properties are subject to local authority rates. The level of commercial tax charged is based on the concept of Net Annual Value (NAV). NAV is an estimate of the rent that property might be let for, from year to year, to a hypothetical tenant who would bear the cost of maintenance, repairs and rates. The Valuation Act, 2001 specifies that certain commercial property uses are exempt from commercial rates such as non profit making galleries, museums and libraries, places of public religious worship, property used for charitable purposes, non-profit driven schools and third level institutions and properties used for the advancement of science, literature and the fine arts etc.

7.2 Debt As the Joint Venture is a limited liability company, the Joint Venture Company can only be held liable for the assets and liabilities of the company. If the Joint Venture was to go bankrupt then the remaining debt can only be paid from the existing assets remaining in the company and not directly by the local authority or by the private sector. When a company goes bankrupt there is potential for the directors of the company to be personally liable for the liabilities of the company if they can be found to have acted negligently as directors. Therefore if the local authority is appointing personnel to act as company directors on the local authority’s behalf these representatives should be aware of their responsibilities as company directors. See section 4.2 Corporate Governance and section 4.3 Role of Directors.

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7.2.1 Impact of JVCo Debt on National Accounts and General Government Balance

As noted in section 6.2.1 the principle of whether JVCo’s debt will be classified in the National accounts in the General Government Balance (GGB) is based on whether JVCo is a market or a non-market company. The difference between a market and non-market company is commerciality, i.e. if sales revenue from non-government third parties cover most of the operating costs the company is a market company. In the national accounts, the assets, liabilities, expenditure etc of a market company are not classified within the Government Sector or on the GGB but a non-market company is classified in the Government sector and on the GGB.

This distinction is important, as EU countries cannot allow their General Government Balance (GGB) to exceed 3% of their Gross Domestic Product (GDP) under the Stability and Growth Pact. The GGB is the difference between the Capital and Current Expenditure versus the Capital and Current Income of the State. Also as part of the Maastrict agreement EU countries must maintain a General Gross Debt (GGD) of below 60% of the GDP. If either of these criteria is breached then penalties can be incurred. These two criteria place a restriction on the day to day spending of the government and on the overall borrowing levels of the State.

Local authorities should be aware of the impact of borrowing on the GGD. If the local authority borrows directly on the market or via Government, this liability must be classified on the GGD. If the JV Company, which is market classified, borrows from the private sector then this is regarded as private sector borrowing and it has no impact on the GGD. Furthermore, the borrowings of a market-classified company can be guaranteed by Government and still not have an impact on the GGD. However, this is on the basis of a fair assumption that JVCo is a viable company which is expected to pay back its own borrowings. If it is likely that the Government will have to make good on these guarantees and repay borrowings then these contingent liabilities should be classified on the GGB from the outset. In this manner it is the nature of the transaction that is more important than the issue of control or the legal form.

7.2.2 Borrowing by local authorities

Section 106 of the Local Government Act 2001 allows a local authority to borrow money in any manner that it considers suitable for the effective performance of its functions. Borrowing shall only be with the sanction of the appropriate Minister.

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7.2.3 Local authority involvement with capital projects that are outside the remit of the DoEHLG

The Department of Finance has issued guidelines to all Government Departments clarifying their functional responsibilities when engaged, either directly or through bodies under their aegis, in sponsoring and co-funding projects being undertaken by local authorities. In particular Departments/Agencies providing grant assistance have responsibilities for:

Vetting the project for its viability/suitability and technical specification,

Sanctioning local authority borrowing where the project does not fall within the functional responsibilities of the Minister of Environment, Heritage and Local Government, and

Monitoring the project at construction stage and dealing with subsequent issues that may arise with the project.

Where local authority borrowing is required to finance the balance of the cost of a project the local authority concerned is obliged to consult with the relevant Department/Agency. This is because the Department is concerned that the involvement of local authorities with such projects may have serious long-term financial implications. As advised by the Department of Finance, local authorities should not become involved in projects where potential liabilities or ongoing operational costs could be such as to seriously impact their financial position. Where authorities do guarantee loans/overdraft or underwrite any losses, they should ensure that arrangements are in place to enable them to have control over the project.15

7.3 Guarantees When the Joint Venture is looking for initial or additional funds from private banks, the banks may look for guarantees in the form of assets, written guarantees from the private or public sector. In relation to the public sector providing guarantees, local authorities should be aware of “Public Financial Procedures”16 issued by the Department of Finance, in particular Section C8 which outlines the policy in relation to the issuing of guarantees. These Procedures state, “A guarantee may only be issued where there is specific statutory authority to issue such a guarantee”.

Statutory power to guarantee borrowing is provided:

o Under the State Guarantees Act, 1954 (which allows the Minister for Finance to guarantee borrowing by any body named in the Schedule to the Act or added to the Schedule by Government order), or

15 Local Government Finance Section, DoEHLG Circular Fin 12/96 and Department of Finance Circulars 23/94 and S74/17/03 of 16 January, 2004.. 16 Available at www.irlgov.i.e./govacc/procedures.pdf

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o Under the specific legislation governing a particular body.

Sections 66 and 67 of the Local Government Act, 2001 gives local authorities a general competence to take such measures, engage in such activities or do such things (including the incurring of expenditure) in accordance with the law as they consider necessary or desirable to promote the interests of the local community. Such measures include providing assistance in money or in kind to persons engaging in any activity, which in the opinion of the local authority, benefits the local community. The provision of money or assistance in kind includes grants, loans, guarantees, or other financial aid. Such decisions are reserved functions. Where guarantees are given, local authorities should ensure that they have fully evaluated the potential financial implications of providing the guarantee, taken into account State Aid considerations and are fully cognisant of the contents of Circular Fin 12/96 and S74/17/03 of 16 January, 2004.

The statutory power to guarantee, whether under the State Guarantees Act, 1954 or other legislation, is normally subject to a cash limit above which guarantees cannot be given in respect of a particular body. The use of the State Guarantees Act for guaranteeing borrowing has diminished and the practice now more usually adopted is to provide borrowing and guaranteeing powers in the particular legislation which relates to the specific State body.

The local authority should think carefully before it provides any guarantees for one of its Joint Ventures.

7.3.1 Letters of Comfort

A letter of comfort is a type of written assurance to a lending institution or others in relation to borrowing or other financial commitments where there is no statutory power to guarantee or where guarantees up to the statutorily authorised level have already been given. The Department of Finance has issued a circular (ref 4/84) in relation to letters of comfort, and the instructions in that circular should be strictly observed when considering the issue of such letters.

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8 Financial Affairs

8.1 Funding There are two main categories of capital funding that occur in the establishment of a company and these are applicable to JVCo:

o Initial funding, and

o Additional funding

8.1.1 Initial funding

The initial funding “start-up” that the local authority may inject into JVCo may be in the form of assets other than cash e.g. land. This initial funding may also be in the form of debt or grants. The cash/non-cash injection will be in return for a level of control/influence over the running of JVCo and for a share issue in the company. The local authority must ensure that it either owns the assets or has the authorisation to transfer these assets to JVCo in return for a shareholding in the company. The assets that are being transferred by the local authority should only be for their intended purposes as laid out in the shareholders agreement. As addressed in detail in section 5.5, the shareholding that the local authority is receiving in JVCo must be based on the valuation of their investment in JVCo. If the local authority desires a minor role in the daily running of JVCo and require nothing more than 30% of JVCo’s shareholding, then the local authority must only contribute to 30% of JVCo’s share capital valuation.

8.1.2 The issuing of shares in the Joint Venture company

Before shares are issued in the Joint Venture Company the local authority should take into consideration two factors.

o The assets that are being transferred to JVCo and the value of these assets.

o The level of shareholding the local authority will hold based on the desired classification of the JV Company, i.e. privately or publicly classified.

These two issues should be addressed prior to the issuing of shares so that value for money is achieved on the assets that are transferred into JVCo. Therefore, the method for how the shares will be issued and how they will be apportioned to their respective parties should be done in relation to the assets that are being transferred into the company by each party and the risks that each party will bear. (See section 5.5)

Based on the discussions between the local authority and the selected private partner an agreement will be drawn up as to the split in the shareholding between the two entities and

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the level of control that each partner desires. This allocation will be legally captured in the shareholders agreement. The split in the shareholding should be based on how the local authority wishes the company to be classified and the commercial impact this will have on JVCo (See classification. section 6.0). The shareholders agreement is a legal document setting out the share allocation between the respective Joint Venture partners. During this process, the local authority should consider the amount, value and type of shares that it requires to be authorised and issued in JVCo. There are two main types of shares that can be issued in a limited company and these are:

o Ordinary shares, and

o Preference shares.

8.1.2.1 Ordinary shares

Ordinary equity shares are the most common and easiest way to capitalise a company. Shares can be issued for either a cash or non-cash consideration e.g. land. The holders of the Ordinary shares generally have control of the company as they have the voting rights attached to those shares. Ordinary shares carry the risk and reward of ownership; they are entitled to a share of the retained earnings but also face the risk of their shares becoming valueless should JVCo be unsuccessful. Each ordinary share in JVCo has its respective voting rights and the more shares that are held then the more voting rights that are associated with that partner. With these voting rights the partner can influence the decision-making of the company. The local authority must be aware that if additional ordinary shares are issued in the company, this can alter their existing share ownership percentage. An additional share issuing may be required in order to provide additional funding as required for JVCo. The local authority’s shareholding may increase or decrease if they opt to subscribe or not to the additional share issuing. The local authority may be unable to subscribe to additional shares based on the Memorandum and Articles of Association.

Additional shares can be issued/subscribed in JVCo in return for a capital injection into the company. Local authorities that enter into Joint Ventures should be aware that a reduction in ownership through share dilution can happen if the local authority either:

o Does not have the funding available so as to subscribe to these new shares, or

o Does not have a right to participate in these new share issues. These rights would be provided for in the Memorandum and Articles of Association.

An alternative option that could be considered is that of the private partner, public partner or both lending funds to the Joint Venture. Alternatively, the Joint Venture company may be able to borrow in its own right from a third party bank. Where additional funds are raised through borrowings, no new shares are issued and the local authority’s shareholding in the Joint Venture remains unchanged. (See section 9.1.4 below on additional borrowing).

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8.1.2.2 Preference shares

While it is also possible to issue preference shares in JVCo, it is recommended that prior professional advice be sought as their issuance could give rise to additional concerns. Certain types of preference shares are similar in nature to ordinary shares in that they have voting rights in the control of the company. However, unlike ordinary shareholders, who are entitled to a percentage of the profit of JVCo, the preference shareholders receive a predetermined amount. For example, a 7% preference shareholder who invested €100 would be entitled to €7 per year out of the profits of JVCo. This dividend is payable to the preference shareholders before the profits are divided among the ordinary shareholders. JVCo should always seek to maintain adequate reserves to pay the preference shareholders, but in the event that this is not possible (i.e. JVCo is making a loss) the dividend owed to the preference shareholder will accumulate until the company is making a profit and is in a position to pay the cumulative dividend to the preference shareholders.

Preference shares may be the preferred option for the local authority in some circumstances as certain rights can be attached to the preference shares, such as the ability to veto a vote by the majority ordinary shareholders or to appoint directors to the board. In this way the holding of preference shares by the local authority may be a way to exercise additional control over the company. For example if there is a 50/50 split in the ordinary shareholding of JVCo and the local authority holds preference shares with voting rights, in the event of a deadlock situation occurring the local authority could use these shares to their advantage. For obvious reasons, the private partner may not be happy with such a situation, as it would mean additional control for the local authority.

It must be noted that not all types of preference shares carry voting rights and if preference shares are to be issued in a Joint Venture it is recommended that advice be taken in relation to the rights associated with these shares.

8.1.3 Additional funding

The Joint Venture company should be undertaken under the principle that it will be self-supporting. However, at the establishment of JVCo the local authority should consider the possibility of additional funding being required in the future and how this would be addressed. The local authority has the option of transferring the risk of additional funding to the private partner at a cost to itself, and this may make economic sense in the long run as a means of preventing additional future costs to the local authority. The shareholders agreement must also take account of the assets that have been transferred to JVCo and the manner in which these assets can be used in the event that additional finance is required. The shareholders agreement should emphasise the protection of the local authority investment in order to prevent State assets being used as a re-financing vehicle or bank collateral. (See also section 7.2 and 7.3 on debt and guarantees).

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If additional funding is required by JVCo, it can be sought through three different options:

o Additional shares are issued in JVCo

o JVCo borrows on its own behalf

o The JV partners lend to JVCo

When considering these options, the question of risk transfer and the protection of State assets should be central to any decision that is made.

Additional shares can be issued in JVCo in return for an additional capital investment and the regulations governing this should be set out in the Memorandum and Articles of Association. The issue also arises as to how a value can be put on these new shares based on the success of the company and the net assets that it held at that time. The local authority can either subscribe or not to the share issuing. However, if the private partner avails of the share issue and the local authority abstains, this may lead to a dilution in the shareholding held by the local authority and a reduction in the level of control exercisable by the local authority over JVCo. An option may be for new shares to be non-voting, but with the rights to dividends. The shareholders agreement should address the issue of additional shares and the impact this will have on the company. Financial and legal advice should be sought prior to the issue of new shares as it can lead to a change or dilution in the JV company structure.

The second option that is available to JVCo is borrowing from a commercial bank. As JVCo is a limited company with its own legal form, it is in a position to borrow on its own behalf and this is a source of funding that will not impact on the local authority’s control over the company. However, it must be noted that the bank may want parent company/public sector guarantees or deeds for security purposes on the loan. The local authority must therefore ensure that they act within their powers (intra vires) in relation to providing guarantees or using State assets as collateral with a commercial bank (See section 7.2 Debt and 7.3 Guarantees). JVCo should first check that its Memorandum and Articles of Association allow for it to borrow.

The third option is one of the Joint Venture private partners providing a loan facility to JVCo. This option is the least risky to the local authority but may be unfavourable to the local authority. This option could be suitable if the Joint Venture requires short term funding and one of the stakeholders has sufficient excess funds available.

The shareholders agreement should also take consideration of appropriate termination provisions in the situation where additional funding cannot be sought and JVCo is to go bankrupt or in the situation where a party is contractually obliged to provide additional funding required but fails to provide it.

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8.2 Protection of Investment By establishing a JV company, the local authority has transferred certain assets, be it land, cash or other forms, in a return for a shareholding in JVCo. The local authority must be in a position so as to be able to protect its investment and, ultimately, State assets. Protection of these assets is through the local authority’s ability to exercise control over the commercial strategy of the company and through its shareholding in JVCo.

8.2.1 Types of additional protection

There are also additional measures that can be taken by the Local authority so as to protect their investment. These are:

o Shareholders Agreement

o Number of directors on the board

8.2.1.1 Shareholders Agreement

As has been mentioned throughout this guidance document, the local authority should consider the insertion of clauses in the shareholders agreement to protect the local authority’s investment in JVCo. The shareholders agreement is a legal document, which sets out the manner in which JVCo can operate and be run. Therefore if the local authority is in a minority shareholding position or if the local authority relinquishes control over the company through either a share issuing or sale of a portion of their share holding to another party, the principles of the shareholders agreement will stand. The shareholders agreement is a legal document that can be used to ensure that JVCo management operate in a manner as intended in the shareholders agreement.

8.2.1.2 Directors on the Board

By having local authority personnel as directors on the board of JVCo or its members sitting on the executive management committee, the local authority will take an active role in the management of JVCo and be aware of the commercial activity of the company.

8.3 Commercial Insurance Local authorities generally do not need to take out commercial insurance, as they do not operate in a commercial manner. When establishing a JV company and becoming a partner in this company the local authority should consider the need for commercial insurance in relation to the activities that JVCo will be engaging in and the exposure this will have on the local authority as a partner in this business. When considering whether to take out

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commercial insurance, the local authority should decide if the benefits of the protected risk merit the cost of the associated insurance.

It is recommended that if any of the local authority’s staff are going to be directors of JVCo, adequate insurance be put in place for their potential liabilities as directors.

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9 Conclusion The purpose of this guidance document is to set out the relevant issues for the local authority in the establishment of a Joint Venture company. A Joint Venture company could be established to procure a wide range of potential PPP projects and as such this guidance document cannot cover every issue that may occur. The relevant Government Departments should be contacted (See Appendix 1) prior to any decision to establish a Joint Venture company

The decision to form a Joint Venture company, along with deciding who exercises majority control and how the company will be classified should be based on the best interests of the local authority and, ultimately, the State. The impact of their decision on the level of private sector interest should be of secondary concern for the local authority.

Forming a Joint Venture company is a complex process and the decision to establish one should not be taken lightly. Initially the local authority should ensure that the proposed project is commercially viable and will therefore attract potential private partner interest. A formal study (Feasibility study) should be carried out before proceeding with the establishment of a JV company or arrangement, to ensure that forming a Joint Venture company is the best available option.

While it is recommended to obtain professional financial, legal and technical advice before proceeding with a JV company, the PPP Unit in the DoEHLG are available to give any additional advice and support required regarding the PPP process.

An outline approvals procedure checklist is attached in Appendix 3, which sets out the initial steps that the local authority should undertake in using a Joint Venture Company approach.

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10 Appendix 1 – Further contact Points

Additional personnel or departments can be contacted in relation to further advice or queries in relation to a particular section.

Department Particular Area Telephone Number

Website

PPP Unit. Department of the Environment, Heritage and Local

Government

Overall advice on Joint Ventures.

01 888 2517 www.environ.ie

PPP Unit. Department of Finance

Overall advice on Joint Ventures.

01 639 6211 www.ppp.gov.ie

Local Government Finance. Department of

the Environment, Heritage and Local

Government

Loans

Borrowing

01 888 2465 www.environ.ie

Valuation Office. Department of Finance

Valuation issues. 01 8171000 www.valoff.ie

Department of Enterprise Trade and

Employment

Establishment of a JV Company. State Aid and Competition rules

01 631 2121 www.entemp.ie

Central Statistics Office Public and Private Company classification guidelines

01 497 7144 www.cso.ie

National Development Finance Agency

Financing of PPP projects

01 664 0800 www.ndfa.ie

Office of the Director of Corporate Enforcement

Companies, directors, secretaries, members & shareholders etc.

01 858 8500 www.odce.ie

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11 Appendix 2 – State Aid

Article 88(3)

Proposals or amendments relating to state aid (including tax measures) must to be notified to the Commission and may not be put into effect without the Commission’s prior approval. If the Member State fails to notify the Commission of its proposal to grant aid the Member State may be required to recover any aid already paid along with interest. Member States may appeal against the Commission’s decision by applying to the Court of Justice.

Article 88 paragraph 1 empowers the Commission, in co-operation with the Member States to keep under constant review all aid measures and to propose to Member States “any appropriate measures required by the progressive development or by the functioning of the common market”.

Article 87(2)

The following will be compatible with the common market, provided it is granted without discrimination related to the origin of the products concerned:

o Aid having a social character granted to individual consumers;

o Aid to make good the damage caused by natural disasters or exceptional occurrences;

o Aid granted to certain areas of Germany affected by the division of that country (prior to 1991)

Article 87(3)

The following may be considered compatible with the common market:

o Aid to promote the economic development of areas with economic or social problems;

o Aid to promote the execution of an important project of common European interest or to remedy a serious disturbance in the economy of a member state;

o Aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions;

o Aid to promote cultural and heritage conservation;

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o Other categories of aid that are specified by a decision of the Council acting as a qualified majority on a proposal from the Commission.

The Commission has the power to adopt block exemption regulations for certain categories of horizontal aid (in favour of SME’s, research & development, environmental protection, employment and training) and for aid below a given threshold. The exemption is from the need to notify so long as all the requirements in the regulation are met.

Under the “de minimus” rule, aid of less than €100,000 provided to a single firm over three years is not thought to affect trade between the member states and therefore does not need to be notified to the Commission.

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12 Appendix 3 - Approvals Procedure17

The State Authorities (Public Private Partnership Arrangements) Act, 2002, requires the state authority to obtain the consent of the appropriate Minister before taking shares in an existing company or setting up a JV company for the purposes of a PPP. In the case of a local authority, the approval of the Minister for Environment, Heritage and Local Government must be obtained. The letter from the local authority seeking Ministerial approval to the establishment of or taking shares in a JV company should be signed by the appropriate Director of Service or City/County Manager. Local authorities should contact the PPP Unit in the Department and provide the following information and reports as set out below. 1 Prior to the establishment of JVCo: In seeking the approval of the Minister for the Environment, Heritage and Local Government under the State Authorities [PPP Arrangements] Act, 2002 the local authority should provide the following information:

Feasibility Study18: the initial outline of the project setting out the objectives, an estimate of the costs / benefits and the preliminary examination of the different options for implementing the project.

Business Case: this plan will include the initial rationale as to how the company will

be procured, funded, managed and operated. This business plan will indicate how viable and affordable the project is and should include the following categories;

- A summary of the objectives of the local authority and how these can be

best achieved through the establishment of the JV company; - An analysis of the market in which the company plans to compete (i.e.

description, size & growth of the potential market demand and marketing strategies);

- Financial projections (i.e. Capital expenditure, staffing costs, operating and other expenses, revenue projections, profitability and cash flow for an initial 5 year basis);

17 This note refers only to the approvals required by a local authority setting up or taking an interest in a JV Company. Separate approvals may be required depending on the nature and size of the project concerned. 18 For some smaller projects a separate Feasibility Study may not be necessary and the material included instead in the Business Case.

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- How the company will be managed and operated, and the perceived role of the local authority;

- How the company will be initially financed (e.g. share capital, debt), details of any guarantees and/or letters of comfort provided by the local authority;

- In the event of further finance being required, how this finance will be raised;

- Details of any assets and/or funds to be transferred from the local authority to the company and the potential impact on local authority resources;

- Proposed public/private classification of the company; - Risk Analysis (e.g. identification, assessment and allocation of risks

between the parties involved); - The procurement method to be followed and the desired qualities sought in a

private partner; - The commercial viability of the new company and the level of commercial

interest, if any, from potential partners to date; - Any other areas that may require Ministerial approval, such as local

authority borrowing.

Application for sanction of borrowing; Section 106 of the Local Government Act, 2001 allows for a local authority to borrow money in any manner that it considers suitable for the effective performance of its functions. However, when borrowing the local authority must seek the sanction of the appropriate Minister and the application for the approval of any loans should be sought in conjunction with the approval for the establishment of the company. The local authority should include in their application all relevant information regarding borrowing for the new company, such as the amount and purpose of the loan, any assets that will be required as collateral, along with estimates of the future interest and capital repayments.

The letter from the local authority seeking Ministerial approval to the establishment of or taking shares in a JV Company should be signed by the appropriate Director of Service or City/County Manager.

3. After the establishment of JVCo:

Legal Documentation; As soon as the JV partner has been selected and the

company established, any legal documentation such as the Memorandum & Articles of Association and the Shareholders Agreement should be sent to the PPP Unit, along with details of the membership of the JV Company Board.

Directors: Local authority officials and elected members acting as Directors of Joint

Venture companies on behalf of the local authority may not be paid additional remuneration in respect of this role.

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3. During the Lifetime of JVCo:

Future Funding; any future borrowing of the local authority in respect of the

company or any further issuing of financial guarantees, letters of comfort etc should be approved by the appropriate Minister.

Annual Reports; the Annual Report of JVCo and any Financial Statements should be forwarded to the Department.

Notification of Changes; any significant changes in the ownership, management or

direction of JVCo should be notified to the Department.

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13 Appendix 4 – State Authorities (Public Private Partnership Arrangements) Act, 2002

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