Insight

Guidelines for Acquisitions of Infrastructure Assets

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

Acquisitions of Infrastructure Assets
PR

Posse Herrera Ruiz

May 4, 2020 08:00 AM

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

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

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

Anatomy of common infrastructure projects

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

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

Corruption risk

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

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

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

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

Purchasing an asset already affected by corruption claims of the sponsors

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

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

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

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

Related Articles

Mergers and Acquisitions Law in Texas: Top Legal Considerations for M&A Deals


by Best Lawyers

Mergers and acquisitions are major events for many stakeholders involved in businesses. Learn more about mergers and acquisitions law in the state of Texas.

Two animated figures shaking hands and divided by red and white space

IN PARTNERSHIP

Beyond Business: The Personal Touch in M&A Transactions


by Justin Smulison

The stakes are always high in a business transaction because real people are often embarking on a once-in-a-lifetime event. Tiffany & Bosco M&A/Business Solutions Practice Group co-chairs Jim O’Sullivan and May Lu discuss their approach to helping business leaders make life-changing decisions and how professional partnerships strengthen their results.

Headshot of male lawyer in dark suit and red tie, and headshot of female lawyer in dark suit and gla

2023's Best Lawyers in Colombia™


by Best Lawyers

Announcing Colombia's elite group of lawyers recognized for 2023.

Yellow, blue and red stripes

Brick to Click


by Lindsay Mesh Lotito

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

Online Shopping Shifts Commercial Real Estate

Announcing the 2022 Best Lawyers: Real Estate and Infrastructure Publication


by Best Lawyers

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

Real Estate and Infrastructure Publication

Announcing the 2022 Best Lawyers in Colombia™


by Best Lawyers

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

Announcing the 2022 Best Lawyers in Colombia™

Summer Voting Season Is Here!


by Best Lawyers

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

How To Vote On Your Best Lawyers Ballot

Morrison & Foerster Attorney Randy Bullard’s LGBTI Advocacy


by Greg Sirico

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

Morrison & Foerster Attorney Randy Bullard's

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


by Best Lawyers

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

Best Lawyers in Chile, Colombia, Puerto Rico

Working With Changes


by Best Lawyers

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

An Interview With Herbert Smith and Freehills

Too Good to Fail


by Best Lawyers

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

An Interview With Niederer Kraft Frey

From Russia, With Law


by Best Lawyers

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

An Interview With Cleary Gottlieb

How This Firm Is Shaping the Economic Future of Ukraine


by Best Lawyers

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

An Interview With AEQUO

How Russia's Global Policy Is Impacting Mergers and Acquisitions


by Best Lawyers

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

An Interview With Dentons Russia

How Corporate Law in France Is Navigating the Trade Wars


by Best Lawyers

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

An Interview With Darrois Villey Maillot Broc

A Sea Change on Land


by Linda A. Klein and Suneel Gupta

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

Legal Considerations for Autonomous Vehicles

Trending Articles

2025 Best Lawyers Awards Announced: Honoring Outstanding Legal Professionals Across the U.S.


by Jennifer Verta

Introducing the 31st edition of The Best Lawyers in America and the fifth edition of Best Lawyers: Ones to Watch in America.

Digital map of the United States illuminated by numerous bright lights

Unveiling the 2025 Best Lawyers Awards Canada: Celebrating Legal Excellence


by Jennifer Verta

Presenting the 19th edition of The Best Lawyers in Canada and the 4th edition of Best Lawyers: Ones to Watch in Canada.

Digital map of Canadathis on illuminated by numerous bright lights

Legal Distinction on Display: 15th Edition of The Best Lawyers in France™


by Best Lawyers

The industry’s best lawyers and firms working in France are revealed in the newly released, comprehensive the 15th Edition of The Best Lawyers in France™.

French flag in front of country's outline

Announcing the 13th Edition of Best Lawyers Rankings in the United Kingdom


by Best Lawyers

Best Lawyers is proud to announce the newest edition of legal rankings in the United Kingdom, marking the 13th consecutive edition of awards in the country.

British flag in front of country's outline

Announcing the 16th Edition of the Best Lawyers in Germany Rankings


by Best Lawyers

Best Lawyers announces the 16th edition of The Best Lawyers in Germany™, featuring a unique set of rankings that highlights Germany's top legal talent.

German flag in front of country's outline

Prop 36 California 2024: California’s Path to Stricter Sentencing and Criminal Justice Reform


by Jennifer Verta

Explore how Prop 36 could shape California's sentencing laws and justice reform.

Illustrated Hands Breaking Chains Against a Bright Red Background

Celebrating Excellence in Law: 11th Edition of Best Lawyers in Italy™


by Best Lawyers

Best Lawyers announces the 11th edition of The Best Lawyers in Italy™, which features an elite list of awards showcasing Italy's current legal talent.

Italian flag in front of country's outline

Combating Nuclear Verdicts: Empirically Supported Strategies to Deflate the Effects of Anchoring Bias


by Sloan L. Abernathy

Sometimes a verdict can be the difference between amicability and nuclear level developments. But what is anchoring bias and how can strategy combat this?

Lawyer speaking in courtroom with crowd and judge in the foreground

Things to Do Before a Car Accident Happens to You


by Ellie Shaffer

In a car accident, certain things are beyond the point of no return, while some are well within an individual's control. Here's how to stay legally prepared.

Car dashcam recording street ahead

The Push and Pitfalls of New York’s Attempt to Expand Wrongful Death Recovery


by Elizabeth M. Midgley and V. Christopher Potenza

The New York State Legislature recently went about updating certain wrongful death provisions and how they can be carried out in the future. Here's the latest.

Red tape blocking off a section of street

Tampa Appeals Court ‘Sends Clear Message,” Ensuring School Tax Referendum Stays on Ballot


by Gregory Sirico

Hillsborough County's tax referendum is back on the 2024 ballot, promising $177 million for schools and empowering residents to decide the future of education.

Graduation cap in air surrounded by pencils and money

Find the Best Lawyers for Your Needs


by Jennifer Verta

Discover how Best Lawyers simplifies the attorney search process.

A focused woman with dark hair wearing a green top and beige blazer, working on a tablet in a dimly

Key Developments and Trends in U.S. Commercial Litigation


by Justin Smulison

Whether it's multibillion-dollar water cleanliness verdicts or college athletes vying for the right to compensation, the state of litigation remains strong.

Basketball sits in front of stacks of money

Is Premises Liability the Same as Negligence?


by Jeremy Wilson and Taylor Rodney Marks

In today's age, we are always on the move, often inhabiting spaces we don't own. But what happens when someone else's property injures you or someone you know?

A pair of silhouetted legs falling down a hole with yellow background

Woman on a Mission


by Rebecca Blackwell

Baker Botts partner and intellectual property chair Christa Brown-Sanford discusses how she juggles work, personal life, being a mentor and leadership duties.

Woman in green dress crossing her arms and posing for headshot

Best Lawyers Celebrates Women in the Law: Ninth Edition


by Alliccia Odeyemi

Released in both print and digital form, Best Lawyers Ninth Edition of Women in the Law features stories of inspiring leadership and timely legal issues.

Lawyer in green dress stands with hands on table and cityscape in background