• New Greenfield Project: Madrid's City of Justice
  • April 14, 2015
  • Law Firm: Dentons Canada LLP - Toronto Office
  • Madrid’s Regional Government has recently announced the opening of the bid for the new City of Justice. The project foresees the construction and operation of a new town district in the outskirts of Madrid where all the courts of justice of the capital will be gathered. The City of Justice shall be built and operated by a single concession company under a PPP scheme.

    Scheme key aspects
    • The projects consist on the building and operation of the new campus under a PPP scheme with the Madrid Regional Government
    • It foresees the construction of several buildings in 202.000 m2 in a new district of Madrid
    • The contract’s duration is 30 years
    • The construction value is estimated in approx. 771 million euro
    • The maximum retribution is estimated in approx. 1,448 million euro in 30 years
    • Fixed retribution is done through fixed direct payments from the Madrid’s Regional Government payments start when construction is finished (i.e. 4 years after the contract’s signature)
    • Variable retribution is obtained by the concessionaire by the exploitation of commercial areas (shops and restaurants) and parking facilities
    Legal overview of the scheme

    1. General legal and contract framework.

    The project is regulated under a PPP scheme foreseen in the Royal Decree- Law 3/2011. Unlike common law jurisdictions, Spanish PPP regulations are set out by Acts and Decrees.

    In addition to the Act, the contract is structured into the following documents, (Clause 6 PCAP):
    1. The PCAP or bidding rules
    2. The PPT or technical description of the pourpose of the contract.
    3. The bid submitted by the tenderer, including his business case plan (“Plan Económico-Financiero”).
    4. The contract that captures the key aspects of the agreement.
    5. The master design for construction.
    6. The detailed design, once it is approved by the authority. The detailed design shall be drafted during the following 6 months from the execution of the contract.
    The PCAP prevails over the other documents in case of contradiction of any of the documents.

    2. Purpose and term of the contract
    The contract includes the following services to be implemented by the SPV or Concessionaire:
    • Drafting the detailed design of the City of Justice.
    • Construction of the City of Justice.
    • Providing the furnishing of the buildings.
    • The exploitation of ancillary installations (shopping and leisure areas)
    • Maintenance and modernization of the installations during the term of the concession.
    The term of the concession is 30 years and it is divided in 2 phases:
    • The construction period is 4 years from the execution of the contract.
    • The exploitation period starts when all the works and buildings are delivered.
    Delays in the delivery of the works will not allow extension of the concession contract.

    3. Remuneration of the SPV
    The remuneration of the SPV consist on
    • A fixed fee that is paid monthly by the Authority according to the amount finally proposed in the tenderer’s offer.
    • A variable fee depending on the commercial leases rent and parking returns obtained from third parties using the facilities.
    It is important to underline that the fixed remuneration can be reduced in case of (i) SPV’s non-compliance with availability technical criteria set out in the PPT and (ii) the unilateral application of penalties by the contracting authority (in case of the Concessionaire partial breach of the contract).

    4. Financing
    There is no financing support from the Authority. Thus, the awardee shall look for financing with commercial banks, on a “project finance” basis.

    It is standard in Spanish PPP projects that the following securities are put in place:
    • Pledge over the shares of the SPV.
    • Pledge over the fixed remuneration from the authority.
    • Pledge over the variable remuneration from third parties.
    • Pledge over the future compensation from the insurance companies.
    • Pledge over the compensation from the authority in case of early termination (“RPA”).
    • Mortgage or promissory mortgage over the concession.
    According to the bidding rules, the SPV shall benefit from a paid share capital superior to 20% of the financing needs.

    The SPV is required to close the financing arrangements 6 months after the execution of the contract.

    5. Standard industrial risks in this PPP contract
    • Construction risks: construction risks; mainly (i) costs overruns and (ii) delays in delivery, shall be passed down to the construction company on a back to back basis. This is sometimes problematic because it is frequent that the PPP and the construction company belong to the same group, and there exists conflict of interest.
    • Operation risks: the availability risk shall be also passed to the operator. It is standard that the SPV performs directly most of the operation.
    • Other risks for the SPV: the following are risks that are born by the SPV and that are not always flown down to the operator or constructor (i) Financing risk, (ii) insurance costs, (iii) refinancing, (iv) change in law, (v) risks that are not passed to the maintenance provider/construction company.
    • Delays in the payment from the contracting authority: as the consideration to be received by the PPP Company is a fixed rent to be paid by the Government of Madrid, it is necessary to consider potential delays in the payment of the rent from the Contracting Authority.
    6. Other key aspects in the PPP contract
    • Guarantees or bonds for the authority:
      • A provisional bond of 100.000 euro is needed to bid.
      • A final bond of 5% of the price of the contract must be granted by the SPV when the agreement is awarded.
    • Ownership of the assets, compensation in case of early termination and residual value:
      • The buildings are owned by the authority (public domain), only leased by means of the concession in favour of the SPV.
      • Hence, in case of early termination, the authority must compensate the SPV with the value of the assets minus the depreciation of the assets (RPA or Responsabilidad Patrimonial de la Administración).
      • At the end of the agreement assets are transferred free of charge to the Authority and with no residual value.
    • The legal principle of “contract rebalancing”.
    The SPV has the right to obtain a rebalancing of the concession agreement in case the contract is unbalanced by the modification for public interest reasons on behalf of the contracting authority or because of a force majeure event. (Clauses 38 f) and 47 PCAP).

    Best way to invest in this Greenfield project

    • Bids are due for April 1, 2015. The openings of the bids are due for April 28. The award is likely to be mid- May, early June 2015.
    • An international investor wishing to obtain some interests on the project shall approach the concession company when the contract is awarded, once the contract is awarded, either during the construction period or the exploitation period.
    • The investment can be done through the purchase of a stake in the SPV or/and by means of participative loan or other type of financing.
    • Any transfer of shares of the SPV needs to be authorized by the Contracting Authority.
    • The contract can be assigned prior authorization of the Contracting Authority. A change in control is considered to be an assignment of the contract (clause 42.2. PCAP).