PUBLIC PRIVATE PARTNERSHIPS
IN THE LOCAL GOVERNMENT
TECHNICAL NOTE: 4
Guidance on PPP Joint
Guidance on the adoption of a
Joint Venture Company approach
for a Public Private Partnership in
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
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
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
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.
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
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
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.
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
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
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.”
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
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 Goes beyond mere cost or risk sharing
Continuing 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.
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
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
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/
The setting up of JVCo is likely to expose the local authority to some 4 Management of
degree of risk; in the event of JVCo being unsuccessful the local Risks
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
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
There will be costs to the local authority in terms of time and resources 5.5 Assets
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 5.6 Industrial
demand on current resources and how best to manage them efficiently Relations
The local authority may have greater control and power over a project if 5.4.2 Public
it sets up a JV company rather than entering into a contractual Servants as
arrangement with a private partner. However, it is important to avoid Directors
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.
There may be reputation concerns for the local authority entering into a 4.2 Risks to the
JV. Therefore the local authority should be mindful of choosing a Local Authority
partner that has a similar cultural and commercial outlook.
If the JV Company is classified as a private sector company it may face 6 Joint Venture
advantages such as a higher level of commercial freedom and Classification
confidentiality, with only the public resources involved in the JV being
subject to public scrutiny. A private company may not be subject to Irish 2.1 Procurement
and EU procurement rules, as it will not be a contracting authority in
JVCo would have its own legal form separate from its founder members 5.2 Legal Form
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.
Forming a PPP JV may give the local authority a greater access to the 5.5 Assets
resources, skills and expertise of the private sector than under other PPP
options. 5.6 Industrial
JVCo would have its own management team independent from either 5 Structure of the
the private or public partners although under the direction of the founder Joint Venture
shareholders. JVCo would also have the flexibility to introduce Company.
incentives to encourage greater productivity from its own staff.
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
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:
Establishment of a Advice on how to select a partner, summary of EU and national procurement
Joint Venture company 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 This section deals with the general considerations when setting up a
Company company such as the legal form, directors, corporate governance, transfer of
assets, industrial relations issues, intellectual property rights and exit
Joint Venture Explores the implications of either a private and public sector classification
Classification for JVCo.
See Appendix 3 for details.
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
2 Establishment of Joint Venture
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
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
A separate Directive covers works, supply and services contracts awarded by entities operating in the water,
energy, transport and telecommunications sectors (Utilities Directives).
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
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.
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.
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/ €5,923,624 Threshold applies to Government Dept’s &
Prior Indicative Offices, Local and Regional Authorities and
Notice6 other public bodies outside the Utilities Sector.
Supplies and Directive 97/52/EC
Contract Notice €154,014 Threshold applies to Government Dept’s &
Contract Notice €236,945 Threshold applies to Local and Regional
Authorities and public bodies outside the
Prior Indicative €750,000 Threshold applies to Government Dept’s &
Notice Offices, Local and Regional Authorities and
other public bodies outside the Utilities Sector.
Utilities Directive 98/4/EC
(Works) For entities in the Utilities sectors.
(Supplies and For entities in the Utilities sectors.
Contract Notice €473,890
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
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.
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
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
- 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,
- Cultural fit
- Relationship management
- 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
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
Value for money considerations should include the following:
Internal Audit Guidance Handbook for Local Authorities, April 2001, Value for Money Unit, DoEHLG
- 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.
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
- Arrangements to return any sensitive documents at the end of partner’s involvement
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 126.96.36.199).
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
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.
In order for a measure to be deemed to contain state aid, all of the following four tests should
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
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.
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
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
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,
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.
3 The Joint Venture Process Flowchart
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 :
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
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
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.
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
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
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
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.
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
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).
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.
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.
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.
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.
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
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
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
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
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
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
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.
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.
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
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
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
o Convening of meetings of members;
o Ensuring that statutory forms are completed and filed in time with the Companies
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
Tangible Land, buildings, equipment, buildings and
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
For more detailed information refer to The Company Secretary, Information Leaflet No.16 issued by the
Companies Registration Office.
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.
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
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.
DoEHLG; Briefing Number 12, Consultation with Stakeholders, August 2002.
Public-Private Advisory Group on PPPs; Framework on PPPs, May 2001.
DoEHLG, A Policy Framework for PPPs, May 2000.
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)
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
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.
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
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
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.
The local authority staff can work as consultants for JVCo, but are still employed by the
Local authority staff could take unpaid leave from the local authority in order to work for
5.6.3 Other issues concerning the transfer of staff
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
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
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.
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 Concerned with the appearance of a product such as its shape,
DESIGN 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,
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.
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
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
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
recently been sold in the open market.
The Net Present Estimates the economic benefit that might derive from the IPR less
Value (NPV) 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:
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
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
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?
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
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
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
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
188.8.131.52 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
J o in t V e n tu re C o m p a n y
C la s s ific a tio n
C o n tro l
P u b lic ly P riv a te ly
C o n tro lle d C o n tro lle d
N o n
C o m m e rc ia l C o m m e rc ia l
C o m m e rc ia l
" M a rk e t" " M a rk e t"
" N o n -m a rk e t"
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
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
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
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.
184.108.40.206 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.
220.127.116.11 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
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
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 5 Officials & 2 Members
of the Company
5 Amount and nature of any guarantees, Underwritten operational losses
underwritings, loans, grants or borrowings given by for 10 years. Loan Guarantee
the local authority in respect of borrowings of the £500,000
6 The extent to which the local authority has any Wexford County Council has
security for moneys advanced to the Company. title
7 How and where the results of the company have £40,000 allocated 1999 to co-
been reflected in the accounts of the local authority. fund loan repayments.
Classified in ‘Promotion of
Interest’ section of the Local
18.104.22.168 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
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.
22.214.171.124 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:
Local authority can exercise control over the A Joint Venture Company where the local
day-to-day running of JVCo. 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 The level of management experience from
majority of the board members/senior the public sector may not be as high as if
management of JVCo and therefore will be specialised private management personnel
the main decision maker in the commercial are brought in by the private sector that
activity of JVCo. would have experience of managing this type
of Joint Venture operation.
The local authority would have access to the The local authority may have to contribute to
majority percentage of the earnings the majority of the initial investment in JVCo
attributable to the shareholders that are made and accept a higher portion of risks. In
by the Joint Venture company. addition, there may be more pressure on
local authority resources such as staffing.
The local authority will be in a stronger The commercial freedom of JVCo may be
management position so as to operate JVCo lower; as JVCo would have to comply with
in the local authority’s best interests. 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.
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
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
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
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.
Shareholder Ordinary Shares in JV Limited Percentage Shareholding of
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
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
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
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 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.
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.
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.
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
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.
7.2.3 Local authority involvement with capital projects that are outside the remit of
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
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
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
Local Government Finance Section, DoEHLG Circular Fin 12/96 and Department of Finance Circulars 23/94
and S74/17/03 of 16 January, 2004..
Available at www.irlgov.i.e./govacc/procedures.pdf
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
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
8 Financial Affairs
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
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.
126.96.36.199 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).
188.8.131.52 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).
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.
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
184.108.40.206 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.
220.127.116.11 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
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.
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
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.
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 Website
PPP Unit. Department Overall advice on Joint 01 888 2517 www.environ.ie
of the Environment, Ventures.
Heritage and Local
PPP Unit. Department Overall advice on Joint 01 639 6211 www.ppp.gov.ie
of Finance Ventures.
Local Government 01 888 2465 www.environ.ie
Finance. Department of
the Environment, Loans
Heritage and Local
Valuation Office. Valuation issues. 01 8171000 www.valoff.ie
Department of Finance
Department of Establishment of a JV 01 631 2121 www.entemp.ie
Enterprise Trade and Company. State Aid
Employment and Competition rules
Central Statistics Office Public and Private 01 497 7144 www.cso.ie
National Development Financing of PPP 01 664 0800 www.ndfa.ie
Finance Agency projects
Office of the Director of Companies, directors, 01 858 8500 www.odce.ie
Corporate Enforcement secretaries, members &
11 Appendix 2 – State Aid
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
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
o Aid granted to certain areas of Germany affected by the division of that country
(prior to 1991)
The following may be considered compatible with the common market:
o Aid to promote the economic development of areas with economic or social
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;
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.
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
- Financial projections (i.e. Capital expenditure, staffing costs, operating and
other expenses, revenue projections, profitability and cash flow for an initial
5 year basis);
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.
For some smaller projects a separate Feasibility Study may not be necessary and the material included instead
in the Business Case.
- 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
- 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
- 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
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.
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.
13 Appendix 4 – State Authorities (Public Private Partnership
Arrangements) Act, 2002