A little known committee within the US Treasury Department could have a big impact on deals involving concession agreements over US infrastructure with foreign contractors or investors.
The Committee on Foreign Investment in the United States — CFIUS — reviews transactions in which a foreign person acquires control over a US company or facility and there are potential national security concerns.
Certain concession agreements for owning or building out US infrastructure may raise national security concerns.
State and local governments in the United States are in need of innovative solutions to budget shortfalls. Public infrastructure is aged and inadequate. The public strongly resists tax increases to pay for rebuilding roads, bridges, tunnels, ports and other basic infrastructure.
One way state and local governments are dealing with the problem is by selling, or privatizing, existing facilities to raise money. The state or local government enters into a concession agreement leasing an existing facility to a private party and granting it the right to provide basic services using the facility and to earn fees for doing so. The private party may be required to rebuild the existing facility. It is required to operate and maintain it. The concession agreement runs long enough for the contractor to recover its costs and earn a return.
The private party makes a large upfront payment for the concession, thereby providing cash for the state or local government that can be used to pay off debt, fund other programs and create reserves. The contractor may be able to deliver any needed upgrades more quickly and operate and maintain the facility more cheaply than the government could. Risks are also shifted from the public to the private sector.
The concession agreement can last as long as 99 years, although, in recent years, the trend has been for concessions that are in the 30- to 50-year range. At the end of the contract, the facility reverts to the state or local government.
Many private parties who take on these concessions are based outside the United States. For example, in 2005, the City of Chicago leased a stretch of elevated highway called the Chicago Skyway to foreign investors for 99 years. Chicago received a $1.83 billion upfront payment. In 2006, Indiana leased the Indiana toll road to foreign investors for $3.8 billion. Last year, Gulftainer, a wholly-owned subsidiary of a company based in the United Arab Emirates, entered into a 35-year concession agreement with Port Canaveral in Florida to upgrade and operate its container and multi-purpose cargo terminal.
Must a foreign company that merely enters into a concession agreement — instead of buying a US company or facility — clear the transaction with CFIUS?
CFIUS is charged with reviewing transactions in which a foreign person acquires control over a US company or facility, so-called “covered transactions.” It reviews such transactions for national security concerns.
Notifying CFIUS of a transaction is voluntary; however, failure to do may lead to the deal being unwound later if CFIUS decides there were national security issues. CFIUS does not have the authority to review deals that are not covered transactions.
State and local governments sometimes require a legal opinion that the concession agreement will not be a covered transaction subject to CFIUS review or a more general opinion that the concessionaire has obtained all required approvals. In some circumstances, the government may go one step further and require that the parties notify CFIUS of the transaction and get CFIUS sign off. Thus, it is important for foreign investors bidding on concession agreements to think about the CFIUS risks and find out at an early stage whether the government will require a CFIUS filing. CFIUS review can take up to three months after filing. The filing itself typically takes one to two months to assemble, depending on the complexity of the deal and the US business or assets involved.
Is a concession agreement potentially a “covered transaction”?
It must first be a transaction. The CFIUS regulations say that certain long-term leases are “transactions.” A long-term lease is a transaction if the “lessee makes substantially all business decisions concerning the operation of a leased entity, as if it were the owner.” The regulations provide the following example with respect to long-term leases:
“Corporation A, a foreign person, signs a concession agreement to operate the toll road business of Corporation B, a US business, for 99 years. Corporation B, however, is required under the agreement to perform safety and security functions with respect to the business and to monitor compliance by Corporation A with the operating requirements of the agreement on an ongoing basis. Corporation B may terminate the agreement or impose other penalties for breach of these operating requirements. Assuming no other relevant facts, this is not a transaction.”
The regulations do not draw a line between what is a long-term versus short-term lease. There is no official guidance on this issue. The parties must make a judgment call. A 50- or 99-year concession agreement seems certainly to be the former. A 35-year lease likely also is considered long-term, while a 10- to 20-year lease probably is not. Short-term leases are not transactions subject to CFIUS review.
Similarly, there are no bright-line rules to determine whether the lessee is acting as if it is the owner of the leased property. It is determined based on the specific facts and circumstances of a concession. The regulations tell us that “the more significant the substantive responsibilities retained by the lessor over the leased property, the likelier that the lease would not be viewed as a transaction.” The example recited above suggests that, if a lessor retains responsibility for major functions such as safety and security measures, which is common in concession agreements, then the lessee will not be viewed as making substantially all of the business decisions for the leased entity. In addition, some degree of oversight by the lessor of the lessee’s operation of the property, including termination or step-in rights, points to a concession not being a “transaction” for purposes of CFIUS.
A transaction is a “covered” transaction if it gives the private party “control” over a US trade or business. “Control” is very broadly defined in CFIUS regulations. The power to determine, direct, take, reach or cause decisions regarding the operations of a US trade or business are considered control. In a typical concession agreement in the US, the lessee controls the day-to-day operations of the assets, while the lessor remains responsible for major safety and security functions, including ensuring that the lessee complies with all safety and security requirements. The lessor also typically retains certain step-in rights to assume control of the asset or suspend lessee performance if the lessee fails to perform as expected or, in some cases, at the lessor’s discretion.
For a concession to be both a transaction and a covered transaction, the lessor must pass on its safety and security responsibilities to the lessee and forgo oversight of the lessee’s activities, which would be a departure from how concession agreements typically work.
Does a filing have to be made with CFIUS? A filing is required only if the granting of the concession to a foreign person potentially raises national security concerns.
A concession over critical infrastructure raises such concerns. An example is an interstate highway or a heavily-used bridge or tunnel in a major US city.
The regulations define critical infrastructure as “a system or asset, whether physical or virtual, so vital to the United States that the incapacity or destruction of the particular system or asset of the entity over which control is acquired pursuant to that covered transaction would have a debilitating impact on national security.”
A concession may raise national security concerns based on the identity of the person granted the concession. For example, companies owned by foreign governments are subject to increased scrutiny. Generally, a 45-day investigation is mandatory if the person being granted the concession is controlled by a foreign government
Recent CFIUS actions also suggest proximity to sensitive US government installations or critical infrastructure is an important national security factor. The US government blocked a sale of wind farms by a Greek developer to a Chinese company. The wind farms were close to a US military facility used to train operators of drone aircraft.
The takeaway? A foreign bidder for a concession agreement should consider these issues as it readies its bid and be prepared for the state or local government to ask whether the bidder will have to make a CFIUS filing. The bidder may need to provide more than a mere oral assurance.