Special Purpose Entities in Megaprojects: Empty Boxes or Real Companies?
of the SPEs and consequently of the
In summary, together, these three dis-
tinctive SPE features enhance the abil-
ity to attract external financial resources,
align the actors’ interests, stakeholder
integration during the life cycle, effective
risk sharing, lower taxes, and easier trans-
fer of assets among companies (Basel
Committee on Banking Supervision
(BCBS), 2009; De Nederlandsche Bank,
2004; OECD, 2008). These abilities are
particularly suitable for project finance
and project partnering. Conversely, SPE
features can lead to certain drawbacks,
such as: limiting the flexibility, the ten-
dency to create monopolies, and involve
a longer due diligence and negotiation
process (Finnerty, 2013).
Table 4 summarizes the main abilities and drawbacks associated with the
adoption of SPEs in megaprojects.
SPEs are often used to design, deliver,
finance, and operate infrastructural megaprojects. Their relevance lies in the ability
to attract finances, manage the risks, and
shape the governance of the megaproject.
Legal Domain Financial Megaproject
Legal Legal—The SPE is considered as an
intentional off-balance sheet instrument.
The domain focuses on the legal
provisions addressing the accounting
recognition of SPEs. Similarly, in the
financial domain, the SPE is usually an
empty box registered in tax haven for
fiscal optimizations, arbitrages, structured
finance, and balance sheet management
SIMILARITIES—The SPE is an off-balance
sheet instrument used to isolate (and
sometimes hide) risks, assets, and
liabilities. The SPE is an empty box, usually
in off-shore jurisdictions, with passive
or external management. Its lifetime can
be either limited or perpetual. Its typical
activities encompass: insulation of risk,
assets, liabilities or cash flows, risk transfer,
sharing and spreading, securitization
(assets and liabilities), PF, leasing, factoring,
commercial or fake transaction, channeling,
retention and exchanging of rights, licenses,
permits, channeling cash flows.
SIMILARITIES—The SPEs can be
employed as an off-balance sheet vehicle
for megaproject investors. For example,
the Private Finance Initiative (PFI) involves
the SPEs as off-balance sheet vehicles for
the public administrations.
Sometimes, the SPE is also used to
manage concessions and licenses
associated to the infrastructure
Financial DIFFERENCES—There are deregulated
financial instruments that are legally
recognized and not considered by the legal
domain. Furthermore, there are classes of
financial SPEs that are not off- balance
sheet instruments. This is in contrast to
the understanding of the legal domain that
focuses on accounting recognition of SPE
and the associated information disclosure.
Financing—The SPE is considered as a
financial vehicle permitting the structured
finance transactions (i.e., securitization,
PF transactions, leasing transactions,
SPE is a bankruptcy remote entity with
low probability of insolvency.
SIMILARITIES—SPEs are designed for
PF. They involve a complex contracting
network to secure, to the possible
extent the project risk; e.g., off-take
agreements, supply agreement, etc. The
SPEs are designed to give confidence
to the financial institution to make the
investment bankable. This requires a long
due-diligence and typically allows for
increasing the financial leverage (e.g.,
80%–90%) of the SPEs.
Megaproject Megaproject SPEs don’t focus primarily
on off-balance sheet related issues,
which is the central topic in the legal
domain. Megaproject SPEs have a public
and clear venue, typically the same
jurisdiction where the infrastructure is
developed. Sometimes, the jurisdictions
are selected because they have “friendly,”
and enforceable banking laws (usually
Conversely, the legal domain focuses on
the SPEs that are intentionally settled up
in jurisdictions with favorable legislation
regarding taxes and information
DIFFERENCES—The financial domain
considers a wider range of uses for SPEs.
Typically, the financing domain focuses
on ‘mailbox’ companies that are virtual
companies. In such cases, the SPE is auto
managed and does not involve physical
assets or people (i.e., it is just financing
vehicles). By contrast, the megaproject’s
SPEs enable the partnering of the key
SPE’s stakeholder by pooling their assets
and workers into a joint company.
The megaproject SPEs are physical
organizations (with staff, facilities, etc.)
with a defined and limited lifetime.
Typically, the shareholders are industrial
organizations (contractor, utilities) and
sometimes public institutions (e.g., PPP).
These SPEs design, deliver, and operate
large/megaprojects. The SPEs are used for
PF and project partnering.
Table 3: Comparison between legal, financial, and megaproject domains.