Infrastructure, News

A New Legal Framework for Public Private Partnership

The Senate voted, by a large majority, in favor of the approval, with amendments, of the Federal Executive Branch’s bill to establish a new regime for Public-Private Partnership. This new regime seeks, essentially, to allow a balanced and predictable collaboration between the public and private sectors.

On September 21, 2016, with 48 votes in favor and 13 against, the Senate approved the bill on Public-Private Partnership (“PPP” and the “Bill”, respectively) proposed by the Federal Executive Branch (“PEN”, after its Spanish acronym).

The PPP is a new tool to help address the country’s existing infrastructure deficit and generate greater involvement of banks and multilateral lending agencies in financing public works. It allows for balanced and predictable cooperation between the private and the public sector, something that the current government has been promoting since the beginning of its administration. The Bill aims to provide the legal certainty and predictability needed to attract investment in the infrastructure sector.

The text approved by the Senate includes some modifications to the text submitted by the PEN, and will now be considered by the Lower House.

1. PPPs and their strategic importance in Argentina’s current scenario

The lack of investment in infrastructure in Argentina is very deep. Indeed, so massive is the need for capital, technology, management and resources to overcome this deficit, that neither the public nor the private sector can alone provide a solution. It is necessary to find new ways for the two sectors to work  together to take advantage of the best each of them can offer and, thus, materialize the infrastructure investments that will improve quality of life for the Argentine people.

PPPs were first used in the United Kingdom during the early ’70s, and then spread to the rest of Europe, North America and Latin America, with Brazil, Chile, Colombia, Peru, Uruguay and Mexico, among their main exponents. They represent new means of association between the private and public sectors. Under this model, part of the projects or services traditionally run by the public sector are performed by the private sector through a contract in which the shared purposes for the provision of the relevant services or the performance of certain works are clearly set out, as well as the obligations undertaken and the risks assumed by each party.

In the classic conception of PPP, the private sector provides a service directly to the public sector through a contract for the design, construction, operation and maintenance of, for example, water treatment plants, hospitals or freight hubs. The possibility of unifying and aligning the interests of those who design, build and operate the project results in quantifiable efficiencies which have already been shown in those jurisdictions where PPPs are frequently used. The greatest advantage for the public sector is that the works are financed by the private sector. The works are paid over time by the State in instalments in consideration for the service provided. This not only allows for deferment of the budgetary impact of the price of the project but also for promotion of intergenerational solidarity in its financing.

PPPs constitute an alternative to the classic public works contracting systems in which the State usually designs, finances, operates and pays for the works, while the private party only builds. The legal framework proposed by the PEN also implies a shift in the traditional paradigm of public contracts, as it excludes or limits the public law prerogatives of the administration (among others, the power to unilaterally modify the contract; to terminate it for reasons of public interest; to force the private contractor to continue with the performance of the contract despite the State’s lack of compliance of its own obligations; the limitation of State liability). Experience shows that these powers have been exercised when the private contractor is at its weakest position (i.e., once the main investments have been made and the infrastructure is already built).

The key for PPPs to become an efficient tool for infrastructure projects to be financed by the private sector is that the relevant agreements be suitable for private financing. For this, it is essential for contracts to include the legal and economic elements which provide the necessary assurances for the payment of the relevant loans.

In Argentina, two regulations were enacted in the past to govern PPPs, neither of which was ultimately used: Decree No.1299/2000 and Decree No. 967/2005. The first was an excellent framework but was put in place in a very adverse context as regards both the international economy and Argentine politics. The proposed framework includes many elements and institutions created by Decree No. 1299/00, such as the possibility of assigning the contracts which allow structuring the project financing.

2. Main provisions of the bill on PPP

 Alternative regime. PPPs constitute an alternative regime for public works and public work concessions, and thus, do not preclude the use of traditional systems. The public sector will consider which is the most suitable contracting method to satisfy public needs in each project. Therefore, PPP will be chosen only if it is deemed the most efficient method for the specific project.

 Regulatory framework. The proposed legal regime is concise. It sets a framework of principles and parameters that must be completed by future regulations, as well as by the relevant bidding terms and conditions, and the provisions of the contract that will define the specific undertakings. Neither Public Works Law No. 13,064 nor the Concession of Public Works Law No. 17,520 nor the Public Procurement Decree No. 1023/01 will be applicable to projects governed by the PPP regime. The parties’ contractual obligations will be those expressly provided in the PPP law, in the relevant bidding terms and in the contract. The new regime provides for the creation of a central body to provide advisory, operational and technical support at the request of entities and bidders, from the initial stage of plan development to its final execution.

 Possible types of legal structures. The Bill provides for the structuring of the PPP through an existing partnership or a SPV, and it specifically clarifies the possibility of structuring it through financial trusts and other types of vehicles or partnership schemes. The creation of corporations or trusts in which the State jointly participates with the private sector is also allowed, and in both cases they can be publicly traded under the Capital Markets Law (No. 26,831). This is a potentially important tool in seeking a wider financing net.

 Possible guarantee structures. The Bill provides for the specific allocation and/or transference of any kind of public revenue and the granting of any instrument that may serve as a guarantee. In addition the possibility of using trusts is included as a guarantee mechanism and/or as a payment of consideration by the contracting entity. These trusts must have liquidity during the life of the contract and in some cases they will require authorization from Congress.

 Contractor’s remuneration. With a currency exposed to inflation, financing long-term projects in Argentine pesos is impossible unless the regime allows for efficient price redetermination mechanisms. For this reason, the Bill specifically excludes the prohibition of indexation set forth by the Convertibility Law (No. 23,928). In addition, the parties may agree on the consideration to be payable in foreign currency, and the application of article 765 of the Civil and Commercial Code is excluded. Regarding the consideration structure, the Bill provides the possibility of assigning funds, assets, loans or taxes; the creation of surface rights and/or use or any other contributions by the State. Finally, the contractor has the right to maintain the original economic-financial balance of the contract.

Step-in rights. Loan agreements entered by the contractor may include step-in rights, that is that, in case of default by the borrower, the PPP contract is assigned to the creditor or to eligible third parties, subject to the procedures to be established in the contract.

Remedies in case of breach. In case of termination of the contract due to reasons of public interest, the rules that limit the State’s responsibility do not apply. Furthermore, in cases of early termination by the State, prior to the takeover of assets, compensation must be paid to the contractor and may never be less than the unamortized investment, guaranteeing the repayment of financing. The liability of the parties is governed by the provisions set forth in the bidding terms and the resulting contract, as well as by the provisions of the Civil and Commercial Code. The calculation of damages may include the possibility of claiming lost profits under the terms provided by the contract.

Dispute Resolution. Technical or any other kind of disputes arising from PPP contracts may be submitted to technical panels and/or arbitral tribunals. In the case of opting for arbitration with a change in jurisdiction, the PEN must approve such election and notify Congress. Review by local courts of the merits of the award is expressly excluded. The bill does not exclude the possibility that the arbitration takes place abroad.

Appointment of independent external auditors. The parties to the contract may appoint external technical auditors to carry out the effective control and monitoring of the performance of works, to determine whether the consideration owed has become due. The contract may provide that if the Administration does not agree with the auditor’s assessment, this will not preclude the payment of the consideration, which will remain in an escrow account or trust until the resolution of the dispute.

4. Final Comments

In our view, the keys for the success of the new PPP regime, once approved by Congress, are, inter alia, the following:

  • Contract management, until the work is completed and operative, in a coordinated manner between the relevant administrative agencies.
  • The adoption in the medium term of an objective method to measure the economic efficiency of the PPP system.
  • Macroeconomic, legal and fiscal stability and a tax system which promotes long term investment. Provinces adhering to this framework and providing for stamp tax exemption.
  • The PPP projects require an intensive use of contracts.
  • Coordinated and synchronized execution of the PPP projects with the use of traditional budgetary tools.
  • Efficient allocation of risks between the parties intervening in each project.
  • Mechanisms which allow and encourage public officials to compare differing offers.
  • Lack of interpretative risks and ambiguities when it comes to determining breach, as well as in the authorization of the use of the financer’s step-in right.
  • Use of stability clauses as regards the applicable legal framework.
  • Consistent case law endorsing the new framework.

 

Ultimately, it is the responsibility of the entire legal community to provide what is necessary for the PPP framework to become a suitable tool to channel private investment in public infrastructure. This new regime seeks, essentially, to allow a balanced and predictable collaboration between the public and private sectors, allocating the project’s risks in a reasonable and efficient way between the parties. This objective is incompatible with a system of law which, as has sometimes been the case in Argentina, acquiesces to the State’s omnipotence in contractual relations, even against the text of the contract.

The approval of the Bill in the Senate by a large majority shows a high degree of consensus in achieving the implementation of legal tools necessary to attract investment. The intention of the proponents of the Bill to distribute the risks adequately between the contractor and the State, to provide legal predictability to the private sector, and to define the rights and obligations of the parties in the contract, responds to that goal.

Santiago Carregal

Partner

C.V.

María Lorena Schiariti

Partner

C.V.

Enrique V. Veramendi

Partner

C.V.

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