The Federal Executive Branch submitted a bill seeking the approval of a new legal framework for Public-Private Partnerships to Congress. This new regime seeks, essentially, to allow a balanced and predictable collaboration between the public and private sectors.
The Federal Executive Branch ("PEN", according to its Spanish acronym) has recently submitted a bill seeking the approval of a new legal framework for Public-Private Partnerships ("PPP") to Congress. This regime is seen as another 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 is expected that Congress will discuss this initiative in the coming weeks and, if approved, the new legal framework for PPPs may be applied to a number of infrastructure projects in different parts of the country.
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 promotion of intergenerational solidary 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 drafted 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 second resulted in a deficient regulation despite having been issued in an excellent international context with abundance of capital available for emerging markets and very favorable terms of trade for Argentina.
2. The bill on PPPs submitted by Executive Branch – Main provisions
The bill submitted by the PEN represents a substantial improvement considering the current PPPs framework, set forth by Decree No. 967/2005.
The proposed framework includes many elements and institutions created by Decree No. 1299/00, such the possibility of assigning the contracts which allow structuring the project financing.
The bill is relatively short and that fact allows for the principles and parameters established therein to be completed through its subsequent regulations as well as by the specific bidding terms and the relevant contracts.
The bill also provides a broad definition of PPP, which is not circumscribed to infrastructure projects or to a certain type of contract (e.g. construction, supply, maintenance, management and/or operation of projects are included).
The main provisions of the bill are as follows:
Alternative regime. PPPs constitute an alternative regime for public works and public works concessions and therefore, do not preclude the use of traditional systems. The public sector will consider which is the most suitable contracting method in order 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 legal framework will be completed through the implementing regulations, the bidding terms and the provisions of the contracts. Neither the 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.
Flexibility in legal structure. The vehicle involved in the contract may be an existing company or a SPV. The government may have a stake in the SPV. The SPVs created under the PPP framework can be publicly traded under the Capital Markets Law No. 26,831, a potentially important tool in seeking a wider financing net.
Flexibility in guarantee structures. The bill allows for the assignment of receivables and contractual rights, as well as step-in rights. Also, of contracting insurance or any other guarantee from local or foreign entities. Moreover, it allows for the creation of trusts as a security measure and/or for payment of consideration by the contracting entity, which must provide for the existence of a minimum liquidity during the performance of the contract. The trust's assets, which shall be in charge of a trustee (a financial entity), shall consist of the resources provided by law, including taxes, and will allow for the issuance of securities and thus, the securitization of flows arising from the regular fee payments. One issue that Congress should address when discussing this bill is the elimination of the requirement that the assignment of credits be notified to the payer, in order to be enforced against third parties (as required by the Argentine Civil and Commercial Code) if the consideration is wholly or partially backed by fees or rates to be paid by users. In the past decades, this has been a difficulty for the financing of projects such as toll roads or construction of gas distribution networks where such notification was —and still is— unworkable. We suggest replacing such mechanism with a publication of the assignment in the Official Gazette and, if necessary, in a newspaper in the jurisdiction where the project is taking place.
Flexibility in the 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 expressly excludes the prohibition of indexation set forth by Convertibility Law 23,928. Moreover, the parties may agree that the consideration be payable in foreign currency. Regarding the consideration structure, it provides the possibility of assigning funds resulting from credit operations or taxes; the creation of surface rights and/or use or any other contributions made by the State. Finally, 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.
Possibility of appointing independent technical auditors. The parties to the contract may appoint independent technical auditors who will control and monitor the execution of projects. The contract may specify that if the administration does not agree with the auditor's determination, this will not preclude the payment of the consideration, which will remain in the trust until the dispute is solved.
Competitive dialogue. This is a novel institute introduced by the bill. This competitive dialogue is one of the options the administration has to carry out a procurement of supplies and services, and is used when the kind of goods or services required is unknown but the Administration does know the goal or benefit sought. For example, if the administration wants to save energy in its buildings and facilities, the goal is clear: saving in energy and therefore funds, but how to achieve it may not be so evident, as there are several possible solutions to achieve the same goal. That is the purpose of this procedure in which pre-qualified companies are invited to file their proposals and a process of competitive dialogue is begun with all of them. Thus, it is through interaction with private parties that the most convenient solution for both the administration and companies participating in the bidding process is outlined.
Quantification of damages in case of breach by the parties. It is established that the parties' liability is governed by the provisions of the bidding terms and the resulting contract, as well as by the provisions of the Civil and Commercial Code (in subsidy). The calculation of damages may include the possibility of claiming lost profits under the terms provided by the contract.
Compensation for early termination. The contract will set the scope of compensation in cases of termination for reasons of public interest, as well as its determination and payment method. The 100% of the compensation will have to be paid prior to the takeover of assets. Rules limiting the liability of the State shall not be applicable.
Dispute resolution. Arbitration. Technical or any other kind of disputes arising from PPP contracts may be submitted to technical panels or arbitral tribunals. The text expressly excludes the review of the merits of the arbitral award by the local courts. The bill does not exclude the possibility that the arbitration takes place abroad.
3. 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.
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