The implementation of a public-private partnership (PPP) framework at a federal level and therefore of PPP projects is relatively recent in Mexico. Although various states in the country had regulated and promoted different PPP local projects, the federal government is determined to use this mechanism as a new measure to improve key infrastructure and services at a national level.
The initial step towards the use of PPPs was the publication of the Public-Private Partnership Law (the PPP Law) and the Regulations of the PPP Law (the Regulations) both in 2012. As detailed below, the PPP Law regulates the schemes for the development of the projects on a federal basis in accordance with the Mexican Political Constitution in order to create long-term relationships between public and private parties for, among others, the provision of services to the public sector and the use of infrastructure totally or partially provided to increase social welfare and private investment projects in Mexico.
In January 2012, former Mexican President Felipe Calderon Hinojosa enacted the PPP Law authorising the use of PPP projects on a federal basis. The Regulations were issued in November 2012. Notwithstanding the foregoing, the PPP Law and the Regulations were not really applied until the corresponding technical guidelines were issued on 31 December 2013 (although the current guidelines were published in February 2015). Since then, the federal authorities have commenced the implementation of such regulatory framework, considering that the PPP Law has been amended three times (two times in 2014 and the third in 2016) and the Regulations have been amended in 2014 and 2017.
At a federal level, there have been different projects using PPP schemes mainly involving the health, communications, construction and transportation sectors. Overall, there have been approximately 45 PPP federal projects during the past five years.2 It is early to weigh the results of the PPP regulatory framework and of the ongoing projects, but we expect that the PPP regulatory framework will likely be applied in the long term, to continue attracting local and foreign investments in order to improve the welfare state and private interests.
II THE YEAR IN REVIEW
The last reform of the PPP Law took place in April 2016, when several amendments became effective. As part of such amendments, the Investment and Technological Development Fund (the Fund) was included in the PPP Law to support technological projects on different key areas in accordance with the applicable science and technological regulations. In general terms, the purpose of the Fund is, among others, to plan, develop and promote projects that will be developed by the private sector in technological areas. In 2014, the Fund was incorporated and received approximately US$45.5 million of federal contributions. At all times, the Fund shall be used in accordance with the National Development Plan.3
Likewise, in order to increase transparency on the bidding procedures of PPP projects, several changes were included regarding the manner of displaying relevant projects through the government electronic public information system web page known as ‘CompraNet’.4 Now, all information regarding the use of PPP projects will be publicly available except as otherwise established by the applicable regulations.
The Regulations of the PPP Law include provisions regarding the use of the National Infrastructure Fund (FONADIN), as well as the scope to consider such funds by any entity.
In addition and as mentioned above, there are also state laws which regulate PPP projects on a local level. In general terms, the distinction between the state and federal level will depend on the origin of the funds that will be used for the PPP project. PPP projects that will use the expenditure of federal funds will be deemed of a federal nature. In this chapter we will focus only on federal PPPs.
In 2015, the Ministry of Public Function (MPA) issued the Code of Ethics for the public officials of the federal government, which makes reference to the obligation of public officials to perform their activities with honesty, legality, loyalty, impartiality and efficiency, so public officials should consider these principles when carrying out PPP procedures.
In 2016 and 2017, there were 14 PPP projects published on CompraNet. The most relevant projects related to the public health sector, road networks and fibre optics. As can be seen, PPPs have been used as a new mechanism not previously available for building new major infrastructure works in Mexico.
On 10 January 2018, a legislative proposal was submitted at the Chamber of Deputies to regulate PPP projects becoming more transparent and additional controls being implemented during the execution of PPP contracts (the Proposal).5 For ease of reference, the Proposal is focused on, among others, the appropriate use of governmental funds and the promotion of a balanced assessment of governmental expenditure. According to the Proposal, there have been various PPP projects that have involved a lack of transparency, inefficiency and wasteful spending. Therefore, each phase of PPP projects requires different mechanisms to achieve better conditions for the Mexican state and promote effectiveness. In other words, for the award, hiring, development and termination of PPP projects, specific transparency and control requirements shall separately apply.
As a way of example, if approved, the following criteria should be met for the relevant phases:
- The award and hiring of PPP projects should not be interfered in by nepotism activities carried out by public officials and individuals or private entities. For such reason, the award deed must include, among others, all applicable legal grounds and technical considerations to grant the award of such agreement to the relevant party. In addition, at all times, the awarded party should strictly follow up the terms of the relevant contract and the applicable provisions of the PPP Law. Therefore, for these stages, the proposal pretends that there are no corrupt risks and to move forward with the contact on a detail basis in accordance with the applicable agreement and regulations.
- The development of PPP projects should include, among others, a strong penalising scheme to avoid breaches to PPP contracts performed by the awarded party. By using such mechanism, it is intended that the Mexican government will reduce unnecessary expenses to make progress with the use of PPP contracts.
- The termination of PPP projects plays a significant role in the use of government funds, given that in some events payments and wire transfers to awarded parties are not properly calculated by the Mexican government. Additionally, in the event of a PPP contract termination, it should be prohibited for the Mexican government to rescue those liabilities from awarded parties to maintain the relevant project. With such prohibition, it is intended that only minor financial risks will exist for the government.
That being said, it should also be noted that in 2015 the Federal Superior Audit carried out an analysis about the scope of the use of public funds. It suggested, among others, that the relevant legal framework for the use of PPP projects must be strengthened, and specific financial guidelines must be issued for the proper use of PPP projects, so the Proposal tries to implement such suggestions made by such surveillance entity.
On the other hand, according to the Proposal, PPP projects shall have a term no longer than 20 years, which may be extended up to 10 additional years, so a specific term and extension will apply for further projects. In addition, owing to welfare reasons, PPP projects would not be considered for the following key sectors: (1) essential public services (such as those with educational, safety and social security purposes); (2) the armed forces; and (3) use of national resources. In that regard and given that approximately 50 articles of the PPP regulation would be amended, it will be necessary to monitor any discussion by the relevant meetings of the Chamber of Deputies in order to be aware of any possible approval.
III GENERAL FRAMEWORK
i Types of public-private partnership
There could be different classifications of PPPs depending on the characteristics considered for such purposes. One useful classification refers to the subject matter of the PPP. The PPP Law distinguishes between PPPs carried out to develop productive investment projects, applied investigation and/or technological innovation (Technological PPPs) and the rest of the PPPs, which are the most common projects.
Technological PPPs have the purpose of financing projects for social welfare and technological development with the support of research centres and higher education entities. The Science and Technology Law is applicable to the Technological PPPs and the Fund will be used to promote these projects.
Another useful classification considers the type of federal resources used to fund a PPP. Considering the foregoing, there are three types of PPP: (1) budgetary funds; (2) funds of FONADIN or other federal non-budgetary funds; and (3) non-financial funds such as contribution of authorisations (e.g., granting of authorisations for the execution of the works and for the provision of services; permits, licences, concessions or authorisations for the execution of the works as required by law; and permits, concessions or authorisations for the use or exploitation of public goods or the provision of services as required by law).
ii The authorities
The PPP Law is applicable to the following promoting entities calling for or involved in a PPP project: (1) agencies and entities of the Public Federal Administration; (2) federal public trusts that are not deemed as state-owned entities; (3) constitutional autonomous bodies; and (4) any other entity whether municipal, local or federal that uses federal funds (or the majority of the funds are federal). For such reason, it would be deemed that more projects in the social sector might be developed based on the federal entity or the origin of the funds.
The Ministry of Finance and Public Credit (the Ministry of Finance) is in charge of interpreting the PPP Law on administrative matters and has a major role in controlling all the budgetary, investment and similar studies and procedures. On the other hand, the MPA is the authority in charge of the public goods, valuations, responsibilities of public officials, supervision and CompraNet, including the enforcement of the PPP contracts. The MPA is focused on, among others, the administrative enforcement of the proper conduct of procurement processes and federal PPP projects. In accordance with the PPP Law, the MPA holds the authority to supervise the preparation, beginning and award of the PPP projects and the development of the projects, as well as any other process regulated by the applicable law.
Of course, other authorities will be involved with respect to the granting of authorisations applicable to the relevant project, such as, for example, the Ministry of Environment and Natural Resources. In the case of the allocation of federal budgetary funds, the corresponding approval shall be issued by the Chamber of Deputies. With respect to the Technological PPPs, the corresponding authorities will participate accordingly.
As an example of the promoting entities, the Mexican Social Security Institute and the Ministry of Communications and Transportation (MCT) played a significant role for the promotion of 2016 and 2017 PPP projects. For instance, the former called for the construction of a hospital located in Mexico City. The MCT developed a major PPP project in the telecommunications sector called ‘Red Compartida’ (wholesale shared wireless network in the 700MHz band), which is the biggest telecom project in Mexico’s history.6 The awarded party of the PPP project is a consortium of various Mexican and international investors, which will make large investments as part of a 20-year contract.
iii General requirements for PPP contracts
Under the PPP Law, the PPP contract must include, among other information, relevant to the project, the following: (1) purpose (provision of the services and, if applicable, the execution of the infrastructure works needed for the provision of the services); (2) technical specifications and level service agreements; (3) properties, assets and rights to be used for the project; (4) financial regime and consideration to the developer; (5) the regime of distribution of risks and other terms and conditions applicable in case of force majeure and acts of God; (6) beginning of the operations, if applicable; (7) penalties and sanctions; (8) method of dispute resolution; and (9) date of issuance. The term of the contract and, if applicable, its extension may not exceed 40 years.
Administrative sanctions and penalties apply to PPP contracts in cases where the individual or company does not comply with its obligations under the contract and the PPP Law. Under specific scenarios (e.g., wilful misconduct or bad faith), the relevant individual or company may be subject to disbarment by the MPA.
In Mexico, information on awarded PPP contracts is publicly available, provided there are, among others, no national security reasons against making the information public; however, it should be noted that third-party information must be protected and preserved according to General Transparency and Access to Public Information Act and the Personal Data Protection General Act. In that regard, the information publicly available regarding the execution of the PPP contract and the development of the contract can be found: (1) in CompraNet, whereby none of the information contained therein (such as award deeds) should be marked as confidential or classified; and (2) through requests for information to the competent authority.
IV BIDDING AND AWARD PROCEDURE
i Expressions of interest
In accordance with the PPP Law, PPP projects are subject to transparent and publicly available tender procedures. In that regard, the public call for tender must be published on the website of the relevant entity and in the Federal Official Gazette, on CompraNet and in a national and regional newspaper. All local or foreign individuals or companies may participate in PPP calls, provided, however, that they fulfil the applicable requirements of the project. If applicable, local or foreign participants may participate individually or as a consortium (a joint proposal that is formed by two or more individuals or companies). If awarded, the consortium must incorporate a special purposes company only for the relevant project.
According to the PPP Law, any individual or entity is allowed to assist as an observer to the events of the PPP procedure. PPP procedures must have a social witness in order to verify, among others, that the relevant process is carried out impartially, ethically and independently.
The specific bidding rules of the project shall establish, among others, certain requirements such as (1) the name of the calling entity; (2) information for identification of the project; (3) a general description of the project; (4) applicable dates; (5) the authorisations required for the execution of the project; (6) legal and financial matters; (7) technical specifications; (8) standards for the performance of the project; (9) draft of the contract; (10) guarantees to be provided; and (11) any clarification or additional information requested by the entity. It is prohibited to establish requirements that may restrict free competition. In that regard, the calling entity must take into account the recommendations issued by the Federal Economic Competition Commission and the guarantees may not exceed 10 per cent of the estimated value of the investment.
In addition, the PPP procedure must have at least one Q&A meeting to clarify any doubts or concerns that the participants may have. The entity shall answer in writing the doubts and questions submitted by the participants. In the event that the calling entity intends to carry out a modification to the bidding rules, there should be enough time to prepare the relevant information to be submitted. Likewise, for the purposes of promoting participation in the procedures and avoiding being disqualified by a minor matter, previous reviews of the documentation are allowed to be performed by the relevant entity except with respect to the economic proposal. Between the last meeting of clarifications and the submission of the proposals, there must be enough time and if necessary, the date established for the submission and opening of proposals may be deferred.
ii Requests for proposals and unsolicited proposals
Entities or agencies may publish a notice in the Federal Official Gazette and on their own web pages in order to determine the project proposals they are willing to receive, specifying the sectors, subsectors, geographical matters, type of projects, estimated dates, estimated physical goals, relationship between the proposal and the purposes described in the National Development Plan, as well as the expected benefits.
Notwithstanding the foregoing, any individual or company interested in carrying out a PPP project may submit an unsolicited proposal of the project before the relevant entity or agency, which will have 30 business days to respond if the unsolicited proposal is feasible. Unsolicited proposals must comply, among others, with: (1) a viability study that includes the description of the project; (2) social profitability; (3) legal viability; and (4) estimated investments. The relevant unsolicited proposal must also not have been submitted previously or have already been resolved by the relevant entity. If the relevant unsolicited proposal does not fulfil any of the requirements set forth in the PPP Law and its Regulations, the proposal will not be analysed.
In the event that the unsolicited proposal is feasible, the relevant participant is entitled to obtain an incentive in the evaluation of its offer, which will be no greater than 10 per cent of the evaluation method over the other participants. If the relevant participant is the only one in the process, the contract may be directly awarded if it complies with all of the requirements.
The estimated period for the competent entity to carry out the analysis and evaluation of the feasibility of the project is three months, which may be extended for an additional three-month period depending on the characteristics of the project. At this time, the public entity may request clarifications or additional information, and may even transfer the proposal to another public sector entity (e.g., municipality), as well as to invite said agencies to participate in the project.
Once the appropriate evaluation has been fulfilled, the relevant entity will express its opinion regarding the feasibility of the studies submitted. If applicable, this information will be sent to the applicant and will be published on the website of the entity and on CompraNet. Subsequently, a PPP procedure may be initiated.
On the other hand, the Ministry of Finance will be in charge of coordinating and publishing the relevant information about the unsolicited projects on the Transparency Portal Budget of the Ministry of Finance, which will be public.
The Ministry of Finance must report to the Chamber of Deputies, including without limitation, the following: (1) the description of the authorised PPP projects, as well as those projects in review process; (2) the amounts disbursed or that will be disbursed in accordance with the estimates of the relevant case, including the amounts related to the preliminary phase; (3) the progress on the execution of the project; and (4) the annual amount of the payments committed during the permanence of the contract.
iii Evaluation and grant
For the purpose of making an assessment of the relevant project, the documents of the proposal must be submitted before the entity in sealed envelopes. In order to promote transparency, the envelopes will be publicly opened. On such meeting, participants are allowed to submit one proposal only, which is final and not subject to negotiation. Once the proposals are submitted, they are mandatory, so there is no opportunity to withdraw or invalidate them. For the purpose of making an evaluation of the proposals submitted, it is necessary to consider, among others, the following:
- the entity must verify that the requirements established in the bidding rules have been met;
- to follow up on the applicable evaluation method (e.g., cost-benefit criteria and point-rated criteria) to be used in accordance with the rules;
- to carry out a clear evaluation of the project; and
- to verify the technical, legal and financial capabilities of the awarded party.
As long as the applicable evaluation has been carried out, the relevant project will be awarded to the participant that has met the applicable requirements in accordance with, among others, the points established above. For such purposes, there must be grounded reasons to support the decision by the calling entity. However, in the event that more than one proposal meets the requirements set forth, the project will be awarded to the proposal that guarantees the best economic conditions for the Mexican government. If both proposals have equal conditions, the award of the project will be granted to the one that offers greater use of, among others, Mexican human resources, goods and services.
The relevant project will be awarded to the participant that filed a proposal that meets all applicable requirements. The relevant entity must issue a written decision based on the analysis of all proposals submitted including the legal, technical and financial grounds and the reasons the chosen entity provides the best conditions for the Mexican government.
For the purpose of making the evaluation and award of the project, the calling entity shall hold a public meeting and shall also publish the award on its website and on CompraNet.
V THE CONTRACT
The draft of the PPP contract should establish the payment in favour of the awarded party and the applicable mechanism to proceed with the payment. In the event that a participant is not in agreement with the payment scheme, said individual or company may ask for any applicable change during the Q&A meeting. At all times, the participant must take into consideration any applicable risk in accordance with the bidding rules. For instance, in June 2016, the Security and Social Services for State Workers Institute (ISSSTE) published a call for the provision of supplementary services on the health public sector by means of a PPP project. The bidding rules established an integral monthly net payment in favour of the awarded party, which was composed of various mandatory tariffs. In addition, the bidding rules included, among others, a maximum payment for the provision of services during the term of the contract.
ii State guarantees
The Mexican government guarantees payment arising from the execution of a PPP contract through the corresponding annual Federal Expenditure Budget.7 However, under the applicable regulation, it is not provided that specific guarantees will be issued in favour of awarded parties by the Mexican government. Therefore, in accordance with the applicable legal provisions, the Mexican government will ensure that sufficient funds exist to meet its payment obligations by providing them in the applicable Federal Expenditure Budget of the relevant year of multi-annual expenditure commitments.
The PPP bidding rules must establish that the participant of the project should provide guarantees to evidence its capacity on the project. In such scenario, there are caps on the value of the infrastructure during the construction of the project, but additional guarantees and insurance may be requested by the relevant entity in accordance with the applicable regulation.
iii Distribution of risk
PPP projects allow the parties to assume the risks related to the execution of the project. In accordance with the PPP Law, during the assessment of the proposals, the calling entity must consider a suitable distribution of risks between the public and private sectors for the preliminary, construction and operation phases of the project. Likewise the draft of the contract will establish the distribution of risks of the project, so it may be understood that risks should not be unreasonable for one of the parties only. However, once the contract is signed, the parties may not make adjustments to the distribution of risks to the other party. In that regard, extensive analysis must be carried out by the PPP participants regarding the scope of risks.
iv Adjustment and revision
During the term of the PPP project, adjustments and modifications may be made to the terms originally established, in order to:
- improve infrastructure features, which may include additional works;
- increase the services or their performance level;
- have aspects related to environment protection, as well as to the preservation and conservation of natural resources; or
- restore the economic balance of the project. In the event that such economic adjustment generates any benefits, the calling entity will receive no less than 50 per cent of such benefits.
Under such an event, other applicable documents should be modified accordingly. However, in order to restore the economic balance of the project, the awarded party will have the right to review the contract when the expenses and cost of the project substantially increase or the benefits of the awarded party decrease arising from an administrative, legislative or judicial activity. However, specific circumstances have to be met (e.g., unforeseeable change) to make any review of adjustment by the relevant entity.
v Ownership of underlying assets
As a result of the execution of a PPP project, the relevant parties may acquire the property, assets and rights necessary in accordance with bidding rules or the relevant contract. The acquisition of such properties, goods or rights may be done through conventional means. In other words, a negotiation may be carried out with the owners of the property or through an expropriation proceeding due to public utility principles. In order to proceed with the acquisition through the conventional or expropriation means, an assessment needs to be requested from the relevant entity.
vi Early termination
The entity may terminate the PPP contract early when there are reasons of general interest or if the need to request the services or goods no longer exists, considering justified causes and if the performance of the contract will cause an injury or damage. The early termination must be supported by an opinion of the entity establishing the reasons and causes that make such decision. In case of early termination, the awarded party will be entitled to receive reimbursement of expenses and investments that proves it has invested, which are not recoverable and pending of payment. In any case, the expenses must be directly related to the project. The applicable payments have to be made within a period not exceeding 90 business days once the request has been made including the applicable information.
The National Infrastructure Fund (FONADIN) was created by means of the National Works and Public Services Law in order to, among others, coordinate the development of infrastructure in different key areas in the country. The purpose of FONADIN is, among others, to plan, design, and build up infrastructure projects that will be developed by private individuals or companies with the help of the Mexican government.
In addition, according to the 2014–2018 National Infrastructure Program (the National Program), the Mexican government is determined to increase the existence of, among others, PPP projects.8 Considering the foregoing, the Mexican government established an investment goal of approximately US$338 trillion, which will be partially provided by the government and the private sector. Therefore, there is a clear determination to optimise funds and the public health sector will promote the use of PPP on its projects.
VII RECENT DECISIONS
As previously set forth, in 2016 and 2017, 14 PPP projects were published on CompraNet. The results of said projects are basically addressed to the road networks, health sector and fibre optic. As mentioned above, one project published in 2016 refers to the development of the Red Compartida project to offer competition in the telecoms sector (provision of broadband capacity), considering the high concentration levels in the Mexican telecoms market. In addition, in 2017, five road network projects were published by the MCT on CompraNet; one of those projects refers to the design and construction of the Monterrey-Nuevo Laredo road network, which is an important highway in the northern region of Mexico, for an approximately 30-year term, which was awarded in favour of a Mexican company.
Likewise, in 2018, the MCT has published three projects on CompraNet, in order to provide maintenance and reconstruction services to highways located in the northern and southern regions of Mexico.
During the past few years, several PPP projects have been launched to promote Mexico’s economic growth. The PPP Law and its Regulations (as amended) strengthen the Mexican investment project legal framework. The creation of PPP projects, with a specific scope, is essential to Mexico’s infrastructure and public services that would benefit both the public and private sectors. One of the most important changes in the recent reforms are transparency obligations on a federal basis that have not been adopted at a local level. There are other additional reforms regarding transparency that still need to be strengthened. As explained in Section II above, a legislative proposal was recently submitted at the Chamber of Deputies to mainly regulate that PPP projects become even more transparent at different stages. The proposal is focused on additional controls to prevent nepotism and corrupt activities and to allow transparency mechanisms to be implemented for the use of PPP projects. In general terms, the proposal pretends that governmental funds are properly used and no mismanagement is implemented for these kinds of projects. Also, additional prohibitions for implementing PPP contracts would apply for the benefit of the Mexican state. However, at all times we should take into consideration that said proposal is currently under review of the Chamber of Deputies. Therefore, it will be necessary to follow up any progress on the analysis of such proposal and its approval, if applicable.
The year 2018 will be tough for PPP projects as Mexico has presidential and Congress elections in July, so this will most certainly slow the attraction of foreign and local investments that would be expecting the results of the elections. Once the new administration takes over at the end of the year, we may expect new projects in 2019 and the following years.
1 Federico Hernandez is a partner and Julio Zugasti is an associate at Hogan Lovells BSTL, SC. Special acknowledgement to Karina Galicia, law clerk at Hogan Lovells BSTL, SC, for her assistance in preparing this chapter.
2 For more information about the 45 PPP federal projects, please refer to Compranet at: https://compranet.funcionpublica.gob.mx/web/login.html.
3 For more information about such plan please refer to: http://pnd.gob.mx/.
4 See https://compranet.funcionpublica.gob.mx/web/login.html.
5 The relevant proposal was submitted by Congresswoman Araceli Damian of a left-wing party (Movimiento Regeneración Nacional).
6 For more details about the project, please visit www.sct.gob.mx/red-compartida/index.html.
7 For 2018, the maximum authorised amount is approximately US$1.82 billion. This is approximately 10 per cent higher than in 2017.
8 For more details about the National Program please visit http://cdn.presidencia.gob.mx/pni/programa-nacional-de-infraestructura-2014-2018.pdf?v=1.