A public-private partnership (PPP) is an institution designed to develop an infrastructure project through a stable partnership between the public and private sectors, and on the grounds of joint interests and a distribution of risks.
Under a PPP regime, individuals and companies may enter into a cooperative agreement with the state to develop infrastructure projects or to provide public services.
In Argentina, the first legal framework to govern PPPs was established by Decree No. 1299/2000, ratified by Law No. 25,414 (2000). This Decree aimed at promoting private investment in public infrastructure projects that could not be afforded exclusively by the state, especially in the areas of health, education, justice, domestic transportation, airport facilities, highways and homeland security. In early 2001, Law No. 25,414 was abrogated by Law No. 25,556. Therefore, Decree No. 1299/2000 was deemed abolished.
On 16 August 2005, the Executive issued Decree No. 967/2005, published in the Official Gazette on 15 August 2005. This Decree approved the General Regime for Public-Private Partnerships as Annex I (the 2005 Regime). Several provinces adhered to this Decree.
Finally, on 30 November 2016, Congress passed Law 27,328 on Public-Private Partnership Contracts, which became effective from 9 December 2016 (the PPP Contract Law). The new regime has been implemented by the Executive Decree No. 118/2017 (which also abrogated Decree No. 967/2005).
The new regime has been conceived by the government as the main tool to regulate and stimulate private investment in key sectors of the economy, such as infrastructure, housing, services, production, applied research and technological innovation.
Pursuant to Section 1 of Law 27,328 and the implementing decree, PPPs can pursue the following public purposes: design; construction; expansion; improvement; maintenance; exploitation; operation; financing of projects; and the supply of equipment or other goods. The contracting entity may introduce clauses of any type of contract, provided they are compatible with the PPP regime and the nature of the specific project at stake.
According to the PPP Contract Law, public-private contracts are deemed as an alternative way for the state to perform public works or to develop public services, different from the administrative regime set forth in Laws No. 13,064 on Public Works Act No. 17,520 on Concession of Public Works Act and Decree No. 1023/2001 on General Public Procurement, any of which are applicable to public-private contracts.
Like in previous regimes, the provincial states and the city of Buenos Aires were invited to join the new regime by issuing similar laws in their jurisdictions. So far, 14 provinces and the city of Buenos Aires have adhered to the PPP Contract Law.
II THE YEAR IN REVIEW
Throughout 2018, the government continued to develop the PPP regulatory framework to reinforce investors' confidence in the new regime. Most of the decisions taken were of a financial nature, such as the creation and later regulation of the PPP Trust Fund, the financial tool necessary for the funding of the PPP projects.
On the same path, on 4 December 2018, the government passed Law 27,467 (the 2019 General Budget Law), approving the public funding for the PPP projects for the 2019 period. Those projects are principally related to roads, highways and energy transmission but also to prisons, hospitals, housing, and water distribution and remediation.
Likewise, successful tender processes took place in 2018. The most advanced was Stage 1 of the Highways and Safe Routes project, a national and international public bid for the public procurement of the design, construction, enlargement, improvement, repair, remodelling, management, maintenance and commercial exploitation of six national road corridors. This tender ended up being the first national project in applying the new PPP regulatory framework.
Other ongoing projects in early stages of development are:
- the Electricity Transmission Lines Project, which is pending launch and entails the construction of 10 transmission lines and complementary works in three stages, Stage 1 called 'Extra High Voltage Line in 500kV ET Rio Diamante–New ET Charlone, Transforming Stations and Complementary Works in 132kV';
- the Vaca Muerta Railroad project, which will connect the recently discovered Vaca Muerta non-conventional hydrocarbon field to the cargo port of Bahía Blanca; and
- the Regional Express Network project, for the interconnection of metropolitan railway stations in Buenos Aires.
Similarly, the government continued to launch tenders under the Federal Renewable Energy Programme set up by Law No. 27,191 and Decree No. 882/2016 (RenovAr). Although subject to another law regime, the RenovAr programme is also based on a PPP model.
III GENERAL FRAMEWORK
i Types of public-private partnership
Section 1 of the PPP Contract Law sets forth that PPP contracts shall be designed in accordance with the special features of each project and its financial needs.
Under that flexible criterion, Section 7 of the PPP Contract Law sets forth that the PPPs in charge of the execution and performance of the PPP contract may be organised as a special purpose vehicle (SPV), a trust fund, or any other vehicle or associative organisation.
SPVs shall be incorporated as corporations. Trust funds shall be organised as financial trust funds pursuant to the Civil and Commercial Code provisions on the matter. Further, PPPs may be constituted and organised in such a way that allows them to issue securities under the provisions of Capital Market Law No. 26,831.
Further, the PPP Contract Law explicitly allows the state to create new corporations or trust funds to perform PPP projects.2
ii The authorities
Under the PPP Contract Law, the performance of the PPP contract is subject to the control of the public contracting party or the public body created for that purpose in the relevant jurisdiction. In addition, the bidding terms and conditions of the PPP project might require the appointment of external independent auditors to supervise the performance of the project.3
Pursuant to Section 22 of the PPP Contract Law, the General Audit Agency shall supervise all PPP contracts, their performance and results.
The new regime sets forth two new bodies: the Undersecretariat of PPPs, an official government entity, which shall centralise the regulation of PPP contracts, assist in the development and regulation of the PPP projects and support the public procurement agencies in the design and structuring of PPP projects;4 and the Congress bicameral commission, which is in charge of monitoring the PPP projects' performance and compliance with the PPP regime.5
iii General requirements for public-private partnership contracts
In accordance with the PPP Contract Law, PPP contracts shall regulate, at a minimum, the items described in the law,6 including the following:
- the contractual term and potential extensions, which cannot exceed 35 years in whole and must ensure recovery of investments, repayment of financing and a reasonable profit;
- the parties' duties and obligations and a fair and efficient distribution of the contract contributions and risks between the parties, ensuring the best conditions to prevent, assume or mitigate them and to minimise the cost of the project and facilitate financing conditions (see Section V.iii). The PPP contract shall foresee the contractor's right to transfer its duties to a 'performing company', within the limits set forth in the contractual documents. In this case, both the contractor and the performing company will be jointly and severally liable to the state party;
- the minimum technical requirements applicable to the infrastructure involved in the project and the penalty regime (the application of any sanction in excess of the limits set forth in the PPP contract and regime being forbidden);
- the procedures for the revision of the contract price so as to preserve its economic–financial equation (see Section V.iv);
- the state's power to unilaterally introduce modifications should be restricted only to the project performance and under no circumstance exceed 20 per cent above or below the total contract price. Any such modification shall be compensated so as to keep the original economic–financial balance (see Section V.iv);
- the guarantee of minimum income if such provision is agreed upon (see Section V.ii);
- the events and procedures applicable to the contract's termination and applicable compensation. If termination operates based upon public interest grounds, no state liability limitation set forth in administrative laws can apply (see Section V.vi);
- the assignment of PPP contract rights or receivables arising as collateral and the right to securitise cash flows;
- the right to temporarily suspend performance of obligations in the case of state default;
- the contractor's right to totally or partially assign the PPP contract to the extent the assignee meets the proper conditions to be a contractor and at least either 20 per cent of the contractual term has expired, or 20 per cent of the committed investment has been made. Contract assignment shall be subject to the state contracting party, funders and guarantors' approval. Under these conditions, the assignment releases the original contractor of all duties;
- the assets regime (see Section V.v); and
- the procedures and mechanisms of settling contractual disputes, including the possibility to establish a technical panel to act throughout the contract life and in charge of solving contractual disputes before resorting to court litigation or arbitration. Arbitral agreements setting forth foreign venues shall be expressly approved by the Executive and communicated to Congress. This option is only available for PPP contractors that have foreign shareholders, according to a minimum percentage that must be established in each project.
IV BIDDING AND AWARD PROCEDURE
i Expression of interest
Pursuant to Sections 1 and 4(a) of the PPP Contract Law, the submission of a project to the PPP regime requires a previous justification by the state on the reasons why the PPP structure is suitable for the satisfaction of the public interest pursued through it.
By the same token, Section 13 sets forth that, before any invitation for a PPP public tender, the tender authority shall issue an opinion on, inter alia, the feasibility of the PPP project and the reasons underlying the submission of the project to the PPP regime as the most suitable solution for the public interest. That opinion shall be communicated to the Undersecretariat of PPP for its publicity.
ii Request for proposals
The contractor shall be selected by public or competitive, national or international tender depending on the complexity of the project, the ability of local companies to participate, economic or financial reasons connected to the project's special features, or the origin of the funds in the case of projects that require external financing. Direct adjudication (i.e., without public and competitive tender) is forbidden.
Pursuant to the PPP Contract Law, the provision of assets and services made in the context of PPP contracts shall have a minimum domestic component of 33 per cent.7 This legal requirement may be exceptionally set aside or limited by the Executive if the project special features require so.8
If the PPP contract commits resources from the public budget, prior to the call for tenders or competition, it must obtain the authorisation to commit future fiscal exercises, as provided in Section 5 of Law 24,156.9 The availability of the public funding shall be also confirmed prior to the execution of the contract.
If necessary, when the complexity or size of the project requires it, a transparent procedure of consultation, discussion and exchange of views between the contractor and the prequalified parties may be established, allowing the development and definition of the most convenient solution to the public interest on the basis of which the tenders should be formulated.10
The PPP Contract Law puts special focus on the need for transparency, publicity and competitive conditions for bidders, including specific anti-corruption provisions.
iii Evaluation and grant
The contract shall be awarded to the most convenient offer, in accordance with the conditions established in the bidding terms and conditions. This regime also requires the inclusion of selection guidelines that give comparative advantages in favour of domestic companies and small and medium-sized enterprises. Nevertheless, these comparative advantages may be excluded if that is deemed necessary or convenient because of the particular features of the project.11
V THE CONTRACT
As regards the state's contributions and payments, according to Section 9(g) of the PPP Contract Law, these contributions may consist of:
- contributions of money;
- assignment of funds obtained from public credit operations;
- ownership of assets (budgetary, fiscal, contractual or of any other nature), the assignment of which is permitted by the applicable regulations;
- the assignment of rights;
- the constitution of surface rights over public and private property;
- the granting of guarantees, tax benefits, subsidies and franchises;
- the concession of rights of use, and exploitation of public and private property; and
- any other type of contributions that may be made by the state.
According to Section 18, payments may be made through: specific allocation or transfer of tax resources, assets, funds and any kind of public credits or revenues, with the relevant authorisation from the Federal Congress; or creation of trust funds or use of existing ones.
Moreover, pursuant to Section 20, in the case of the use of trust funds, instructions by the trustor or the state bodies to the fiduciary are expressly forbidden.
The PPP contract shall set forth the payment regime. Payments could be made by the state, users or third parties, depending on the specific project's particular conditions. If the repayment of the assets, services or works is made by the state, the financing shall be made by the PPP contractor, the financing entities or third parties.
The PPP Contract Law excludes the application of Section 765 of the Civil and Commercial Code (which allows the payment of US-dollar debts in the domestic currency); and Sections 7 and 10 of Law No. 23,928 (which avoid the indexation of contractual debts) to the PPP contracts.
ii State guarantees
To secure the payments, Section 18 provides for: the granting of security bonds and guarantees of entities of recognised solvency in the national or international market, and the constitution of any other instrument that fulfils the function of guarantee accepted by the current law.
Further, the PPP Contract Law allows contractual provisions on guarantees on minimum incomes.
Finally, pursuant to Section 19, the contractor may be authorised to grant guarantees on rights of exploitation of public or private property granted to secure the repayment of the necessary financing to carry out the project.
iii Distribution of risks
The PPP regulations attempt to distribute risks between the state and the private party in order to reduce the related costs.
In this line, PPP contracts shall foresee the consequences arising from acts of God, force majeure and extraordinary economic events affecting the contract economic equation and the early termination of the contract.
Further, PPP contract may provide for automatic or non-automatic mechanisms for review of the contract price based on increased costs, including the financial ones.
iv Adjustment and revision
Section 9(i) of the PPP Contract Law allows unilateral variations to the contract instructed by the state, but limits them only to the performance of the project, with a maximum limit of 20 per cent of the total value of the contract. Further, those variations shall be adequately compensated.
Likewise, under the PPP Contract Law, PPP contracts may foresee procedures for price revision in order to preserve the original economic-financial balance of the contract and the possibilities and conditions of financing, in the case of a relevant alteration of such balance as a result of unforeseeable events that are alien to the contractor.
v Ownership of underlying assets
Regarding the ownership of the underlying assets, and pursuant to Sections 9(o) and (v) of the PPP Contract Law, the ownership, exploitation, assignment and destination of the property, movable and immovable, used or constructed during the term of the contract, shall be governed by the provisions of the PPP contract. In particular, those assets that are to be reverted or transferred to the state shall be duly specified in the respective contract.
Further, the PPP Contract Law states that agreements under which the ownership of the work or infrastructure is constructed may only revert to the state after full execution of the contract.
vi Early termination
Early termination is a widely known power of the state, and it may be used for several public interest reasons. It is one of the main regulatory risks that PPPs could face, and for that reason it seems important for a PPP regime to reasonably limit its consequences.
According to Law 27,328, in the case of early termination of the PPP contract by the state, compensation shall be fully paid out to the contractor before taking possession of the assets. In no case can compensation be lower than the non-depreciated investment. Further, financing repayment shall also be guaranteed to the extent effectively applied to the project.12
The parties' liability shall be governed by the PPP Contract Law, its implementing regulations, the bidding terms and the PPP contract. The Civil and Commercial Code shall also be applicable on this matter.13 Therefore, PPP contracts are expressly excluded from all legislation restricting government liability or excluding compensation for lost profits in the event of early termination on public-interest grounds.
The unilateral termination of the PPP contract for reasons of public interest shall be declared by the Executive.
Finally, the suspension or nullity of the contract on the grounds of illegitimacy may be declared only by a court.
The PPP regimes aim at promoting private investments in public infrastructure projects that the state cannot, or deems it inconvenient to, afford alone. Therefore, PPP contracts shall adopt a flexible design in order to adapt their structure to the specific requirements of the project and its financing needs.14
For the same reason, the entity in charge of the performance of the PPP contract shall adopt a legal form able to access the capital markets to develop the project.15
As it usually happens, the resources needed to finance the projects of this kind are sought at the domestic and financial capital markets. Accordingly, the PPP Contract Law explicitly promotes the development of the domestic market and access to the foreign market.16 As a consequence, cross-border finance could be included in the terms of the tendering process for awarding the PPP contract.
In addition, the PPP Contract Law sets forth that the state contracting party may collaborate with the private party to obtain the necessary financing for the project.17
In order to structure the financing of the project, the regime allows the contractor to contract loans, issue debt securities with or without public offer, set up trusts (financial or otherwise) that issue debt securities or certificates of participation, create mutual funds or any other financial structure that could be guaranteed through the assignment of the PPP contracts or the credit rights arising from the PPP contract – including any certificates, minutes or investment recognition instruments or the provision in charge of the PPP contractor and securities, negotiable securities or similar that may be issued – as well as their corresponding guarantees.
As a remarkable feature, under the new regime, the PPP contract may include the conditions for the transfer of the controlling shareholding of the SPV or the certificates of the trust funds to the funders in the case of default of the SPV's or the fiduciary's obligations, in order to facilitate the restructuring of the debt and the project performance continuity (step-in rights). Likewise, the PPP contract may allow the assignment of the collection rights for securisation.18
Further, the implementing regulation provides for the delivery of certificates, securities, negotiable securities or similar to the contractor, according to the progress of the project. The PPP contract may also set forth that the payment obligations represented by said certificates or instruments are negotiable, irrevocable and unconditional, not subject to deductions, reductions or compensations of any kind, to the extent established in the tender and contractual documentation.
The PPP Trust was created by Law 27,431, as amended by Law 27,467. In accordance with such laws, the PPP Trust may be constituted through a single trust or through different individual trusts called 'individual PPP trusts'. The PPP trust or individual PPP trusts shall be set up as administration, financial, payment and guarantee trusts. The trustee of each PPP trust or individual PPP trusts may set up one or more fiduciary accounts per PPP programme or project. As set forth in the relevant trust agreement, each of these accounts shall constitute a patrimony by appropriation, autonomous and distinct from the other accounts created by the same trustee under the PPP trust or individual PPP trusts.
VII RECENT DECISIONS
Before the enactment of the PPP Contract Law, this instrument was not widely used. Thus, so far, no relevant judicial decisions are publicly available on the matter.
During 2018, the first steps in the implementation of the new PPP regime were taken successfully.
The key factors of any PPP regime (such as payments, state guarantees and limitations of state power) are properly reflected in the new law and its implementing decree.
The fact that the basic features of the regime are now set forth in a law (rather than in an executive decree) reinforces the legal certainty needed to attract private investment. In emerging countries with a history of economic crisis and high political risks, explicit legal rules protecting private interests are sine qua non prerequisites for promotion of investments in public infrastructure and services through PPP projects.
Some of the most remarkable provisions of the new PPP regime are those aimed at facilitating access to capital markets by:
- providing sufficient freedom to the parties to design the best contractual structure for the PPP project and its financing needs;
- allowing the transfer of the controlling shareholding to the funders in the case of default of the PPP entity;
- securing prior compensation for the contractor and for the funders in the case of early termination of the PPP contract by the state;
- excluding the application of the administrative contractual laws (and, thus, the state's privileges set forth therein); and
- allowing the submission of contractual disputes to arbitration with or without foreign venues.
In sum, the current PPP regime should promote the entry of new direct foreign investments in relevant sectors (such as energy and public infrastructure), provided the necessary macroeconomic conditions for the development of the PPP projects is reached.
1 María Inés Corrá is a partner and Ximena Daract Laspiur is an associate at Bomchil.
2 The PPP Contract Law, Section 8.
3 ibid., Section 21.
4 ibid., Sections 28 and 29, and Decree No. 1119/2018.
5 The PPP Contract Law, Section 30.
7 ibid., Section 12.
9 ibid., Section 16.
10 ibid., Section 14, and Decree No. 944/2017.
11 The PPP Contract Law, Section 15.
12 Section 10 as regulated by Decree No. 188/2017.
13 The PPP Contract Law, Section 11.
14 ibid., Section 1.
15 ibid., Section 7.
16 ibid., Section 4(j).
17 ibid., Section 9(n).
18 ibid., Section 9(r).