In relation to public investments, national budget limitations have always been an obstacle for Paraguay. For political reasons, a large part of the annual budget of the Paraguayan government is diverted to fund essential expenses leaving little remaining for infrastructure development. In this context, public-private partnerships (PPPs) are a useful and novel tool for financing important infrastructure projects that would avoid these budgetary difficulties. Regarding the implementation of PPPs, fortunately Paraguay has not been detached from the international experience in this matter and has incorporated modern and innovative provisions following international parameters aiming to promote investment and at the same time protect investors. Nevertheless, the law has also been mindful of local institutions and has made the necessary adjustments to the norms of the Paraguayan administrative system.
The regulation that establishes the PPP regime in Paraguay has been enacted through Law No. 5102 on the 'investment promotion in public infrastructure and the expansion and improvement of goods and services provided by the state' (the PPP Law), in force since the end of 2013. The implementation of several rules on PPPs was subject to Regulatory Decree No. 1350 (the Regulatory Decree), which was passed in March 2014. Since then, the administration has been focused on the task of developing institutions with the structure and functionality that this new legal instrument requires as well as identifying potential projects to be developed through the PPP regime.
The specialised public office in charge of following and coordinating PPP projects is the Public Private Participation Projects Unit (the PPP Unit) of the Technical Planning Bureau.
PPPs are definitely the instrument that will allow the creation of necessary infrastructure that is vital for the social and economic development of Paraguay by means of long-term contracts between the private and public sector and with the main goal of developing public infrastructure or rendering services complementary to that infrastructure.
ii THE YEAR IN REVIEW
The PPP Law has been in force since 2013 and the Regulatory Decree since March 2014, and therefore the law is in full force. Numerous developments have since been implemented – mostly at the administrative and organisational level – including the web page publishing the lists of PPP projects, both private and public initiatives (www.stp.gov.py), the appointment and training of specialised civil servants at different levels and establishing departments in charge of all the phases of the pre-contractual activities and contractual follow-up.
Numerous private-initiative projects filed by private companies (see Section II.i) have been analysed by the PPP unit at a prefeasibility stage; some have been approved and others are still being considered under a strictly confidential process.
Under the previous government, two important public-initiative projects reached the international tender stage during 2016–2018. The Route 2 & 7 highway roadwork, for US$507 million, with 11 pre-qualified companies, was awarded in October 2016 in favour of a consortium integrated by one local company and two international construction companies; the contract was signed in March 2017 and the funding agreements are currently being finalised. This contract represents the first PPP project to be implemented in Paraguay. The second public-initiative project launched during 2016 was the airport infrastructure improvement, operation and management project for US$132 million.
In August 2018, Mario Abdo Benítez was elected into office as president for a five-year term, and in early 2019, during the Paraguay Infrastructure Summit, officials confirmed their intention to invest US$681 million in PPPs. These projects include mainly roadwork construction, maintenance and operation along segments of Route I, Route 6, Route 9 and improvements of urban crossings along the Central Department.
Other projects defined by the former administration have been reoriented to be conducted by means of other legal instruments, such as the traditional public tendering, turnkey agreements with bond warranty, and other instruments that vary depending on the funding. These include the Alto Parana water supply, sanitation and water treatment infrastructure project; highway infrastructure works; Ypacarai Lake basin sanitary and water treatment infrastructure; Asunción and metropolitan area sewage system and water treatment plant, operation and maintenance; the ferry boat routes, railway system; and the construction, operation and maintenance of prison facilities.
iii GENERAL FRAMEWORK
i Types of public-private partnership
There are two ways in which a PPP may originate. On the one hand, there are public initiative projects, in which the government proposes the project and then wholly or partially delegates its execution to a private participant. And on the other hand, there are private initiative projects, in which the private participants propose a project to the government and then they carry it out.
Public-initiative projects are those in which the relevant public institution prepares and follows up a project of its interest and submits it to the PPP Unit.
The public initiative must include a pre-feasibility report, with a project of contents of the feasibility report. The pre-feasibility report will be evaluated by the PPP Unit and Ministry of Finance. Once a favourable opinion is rendered by those authorities, the feasibility report must be presented. The PPP Unit must then issue a new opinion, as must the Ministry of Finance. Once the favourable opinions are issued, the executive power must then grant its approval through a decree. After the decree is issued, the public bidding process begins for all interested parties. The minimum term to submit the offers is 60 days.
The terms and conditions of the bidding documents shall include the pro forma agreement approved by the PPP Unit as well as by the contracting administration. The offers will include a 'technical offer' and an 'economic offer'.The government will also demand a warranty for the fulfilment of the offer, otherwise referred to as a 'bid security'. After the opening of envelopes, the evaluation and comparison of the offers is carried out, the selection of the bidder is made and finally the bidder is awarded the contract.
To carry out the awarded PPP project, the bidder must incorporate a company with the sole corporate object of the accomplishment and development oft he PPP project. The initial paid-in capital of the corporation must be at least 20 per cent of the project's official budget, as estimated by the contracting administration.
The PPP Unit of the Technical Planning Bureau is the institution in charge of receiving all the private initiatives as long as: the proposed project's goal is not similar to another that has already been submitted; and either the contracting administration is performing studies for the project's presentation through the public initiative process, or the contracting administration has expressly identified the project and incorporated it in its future planning as a project that will be carried out ex officio or by a public initiative regime.
Projects that are rejected may not be resubmitted for three years after their rejection. A private-initiative process comprises the following stages:
- Presentation: the proponent must demonstrate the technical, economical-financial and legal capacity for the development of the project. Besides, it must demonstrate the viability of the project at a pre-feasibility level. The PPP Unit will analyse the presentation within 10 days and forward it to the contracting administration for further analysis. The costs of the pre-feasibility study and preparation and presentation of the project are borne by the proponent.
- Evaluation: the PPP Unit and the contracting administration analyse the project for 60 days (which may be extended).Within this period, the Ministry of Finance will have to determine the viability of the project through the PPP regime. Acceptance at this stage implies a favourable opinion and a declaration of public interest.
- Feasibility report: once a declaration of public interest is issued, the feasibility report must be submitted. The deadline for its submission will be established by the contracting administration.
- Approval or modification: the PPP Unit has 120 days to approve or request modifications to the project. In the case of an approval, the Unit will pass the bid onto the executive branch for its approval and the preparation of the bidding documents and the terms and conditions. After this stage, the same provisions that apply to public bidding in a public-initiative project will be followed.
Unsuccessful bidders may be reimbursed for the costs of their feasibility studies.
Further, at the stage of evaluating the various bids, a 3–10 per cent bonus will be added on to the score of the original proponent's bid (see Section IV.ii).
ii The authorities
There are three main authorities involved in the PPP process: the contracting administration, the PPP Unit and the Ministry of Finance.
The contracting administrations are the government entities and government-owned corporations that are empowered to award PPP contracts. Because Paraguay's greatest deficit is infrastructure, the leading contracting administration is the Ministry of Public Works, which is by law in charge of the development and execution of all PPPs relating to transportation, roads and highways, dredging river services, riverine communications and airport infrastructure.
The contracting administration, with the coordination of the PPP Unit, is responsible for structuring, awarding and executing the PPP contract as well as exercising control in the correct execution of the contracts and monitoring parties' compliance with their obligations. The PPP Unit (www.stp.gov.py) has been created as a special unit in charge of promoting and coordinating all authorities, contracting administrations, agencies and other parties regarding the implementation of PPP projects.
The Ministry of Finance has the key role not only in evaluating proposals and risk assessments for PPPs, but also in provisioning future payments to be included in the national budget. Further, in a PPP project, a trust fund is created for the sole purpose of guaranteeing payment and liquidity in relation to the PPP contract, and the Ministry of Finance acts as trustor in that trust fund.
This fund is created to collect, safeguard, invest and manage the financial resources that are part of it, and to fulfil the obligations undertaken by the government and the costs involved in the dispute-resolution process in the PPP contracts. The trustee will be the Financial Agency for Development, the government will act as the trustor or settler of the trust through the Ministry of Finance.
iii General requirements for PPP contracts
PPP contracts may involve a wide range of infrastructure and related service-provision projects, including but not limited to: road projects, railways, ports, airports, waterways and dredging and the maintenance of river navigability, social infrastructure, electric infrastructure, improvement supplying and urban development; drinking water supply and sanitary services; among other investment projects in infrastructure and services of public interest. PPP contracts may also relate to the production of goods and rendering of services that are intrinsic to government agencies and public companies in which the government holds an interest.
PPP contracts as defined by Law No. 5102 shall only be applicable to projects in which the estimated investment is equivalent or above 12,500 minimum monthly wages.
All contracts must contain specific provisions regarding the following:
- distribution of obligations and costs of the project to be borne by the parties, with risk to be assigned to the parties in a better position to assume each risk;
- the exact distribution of profit sharing;
- the distribution of the legal and financial risks and consequences for contingencies that may occur during the execution of the contract;
- the identification of the one-off payments, benefits and costs that third parties should assume;
- the determination or indication of the procedure and steps to take in the case of any adverse events;
- determination of the risks relating to each contract, which will depend on the type of contract. To name a few: construction and engineering risks, operational risks, market risks, social conflicts and environmental risks, financial risks, and political risks; and
- the identification of all necessary authorisations, permits, licences and approvals to carry out the PPP contract, together with its costs and responsible party.
Assignment of contract or shares
The PPP contract will be executed by the contracting administration and the private party, who will operate by means of a local company incorporated with the sole corporate purpose of executing the PPP contract. The assignment of the contractor of the shares of the company requires the authorisation of the contracting administration, while the subcontracting of any type of activity will be allowed under the private law regime, except where expressly forbidden. During the execution of the contract the contracting administration will request the establishment of performance securities in each of the construction stages and operation, as well as insurances policies covering all types of risks including: third-party insurance, construction risks, insurance for work-related accidents and other types of insurance policies to be established in the bidding documents.
As for control, the contracting administration will have a wide range of powers to perform controls through, inter alia, external audits, performance and quality evaluations, inspections and expert testimonies in the technical, legal, economic, financial, accounting and environmental fields.
There are three levels of dispute resolution:
- at the first level, direct negotiations between the parties;
- an the second level, technical and economic issues will be discussed before a technical panel appointed by the parties upon signing the contract; and
- at the third level, the differences will be resolved by an arbitration procedure in accordance with Law No. 1879/2002 on Arbitration and Mediation.
The Regulatory Decree allows the appointment of foreign arbitrators. Parties may also agree on the venue of the arbitration proceedings. Legal issues may only be dealt with by direct negotiations or an arbitration procedure.
iV BIDDING AND AWARD PROCEDURE
i Expressions of interest
As stated above, there two procedures by which the PPP process may begin: a public initiative or an unsolicited bid (private-initiative proposal). In the first case, the government has already identified its scope of interests and has already prepared a project for which it requests proposals. In the second instance, the PPP Unit receives a private initiative (up to the pre-feasibility level) that complies with the threshold for the invested amount, the corresponding authorities then analyse and evaluate the entire project proposal and eventually, if they approve, the government declares the project as being of public interest.
ii Requests for proposals and unsolicited proposals
Content of a private-initiative proposal (unsolicited bid)
The private-initiative proposal must be filed in compliance with the terms indicated in the application form for private initiative projects available on the PPP Unit's website (www.stp.gov.py).
Further, the project to be filed must contain comprehensive information up to a pre-feasibility level, including at least the following information:
- documents proving the legal, technical and financial capacity of the private party;
- designation of the relevant contracting administration for the project;
- a proposal identifying the need, the problem and the potential benefit that the project pretends to bring, including the benefits and costs, performance and quality indicators, and socio-economic indicators;
- a market analysis, technical, legal, competition, economic and financial risk assessment;
- an estimation of government support during the applicable fiscal years and the commitment to be assumed by the government; and
- social impact, environmental studies of the project identifying the affected population and setting forth the mitigation plan for possible damages during or as a result of the deployment and development of the project.
Incentives granted to private initiative projects
Private proponents of PPP projects shall benefit from the following preferences:
- reimbursement of the costs of feasibility studies if the project is deemed of interest but the proponent is not awarded the contract;
- an advantage of 3–10 per cent in the evaluation score assigned during the evaluation of the offer, depending on the size and complexity of the project; and
- a waiver of the costs of submitting bidding documents.
iii Evaluation and grant
Once the private party has filed the proposed project with the PPP Unit, the project will be evaluated by the Unit, the contracting administration and the Ministry of Finance within 60 days, which may be extended. If the proposal is accepted, a declaration of public interest is issued by the government and the private party must file the studies at a feasibility level in accordance with the recommendations issued by the PPP Unit and the contracting administration.
The feasibility studies shall be analysed within 120 days, which may be extended. If the analysis is positive the government shall approve the project and the bidding documents, terms and conditions shall be prepared for the public tender.
The public initiative initiates with the contracting administration stating the intention to promote a PPP by public initiative and this must be informed to the PPP Unit together with a brief summary of the project.
The contracting administration then files the pre-feasibility studies for the first evaluation; at this stage the information contained must be similar to that private-initiative proposal set out in Section IV.ii, including: a value-for-money evaluation, a fiscal and financial budgetary impact analysis, economic and social indicators of profitability and a proposal for the scope of the feasibility study.
The project will be studied by the PPP Unit and the Ministry of Finance within the terms set forth in the Regulatory Decree. If favourable opinions are issued, the contracting administration must file a feasibility study, which must contain additional, more comprehensive and updated studies, all of them provided for in the Regulatory Decree.
The bidding process
In both cases, the bidding process may consist of a standard international tender procedure with or without a pre-qualification of bidders.
In certain types of multifunctional projects that entail a high level of complexity and in projects in which the proponents need to file costly and complex studies, a pre-qualification stage will be implemented.
v THE CONTRACT
Payment provisions shall be included in the bidding documents, identifying all contributions and costs, benefits, profits and remaining conditions. However, the PPP contract will contain in detail and with precision the exact composition of the public contributions and remunerations for the private party, in line with the principles of transparency.
The PPP Law and the Regulatory Decree do not contemplate a particular frequency or method of payments; this shall be proposed either by the private party in the project proposal or inserted in the bidding documents, depending mainly on the type of project to be rendered (infrastructure, services or both) and its complexity.
ii State guarantees
To guarantee payment, Paraguay has introduced the mandatory creation of a trust fund to facilitate payment and guarantee timely payment and liquidity on the part of the state. The trust will be administered by Financial Agency for Development, the sole second-floor banking institute in Paraguay.
The state shall act as the settlor of the trust through the Ministry of Finance, which is in charge of constituting the trust fund as a first step once the PPP contract is signed. Funds reserved for future PPP contract payments shall be transferred to the trust account and kept separated from remaining state liabilities. These funds shall not return to the state treasury and instead remain for the sole and exclusive purpose of honouring any future assumed liabilities.
Limitations to future indebtedness
According to mandatory norms provided for in the PPP Law, the Ministry of Finance shall be responsible for assessing and registering the payment obligations and contingent liabilities the state assumes in the course of PPP contracts. The accumulated amounts of obligations and contingent liabilities, net of income, assumed in PPP contracts must not exceed 2 per cent of Paraguay's gross domestic product (GDP) for the previous year. Equally, the amount assumed for obligations and contingencies, calculated yearly, must not exceed 0.4 per cent of the GDP of the previous year.
Transparency, publicity and control of the PPP process
The PPP Law sets forth numerous mechanisms of transparency, publicity and control of the PPP process. To this end a register of PPP projects has been created by the PPP Unit, which provides permanent and up-to-date information by electronic means. The register contains the following information:
- legal provisions applicable to PPP projects and process, current policies and approved plans;
- a list of approved public initiative projects;
- general and standard bidding documents;
- pre-feasibility studies and feasibility studies of PPP projects with the approval decrees and mandatory opinions;
- pre-qualification calls and documents setting out the terms for pre-qualification;
- decisions adopted in the pre-qualification process;
- bidding documents for tenders, records of opening offers and awarding decisions;
- PPP contracts and amendments;
- technical, financial and accounting information of PPP contracts; and
- pledges, trusts and constituted warranties.
With respect to mechanisms of control, the PPP Law provides the state with both the authority and the duty to carry out the planning, control, application of sanctions, regulatory supervision and monitoring of the execution of a PPP Contract. The contracting administration in coordination with the PPP Unit is in charge of controlling the correct execution and compliance with the obligations of the contracts.
Additional control and transparency mechanisms are:
- the annual public report to be prepared and filed by the PPP Unit including the performance indicators, goals, results and target achieved;
- external audits and an international audit shall be commissioned by the Ministry of Finance at least every four years covering the contingent liabilities and compliance with all obligations including an evaluation of quality of services;
- management audits to verify the legal compliance and contractual of both parties;
- each December, performance indicators reflecting quality-of-service levels shall be released; and
- every semester, the contracting administration must release information regarding compliance with the terms of the PPP contract.
iii Distribution of risk
In relation to the distribution of risk,the Regulatory Decree provides a non-exhaustive list of possible risks to be considered in PPP contracts on a case-by-case basis and according to the type of contract and the possibility of its occurrence:
- a construction and engineering risks, such as cost overruns, project delays, defective construction, price increase, geological problems, insufficient management, logistical and transport problems and unavailability of land;
- operational risks, such as expected decrease in production, technical obsolescence, transport risks and risk management;
- market risks,including the supply of goods and services,risks in the quality of primary goods and risks in the level of demand;
- financial risks of the project, such as the unavailability of funds, insufficient shareholder capital to guarantee financial support, risks related to variations in interest rates, inflation risks and risks applicable to exchange rates;
- political risks, such as risks of currency convertibility, unavailability of land, local or regional authorities decisions obstructing the roll-out of the project, nationalisation risks, terrorism risks, contractual non-compliance, risk of international conflict affecting multilateral projects, risks during the compulsory-purchase process, risks associated with allocation of permits and authorisations; and
- risks derived from force majeure and fortuitous events.
iv Adjustment and revision
PPP contracts may be adjusted or amended by means of the following procedures.
A unilateral modification to a PPP contract may only be introduced if the contracting administration has the support of the technical opinion of the PPP Unit, the State Attorney General, the Ministry of Finance and a technical report taking into account public-interest considerations and an estimation of possible compensation. However, the contracting administration must compensate the private party for possible damages that may have occurred upon the alteration of the economic equation. The contracting administration may only introduce modifications that represent 15 per cent of the contract price (total investment). The private party must be compensated for any such modifications.
Mutually agreed modifications
The contracting administration and the private party may agree to modify certain aspects of the contract, such as the quality-of-service levels and technical standards, trying at all times to abide by the original nature and object of the contract.
Both parties may only modify up to an amount that represents 30 per cent of the contract price (total investment).
The private party is entitled to corresponding compensation if the agreed changes imply a less favourable economic result than in the original contract.
Modifications or amendments arising out of force majeure or fortuitous events
Upon the occurrence of such events, the private party may request the suspension of the execution of the contract and upon verification of the damages incurred by the private party, the compensation for such damages, subject to the provisions and procedures provided for in the Regulatory Decree.
v Ownership of underlying assets
The PPP contract will determine the existing or future assets that are property of the contracting administration or other state agencies, which will be granted in favour of the private party with a right to use and with the obligation to return them to the contracting administration at the end of the contract.
Assets acquired by the private party that are directly related to the PPP contract may not be transferred separately, nor be subject to any pledge, lien or security except with the consent of the contracting administration.
vi Early termination
The PPP contract may be terminated upon a material breach of contract by the private party according to a resolution reached through the dispute resolution mechanism.
In turn, the contracting administration may terminate the contract for public-interest reasons in accordance with the terms of the PPP contract and upon an agreed payment of compensation for damages. This may occur if the work or service hired has become unnecessary for the satisfaction of public needs or requires a redesign or complementary work that exceeds 30 per cent of the contract price. In this case, the private party is entitled to compensation payment to be calculated upon criteria set forth in the Regulatory Decree.
Any discrepancy regarding the compensation amount or other aspects shall be resolved by means of the dispute resolution mechanism, which includes the opinion of a technical panel.
According to the government's current investment plan, which includes major infrastructure projects, many of these projects already count on partial or complete financing either by international organisations such as the Inter-American Development Bank or the CAF – Development Bank of Latin America. In the case of road works, another source of financing would be the concession regime.
vii RECENT DECISIONS
The Regulatory Decree, which sets out the specific rules and detailed provisions governing the PPP process and contracts, has been in force since March 2014; therefore, Paraguay is still in the initial stages of PPP implementation. During 2016 and 2017, guidelines and manuals were issued; these are intended to facilitate the technical analysis of the proposed projects and serve as a useful instrument in the decision-making process. Specific guidelines for target investment sectors were issued, which include guidelines for the formulation and evaluation of PPP projects in public works, airports, hospitals, waterways and dredges, and urban development.
Nevertheless, the basis for implementation, including the enactment of the PPP Law, its Regulatory Decree, the appointment of selected specialised personnel in all levels, training of civil servants and the identification of the government's intended medium and long-term investment projects has been carried out in a serious and unprecedentedly transparent manner shown in the sharing, distribution and publication of all kinds of information regarding government plans.
The government continues to handle an interesting avalanche of international companies, organisations, financial institutions and third parties demonstrating genuine interest in future projects and offering vital information and recommendations based on real international experience on PPP contracts.
Paraguay's investment environment is healthy: the country has experienced steady growth in recent years, with an average of 5 per cent this decade. According to data published by Paraguay's Central Bank, the economy expanded by 4.3 per cent in 2017 (originally estimated at 3.9 per cent by the International Monetary Fund) and is expected to grow by 4 per cent in 2019, driven by agriculture, trade and services.
With regard to the political situation, it is important point out that in August 2018 the newly elected president took office and, consequently, new officials were appointed in all ministries and departments, whose decision-making will affect current and future infrastructure projects. In spite of this political change and consequent policy change, which may affect leading projects, we still foresee a positive implementation of PPP agreements owing to the need for PPP projects in the country and interests of both private and public parties. The roadmap for this has been shared and there is interest in PPPs evident in both the public and private sectors.
1 Javier Maria Parquet Villagra and Karin Basiliki Ioannidis Eder are partners at Parquet & Asociados.