The Projects and Construction Review: Argentina
The year 2022 is a year of uncertainty and expectation in Argentina due to the upcoming presidential elections and the consequences of the agreement with the International Monetary Fund for the payment of outstanding debt.
The real estate market is no exception to this reality. After two years of great political, economic and social fluctuation, which affected the confidence of developers and buyers in the real estate world, what will happen after 2022 in this key sector for Argentina is a big question. How the real estate market develops will likely depend on the economic direction to be taken by political leaders after the presidential elections in 2023.
The year in review
Law No. 27,271, which was enacted in September 2016, created an inflation-adjusted unit called the UVA. The UVA is a measure for savings, loans and investments for physical and legal persons and the public sector. It is used for the long-term financing of a purchase, construction or development of real estate property in Argentina.
Law No. 27,271 amended Article 2,210 of the Civil and Commercial Code (the Code), extending the maximum term for mortgages to 35 years.
The mortgage system in Argentina, which was virtually non-existent until mid-2017, seemed to start operating as of that time. As of 2017, with Law No. 27,271 and other regulations issued by the Central Bank, national and private banks began to grant 30-year mortgage loans in Argentine pesos for housing. During that year, national and private banks were filled with requests from prospective residential property purchasers, which inevitably resulted in a rise in house prices.
Unfortunately, the economic crisis that emerged in mid-2018, which resulted in high inflation, significantly diminished the 'mortgage boom', but house prices were not modified. The mortgage crisis continued in 2019 and impacted the growth of the real estate market.
During the years 2019 and 2020, there was a marked decline in real estate transactions, ending with a historical low in transaction volume owing to the social and economic crisis left as a result of covid-19 pandemic and the inflation situation in Argentina. The devaluation of the local currency, the recession and the decrease of salaries led to a depressed market.
The government is analysing measures to activate the real estate market, such as making changes to the leasing law and reducing certain taxes for the tenancy of real estate, as a way to expand the rest of the economy.
In December 2019, Argentina enacted the Social Solidarity and Productive Reactivation Law No. 27,541, which introduced amendments to income tax, the tax on personal assets and the tax on debits and credits. It further created a new tax (Impuesto PAIS) on the purchase of foreign currency or goods and other transactions applicable on transactions carried out by residents abroad.
In December 2020, Argentina enacted Law No. 27,605, through which an extraordinary tax on wealth was created. The tax was aimed at mitigating the effects of the covid-19 pandemic and is called the Solidarity and Extraordinary Contribution to Help Mitigate the Effects of the Pandemic. The tax is applicable only once and is applicable to residents in Argentina over all their assets located in Argentina and abroad, as well as to non-residents over their assets located in Argentina.
Risk allocation and management
The project finance sector in Argentina must be aware of political and financial hazards. Politically, Argentina has been stable, with some exceptions, for the past few decades, and economically it has experienced both surging growth and daunting setbacks; therefore, while political risks are minor, Argentina's recent economic history has left a legacy of regulations that, along with the lack of predictability, continue to significantly affect project finance and construction contracts.
The most relevant example arose as part of the Law of Convertibility in 1991: a prohibition on indexation of contracts and payments. To manage changes in price levels, a valuable tool used by private parties involves writing into a contract an upward adjustment of nominal payments based on standardised inflation rates. With this Law, the government prohibited indexed contracts, including all forms of currency updates, cost variations and debt restatements.
Although the prohibition on indexation was specifically promulgated in tandem with the Law of Convertibility, it inexplicably remained even after the Law was scrapped in 2002 and is still in force today. In line with the aforementioned prohibition, indexation clauses have been declared null and void by the Supreme Court of Justice and the lower courts of the country.
Architects of project finance and construction contracts have become creative in their use of legally permissible methods to stem rising costs, especially regarding construction agreements. Those used most frequently include price increases and a combination of fixed and variable prices.
While this may seem like indexation, Argentine courts have confirmed that these price increases do not fall foul of the law. Regarding leases, however, Law No. 27,551, enacted in July 2020, allows the application of indexation rates to leases (these rates differ from commercial to residential leases).
In a country marked by constant inflation, the prohibition on indexation makes payments challenging in construction contracts if they are not adjusted in the manner described above. The next question becomes whether force majeure clauses can be invoked in cases of hyperinflation.
While no legal codes exist to that effect, the answer is almost certainly 'no'. In Argentina, force majeure clauses are permissible, and are regulated in Section 1730 of the Code. Nevertheless, their applicability is limited to situations in which the events are extraordinary and unpredictable.
Unfortunately, in Argentina's case, hyperinflation is not an extraordinary occurrence, least of all unpredictable. As a result, the majority view is that an inflation crisis – even a crisis of hyperinflation – constitutes an expected phenomenon that does not merit the exercise of a force majeure clause.
Security and collateral
As in other parts of the world, security interests in Argentina can be obtained through pledges and security assignments and be established in trusts or tucked into mortgages.
Argentina has a two-tiered system of ordinary and registered pledges. In the ordinary pledge, the debtor physically transfers the pledged property into the possession of the creditor or into the custody of a third party. The Code does not necessarily require a court-ordered foreclosure procedure, since it enables the parties to agree on the creditor keeping the pledged property if a default occurs, as well as on a private sale of the asset. If nothing is specified in the contract, the creditor can choose from any of the possibilities foreseen in the Code.
When a security interest takes the form of a registered pledge, the debtor retains possession of the property instead of transferring it to the creditor. As Law No. 12,962 describes, that pledge must be filed with the Registry of Pledges through either a public deed or an authenticated private instrument so that the pledge becomes enforceable against third parties.
When that act of registration occurs, the creditor must also decide whether the pledge will be fixed or floating. If the pledge is fixed, the registration only encompasses the particular asset and nothing more. In contrast, if the pledge is floating, the creditor captures any changes the asset may undergo while it is registered and any additional assets that derive from those changes.
The choice between a fixed and a registered pledge has another consequence: jurisdiction. If a fixed pledge is chosen, the assets fall under the jurisdiction of the registry of pledges in the place where they are located. In contrast, floating pledges fall under the jurisdictional wing of the registry of pledges located where the debtor is domiciled.
Trusts, security assignments and mortgages round out the various forms of security interests. Crucially, when property is placed in a trust, the secured assets are protected from the prying fingers of a debtor's other creditors. Argentina expressly regulated trusts in 1995 with the enactment of Trust Law No. 24,441, which imbues trusts with one key quality: limited liability for the trustee. The Trust Law also establishes that trust property will be treated separately from property belonging to either the trustee or the trustor. These two protections have led to trusts becoming a popular component of project finance transactions in Argentina since the Trust Law was enacted.
Notwithstanding this, the Code has amended a significant majority of the legislation applicable to international transactions, including the Trust Law; however, the key components of this Law remain unchanged.
Security assignments share some characteristics with trusts, but differ in that assigned assets are generally limited to rights or credits. Trusts are free from this limitation, and can encompass most forms of assets, including movable property and real estate. Mortgages, for their part, grant security interests over real estate, ships and aircraft and usually secure the principal amount plus accrued interest. Created by means of a notarised deed, a mortgage only becomes valid in relation to third parties once it is registered with the public real estate registry in the jurisdiction in which the property lies.
Registration is obligatory to ensure the validity of most security interests. Mortgages and registered pledges must be catalogued, and fees must be paid, which are calculated based on the total value of the secured asset. Certain descriptions must also be included.
When registering mortgages, the value of the collateral security must be specified in the deed; if that step is overlooked, there is a risk of the entire mortgage being invalidated in accordance with Section 2189 of the Code. Similarly, the value of the collateral must be noted when registering a pledge, in addition to information regarding the applicable interest rate and the method of repayment.
Finally, when executing a mortgage, notary public fees must be paid as well.
Bonds and insurance
In accordance with the Public Works Law, contractors are required to deposit 1 per cent of the total cost of a project to submit their proposal and must maintain their tender within the time limit set based on this tender. The deposit may be made using one of the following methods: cash, certified cheque, public debt securities issued by the federal or provincial government, bank guarantee, surety insurance or demand note.
Surety insurance may be used both in public and private contracting and can be effected in different forms, such as:
- a bid bond that ensures the bidder on a contract will enter into the contract and furnish the required payment and performance bonds if awarded the contract;
- a performance bond that ensures the contract will be completed in accordance with the terms and conditions of the contract;
- a down payment or collection that ensures that the policyholder will use the advance payments received for the material supply; or
- funds for reparation orders.
Enforcement of security and bankruptcy proceedings
The process of foreclosing on a pledge differs depending on whether the pledge is ordinary or registered. As mentioned in Section IV, the Code does not necessarily require a court-ordered foreclosure procedure for ordinary pledges since it enables the parties to agree that the creditor will keep the pledged property if a default occurs, as well as on the private sale of an asset. If nothing is specified in the contract, the creditor can choose from any of the possibilities foreseen in the Code.
If the pledge is registered, the foreclosure process varies in accordance with whether the secured party is classified as a financial entity under the Financial Entities Law No. 21,626, as decreed by the Central Bank. If the secured party is not a financial entity, the lender must pursue judicial foreclosure proceedings similar to the one described below for mortgages. If the lender is a financial entity, the court's presence is circumscribed.
Mortgages are foreclosed through either summary proceedings in court that end with a public auction of the property, or a speedier, more simplified process in which the creditor can assume a greater role. In traditional judicial proceedings, the property is sold to the highest bidder at auction (the lender is permitted to bid on the property as well) as long as the debtor does not offer any successful defences. After the sale, the proceeds are deposited in a bank under court order, and the creditor's claim is satisfied against those proceeds. This traditional foreclosure process can take anywhere from one to two years from start to finish.
If a debtor is insolvent, the procedures differ yet again depending on whether it decides to pursue a judicial reorganisation or bankruptcy proceedings. The reorganisation procedure can only be instigated by the individual or corporate debtor in question, which must file a petition for relief under the Bankruptcy Law with evidence of both its inability to satisfy debts and its ability to reorganise.
Once this petition has been filed, all claims by unsecured creditors are in effect stayed, although creditors may proceed with claims relating to mortgages and pledges, but only if they give notice to the bankruptcy court. That is to say, the creditor will have to request admittance of his or her credit and collateral to the relevant court.
Bankruptcy proceedings can be commenced either voluntarily by the debtor or involuntarily by his or her creditors. In contrast to the reorganisation process, the debtor is not allowed to manage its own assets; a trustee is appointed as administrator in its place. All creditors – including preferred creditors – must submit evidence of their claims to the debtor's trustee.
Certain creditors do retain an advantage, however, when the time comes for distribution of the debtor's assets. Creditors with a lien over a particular secured asset are granted a special preference by law, which entitles them to priority over the proceeds from the sale of that asset. In addition, Section 239 of the Bankruptcy Law provides for the subordination of debt, with the result that senior creditors will be paid before subordinated lenders. Lenders will not incur liabilities if project assets are foreclosed.
Beyond the litany of the usual permits needed for a particular building project, Argentina has one licensing requirement that applies specifically to foreign citizens and companies, specifically foreign nationals and national or foreign companies who wish to acquire land in a border security zone. In those cases, special permission from the National Commission of Security Zones must be obtained to complete their purchase.
Generally speaking, border security zones encompass land that lies within 150km of Argentina's borders or within 50km of the sea. This permission is typically granted within approximately one year.
Local companies controlled by foreign nationals are deemed to be foreign companies for the purposes of this legislation, in contrast to standard corporate legislation. Further, this licensing requirement applies even if a new company (either foreign or national) decides to acquire shares in a company that already holds land in a security zone; if management of the local company shifts into foreign hands, permission from the National Commission of Security Zones must be granted before the transaction can proceed.
Foreign citizens and companies that wish to acquire rural land in Argentina also need a special approval from the Rural Land Registry. In addition, a rural land law was enacted in 2011 that establishes that foreigners may only acquire 15 per cent of the rural land of the country, and each foreign nationality cannot exceed 30 per cent within the total 15 per cent available. This permission is typically granted within approximately six months. For the purpose of this legislation, local companies that are 51 per cent controlled by foreign nationals are considered foreign companies as well.
With the amendment of the Constitution in 1994, environmental legislation and sanctions for environmental violations have increased in tandem. As stated in Section 41 of the Constitution: 'All inhabitants are entitled to the right to a healthy and balanced environment fit for human development . . . and shall have the duty to preserve it.'
Furthermore, the Constitution requires that a person or company who damages the environment has the 'obligation to repair it according to law'. If a person believes that his or her environmental rights are being infringed, he or she can file Section 43 summary proceedings (an amparo) for immediate injunctive relief.
Environmental legislation exists at both the federal and provincial levels. At the federal level, Congress has the power to set forth minimum standards legislation for the protection of the environment, which is applicable throughout the country. Conversely, the provinces may establish supplementary legislation to these minimum standards either by enacting more stringent regulations or by passing their own environmental regulations in areas in which the federal government has not established any minimum standards.
Certain environmental legislation specifically prescribes criminal penalties for environmental transgressions (e.g., the national Hazardous Waste Law No. 24,051 and the Buenos Aires Special Waste Law No. 11,720 hold representatives of companies liable for environmental damage caused by the activities of their companies, to the extent of their participation in the action). Further, some courts have invoked Section 200 of the Criminal Code regarding crimes against public health to sanction people who release hazardous substances into the environment. Otherwise, administrative sanctions, injunctive relief or civil penalties usually accompany environmental offences.
In September 2020, the government announced an environmental policy plan, a set of federal and transformative measures established to move towards sustainable development, in coordination with provinces, municipalities and civil society organisations. The plan is developing its scope from the presentation of its four main policies: the comprehensive plan 'Casa Común', the plan for the eradication of open dumps, the environmental education bill and the national programme for fire prevention and fire management.
Additionally, in May 2021, a law to implement integral environmental education (IEE) throughout the country was enacted. The initiative seeks to establish IEE as a right in accordance with the Constitution and a set of laws and international treaties. The law foresees the formation of an environmental conscience to articulate and promote integral educational processes aimed at the construction of a rationale in which different knowledge, wisdom, values and practices converge and contribute to the formation of citizenship and the exercise of the right to a healthy, dignified and diverse environment. Its application will be coordinated between the Ministry of Environment and Sustainable Development and the Ministry of Education, with differentiated competences and powers. In turn, it will also be coordinated with the universities, the provinces and the city of Buenos Aires.
PPP and other public procurement methods
Public-private partnerships (PPPs) have not been as popular in Argentina as in other Latin American countries in the past decade, although the country already had regulations regarding PPP, such as those provided in Decree 967/05 and Decree 966/05 on private initiatives.
Decree 967/05 was abolished by Law No. 27,328, which was enacted in 2016. The Law establishes the terms and conditions for PPPs. In February 2017, the president issued Decree 118/2017, implementing Law 27,328. This legislation governs PPPs at the federal level and was implemented in anticipation of the significant increase in investment in infrastructure that was expected in the next few years.
Notwithstanding the above, PPPs have not had the impact that was expected. The previous government therefore established a trust under which PPPs would be implemented, which was created by Decree 153/2018. The aim of the trust was to ensure transparency and integrity in the execution of PPP contracts, especially considering the Notebook case, which is still being investigated before the federal courts and involves incidences of corruption relating to the public works and construction industry under the administration of 2015.
Under the new legislation, several projects have been drafted (e.g., road construction), meaning big opportunities for PPP investment in areas such as highways, railways, hospitals, schools and prisons, among other things. The first project that was launched and executed was the Highways and Safe Routes PPP, which covers the construction of more than 2,800km of highways and 4,000km of safe roads. The location of the project is in the provinces of Buenos Aires, La Pampa, Santa Fe, Córdoba, Mendoza, Santiago del Estero, Tucumán, Salta, Jujuy, Misiones, Corrientes and Chaco. The parties have already signed the contracts, and currently each section of roadworks is under construction.
In the energy sector, a high-voltage transmission lines project and ancillary works have been designed, but their launch to tender has been suspended in accordance with the country's current situation; although the launch was originally foreseen for March 2020, the covid-19 pandemic and the economic situation have reorganised public priorities.
Foreign investment and cross-border issues
According to the Business Associations General Law No. 19,550, foreign companies may only engage in isolated activities in Argentina if they are not registered in the country. Since the Law does not provide an exact definition of isolated, it has been the topic of various interpretations and discussions.
Despite this, the developments on this subject suggest that a project finance transaction would be unlikely to fall under its scope; thus, to perform regular activities in Argentina, a foreign company must register either a branch or a local subsidiary. If it fails to do so – and carries out regular activities nonetheless – the company assumes the risk that its activities will be unenforceable, and its representative will be held jointly liable. It is therefore advisable that project finance transactions are organised locally.
The most convenient forms of legal entities for foreign investors include stock corporations, limited liability companies and branches. The first two forms limit the liability of shareholders with respect to third parties; however, if an entity is set up as a branch, the foreign parent company can be held liable for its activities. Consequently, special purpose vehicles are usually organised as a stock corporation, both to limit liability and to invoke the favourable tax treatment given to corporations.
With the exception of investments in certain sectors, including rural land, energy and broadcasting, foreign investors are granted the same rights under the Constitution as local investors and may invest in any economic or productive activity.
In terms of taxation, foreign investors are also treated largely the same as locals: they, too, must pay federal, state and municipal taxes, although dividend payments are exempt from taxation; however, there is one salient difference: profits from the sale of shares in an Argentine company are not taxed as income if the seller is a non-resident investor. In addition, foreign investors are currently experiencing certain difficulties in taking their profits out of the country due to current exchange regulations.
Even though the previous administration relaxed foreign exchange restrictions that were set concerning funds entering the country and being transferred abroad, and that inevitably limited foreign investment in Argentina, since the new administration took office, foreign investments have slowed down. The uncertainty of the covid-19 pandemic has certainly contributed to this.
A reasonable stance, which seems to have been broadly adopted by most investors, is to take time and evaluate options very carefully so that in a more stable future, and provided that the covid-19 pandemic comes to an end, they will invest in profitable projects.
Free will manifests even in the jurisdictional sphere. Parties to a contract can choose to submit to the jurisdiction of a foreign court as long as there is a connection to the chosen jurisdiction and the dispute is pecuniary. There is an exception to this openness: Argentine courts claim exclusive jurisdiction over debtors domiciled in the country. If a debtor's domicile is abroad, insolvency proceedings in Argentine courts will only touch assets held in the country.
When it comes to choice of law, contractual parties are generally free to choose the laws that will govern their agreements. In those cases, and to avoid reference to a different legal system than the one agreed upon, the parties tend to consent that only the direct rules of the chosen country apply; however, the major caveat is that foreign law will not be accepted if it flouts Argentine public policy.
As a consequence, disputes involving bankruptcy, tax, criminal and labour laws will be governed by the Argentine public policy laws corresponding to those areas. Specifically, Argentine law shall also govern rights and legal actions relating to real estate and movable property located permanently in the country.
Foreign judgments and arbitral awards are enforceable in Argentina either in accordance with international treaties or the Unified Civil and Commercial Procedural Code. If a country has signed a treaty with Argentina regarding foreign judgments, those procedures will prevail; otherwise, the Unified Civil and Commercial Procedural Code will apply in federal court.2
Article 517 of the Code sets out several requirements that a foreign judgment must meet for it to be enforced in Argentina:
- the judgment must have been issued by a competent court, as determined by Argentine law;
- the judgment must be final and valid in the foreign jurisdiction, and later authenticated according to Argentine law; and
- the judgment cannot conflict with Argentine public policy, or with a prior or contemporaneous judgment in the Argentine courts.
Finally, the defendant must have undergone due process of law, including a proper summons and a chance to defend itself.
Once all these prerequisites are fulfilled, several procedural requirements must also be satisfied before enforcement can occur:
- the petitioner must file a statement proving that the aforementioned legal requirements are satisfied;
- all documents in a foreign language must be translated into Spanish by a translator registered in Argentina;
- a copy of the foreign judgment must be notarised and filed with the appropriate Argentine court; and
- all pertinent documents must be authenticated by the Argentine consulate located in the foreign court's jurisdiction.
Finally, a 3 per cent court tax must be paid upon enforcement.
The enforcement of foreign arbitral decisions follows the same framework. If both the legal and procedural steps are fulfilled, foreign arbitral awards will be accepted by Argentine courts; however, if a treaty applies, its procedural and substantive requirements take precedence. Argentina has been bound by the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) since 1988.
Outlook and conclusions
This chapter should be taken as a mere outline of the project finance landscape in Argentina. While the legal framework does not differ much from other Latin American countries, decisions regarding investments in public works have been unusually politicised in recent times.
No important measures have been taken since the new government took office; it has mainly focused on the renegotiation of the national foreign debt, which was finally achieved in March 2022. Owing to the covid-19 pandemic, the political agenda has been specially focused on the social impact and its consequences in the run-up to the elections. Time must pass and economic and political certainty regarding the long-term direction of Argentina must be achieved before we can assess where we stand with respect to future investments in infrastructure and real estate in Argentina.