New Legal Framework for Public-Private Partnership

On November 16, 2016 the Senate approved the bill on Public-Private Partnership contracts (the “PPP regime”) proposed by the Federal Executive Branch (“PEN”, after its Spanish acronym). The PPP Regime was published in the Official Gazette on November 30, 2016, as Law No. 27,328.

The PPP regime is a new tool that allows for more balanced and predictable cooperation between the private and the public sector, something that the current government has been promoting since the beginning of its administration. The PPP regime aims to provide the legal certainty needed to attract investments, mainly in the infrastructure sector.

The text approved by Congress includes amendments to the bill submitted by the PEN, but the core of the initiative went through without substantial changes.

1. Main provisions of the PPP regime

Alternative regime: The PPP regime constitutes an alternative for public works and public work concessions and thus, does not preclude the use of traditional systems. The public sector will consider which is the most suitable contracting method to satisfy public needs in each project.

Limitation or exclusion of Government prerogatives: The PPP regime implies a shift in the traditional paradigm of public contracting as it excludes or limits the public law prerogatives that have been traditionally recognized by the administration (among others, the power to unilaterally modify a contract; to terminate it for reasons of public interest; to force the private contractor to continue performing despite the State’s failure to comply with its own obligations; the limitation of State liability).

Legal structure: The PPP regime provides a broad framework of principles and parameters that must be completed by future regulations, as well as by the relevant bidding terms and conditions, and the contract that will define the rights and the specific undertakings of both parties. Neither Public Works Law No. 13,064 nor Concession of Public Works Law No. 17,520 nor the Public Procurement Decree No. 1023/01 will be applicable to projects governed by the PPP regime. The PPP regime creates a PPP unit to provide advisory, operational and technical support at the request of entities and bidders, from the initial stage of plan development to its final execution.

Methods covered: The PPP regime provides for the structuring of the project through an existing partnership or a SPV, and it specifically clarifies the possibility of structuring it through financial trusts and other types of vehicles or partnership schemes. The creation of corporations or trusts in which the State jointly participates with the private sector is also allowed, and in both cases they can be publicly traded through the Capital Markets Law (No. 26,831). This is a potentially important tool in seeking a necessary financing net.

Possible guarantee structures: The PPP regime provides for the possibility of allocating any kind of public revenue to the repayment of the project and the granting of any instrument that may serve as a guarantee. In addition, the possibility of using trusts is included as a guarantee mechanism and/or as a payment of consideration by the contracting entity. These guarantees must be authorized by Congress.

Contractor’s remuneration: The contractor’s right to maintain financial-economic balance is set out. The PPP regime excludes the prohibition of indexation set forth by the Convertibility Law (No. 23,928). In addition, the parties may agree for the consideration to be payable in foreign currency, and the application of article 765 of the Civil and Commercial Code is excluded. Regarding the consideration structure, the Bill provides the possibility of assigning funds, assets, loans or taxes; the creation of surface rights and/or use or any other contributions by the State.

Step-in rights: The contractor is entitled to enter into loan agreements on the condition that in case of default by the borrower, the PPP contract is assigned to the creditor or to third party financiers.

Competitive Dialogue: A novel institute is introduced, that is especially useful in cases in which a particular goal is pursued but the type of good or service required is not known. For example, if the Administration wishes to save energy in its buildings and facilities, the goal is clear –saving in energy and therefore funds– but the most convenient way to achieve this may not be so evident, as there are several possible solutions to achieve the same goal. The contractor is then enabled to engage in a process of consultation, discussion and exchange with pre-qualified contractors who might help determine the most advantageous solution, after which the contractor is to be selected though a public bidding process.

Appointment of independent external auditors: The parties to the contract may appoint external technical auditors to carry out the effective control and monitoring of the performance of works, to determine whether the consideration owed has become due. The contract may provide that if the Administration does not agree with the auditor’s assessment, this would not preclude payment of the consideration that would then remain in an escrow account or trust until the resolution of the relevant dispute.

Remedies in case of breach: In case of termination of the contract due to reasons of public interest, the rules that limit the State’s liability do not apply. Furthermore, in cases of early termination by the State, prior to the takeover of assets, compensation must be paid to the contractor and may never be less than the unamortized investment, guaranteeing the repayment of financing. The liability of the parties is governed by the provisions set forth in the bidding terms and the resulting contract, as well as by the provisions of the Civil and Commercial Code. The calculation of damages may include the possibility of claiming lost profits under the terms provided by the contract.

Dispute Resolution: Technical or any other kind of disputes arising from contracts celebrated under the PPP regime may be submitted to technical panels and/or arbitral tribunals. In the case of opting for arbitration with a change in jurisdiction, the PEN must approve such election and notify Congress. Review by local courts of the merits of the award is expressly excluded. The bill does not exclude the possibility that the arbitration takes place abroad.

2. Final Comments

The PPP regime allows risks to be distributed adequately between the contractor and the State providing legal predictability to the private sector since it clearly defines the rights and obligations of the parties in the contract.

The approval of the PPP regime shows a high degree of consensus in achieving the implementation of legal tools necessary to attract investment.