Argentina: Private – Public Partnership Regime Overview
The Argentine government has issued new regulations for public-private partnership (PPP) contracts in the public works sector, which are expected to streamline the process and bring at some US$40bn in infrastructure investments, according to state news agency Telám.
Since Macri assumed power in Argentina, he has lifted currency controls, cut subsidies and brought the country out of a 15-year default by settling with holdout creditors. Now, he needs foreign investment to compensate for the decline in weaker consumer demand and kick-start a flagging economy.
In Argentina, the need for infrastructure repair and improvement has never been greater. By itself, the public sector lacks resources to do anything meaningful given the infrastructure deficit. Thus, the new legal framework aims to attract the interests of banks, financial corporations and other private sector players through Public Private Partnerships (PPPs).
The key for PPPs is a legal framework that provides the private sector with confidence that loans will be repaid. It is for this reason that the recent approval of the new legal framework for Public-Private Partnerships is a win for Argentina and international investors as a whole.
The bill constitutes only an alternative way of cooperation, which means that the tradition model may still be applied. The bill is relatively short, it sets out key guiding principles and mandatory terms of the regime. It clarifies that more detailed regulations will have a place in subsequent legal acts, bidding terms and conditions of the contract.
What are the main provisions and benefits of the PPP regime?
- Transparent, flexible and competitive procurement process.
The PPP bill requires a transparent, flexible and competitive procurement process and can be launched by means of a tender or private initiative. Moreover, the bill provides a new tool – Competitive Dialogue, which is widely used in the U.S. It applies when a government determines its final goal, but there are a variety of methods to reach that goal. So, the government may discuss all available methods with possible contractors and start a public bidding process with a formulated final request.
- Flexibility in financing and guarantee structures.
Depending on the bidding terms and project-specific characteristics, the PPP regime enables the use of any kind of financing tools and instruments of guarantee. For example, for financing purposes, the State may allocate demand-based, shadow or availability payments, and third-party funds, among other alternatives. The regime also sets step-in rights, for example, if the contractor entered into a loan and failed to carry out the loan’s obligations, the PPP contract is assigned to the creditors.
- Limitation of certain government powers
The PPP bill eliminates some powers of public authorities, such as the power to unilaterally modify a contract, the power to force the contractor to carry out his obligations even if the State fails to comply with its own, and it cancels the limitation of the State liability, etc. According to the Art 9 (sub. I), the government has a right to unilaterally modify a contract only in regards to the scope of works and if it will constitute no more than 20% of the total contract value; additionally, the contractor must be adequately compensated.
- The contractor’s remuneration.
Here are two important aspects: firstly, under the PPP regime the prohibition of indexation is excluded, which plays an important role for long-term projects due to inflation; secondly, the possibility of the remuneration to be paid in foreign currency. In regards to the structure of the remuneration, there are ample choices of possibilities, such as funds, assets, taxes, loans, surface rights and others assigned by the State.
- Legal structure
The bill provides the possibility to accomplish the project through an already existing company, a SPV (Special Purpose Vehicle), as well as through financial trusts or other types of vehicles. There is also a possibility for the State to participate in such corporation or trust.
- Adequate compensation in case of a breach.
The rules governing the early termination of the contract have to be set out in the contract. However, the PPP bill affirms that compensations have to be paid prior to the takeover of assets. Moreover, when the State terminates the contract for reasons of public interest, the State is no longer able to enjoy the limitation of its liability. In such case, the State has to pay compensation to the contractor equal to the cost of unamortized investment in the project.
- Dispute resolution.
Depending on the nature of the dispute, it may be resolved in technical panels or arbitral tribunals. The PPP Bill doesn’t exclude international arbitration as a means to dispute resolution.
- The possibility of appointing independent technical auditors.
The parties to the contract may appoint independent technical auditors who will control and monitor the execution of projects. The contract may specify that if the administration does not agree with the auditor’s determination, this will not preclude the payment of the consideration, which will remain in the trust until the dispute is solved.
The PPP law is a step in the right direction that will help restore Argentinas image to the global investment community. The bill is fashioned on the combined expertise demonstrated in other countries (the US & the UK) and represents a modern and market-friendly model of public-private cooperation. It allocates risks adequately on both sides, seeks to achieve economic equilibrium, and provides flexibility in structure, guarantee and financing schemes, contractor’s remuneration.
Harris Gomez Group has a specialised team of legal and commercial professionals that help foreign companies with their interests in Latin America. Our team of specialists understand both Common and local laws which allow us to bridge the gaps that tend to arise when doing business in the Region.
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