MEXICAN UPDATE – Public Private Partnerships Act
- On January 16, 2012, the Public Private Partnerships Act (“PPP Act”) was published and amendments were made to several related laws (the Law of Acquisitions, Law of Public Works, Expropriation Law, and National Assets Law) with the intention to consolidate a market practice that has been carried out without a clear legal framework.
- The PPP Act intends to provide the Federal Public Administration and the private sector with a new framework for the development of long term infrastructure projects that have a high social impact, in which the infrastructure is provided, in whole or in part, by the private sector.
- As a general rule, PPP projects are awarded to whoever presents the best proposal in technical and financial terms in the corresponding public bid.
- The PPP Act does not establish limitations related to the nationality of the bidders, allowing the specific laws that govern the subject matter of the project in question to establish the applicable restrictions for foreigners.
This last January 16, 2012, President Calderón published in the Federal Official Gazette (“DOF”) the Public Private Partnerships Act (“PPP Act”) and amended several provisions of the Law of Acquisitions, Leases, and Services for the Public Sector (“Law of Acquisitions”), the Public Works and Related Services Law (“Law of Public Works”), the Expropriation Law, and the General Law of National Assets (“National Assets Law”).
The PPP Act (along with the amendments made on the previously mentioned laws) consolidates a market practice that has been carried out without a clear legal framework. Prior to the PPP Act, projects that involved the construction of infrastructure and the provision of services between the Public Administration and the private sector were regulated, due to the absence of a specific law, by the Law of Acquisitions, the Law of Public Works, and the Federal Budget and Fiscal Responsibility Law, amongst others.
In general terms, the PPP Act intends to provide the Federal Public Administration and the private sector with a new framework for the development of long term infrastructure projects that have a high social impact, in which the infrastructure is provided, in whole or in part, by the private sector.
The following is a summary of the most relevant aspects of the PPP Act.
- Scope of application
The PPP Act is a public interest law applicable to Public Private Partnerships (“PPPs”) entered into by: (i) the Federal Public Administration, (ii) federal public trusts not considered government owned or controlled, (iii) entities governed by federal public law with constitutional autonomy, and (iv) the federal states of Mexico, municipalities, and the public entities of any the aforementioned which use federal resources for the development of projects (each of them, a “Contracting Entity”). PPP projects must be executed by companies incorporated with the exclusive corporate purpose of executing the respective project, in the understanding that these projects may be awarded to an individual or company (individually, or by means of a consortium), either national or foreign, which in turn shall create the special purpose company or trust for the development of the project with the corporate statutory limitations established in the bid documents of each project of the applicable project or public bid.
The PPP framework is optional and may be used in activities in which the specific legislation allows the free participation of the private sector through permits, authorizations, or concessions. This framework may not be used in activities related to the exploration, exploitation, refining, transportation, storage, or distribution of oil, gas and its derivatives.
The PPP Act is not an exception to public bids, but an additional set of legal provisions that apply in addition to the acquisition requisites applicable to each project and sector. Likewise, the PPP Act is not an exception for obtaining authorizations, permits or concessions that are required in the project at hand.
- Authorizations for commencement of projects
The PPP Act establishes that PPP projects are subject to several analyses and governmental authorizations, such as:
(i) Feasibility Analysis. A previous analysis in order to confirm (a) the technical and legal feasibility of the projects, (b) the convenience of carrying them out under the PPP framework, (c) the public benefit of the project, (d) its environmental impact, and (e) the satisfactory results of a cost-benefit analysis, among others (the “Feasibility Analysis”). The Contracting Entities will be able to contract from third parties the execution of the Feasibility Analysis, without such contracting being a cause of disqualification for participating in the public bid;
(ii) Finance Ministry Registration. The registration for statistical purposes of the information regarding the PPP projects by the Ministry of Finance and Public Credit (the “Finance Ministry”);
(iii) Finance Ministry Reports. The report of the Finance Ministry in its Quarterly Reports about the Economical Situation, the Public Finances and the Public Debt, that are presented to Federal Congress, where the projects are to be described, and which will include information regarding the amounts disbursed by them, their financial projections and corresponding estimations, advances in their execution, calendar and amount of the compromised payments;
(iv) Budget. The forecast made by the Finance Ministry in the draft of the Federal Expense Budget of the multiannual expense commitments that are to be expected from the PPP projects for the approval of the corresponding expenditures, and
(v) Intersecretarial Commission. The aforementioned also includes the analysis and authorization by the Intersecretarial Commission of Public Expenditure, Financing and Divestment of the relevant PPP projects for purposes of prioritization and inclusion of these in the draft of Federal Expenses Budget, as well as its order of execution.
- Unsolicited proposals
It is important to highlight that the PPP Act establishes a new legal concept. Those interested in developing a new project under the PPP framework now have the right to propose such project to the Contracting Entity without excluding itself from participating in the bidding process in case the entity decides to issue such public bid based on the proposed project. Furthermore, the Contracting Entities are even allowed to determine the types of projects, sectors, geographical scopes and other elements that they are willing to analyze.
On this regard, the interested party must submit to the Contracting Entity a preliminary feasibility study (practically in the same terms as the Feasibility Analysis), for its evaluation. The Contracting Entity will have a term of three months, renewable for the same term, to issue its opinion about the feasibility of the project and its admissibility.
If the proposal of the PPP project is admissible, the Contracting Entity shall issue summons for the respective public bid and will reimburse the proposing party for incurred and justified expenses related to the preliminary studies it executed in case such proposing party is not granted the award. All rights related to the studies presented to the Contracting Entity (including, without limitation, copyrights and industrial property rights) will be transferred to the Contracting Entity.
Under no circumstance may an unsolicited proposal be awarded through a direct award; these are always to be awarded by means of a public, competitive bidding. The proposing party will always have a bonus in the evaluation of its proposal in the public bid that shall not exceed the equivalent to 10% of the applicable criteria for the awarding of the project. However, if only the proposing party participates in the public bid, the project may be awarded to it.
If the public bid is considered vacant and the Contracting Entity decides not to acquire the rights over the feasibility studies, the expenses incurred by the proposing party will not be reimbursed and its studies shall be returned. However, if the project was admitted but the Contracting Entity did not carry out the public bid, the Contracting Entity may acquire the studies once it has reimbursed the expenses incurred by the proposing party.
- Awarding of theprojects
As a general rule, PPP projects are awarded to whoever presents the best proposal in technical and financial terms in the corresponding public bid.
In order to incentivize the participation in public bids, the PPP Act does not establish limitations related to the nationality of the bidders, allowing the specific laws that govern the subject matter of the project in question to establish the applicable restrictions for foreigners.
Once the evaluation of the proposals is made, the project will be awarded to the bidder that presented the most solvent proposal from a legal, technical and financing standpoint, according to the requirements in observance of the bid documents. In case of a tie between two bidders, the award will be given to the party that presents the proposal with the best financial terms, and if the tie persists, the award will be granted to the party that offers more employment as well as utilization of national goods and services.
As an exception, PPP projects may be awarded through a bidding process in which at least three parties are invited or by direct award (which will not be valid in the case of unsolicited proposals).
- Acquisition and expropriation of assets necessary for the development of the project
The responsibility to obtain the property, assets and necessary rights for the execution of PPP projects may lie on the Contracting Entity, the private party, or both, as stated under the relevant agreement.
If this responsibility corresponds to the Contracting Entity, it may acquire the property, rights and other assets through conventional means or by expropriation, with the limitations established in the PPP Act.
If the responsibility to obtain the real estate, assets and necessary rights for the development of the project falls upon the private party, obtaining them will be left to the negotiation of all relevant parties. On such scenario and for the purposes of calculating the amounts invested in the project, the acquisitions will be ruled by the terms and conditions agreed upon in the PPP contract, regardless of the amounts that the private party has disbursed in order to obtain the real estate, assets and necessary rights for the development of the project.
As for the expropriation, the PPP Act grants the status of public interest to the acquisition of real estate, assets and rights for the development of the PPP project. For such purposes, the opinion of the Contracting Entity regarding the technical feasibility and social benefit of the respective project will be sufficient.
The PPP Act (as well as the amendments to the Expropriation Law and the National Assets Law) introduces some new innovative aspects regarding expropriations and conventional acquisitions, such as the following:
(i) The compensation amount is allowed to be determined not only by the Institute for the Administration and Appraisal of National Assets, but in addition, by credit institutions, commercial notaries or authorized professionals. Likewise, the corresponding appraisal can take into account the future value of the real estate that results from the development of the project in the relevant area;
(ii) During the negotiations, the relevant authority may advance, against the possession of the real estate, asset or right it requires, payments up to an amount of 50% of the price and once in possession, will be able to cover additional advanced payments with charge to the price;
(iii) When only part of a real estate is expropriated and the remaining surface is no longer financially feasible for the owner, the owner may request the relevant authority to acquire such additional surface;
(iv) If the real estate that is expropriated has a lien, the corresponding entity may consign before the relevant authority the required compensation in order to have the authority determine the amounts that correspond to the owners of such affected rights, i.e., the amount for paying the corresponding lien will be deducted from the owner’s compensation, and
(v) These measures will not have to be formalized in a public instrument.
- Authorizations for the execution of the project
In the context of a PPP project, if the private party requires authorizations, permits or concessions in order to provide services or use public assets, such requests shall be granted in observance of the relevant provisions that regulate them but with the following restrictions:
(i) They will be granted through the same bidding process in which the respective contract was awarded;
(ii) The term of the authorizations will be (a) if the maximum initial term established by the specific law is equal to or less than 40 years, this last term shall apply, (b) if the maximum initial term in observance to the specific law is more than 40 years, the longer term shall apply, and (c) in any case, the maximum term, including extensions, cannot exceed the maximum term established by the applicable law;
(iii) Regarding federal authorizations (except for the ones foreseen in the General Law of Ecological Equilibrium and Protection of the Environment), if the competent authority does not answer the request within 60 days term starting from the day of its filing, it will be understood that the authorization has been granted (afirmativa ficta), and
(iv) Public agencies and entities of the Federal Public Administration will give priority in the evaluation and processing of authorizations in environmental matters, human settlements, urban development, construction, land use and other applicable matters subject to federal jurisdiction.
Another relevant characteristic of the PPP Act is that in case the rights of the developer under the respective contract are assigned, given as collateral or affected in any way, the developer has the right to assign, give as collateral or affect its rights under the applicable governmental authorization, prior approval from the authority that granted them.
- PPP contracts
The following are some relevant aspects of the PPP contracts under the PPP Act:
(i) Unlike the concessions in which the private party obtains the benefits directly from the final user, the PPP contracts establish that the Contracting Entity must pay a periodical consideration in favor of the developer for the execution of the project;
(ii) By virtue of these agreements, the developer is obliged to provide determined services and in due case, the construction of the necessary infrastructure to provide them;
(iii) The respective contracts must establish the system for the distribution of technical, execution, and financial risks to force majeure risks and of any other nature between the parties;
(iv) The characteristics, specifications, technical standards, performance and quality levels for the construction as well as the services of the project must be defined;
(v) The term of the contracts, including extensions, shall not exceed a period of 40 years (unless the applicable law to the required governmental authorizations under the project establish a longer initial period);
(vi) The contracts must specify the resources for the execution of the works and the rendering of services to be provided by the developer (although depending on the case, the government may contribute resources to the project);
(vii) The PPP contracts must establish the terms and conditions under which the private party will be able to agree with its lenders that in case of default in accordance to the respective contracts, the lenders will be able to execute temporary step-in rights, prior authorization from the Contracting Entity;
(viii) Prior authorization of the Contracting Entity, the developer will have the right to subcontract the execution of works or the provision of services. However, the developer will be the only responsible party before the Contracting Entity;
(ix) The developer’s rights derived from the PPP contracts may be transferred or granted as collateral with the prior authorization from the Contracting Entity;
(x) The developer’s equity interests may also be transferred or granted as collateral with prior authorization from the Contracting Entity;
(xi) The infrastructure works may include facilities for the execution of complementary or commercial activities different from the principal service, i.e., the construction of commercial premises that can be leased in addition to the main project;
(xii) In case that the developer transferred, granted as collateral, or in any way affected its rights derived from the PPP agreement and its lenders foreclose such collateral, the lenders will only have rights regarding the financial revenues generated by the project. Likewise, it is anticipated that the holders of collateral or encumbrances, prior authorization from the Contracting Entity, may hire by themselves a supervisor for the execution of the works or provision of the services, and
(xiii) The developer may request the extension of the term of the contract and indemnification payments when its performance has been delayed by causes attributable to the Contracting Entity.
- Step-in rights of the project
In accordance to the PPP Act, the Contracting Entity is allowed to intervene at any stage of the development of the project when it considers that the developer is in default, for causes attributable to it, and adversely jeopardizes the development of the project.
For such purposes, the Contracting Entity shall notify the developer the cause that leads to the intervention and state a cure period. If the default persists after the cure period, the Contracting Entity will proceed to execute its step-in rights, or if applicable, depending on the respective contract, to the early termination of the contract.
The intervention will have the duration that the Contracting Entity determines, but it may not exceed, including extensions, a period of three years. If the intervention term has ended and the developer is not in conditions to continue with its obligations under the contract, the Contracting Entity will proceed to the rescission of the contract and the revocation of authorizations for the development of the project.
- Amendment of PPP contracts
The PPP Act establishes limited provisions under which the amendment of the contracts is permitted. The contracts can only be amended under the following circumstances: (i) improve the characteristics of the infrastructure, which may include additional works, (ii) increase the services or their level of execution, (iii) attend to certain aspects regarding the protection of the environment, (iv) adjust the scope of the projects for unforeseeable causes at the time the project was awarded, and (v) restore the financial equilibrium of the project.
However, for the purposes of the provisions mentioned in (i), (ii), and (iv) above, if the amendments do not require additional compensation, nor they imply a decrease in the developer’s obligations, such changes can be agreed upon at any time. However, if the amendments do require an additional compensation or imply a decrease in the developer’s obligations, the following conditions must be complied with: (a) have the opinion of independent experts that certify the necessity and benefit of such amendments, (b) that during the first two years the equivalent amount of the overall amendments must not exceed 20% of the cost that was agreed upon for the infrastructure and the payment for services during the first year, (c) after the first two years, if the amount of the overall amendments exceeds 20% of the agreed cost for the infrastructure and the payment for services during the first year, such amendments must be expressly approved in writing by the chairperson of the Contracting Entity.
- Early termination of PPP contracts
In addition to the termination causes stated under PPP contracts, the PPP Act establishes the following causes: (i) cancelation, abandonment or delay in the execution of the works, (ii) the lack of provision of the contracted services, the provision of the services in terms different to the ones agreed upon or the suspension of the services for more than 7 days, and (iii) the revocation of required authorizations for execution of the project.
Therefore, the PPP Act differs from the Law of Acquisitions; the PPP Act does not allow the Contracting Entity to unilaterally terminate the PPP contract due to reasons of public interest or due to the lack of need of such service, therefore effectively mitigating the risk for the developer of early termination of the agreement due to causes unrelated to its performance.
In case of early termination of the respective contract, the Contracting Entity shall have the option to purchase the assets owned by the private party which were used for the provision of the contracted services, in the understanding that public assets and those necessary for the provision of the services shall be transferred to the control and administration of the Federation.
- Dispute resolution
In observance of the PPP Act, the differences between parties of technical or financial nature will first settled by mutual consent. If the dispute persists, an expert committee of three members shall be appointed, where each party shall appoint one expert and these in turn shall choose a third one.
Regarding disputes over the PPP contracts, the parties may agree to submit themselves to a conciliation process before the Ministry of Civil Service or agree upon arbitral proceedings.