In late June 2017, the Argentine government announced that it will launch a public tender to develop the Roca Cargas railroad in the last quarter of 2017. The project, which is estimated to require US$500 million in investment, would develop 700 km of railroad connecting Bahía Blanca Port in the province of Buenos Aires to the Vaca Muerta shale field in the province of Neuquén. The public tender was launched under Argentine Law 27,3281 (the “PPP Law”), one of several measures taken by President Mauricio Macri’s administration since assuming office in December 2015 to boost much-needed infrastructure development and restore investor confidence in Argentina.
The PPP Law outlines the general principles and certain mandatory terms to be included in any public-private partnership related to infrastructure, services, production, applied research or technological innovation. Drafted in consultation with local business chambers as well as the IMF and other multilateral entities, the PPP Law implicates a paradigm shift in public procurement. The PPP Law excludes or significantly limits the prerogatives of the government under Argentine public law, including the powers to (i) unilaterally modify a public contract (subject to agreed limits as further described below), (ii) terminate a contract by reason of public interest, (iii) require continued performance by a private contractor following a material breach by the government and (iv) claim limited state responsibility.
The following is a brief summary of the PPP Law’s key provisions.
- The contracts entered into between the government, as contracting party, and a private entity,2 as contractor, will be tailor-made for each project, subject to the provisions of the PPP Law (including prior determination by the government that entering into the contract will meet a specific public interest).
- The PPP contracts are an alternative to contracts governed by public works, public works concessions and public procurement rules. However, in the event that the PPP contract involves the provision of public services governed by a specific regulatory framework, such regulatory frameworks are applicable.3
- The contractor may opt to enter into the contract through a SPV, financial trust, joint venture or other structure, including partnerships with the government, subject to local corporate laws. The contractor may also be a publicly traded company.
- The contractual term is limited to 35 years, including extensions.
- The contract must provide for economic equilibrium and a procedure to adjust compensation in order to preserve such equilibrium. The parties may agree to include stabilization clauses to this effect in the PPP contracts.
- The possibility of unilateral variation by the government must be limited under PPP contracts to a maximum of 20 percent of the contract value and only in respect of the scope of the works. The contracting party must be appropriately compensated for the variation in order to preserve economic equilibrium and the financing structure.
- The parties may agree to compensation in foreign currency or, if denominated in local currency, indexed for inflation.4 Consideration under the PPP contract may also take the form of funds, assets, loans or taxes, the creation of surface rights or any other contributions by the government.
- Any rule establishing the limitation of state responsibility will not apply in the event that the government exercises early termination on the basis of public interest. The contractor must be compensated prior to any such early termination in an amount at least equal to the then-outstanding financing for the project. If the early termination is at no fault of the contracting party, the compensation will be at least equal to the unamortized investment in the project.
Financing and security structures
- The PPP Law provides ample flexibility for projects to be financed and collateralized based on the project-specific tender and contract.
- The government may allocate any type of public revenue towards compensation of the PPP contract. Any of these cash flows may be securitized or collateralized for the benefit of the financing parties. The PPP Law provides for the possibility of financing party step-in rights and the creation of any type of security interest.
- The contractor will be selected through a transparent, public and competitive procurement process, which can be carried out by way of a public tender or private initiative.
- Projects may also be tendered on a competitive dialogue basis in which prequalified stakeholders and the government discuss in an open and transparent manner all the particular issues pertaining to a project that will be subject to a tender.
- Any selected proposal for the provision of goods or services must provide for at least 33 percent of goods and services sourced locally. However, the government may formally exempt a project from such requirement on the basis of project-specific limitations and characteristics.
Control and monitoring contracts
- The contracting party will have broad powers of control and monitoring of the performance of the contracts.
- The parties to the PPP contract may appoint independent technical auditors to carry out the monitoring of performance. In the event that the government disputes the auditor’s assessment as to whether consideration owed under the contract has become due, the amount of the disputed consideration will remain in escrow until the dispute is resolved.
- Any dispute arising out of the execution, application or interpretation of the PPP contract or procurement process may be submitted before a technical panel or an arbitral tribunal. In the event that the parties agree to submit a dispute to arbitration, the government must communicate the decision to Congress.
- The PPP Law does not preclude the parties from agreeing to a seat of arbitration outside of the Republic of Argentina. Parties that choose Argentina as the seat of the arbitration may retain recourse to local courts only for clarification of the arbitral award (where needed) or annulment of the award under limited circumstances (e.g., based on a substantial violation of due process or lack of jurisdiction of the arbitral tribunal).
POTENTIAL FOR SUCCESS
The key to the PPP Law’s success will depend in large part on macroeconomic, legal and fiscal stability that promotes long-term investment in Argentina. The primary election held on August 13, 2017, has strengthened the current administration’s position heading into October’s midterm legislative vote and bolstered its pro-business economic reforms.