Bills lay plans for national PPP legislation - International Law Office

Introduction
Legislative proposals
President's bill - key provisions
Comment

Introduction

In recent years Mexico has been improving its legal framework for infrastructure projects in an attempt to attract greater investment. The process started with the enactment of legislation regulating public-private partnerships (PPPs). However, statutes on PPPs had been introduced only at state level - for example, the states of Jalisco, Chiapas, Veracruz, Tabasco and Tamaulipas have all adopted specific legislation in this area.

The PPP model is based on a long-term contract between the state and private parties for the provision of public services. The state oversees, supervises and evaluates the provider's performance, ensuring that agreed standards of quality and efficiency are maintained. The cost of developing the infrastructure is borne by the private developer and is amortized by the state for the lifetime of the project; the agreement normally includes an option to transfer the assets to the state when the contract expires.

In the past few years the state-level PPP statutes have provided a legal basis for a variety of projects involving public utilities, water treatment, water supply, roads, hospitals, ports and other facilities. Nothing prevents Petroleos Mexicanos and the Federal Electricity Commission - the state-owned oil and gas company and the national power utilities company - from using PPPs for large infrastructure projects in the oil and gas industry and for other power generation developments.

Although the state-level statutes are in effect, there is no efficient PPP framework at national level. In 2004 the federal government adopted certain rules to facilitate the implementation of PPPs and began projects on this basis. However, structures that have worked well in other jurisdictions have been less successful in Mexico - in many cases they have been subject to traditional and inflexible government procurement laws and regulations that are unsuited to public-private collaboration.

Legislative proposals

In order to expedite developments under the National Infrastructure Plan, two bills have been submitted that seek to provide support and a new framework for PPPs in infrastructure projects. A proposal by President Calderon to the Senate on November 10 2009 was followed on February 4 2010 by a bill presented in the House of Representatives by the Institutional Revolutionary Party.

The president's bill is more comprehensive. It proposes a carve-out from existing government procurement laws and sets out separate principles to govern PPPs. For example, they give the initiating government entity or agency significant latitude in defining the terms and conditions of a project contract, which will be largely governed by general contract law. The bill recognizes that successful development in this field ultimately depends on an appropriate allocation of risk between the government and private parties. In shaping the project to ensure its financial, technical and legal feasibility, the parties are expected to have considerable freedom in fairly and accurately apportioning project risk.

President's bill - key provisions

The bill's key features address the main concerns in infrastructure development, including project finance.

Land acquisition
In order to provide for more efficient project development, the bill contemplates a more streamlined procedure for acquiring the land and rights of way that often constitute a vital part of infrastructure projects. On the issue of determining compensation for expropriation, the bill rejects the traditional use of government appraisals in favour of commercial bank appraisals, which may take account of (i) the increase in the value of the land once the project is completed, and (ii) the rights and interests of third parties, such as occupiers and lessees. Moreover, it provides for the acquisition of a complete property holding where only a part is needed, but where the remaining area would be of little or no use to the owner.

The bill also proposes simplified procedures for expropriation and requires that negotiations with landowners be covered by specific regulations.

Permits and concessions
The bill recognizes the importance of permits and concessions when undertaking projects on long-term contracts. It proposes a special regime whereby all necessary permits are (i) issued as part of the bidding process for the project, and (ii) granted and guaranteed at least for the term of the project,(1) thus giving developers considerable regulatory certainty.

Financing collateral and step-in rights
Long-term projects involving the construction of facilities are likely to be developed using project finance structures. The bill would allow service providers to offer the assets and rights in such projects as collateral to lenders.

Developers would be able to grant full step-in rights to project lenders in order to allow them to cure or avoid defaults and prevent negative impacts on the project's revenue flow.

Amending and improving agreements
The legislative proposals acknowledge that during the long life of a PPP contract, a variety of circumstances may require changes to the original contract or the project - for example, the development of new technologies that allow a service to be provided differently or a change in the needs of the government or the community served by the project. The parties may include mechanisms to adjust the contract and provide adequate compensation to the service provider.

Balanced contracts
In structuring a project, one of the key considerations is whether the contract offers a fair deal for all parties. The bill recognizes the fundamental premise that a contract which is not well balanced will affect long-term service quality. For example, the bill presupposes that a service provider will be able to make adjustments to take account of changes in the law.

Dispute resolution
In the interests of a balanced risk assessment of the project, as well as financial feasibility and the overall balance of the parties' interests, the bill proposes that parties resolve their disputes in respect of a PPP project by commercial arbitration. In the case of technical disputes, independent experts may be appointed.

Comment

Once the legislation is enacted, the Ministry of Finance and Public Credit will issue implementing rules to clarify the use of feasibility assessments for projects. However, the government will be free to start using PPP mechanisms under the legislation as soon as it comes into force.

The bills are being reviewed by commissions of the Senate and the House of Representatives. Final legislation is expected later in 2010.

For further information on this topic please contact Rogelio López-Velarde or Ruben Almaraz at López Velarde, Heftye y Soria by telephone (+52 55 3685 3334), fax (+52 55 3685 3399) or email (rlopezv@lvhs.com.mx or ramlaraz@lvhs.com.mx).

Endnotes

(1) Or 40 years, whichever is greater.