The main aspects of the Public-Private Partnership (PPP) model agreement for the implementation of Stage 1 of the Highways and Safe Routes projects were published. This is the first initiative to be carried out by the Argentine Federal Government through the PPP regime and will involve an investment of over USD 16,700,000 for infrastructure modernization and security in more than 7,000 kilometers of national routes.
On November 20, 2017, an executive summary was published on the Undersecretariat Public Private Partnership’s (UPPP) website, which highlights the contractual structure and characteristics of the PPP program for Stage 1 of the Highways and Safe Routes projects, specifying the main aspects of the PPP model agreement. The summary provides that the PPP model agreement is non-binding and subject to changes.
The projects include rehabilitation and improvement of highways and on the so-called safe routes; each of the PPP contracts entails several road sections in different highways.
The so-called “Network of Highways and Safe Routes” is the first implementation of the financing scheme for infrastructure works promoted by the Federal Government through the collaboration of the State and the private sector in a transparent, agile and clear policy framework.
According to the UPPP’s website, dates for presenting offers for Stage 1 of the Highways and Safe Routes are scheduled for February, 2018 and adjudication dates for April, 2018.
The main characteristics of the PPP model agreement are the following:
Structure:
The PPP model agreement separates the consideration for the construction from the consideration for operation and maintenance. It also contemplates mitigating the risks of the financing entities (both for construction and for operation and maintenance), encouraging an efficient operation of the project, strengthening the credit risk profile of the project and mitigating the risk of early termination of the PPP contract.
Prequalification Requirements:
Offerors must satisfy certain technical requirements that shall be provided regarding each project. Such requirements may be evidenced through experience in road construction and/or operation of road concessions and/or other PPP infrastructure projects. Those who do not comply directly with the established requirements may prequalify by (i) companies of the same economic group that comply with the requirements, (ii) one or more shareholder companies that comply with the applicable technical requirements, (iii) other mechanisms provided in the applicable bid terms of each project.
Each offeror must also have a strategic shareholder with solvency requirements and share percentage to be determined in the bidding terms and conditions. The strategic shareholder must maintain its minimum percentage until at least 20% of the original term of the PPP contract or the investment committed has been completed, whichever occurs first.
The amount of the consideration for the construction works will be expressed in US Dollars, while the amount of the consideration for availability, if applicable, will be expressed in Argentine pesos.
Economic Offer and Granting of the Project:
Each offeror that satisfies the prequalification requirements shall make an offer in the corresponding project of: (i) the maximum nominal amount of the consideration of the works expressed in US Dollars, which may include a cap, (ii) the maximum nominal amount of the consideration for availability for operation and maintenance when so provided in the bid terms expressed in Argentine Pesos, which may include a cap.
Guarantee:
A bid maintenance guarantee (to be granted together with the offer) and a funding closure guarantee (to be granted when the PPP contract is signed) will be required, both of which should be executable upon first request.
In addition, the PPP contractor must grant (i) compliance guarantees for the main works that shall be returned to the PPP contractor upon lapsing of a 48 month period as of the provisory reception of the related works, and (ii) guarantees of execution of the main services which shall be returned upon liquidation of the PPP contract. For this purpose, guarantees upon first request or surety bonds are acceptable.
Funding closure:
Funding closure is reached when the PPP contractor demonstrates that it has funds available (of its own or from firm financing) for an amount equal to the main works. Funding closure must be reached within 6 months as of the execution of the PPP contract, a period that can be extended at the option of the PPP contractor for up to two consecutive 3-month periods.
Capital contribution:
The PPP contractor shall be required to evidence that its shareholders or entities related to the shareholders have made capital contributions for an amount of capital equivalent to at least 10% of the total value of the principal works. The PPP contractor may make capital contributions according to a schedule of contributions to be provided in the PPP contract.
Parties and terms of the PPP contract:
The contracting entity under the PPP contract will be the Dirección Nacional de Vialidad (National Highways Department) and the contractual term will be 15 years.
Works:
The average construction period of the main projects will be from 4 to 5 years, according to the works plan of each PPP contract. Additional mandatory works (for up to 20% additional of the total value of the consideration for main works) or voluntary works (above 20%) may be carried out by the PPP contractor upon request from the contracting entity. These works will be carried out under the terms and conditions agreed by the parties or, failing that, by determination of the PPP contract’s technical panel.
Operation and Maintenance Services:
These are the services that the PPP contractor assumes the obligation to provide in exchange for receiving a consideration for use and, when provided in the bid terms, the consideration for availability.
The services shall include the operation and maintenance of the project as of the date of taking of possession of the land and assets related to the project and of the main works and works in progress (the cost of operating and maintaining the works in progress must be contemplated at the moment the offer is made). If later additional or voluntary works were added to the project, the PPP contractor will also be obliged to maintain such works.
PPP Trust:
A PPP Trust will be set up among the Argentine Government, as trustor, a financial entity to be determined, as trustee, and all the project’s awardees, as beneficiaries. The PPP Trust will manage the necessary cash-flows to make the corresponding payments under each project.
The PPP Trust will be funded with the amounts corresponding to the diesel tax rate for the Integrated Road System (Sistema Vial Integrado or "SISVIAL"), the PPP contractor's transit contributions (if applicable) and with any other resource that is allocated by the Argentine Government.
Among other provisions, the Argentine Government will be required to make one or more contingent contributions each year for the necessary amount to cover funding shortfalls in the PPP Trust.
Consideration for works:
Consideration for the construction, rehabilitation and improvement of the tendered works, will be paid with investment payment notes (títulos de pagos por inversión) or "TPIs", which will be issued quarterly upon fulfillment of work milestones. The TPIs will be unconditional, irrevocable and freely transferable without the consent of the contracting entity.
The TPIs will be issued by the PPP Trust (public trustee of the flows of funds) in favor of the PPP contractor or its assignee, in US Dollars and under Argentine law. Each TPI will stipulate 20 semi-annual installments (plus interest in case of default).
TPIs may be fixed (when guarantees granted by the PPP contractor are executable upon first request) or may be combined with variable and conditional TPIs (in an amount equivalent to 15% of the consideration, when any of the guarantees consist of surety bonds). Variable TPIs will be subject to deductions of fines, sanctions and early termination penalties imposed to the PPP contractor.
Consideration for PPP project operation and maintenance services:
The consideration that the PPP contractor will receive for O&M services will be a consideration for use (revenue from transit, excess load and commercial exploitation of the project) and, when provided for in the bidding terms and conditions in order to mitigate the transit risk, a consideration for availability.
In the latter case, availability payment notes (títulos de pago por disponibilidad) or "TPDs" will be issued monthly. TPDs will be unconditional, irrevocable and freely transferable without the consent of the contracting entity. The TPDs, subject to penalties discount, if any, will be issued by the PPP Trust in favor of the PPP contractor or its assignee. Each TPD will stipulate a single cash payment in pesos at 15 business days from the issue date (plus interest in case of default).
Risk allocation and economic-financial equation:
Certain risks will be allocated pursuant to a predefined risk matrix describing the risks assumed by the contracting entity and those risks assumed by the PPP contractor.
In addition, certain particular risks will be specifically treated. The PPP contract will stipulate that, upon the occurrence of certain events, the PPP contractor may request adjustments to the term or to the consideration for availability.
Regarding the exchange risk during the construction period, the offeror may enter into a derivative contract (currency collar) with the PPP Trust. This agreement must provide for a reference exchange rate between the US Dollar and the Purchase Value Unit (Unidad de Valor Adquisitivo - UVA) published by the Argentine Central Bank (Banco Central de la República Argentina). Variations in the exchange ratio may generate compensation in favor of the PPP contractor or the PPP Trust, as the case may be. The payments provided for under the TPIs will remain independent of any possible exchange compensations.
Early termination payments:
In the event of early termination, non-returned investments (i.e. investments pending of registration or, having been registered, investments that have not been included in the corresponding TPI) will be paid to the PPP contractor, subject to certain deductions.
Payments under fixed TPIs and TPDs will not be affected in any case by an early termination of the PPP contract.
Creditors’ protection:
The PPP contract will provide for step-in rights, additional remediation periods and prior consent for certain actions of the PPP contractor.
Conflict resolution:
The PPP contract will provide for an initial conflict resolution procedure for controversies of a technical, interpretative or patrimonial nature. This procedure will be conducted by a technical panel with its own regulations according to the guidelines of the PPP regime.
This article is an executive summary of indicative terms. The definitive terms shall be determined and specified in the corresponding bid terms of each project.
Further information:
Public-Private Partnership Contracts: Amendment of Regulations
New Bill on Trusts in Public-Private Partnership Contracts
This insight is a brief comment on legal news in Argentina; it does not purport to be an exhaustive analysis or to provide legal advice.