New repricing regime for public work contracts

On July 22, 2002 Decree No. 1295 of July 19, 2002 ("Decree 1295") was published in the Official Gazette, approving a new regime for repricing public work contracts governed by Public Work Law No. 13,064 (the "Public Work Law"), as amended.

Decree 1295 was issued pursuant to the powers delegated in the National Executive Power under the Economic Emergency Law No. 25,561 (the "Emergency Law"), in exercise of the powers of the National Executive Power to issue necessity and urgency decrees, and as a decree regulating the Public Work Law.

Although Decree 1295 is applicable to the National Public Administration, it invites the Provinces and the City of Buenos Aires to issue similar rules in their corresponding jurisdictions.

Until the issue of Decree No. 1295, the Public Work Law was regulated by Decree No. 1312 of June 1993 ("Decree 1312"). Decree 1312 allowed the annual repricing of the public works adjudicated as from the issue thereof.

Decree 1295 replaced Decree 1312 in order to allow the reestablishment of the economic-financial balance of ongoing contracts affected by the provisions of the Emergency Law and to give certainty to ongoing bids or to those to be called in the future.

For such purpose, Decree 1295 approved the "Methodology for Repricing Public Work Contracts" (the "Repricing Methodology").

The Repricing Methodology is applicable to ongoing public work contracts, as well as to those that have not yet started. It will also be applicable to pending public bids and to those to be called in the future.

Regarding contracts financed by multilateral organizations of which Argentina is a member, Decree 1295 will be applicable in a complementary way.

1.    Conditions for the application of the Repricing Methodology

The Decree sets forth as a condition for the application of the Repricing Methodology that there should be an increase in the costs of the principal factors included in the contract price reflecting at least a ten per cent (10%) average variation of such prices relative to contract prices or to those fixed under the last repricing, as the case may be. However, ten per cent (10%) of the contract's total price will be maintained fixed and unchangeable during the term in question.

Contract prices will be reset and certified one month after the price variation allowing the repricing has been reached.

The new prices derived from the application of the Repricing Methodology will only apply to those works which, according to the corresponding investment plan, must be executed after the repricing date. Therefore, the Repricing Methodology would not be applicable to works that have not been executed within the term set forth in the corresponding contract.

However, as an exception, the prices corresponding to the work that have not been executed within the term set forth in the corresponding contract, as of June 30, 2002 may be fully repriced if the contractor continues with the execution of the work according to the new investment plan approved by the principal. This exception may also be applied to the offers presented in the bids made prior to January 6, 2002.

Nevertheless, Decree 1295 has not established the treatment that has to be given to those works executed up to June 30, 2002, the economic-financial equation of which has been affected by the passing of the Emergency Law. Rules supplementing or clarifying this provision should be issued to cure the omission, as it is not reasonable to exclude from the scope of the exception contractors who, in spite of being affected by the economic-financial equation of their contracts, have continued performing their obligations.

In future bids, the bidding terms and conditions will require applicants to present, as a condition for their offers to be valid, (i) a broken down budget indicating volumes or quantities and unit prices or their incidence in the total price, as the case may be, and (ii) a price analysis per each item, broken down by component, including social security charges and taxes.

2.    The Repricing Methodology

In order to determine if there has been an average price variation higher than ten per cent (10%) relative to contract prices, the reference variation of such prices must be previously determined. For purposes of calculating the reference variation, contractors shall request to their principal the classification of their agreements in one of the following categories: (i) architectural works; (ii) civil works; (iii) housing works, and (iv) hydraulic works.

The structure to weight the principal supplies corresponding to each category of the contract will be determined on the basis of a weighting table and the information sources provided for in the Decree. The reference variation will be calculated as the weighted average of the price variations of each supply. If the reference variation calculated in that way exceeds the prices set forth in the contract by ten per cent (10%), the repricing will be admitted.

The mechanism for calculating the reference variation is defined on the basis of a pre-established cost structure for each category of contract, which cannot coincide with the real cost structure of the contract. This mechanism, which assumes homogeneous cost structures in each category of public work contracts, is so rigid that could sometimes result in the regime not being adequate or sufficient to fulfill its purpose, i.e. maintaining the economic equation of contracts.

Until termination of the repricing procedure, the reference variation will be taken as provisional adjusting basis for contract prices.

Once the repricing is defined, the Office of the Controller General shall intervene. If same does not issue a decision within the term of fifteen business days, it will be deemed to have agreed to the repricing, but no provisions have been issued regarding the consequences or effects of the remarks made by such controlling body.

Once this requirement has been met, a price determination certificate will be subscribed. The certificate will expressly indicate that the contractor waives any claim for higher costs, compensations, unproductive expenses or purported damages of any nature, allegedly generated by the changes in the economy as from January 6, 2002. The validity of the waiver set forth in this clause could be questioned, as it conditions the contractors' possibility of mitigating the damages caused by the changes in the economy occurred as from the passing of the Emergency Law to their waiving their rights.

Were the working plan provided for in the contract to change, to effect the Repricing Methodology, contractors may subscribe an accession certificate undertaking to start or restart works within a term of not more than ten calendar days after subscription of the repricing certificate.

3.    Repricing criteria

New prices will be fixed by weighting the following factors according to their proven incidence in the total price of the service: (i) materials and other items used in the work; (ii) labor; (iii) equipment depreciation, repair and spare parts; and (iv) any other significant element, at the principal's discretion.

Increases or reductions in the rate of taxes, customs or social security charges to be transferred to final consumers will also be weighted.

The incidence of these factors in the repricing procedure will be calculated on the basis of the relation between contractual basic prices and market prices at the moment of the offer in order to maintain the resulting proportions constant.

The reference prices to determine the incidence of the factors to be taken into account in the repricing will be informed by the INDEC or by the official entities authorized by the principal.

If necessary, in order not to exceed the budgetary provisions allowing the payment of the new contractual price, principals may adjust the working plan and the investment curve to the work.

4.    Conclusions

The new conditions of the Argentine economy as from the passing of the Emergency Law made it necessary for the Government to establish a regime turning economically viable the execution of ongoing public work contracts and allowing the execution of new contracts.

Although Decree 1295 was issued for this purpose, the rigidity of the regime set forth therein may go against such objective.

As an example of the above, the calculation method for the reference variation of contract prices and the intervention of the Office of the Controller General are procedures which, while providing transparency to the regime, may turn it ineffective and bureaucratic.

In this sense, the obligation imposed on contractors to waive some of their rights or claims as a precondition for the applicability of the regime also seems to go against this objective. This imposition could considerably reduce the scope of application of Decree 1295 and generate unnecessary litigation.

The authorities of application of Decree 1295, those empowered to supplement, regulate or clarify it or, as the case may be, the National Executive Power or the Judicial Power should then establish an adequate balance between the procedures implemented to give transparency and uniformity to the regime and those necessary for the regime to achieve its goal of making the execution of public works in a timely, efficient and effective way economically viable for the Government and its contractors.