Top Ten - New Law on Public Private Partnerships (PPP) in Colombia
Oct 22, 2013 Top Ten Download PDF
By Gustavo Tamayo, Partner, and Carlos Carvajal, Associate, Lloreda Camacho & Co.
By: Gustavo Tamayo,Partner, and Carlos Carvajal, Associate, Lloreda Camacho & Co.
Since the early 1990's, Colombian infrastructure projects have focused mainly on transportation infrastructure, utilizing construction and concession agreements to govern the projects. Neither of these mechanisms has been fully successful. Construction agreements do not generally contemplate the operation and maintenance of the road infrastructure, leading to infrastructure deterioration soon after completion. Concession agreements have been implemented under long-term governmental funding commitments, which, in turn, have generated long-term deficits.
In response to the above problems, the Colombian Government promoted the issuance of Law 1508 of 2012 ("Law 1508"), which regulates Public Private Partnerships ("PPP"). This law is aimed at fulfilling the Government's ambitious targets in infrastructure projects, by stimulating local and international private investments. The enactment of the law has had a deep impact in the infrastructure sector - especially in the transportation sector - and has called the attention of major international players. The National Infrastructure Agency (Agencia Nacional de Infraestructura - ANI) is currently in process of awarding new road PPP projects amounting approximately to US26 billion.
PPPs are instruments that engage private capital in the construction, operation, and maintenance of infrastructure projects. This is a substantially different approach than the construction and concession agreements under the traditional public procurement regulations - still in force despite the enactment of Law 1508.
A PPP project is materialized in a contract between a governmental agency and a private company with the purpose of providing public goods or services. The contract must include the allocation of risks between the parties and payment mechanisms subject to the adequate service levels of the infrastructure.
This Top Ten will explain the most relevant aspects of PPPs in Colombia, including the main stages of a PPP project.
1. Investment threshold
In order to be considered as a PPP project under Law 1508, the project must require an investment that exceeds 6.000 minimum legal monthly wages - approximately US1.8 million.
In a PPP project, the revenues of the private partner derive from its right to exploit the infrastructure or service. The specific terms and conditions for exploiting the infrastructure are to be agreed upon with the public agency. The project may include the obligation to provide deliverables in different stages, corresponding to the so-called "functional units" of the infrastructure. The compensation may be obtained from users fees (e.g., a toll road) or from payments directly made by the governmental entity.
The compensation is subject to the availability, service levels, and quality standards of the infrastructure or its functional units. Therefore, the private partner is only entitled to obtain the return of its investment when the infrastructure starts operating according to the contract's terms and conditions. It is thus advisable that the financial model considers the time required for start operating the infrastructure.
3. Term of the Contract
PPP contracts must have a maximum 30-year term, including any extensions. In exceptional cases the contract may have a longer term, with the prior approval from the National Council on Economic and Social Policy (Consejo Nacional de Política Económica y Social - CONPES).
4. Reversion of Assets
At the termination of the PPP contract, the private partner must transfer the assets to the governmental entity, without compensation. As a general rule, the assets to be transferred are all those used in the exploitation of the PPP project. However, certain assets may be excluded from the transfer, as decided by the governmental entity.
5. Funding of a PPP Project
The funding of a PPP project can be wholly private or a mixture of private and public. A wholly publicly-funded project does not fall under a PPP project. This is a key issue to consider because the source of the funding will determine the applicable mechanism for selecting the private partner, as explained in section 9 below. In a PPP project originated by the private partner, the public funds cannot exceed 20% of the total investment of the project.
The funds of the project, as well as the present and future assets and liabilities linked to the project, must be managed in any case under a trust. Furthermore, Law 1508 grants step-in rights to the financing entities, with the purpose of facilitating the funding of the project. Accordingly, in case of breach of contract, said entities may, directly or indirectly, step in and perform the obligations under the contract until its final completion.
6. In-kind Public Contributions
In-kind public contributions - typically, the contribution of real estate properties - are not considered as public funds. Consequently, in this case the public funding of projects originated by the private partner will not be subject to the 20% limitation above-mentioned.
For instance, if the governmental entity contributes a property where the infrastructure will be built, such in-kind contribution will be feasible, regardless of whether the value of the land exceeds the 20% of the total investment of the PPP project, as such contributions are not considered public funds. Moreover, in case the funding of the project is 100% private, the awarding of the PPP contract will not require a public bidding.
7. Sources that are considered as Public Funds
Under Decree 1467 of 2012, public funds are those obtained from the following sources:
The income generated from private sources in exploiting the PPP project (e.g., the toll fees collected in a toll road) is not considered as public funds. On the contrary, in the case of social infrastructure (e.g., construction and operation of schools and jails), where the income is generated from public budgets, these funds will be considered as public funds. Therefore, the 20% threshold of public funding will be applicable.
8. Contracting entities
The private partner must file the initiative of the project with the specific governmental entity that is competent for developing the PPP project, according to its jurisdictional scope and functions. For example, if the project consists of the construction, operation, and maintenance of an urban road, the contracting entity would be the corresponding municipality.
9. Selection Process of the Private Partner
Law 1508 makes an important differentiation regarding the selection process of the private partner, determined by whether the project is originated by the private partner or by the public agency. Also, in case the PPP project is proposed by the private partner, it is necessary to verify whether the project will require public funds or not.
If the project is originated by the public agency or is originated by the private partner and requires any public funding, a public bidding will be required. On the contrary, if the project is originated by the private partner and no public funding is required, an abbreviated selection process shall suffice.
In public-initiative PPP projects, the governmental entity must prepare the technical, socioeconomic, environmental, zoning, financial and legal studies required for structuring the project, among other documents and approvals. Further, the entity will open a pre-qualification bidding system to define the shortlist of potential offerors, comprised of minimum two and maximum ten of them. Finally, the entity will open the bidding process in which the shortlisted offerors will compete to be awarded as the private partner in the PPP Project.
In private-initiative PPP Projects, the private partner must provide the agency with the required documents for structuring the project under a pre-feasibility stage. If the agency considers the project of public interest, the private partner shall provide the documents under a feasibility stage. In case the governmental entity considers that the private initiative is feasible, it will verify whether the project requires public funding or not. If so, the entity will open a public bidding, in which the private partner who originated the project will be entitled to obtaining a bonus in the selection process.
10. Recommendations for carrying out a PPP Project
In order to contemplate carrying out a PPP project, it is advisable to take into consideration the following recommendations:
PPP project proposed by private partners without the need for public funds have more chances of being awarded a PPP contract. In case of competition, the originator of the PPP project will have the opportunity to improve its proposal later under the abbreviated selection process.
When submitting a PPP project to a governmental agency, the private partner must prepare and provide the studies necessary for structuring the project. However costly might be assuming itself this responsibility, it may enhance the private partner's chances to clearly identify the feasibility of the project. The private partner will also be better prepared for facing the project's many challenges in its different stages.
The thorough assessment and allocation of risks between the private partner and the public partner will be a key factor in the success of the PPP project and in mitigating potential litigation. The private partner should profit from the fact that PPP contracts can be heavily negotiated with the contracting agency, with the purpose of adequately addressing this issue.
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