“PPP Road Projects Legal Framework” Mexico


 


Presentation given by Roberto Ríos Ferrer at the Conference organized by the Goverment of the State of Nuevo León, Monterrey, N.L., October, 2008.

Lic. Roberto Ríos Ferrer

Partner: rifer@riosferrer.com.mx

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Road PPS’ characteristics

In Mexico, a public-private partnership, or PPP is called a project to provide public services, that hereinafter we will name a “PPS”.

A PPS implies entering into a long term services agreement, by which the investor is to provide services for a 15-30 year fixed term to the contracting agency (SCT*), thus enabling the agency providing the public services commanded; therefore, the Federal Government continues being the responsible entity that holds the control and continues to offer such services to the users.

Investor’s services are to be provided to the contracting agency not to the public; therefore, it is not a privatization.

Investors must provide the design, funding, upgrading, expansion, operation, preservation and maintenance of the infrastructure that the SCT needs to provide the public service it is committed to render, and assumes most of the risks related thereto.

In exchange for that, SCT makes periodical payments, which amounts are to be defined per service actually rendered, provided that such services comply with the PPS contract requirements.

The contracting agency records payments as current expense, it doesn’t assume financial investment undertakings which shall be deemed as public debt, and does not grant any advance.

The framework must generate economical benefits greater than ones that could be attained should the project was to be executed by traditional public work frameworks, while allowing the investor achieving reasonable return rate on the capital invested.

The project must generate economical and social development, pursuant to the national, sector and region planning.

The legal and financial framework must provide sufficient legal certainty, credibility and transparency thus securing the necessary private funding to execute the project.

* Ministry of Communications and Transportation

 

 

PPS Projects

 
FIRM PARTICIPATION (PPS) LENGTH(km) PRIVATE INVESTMENT(mop*) CONCESION & CONTRACT (PPS)
Irapuato-La Piedad 75 $639 2005
Querétaro-Irapuato 93 $1,172 2006
Ríoverde-Ciudad Valles 112 $3,096 2007
Mitla-Entronque Tehuantepec 163 In the bid process 2009
10 shadow toll roads in the State of Durango 370 In the bid process N/A
Totals 813 $4,906.00  

 

* (mop) = million of mexican pesos/11 for 1 dollar
*Reference: SCT

 

Roads PPS’ Ruling framework
 

The Political Constitution of the United Mexican States, sets that Federal funds must be managed under efficient, effective and honest principles, and securing the best economical conditions for the State.

The Roads, Bridges and Federal Auto Transportation Law, which governs concessions to build, operate, develop, preserve and maintain federal roads and bridges, sets the procedure to grant such concessions. This Law governs the Concession.

The Purchases, Leases and Services for the Public Sector Law, governs service contracts and defines exemption cases to grant direct awards. This Law rules the PPS contract.

The Budget and Finance Liability Federal Law, defines the multi-annual undertakings regarding expenses caused by long term service contracts (PPS).

The Rules* to execute projects to provide services under the PPS contract set the procedure to authorize it.

* Issued by the Ministry of Finance and Public Credit and of the Public Function

 

 

Contracting Procedure

 

The call for a public bid will include the necessary information, the assessment criteria, and the main technical, economical-financial and legal requirements, that the bidders must meet.

The General Basis for the Bid (“Bases”) include the specific provisions that will govern the bid:

 

- During the Clarifications Meetings stage, bidders may suggest modifications to the Bases, the concession and the PPS contract.

- There is a two rounds Pre-qualification stage to submit documentation for review purposes, this is previous to the proposals, thus it allows participant to avoid or correct errors.

- The SCT’s Conceptual Project and its technical specifications are outlined, and the bidders shall prepare their technical and economical proposals accordingly, that may include innovative elements proposed by the bidders

- The bid will be awarded to the bidder who submits a solvent proposal at the lowest economical cost, calculated pursuant to the actual value regarding all the PPS contract effective term.

 

 

 

Concession Title
 

- The concession is the legal act by which, pursuant to the Roads Law, the SCT grants the winning bidder the rights to operate, preserve, maintain, upgrade and expand the projected road; it also acknowledges the exclusive right to award directly the PPS contract for a fixed term.

- The concession is granted through a public bidding process.

- The winning bidder will be legally entitled to provide the Road Capacity Service to the SCT under the PPS contract as a direct award that arises from the exclusive rights derived from the Concession Title. Based on the above, the SCT will be in the position to provide the public service to users.

- The road construction, operation, maintenance, preservation and development shall be subject to the Roads Law and its Regulations, and also to the Concession conditions and the bidding documents, including the Bases

 

 

Concession Contents

 

Concession’s purpose

Information

Concession term

Acts of God and Force

Operation, maintenance, preservation, upgrading and expansion of the concessioned road

Majeure

PPS contract

Revocation

Delivery of the road concessioned and the right of way

Termination

Consideration

Real rights

Concession’s taxes and contributions

Reversion

Norms and technical specifications

Rescue

Intellectual rights and industrial property

Concession Title modifications

Applicable regulation

Liabilities and unconditional acceptance

Prohibition to assign or encumber the concession

Jurisdiction

Liability

Concession Title Performance Security

Preservation and Maintenance Fund

The form of the Agreement to assign to a specific purpose company the winning bidder’s rights and obligations

Securities and insurance

 
Inspection, verification and surveillance  

 

 

Long Term Services Provision Contract (PPS)
 

The purpose of a road PPS contract is the provision of the Road Capacity Service by the concessionaire to the SCT, pursuant to the PPS contract terms.

The PPS contract is governed by the Federal Purchases, Leases and Services for the Public Sector Law; therefore, it is a contract to provide services, not a contract of public works.

The PPS contract shall last the same term as the concession.

The PPS contract constitutes an instrument linked to the Concession Title, which will not necessarily cause the concession termination in case of an anticipated termination of the PPS contract, whereas the concession termination will cause the PPS contract termination.

 

 

PPS contract’s content

 

PPS contract’s purpose

Insurance

Documentation

SCT’s obligations

Securities

Reports and information

Initiation date

Verification of compliance

Financial model

Invoicing and payment

Road concessioned, Existing Road and Project Road

Acts of God or Force Majeure

Upgrading and expansion of the existing road

Indemnifications and restitutions

Road Capacity Development Plan

Termination causes

Operation, maintenance and preservation

Termination effects

Archaeological findings

Procedure to Solve Controversies

Reversion

Modifications and Review Procedure

Quality Control

PPS contract term
 

Applicable law and jurisdiction

 

 

Road Capacity Service
 

The service pursuant to the PPS contract is to provide the SCT with Road Capacity Service, so that the latter provides the users the services consisting in road availability and vehicles´ traffic.

In order to provide such Service, the PPS contract contemplates the following core activities to be executed by the concessionaire:

- Operate, preserve, maintain, upgrade and expand the road concessioned, pursuant to the Concession Title and the PPS contract.

- Revert to the SCT the road at the end of the concession and the PPS contract term, pursuant to the Capacity

- Requirements which apply to such reversion.

- Funding all activities listed above, including engineering design to upgrade and expand the concessioned road

 

 

 

PPS Contract Development

 

The PPS contract sets the Road Capacity Development Plan, according to which the concessionaire will provide the Service to the SCT, and it also sets terms and performance for every main activity integrating it.

Its clauses include references to the parties’ obligations and rights, including the risks involved by the project and the allocation of such risks. Likewise, it defines the applicable insurance coverage frameworks.

The Road Capacity Service provided pursuant to the PPS contract will be paid every quarter by the SCT, such payment will be based on the outcome achieved, and its amount will depend on the road availability and vehicles´ traffic, as well as on the discounts that shall be applied in case the concessionaire does not comply with the performance standards agreed.

In order to quantitatively measure the concessionaire’s technical and operation performance, a framework with penalization points is included.

The standards and/or minimal specifications that must be met regarding the road’s operation, maintenance, preservation and upgrading will be included.

 

 

Coordination
 

The PPS contract foresees setting a Direct Agreement to provide better certainty regarding contract performance. This agreement basically contains the obligation of the SCT to timely notify creditors regarding any nonocompliance by the concessionaire of its obligations pursuant the Concession Title and the PPS contract.

A Review Procedure is included, so the parties may propose modifications to the PPS contract during its term, in order to adapt it to future circumstances with better efficiency and effectiveness standards. The Concession’s and the PPS’ contract effectiveness term is not subject to extension, and the integrated payment can only be modified under the cases provided by the Purchases, Leases and Services to the Public Sector Law.

Likewise, included also is a Controversies Solving Procedure, through which the SCT and the concessionaire will resolve any controversy or claim that may derive from the interpretation or performance of the PPS contract, before filing any judicial claim.

 

 

Legal Certainty
 

The new Federal Public Budget and Financial Liability Law, grants greater legal certainty to investors.

The new law contemplates the execution of multi-annual contracts that may exceed a fiscal year.

The Executive Branch and the Congress, in the allocation of funds, must honor commitments undertaken in these agreements.

A PPS contract is a multi-annual agreement, thus it is protected by this new legal device.