People are starting to wonder if Peru will ever start delivering on President Kuczynski's promise to enliven infrastructure and energy project development in the country. By Fernando Rodriguez Marin, projects and infrastructure partner in the New York office of Pillsbury Winthrop Shaw Pittman LLP.
While an ambitious pipeline of projects had been announced by the new administration, its details remained in limbo far longer than initially expected, waiting for structural changes and the implementation of new legal reforms published earlier this year. And though the government has made it a priority to unblock (destrabar, a very graphic Spanish neologism) existing projects that have been bogged down by unresolved government issues obtaining vacant possession to property, or resolving interferencias, ie completing works for and/or reaching agreements with, third parties that block project progress many have already been on hold for almost ten years.
The government's difficulty in resolving these issues efficiently has caused significant time delays and added to total project costs. The country has also struggled to resolve some of the notorious corruption cases that arose on the coat-tails of the lava jato scandal.
The lack of specificity in existing concession agreements has left the government to spend considerable time and resources searching for the best solutions to extremely complex legal questions, such as whether the corrupt conduct would result in the nullity of the concession (in which case the concession would have been null and void ab initio) or whether it should be dealt with as a concessionaire's default allowing (but not requiring) the concession's termination.
Despite all these complicating factors, Peru is still well-positioned to begin delivering projects to the market. President Kuczynski has finally just revealed plans for more than US$5bn in near-term public-private partnerships. What's more, Alvaro Quijandria, the outgoing head of private investment promotion agency Proinversin, announced that Peru intends to award 20 projects in 2018.
The changes to Peru's P3 legislation, brought about by the new administration (Decreto Legislativo 1224, as amended by DL 1251 of December 2016 and the Supreme Decree 410-2016EF, as amended by Supreme Decree 068-2017EF, of March 2017), deserve some credit for this new momentum and should facilitate the successful closing of many of these projects.
The changes include Decreto Legislativo 1224, as amended by DL 1251 of December 2016 and the Supreme Decree 410-2016EF, as amended by Supreme Decree 068-2017EF, of March 2017. They mark an important step in Peru's progress towards achieving a robust procurement and contractual structure that addresses the most salient flaws of the old system. Noteworthy features of the new regime include:
- The Ministry of Economy & Finance (MEF) is now the main authority establishing and directing the government's policy on P3 projects As the main policy body, the MEF will be responsible for drafting the newly-created National Infrastructure Plan, which must be approved by the Council of Ministers. This plan must be largely based on information gathered by Proinversin from mandatory multi-annual reports on PPP investments delivered by procuring Ministries, Regional Governments and Local Authorities (Responsible Authorities).
The national plan will set the parameters for project selection and employ a multi-sector approach to identify and promote synergies between projects. In addition, the MEF must approve any project requiring public funds (cofinanciado) before Proinversin or any other Responsible Authority can commence the procurement of a PPP. MEF specifically the General Directorate of Private Investment Promotion will also approve the final contract and issue binding opinions on the interpretation of the PPP law. This will provide clarity to the decision-making structure, expedite MEF's ability to vet projects requiring public funds and ensure those projects are eligible to come to market.
- Proinversin is the national governmental entity in charge of procuring large and significant state projects and providing technical support to all other Responsible Authorities In addition to certain large projects and self-financed projects, Proinversin can also procure new projects that have been delegated to it by such Responsible
Despite all the complicating factors, Peru is still well positioned to begin delivering projects to the market. President Kuczynski has finally revealed the plans
Authorities. Proinversin will also be charged with monitoring, supporting and following up on all PPP projects but will not have exclusivity on bringing projects to market. Responsible Authorities will continue to hold that responsibility, but with the full support of Proinversin.
- The new system promotes project readiness, requiring procuring public entities to bring projects to market when they are sufficiently mature. This will mean that co-financed projects will have to have secured public funding before they are launched Before bringing a new PPP to market, Proinversin or the Responsible Authority must prepare an Evaluation Report that includes a preliminary determination of the availability of public funds (if required), the project's bankability, a preliminary analysis of the land required for the project, and a plan for acquisition of that property.
The Government's intention here is to make sure that the land needed to develop each project is acquired or ready to be acquired in advance of a new PPP contract being awarded. These Evaluation Reports must also identify and diagnose any potential interferencias caused by a new project and provide a timeline for resolving them. This will require the Responsible Authority to evaluate and, in some cases, facilitate the negotiation of agreements with third parties such as utilities prior to the award of the contract.
Last, each Evaluation Report must ensure that all the required environmental and technical reports associated with the project are completed. This new pre-evaluation system should allow Responsible Authorities in Peru to procure projects that can be commenced within a reasonable time after award, thereby avoiding the long and costly delays that occurred under the previous regime.
- Tender documents must now establish mechanisms to prevent the acceptance of recklessly low bids. l No addenda to concession agreements will be permitted within the three years following the date of execution of a PPP contract. Exceptions will be made only to correct material errors, address supervening facts that trigger unavoidable changes, and resolve operating matter specifications that prevent the performance of the contract This is one of the biggest changes in the new legal regime, as it eliminates one of the primary causes of delays in Peruvian PPP projects: the almostunavoidable need to negotiate "bankability" amendments to concession agreements in order to accommodate the legitimate requests of lenders.
In the past, however, these requests invariably were not included in the contracts initially signed at the time of the award indeed most PPP contracts have historically included an express provision permitting lenders to amend the agreements as needed to secure transaction financing. Unsurprisingly, some market participants have reacted negatively to this restriction, arguing that it will cause delays in awarding projects because PPP contracts will be necessarily more complex. They also contend this change will increase procurement costs due to the need to negotiate committed financing packages with lenders prior to bid submission. It is important to note, however, that this is typically the case in other jurisdictions, such as the United States.
- All PPP contracts must now include an anticorruption clause Any new contract failing to include the now-required anti-corruption clause will be deemed null and void. Moreover, no compensation will be payable to the investor in the event a concession contract is terminated due to a violation of this clause.
- Officials exercising discretionary authority under the law will receive additional protection Until now, Peruvian government officials have sometimes been afraid to fulfil their professional obligations for fear it might expose them to personal liability sometime in the future. With this risk hanging over them, officials have been hesitant to make decisions, causing delays and additional costs for concessionaires. The new system offers protection against sanctions or liability for the exercise of their functions as representatives of the government, unless they act wilfully or negligently.
To capitalise on the positive momentum these changes have already achieved, the MEF and Proinversin have announced additional initiatives to encourage and advance project development in Peru:
- A substantial increase in the amount and quality of human and financial resources at Proinversin's disposal to fully support their expanded role In August 2017, Proinversin's board approved a new personnel structure that it hopes will attract and retain better talent under a new transparent and thorough selection processes. In addition, a new performance management system has been put in place.
- Numerous new oversight bodies have been established to ensure the project procurement process is administered fairly A new Office of Integrity & Transparency has been established to set up and implement protocols and best practices to prevent corruption and make information more transparent. Likewise, a new department of Social and Environmental Affairs has been created to deal with these important areas. Also very importantly, a new Office of Proper Execution of Investments will assist in the resolution of obstacles to the performance of existing contracts (destrabe).
- Personal insurance products will be procured to protect government officials exercising discretion in the discharge of their functions.
- The likely development of new forms of concession contracts that will incorporate best practices learned from past experience Given the newly implemented prohibition against concession agreement addenda, such contracts will need to be drafted much more carefully. They will now need to address typical bankability requests at the outset, likely employing a broad definition of "Permitted Creditor." They must also clearly outline lenders' rights in the Concession Agreement or in Direct Agreements as they relate to concession assets, step-in rights and subordination of certain Grantor rights to those of the Lenders, right to foreclose and right to replace the Concessionaire and others.
In addition to all of the efforts outlined above, on the finance side, there remains a desire on the part of the MEF to gradually move to a functional unit structure. Under this structure milestones and Government payments, in the case of co-financed projects, will be modulated upon the completion of the separately operable parts of the whole for instance, full segments of roads or a wing of a hospital and not arbitrary percentages of the total construction job, as was the case until now. This is a system similar to the one used in other Latin American jurisdictions, such as Colombia.
At the same time, co-financed projects will gradually move to performance-based availability payment structures, where the Government's payment obligations would be triggered by completion of relevant works, ie making the facility available for public use. Because this may make financing for these projects more expensive, the Ministry of Economy is working with the World Bank and Cofide to design an insurance product that
At the same time, co-financed projects will be gradually moved to performance related availability payment structures protects developers and their lenders against some construction delay risks.
Finally, even though there will still be a need for co-financed projects, to the extent possible, the Government will encourage the procurement of demand-risk projects that can be entirely financed without public funds. This and other new features of the new legal regime indicate a move toward more project finance structures and away from the easily securitisable irrevocable payment instruments (RPI-CAO and their brethren) that have so successfully facilitated Peruvian PPPs in the past.
Regardless, the new Peruvian regime should provide the basis for the much anticipated new wave of PPP projects the market has been talking about for years. The challenge now will be for the government to bring its first transactions as soon as possible. By rapidly moving these transactions through, Peru will show itself to be an attractive market for investors and funders. There are certainly plenty of financial resources available to be deployed in Peru as soon as such projects start coming online.