General PPP framework
How has the concept of public-private partnership (PPP) developed in your jurisdiction? What types of transactions are permitted and commonly used in your jurisdiction?
The origin of PPPs dates back to the nineteenth century, when a liberal conception underestimated the public administration’s capacity to develop commercial and industrial activities. Additionally, the resource shortage to launch large infrastructure projects boosted the expansion of the PPP. The initial model was created in relation to Spain’s railway infrastructure, and, in 1972, it was further developed with regard to motorways. The latest update was made in 2003 following a regulation that generally dealt with PPPs for any sector.
Under the concept of PPP in Spain, several statutory defined contracts may be encompassed, by which, as a general rule, a contractor builds and maintains an infrastructure and, in exchange, it operates such infrastructure and receives the benefits derived from its exploitation. A PPP may also refer to the management of a public service that, in turn, may require the construction of certain infrastructure. Both cases must be privately funded (whether fully or partially). Consequently, the Spanish PPP may be framed within the concept of design-build-finance-maintain-operate contracts.
What categories of public infrastructure are subject to PPP transactions in your jurisdiction?
PPP contracts have been used for many kinds of public infrastructure, in particular for transport (roads, underground systems, tramways, railways, ports and airports) and social services (hospitals, schools and prisons).
Is there a legislative framework for PPPs in your jurisdiction, or are PPPs undertaken pursuant to general government powers as one-off transactions?
There is no specific legislation regarding PPPs, but the Spanish Procurement Law foresees an extensive general regulation regarding PPPs, referring to aspects such as:
- rights and obligations of contractors;
- powers of the public administration;
- the economic-financial regime;
- the modification of the agreement; and
- termination causes, etc.
In some sectors, such general regulation may be completed with sectorial legislation (eg, roads). Furthermore, specific administrative clauses are approved for each PPP.
Is there a centralised PPP authority or may each agency carry out its own programme?
There is no centralised Spanish PPP authority. PPP projects may be tendered by central, regional or local authorities, depending on their competencies, and the relevant activity sector. However, it should be highlighted that, in 2015, the Spanish National Evaluation Office was created for the sole purpose of analysing the financial sustainability of existing and new PPPs. In some cases, it also issues mandatory reports.
Are PPPs procured only at the national level or may state, municipal or other subdivision government bodies enter into PPPs?
See question 4. Public administrations enter into PPP projects according to their competencies. Additionally, central authorities act through their different governmental departments depending on the specific sector to which the PPP is concerned. By way of example, while PPPs relating to motorways that connect some of the main Spanish cities are tendered by central authorities, PPPs concerning local transportation, such as the underground or tramway, are procured by local authorities.
How is the private party in a PPP remunerated in your jurisdiction?
It depends on the PPP. As a general rule, PPPs transfer the demand risk to the contractor, and their revenues mainly depend on the use of the relevant infrastructure (as is the case for motorway PPPs). Further ways to remunerate the contractor are:
- availability payments dependent on an adequate performance of the service provided to the user (measured by predefined criteria); and
- benefits derived from its commercial activities directly related to the infrastructure.
Sharing revenue and usage risk
May revenue risk or usage risk be shared between the private party and the government? How is risk shared?
In general, revenue and usage risk are assumed by the contractor as an essential element of a PPP. Nevertheless, this circumstance may be mitigated by the provision of availability payments by the public administration (see question 6).
Government payment obligations
In situations where the private party is compensated in whole or in part through availability or other periodic payments from the government, are the payment obligations of the government subject to the relevant legislative body approving budgetary funding in the future?
No. The government is committed to complying with its payment obligations under the agreement itself. Additionally, before tendering a PPP, as well as in any other agreement, the government party shall fulfil several requirements, which include the obligation to obtain a certificate evidencing a budgetary provision intended to the relevant agreement.
Rate of return caps
Is there any cap on the rate of return that may be earned by the private party in the PPP transaction?
A cap on the rate of return that may be earned by the contractor is not specially foreseen in the Spanish Procurement Law or in a standard financial PPP plan. However, the tender documentation may include a provision by which, if the contractor’s revenues reach a certain ceiling, the earnings arising from such excess shall be shared between the contractor and the government party.
Restriction of ownership transfer
Is the transfer of direct or indirect ownership interests in the project company or other participants restricted?
The direct assignment of the PPP requires, according to the general regime (ie, it applies to any public contract assignment), the following:
- prior authorisation from the government party;
- that at least 20 per cent of the operation has elapsed;
- that the transferee shall comply with all requirements for entering into contracts with the authority; and
- that the transfer shall be formalised in a public deed whereby the transferee assumes all the transferor’s rights and obligations.
Note that the PPP agreement may include a provision by which a change of control over the contracting company may be deemed as a direct assignment. In the absence of specific provisions with regard to indirect transfers, it would be advisable to notify the government party in advance.
What procedures normally apply to a PPP procurement? What evaluation criteria are used to award a PPP transaction?
The government party decides on the procedure to grant a PPP according to the law. As a general rule, it applies an open or restricted procedure. By means of those methods, every interested bidder (in the open procedure) or some bidders shortlisted by the government party, may submit their proposal, and any negotiations of contract terms with the bidders shall be excluded. However, in some cases expressly provided for by law, a negotiated procedure may be used. Using this method, the public administration selects the contractor legitimately, after consulting with various candidates and negotiating the contract terms with one or several of them. As an exception, the competitive dialogue may be applied for particularly complex PPPs.
The award decision shall select the most economically advantageous tender. The evaluation criteria to be used by the government party rely on the object of the PPP, such as the quality provided, the price, the execution time and environmental issues, etc. When only one awarding criterion is used, this must be that of the lowest price.
Consideration of deviating proposals
May the government consider proposals to deviate from the scope or technical characteristics of the work included in the procurement documentation during the procurement process, without altering such terms with respect to other proponents? How are such deviations assessed?
The government may consider proposals to deviate from the scope or technical characteristics of the work if it is foreseen in the tender documentation. This shall specify the elements and the conditions under which a proposal may vary or improve the characteristics of the work proposed by the government.
May government parties consider unsolicited proposals for PPP transactions? How are these evaluated?
The government may consider unsolicited proposals; however, public contracts shall be awarded according to the proceedings foreseen by the law, for the purposes of guaranteeing the principles of transparency, publicity, competition, equality and non-discrimination.
Does the government party provide a stipend for unsuccessful short-listed proponents or otherwise bear a portion of their costs?
Bidding costs are borne by the unsuccessful proponent. Nevertheless, exceptionally, if the government party grants a bidder a PPP based on a feasibility study (a document required to award a PPP) designed by another bidder, the latter is entitled to compensation.
Does the government party require that proposals include financing commitments for the PPP transaction? If it does not, are there any mechanisms during the procurement process to ensure that the applicable PPP transaction, once awarded, is financeable?
The Spanish Procurement Law does not specifically foresee that the proposal includes financing commitments for the PPP transaction. Nevertheless, it is common that the tender documentation requires such financing commitments to be submitted along with the proposal.
May the government ask its counsel to provide a legal opinion on the enforceability of the PPP agreement? May it provide representations as to the enforceability of the PPP agreement?
In most cases, the government does not have external counsel (ie, law firms) but is advised by its in-house legal department. The specific administrative clauses on which the PPP is based are subject to a report issued by the aforementioned legal department of the government party. However, such a report is issued for internal purposes (ie, there is not a legal opinion). The enforceability of the contract is established by law and there are no further representations made by the government.
Restrictions on foreign entities
Are there restrictions on participation in PPP projects by foreign entities? May foreign entities exercise control over the project company?
There are no restrictions on participation in PPP projects by foreign entities and they may exercise control over the project companies. Companies within the EU shall evidence their contracting capacity by registering with the relevant registry according to the regulation of the corresponding country. Non-EU companies prove their contracting capacity through a report evidencing reciprocity with respect to Spanish companies. Such report is not required for companies from member states that are a party to the Agreement on Government Procurement.
Design and construction in greenfield PPP projects
Form of contract
Does local law mandate that any particular form of contract govern design and construction activities? Does it mandate the choice of governing law?
The Spanish Procurement Law does not mandate any particular form of contract governing design and construction activities nor the choice of governing law. PPPs usually identify the Spanish regulation as the governing law for projects located in Spain.
Design defect liability
Does local law impose liability for design defects and, if so, on what terms?
Spanish Procurement Law imposes liability for the design, construction and operation of the infrastructure on the contractor. In particular, a 10-year liability period as from the completion of construction, established in section 1,591 of the Spanish Civil Code, exists, pursuant to which the contractor is liable for the latent effects (ie, the damages caused by the collapse of a building as a result of defects in its construction). Additionally, tender documentation usually includes a provision for damages in the event that the public work is ruined owing to hidden faults as a consequence of a breach of the contractor.
Does local law require the inclusion of specific warranties? Are there implied warranties in cases where the relevant contract is silent? Does local law mandate or regulate the duration of warranties?
The public administration, as a general rule, requires the contractor to provide a guarantee to be enforced in case the contractor has to pay the public administration any damages caused during the execution of the contract or as a consequence of its contractual default, among others. Tender documentation typically requires two kinds of guarantee:
- a guarantee equivalent to a percentage of the offered budget of the investment, during the construction period; and
- a definitive guarantee equivalent to a percentage of the budget of the investment, during the operational period.
Damages for delay
Are liquidated damages for delay in construction enforceable? Are certain penalty clauses unenforceable?
The tender documentation may foresee the consequences for delay in construction, such as daily penalties proportional to the budget of the investment. The tender documentation may include penalty clauses, although they may not exceed the following limits:
- 10 per cent of the budget of the investment during the construction phase; and
- for each year, 20 per cent of the operational income of the previous year, for the operational phase.
Indirect or consequential damages
What restrictions are imposed by local law on the contractor’s ability to limit or disclaim liability for indirect or consequential damages?
The Spanish Procurement Law obliges the contractor to pay any damages that may be caused to third parties, except when such damages have been caused by reasons attributable to the government party, and does not specifically foresee the possibility to limit indirect or consequential damages. However, this risk is, to a large extent, mitigated as the tender documentation commonly obliges the contractor to take out a civil responsibility insurance policy that covers damage to third parties.
May a contractor suspend performance for non-payment?
Non-payment for a period exceeding four months entitles the contractor to suspend the performance of the contract by giving one month’s prior notice to the government party.
Does local law restrict ‘pay if paid’ or ‘paid when paid’ clauses?
PPP structures in Spain typically have two phases: construction, and operation and maintenance. During the construction phase, the contractor does not usually receive any payments from the government party, or the users, until the project is in service. In that context, the pay if paid or paid when paid clauses related to construction are not applicable to payments during the construction phase.
Are ‘equivalent project relief’ clauses enforceable under local law?
Expansion of scope of work
May the government party decide unilaterally to expand the scope of work under the PPP agreement?
Yes. Although the contractor may be entitled to the rebalancing of its financial position (eg, by the extension of the PPP’s term). However, the tender documentation shall foresee the possibility to amend the PPP; otherwise, the PPP cannot suffer any substantial amendments (ie, other interested potential bidders might have participated if they had known such modifications, or the bidders who took part in the tender might have submitted different offers).
Does local law entitle either party to have a PPP agreement ‘rebalanced’ or set aside if it becomes unduly burdensome owing to unforeseen events? Can this be agreed to by the parties?
The events that trigger the obligation to rebalance the financial position of the PPP are as follows:
- amendment by the government party of the terms and conditions of the PPP for public interest reasons;
- force majeure, if it causes a substantial change in the economic terms of the PPP;
- direct actions from the government party that would result in a substantial change in the financial balance of the PPP; and
- any other cases set out in the tender documentation.
The government party considers and decides at its discretion whether a rebalancing measure is appropriate or not, although it may be agreed with the contractor.
Are statutory lien laws applicable to construction work performed in connection with a PPP agreement?
The contractor has the right to mortgage the PPP in connection with its financing, following prior administrative authorisation by the government party.
Other relevant provisions
Are there any other material provisions related to design and construction work that PPP agreements must address?
If the construction works in relation to the PPP are subcontracted, subcontractors are only obliged in relation to the contractor, who assumes the whole liability before the government party.
Operation and maintenance
Are private parties’ obligations during the operating period required to be defined in detail or may the PPP agreement set forth performance criteria?
The Spanish Procurement Law does not specifically set forth that private parties’ obligations during the operating period shall be defined in detail. Depending on the PPP, the relevant obligations are defined in detail in the tender documentation, or only performance criteria are established.
Failure to maintain
Are liquidated damages payable, or are deductions from availability payments possible, for the private party’s failure to operate and maintain the facility as agreed?
Yes. Deductions from availability payments are possible according to the provisions of tender documentation. Such deductions are generally in relation to poor performance of the PPP and are compatible with penalties.
Refurbishment of vacated facilities
Are there any legal or customary requirements that facilities be refurbished before they are handed back to the government party at the end of the term?
Upon termination of the PPP, once its term has expired, the infrastructure must be reverted to the government party in a good state of conservation and use, including all constructions works, as well as any assets and installations needed to operate the PPP. These conditions will be met as long as the contractor duly carries out the replacement investments and the preventive and corrective maintenance of the infrastructure, keeping it in good working condition, according to the technical tender clauses.
How is the risk of delays in commercial or financial closing customarily allocated between the parties?
The risk of delays in commercial or financial closing is commonly allocated to the contractor.
How is the risk of delay in obtaining the necessary permits customarily allocated between the parties?
The risk of delay in obtaining the necessary permits is allocated to the contractor, save in the case of lack of diligence of the government party in the performance of its duties.
How are force majeure and geotechnical, environmental and weather risks customarily allocated between the parties? Is force majeure treated as a general concept relating to acts outside the parties’ control or is it defined with reference to specific enumerated events?
Force majeure risk is allocated to the government and is defined with reference to the following specific events:
- fire caused by atmospheric electricity;
- natural phenomena with a catastrophic effect, such as tidal waves, earthquakes, volcanic eruptions, soil movement, sea storms, floods or other similar events; and
- damage caused during war, riots or other relevant alterations of public order.
Under Spanish law, it may be construed that the definition of force majeure is not restricted and, as such, other events of force majeure may apply. These include force majeure caused by terrorist attacks on the infrastructure, creating a substantial alteration of public order, although this scenario must be analysed on a case-by-case basis.
Geotechnical and environmental risks are allocated to the contractor, although, in the contract for the construction works, such risks are re-allocated to the subcontractor.
Third party risk
How is risk for acts of third parties customarily allocated between parties to a PPP agreement?
Such risks are allocated to the contractor, although, in the contract for the construction works, such risks are re-allocated to the subcontractor and, during the operating phase, to the entity responsible for the operation and maintenance of the infrastructure.
Political, legal and macroeconomic risks
How are political, legal and macroeconomic risks customarily allocated between the parties? What protection is afforded to the private party against discriminatory change of law or regulation?
Political risks are assumed by the government party, as the contractor is entitled to compensation should the PPP be nationalised or expropriated (see questions 43 and 45).
Discriminatory changes of law (ie, changes that are not deemed as general obligations applicable to any contractor) may trigger the obligation of the government to pay compensation to the contractor.
Macroeconomic risks are customarily allocated to the contractor, unless it may be argued that the economic fundamentals of any given contract have been materially changed owing to an unexpected event that has caused an unreasonable economic burden to the contractor (rebus sic stantibus clause). Where the rebus sic stantibus clause applies, the relevant risk may be shared between the parties at stake.
What events entitle the private party to extensions of time to perform its obligations?
Force majeure events or those attributable to the government party may entitle the private party to extensions of time to perform its obligations. Additionally, note that any extensions or reductions of the PPP term may be agreed as a rebalancing measure, if necessary.
What events entitle the private party to additional compensation?
The tender documentation generally foresees compensation events in connection to the following:
- force majeure;
- direct actions from the government party that result in substantial changes in the financial balance of the PPP; and
- early termination.
Be aware that the extension of the compensation in case of early termination varies depending on the party to which the early termination event is attributable.
How is compensation calculated and paid?
Compensation is calculated and paid by the government party whose resolutions rendered in the exercise of its powers will be immediately enforceable.
In the case of early termination events, the calculation of compensation is mandated by law, which refers the concepts included therein. Note that the tender documentation generally contains further details.
Should the compensation result from direct actions from the government party, it should restore the existing financial balance of the PPP at its awarding time. Last, if the compensation is owing to force majeure events, the government party shall pay the contractor the minimum return agreed in the PPP. In these two cases, compensation may be calculated on a case-by-case basis.
Are there any legal or customary requirements for project agreements to specify a programme of insurance? Which party mandatorily or customarily bears the risk of insurance becoming unavailable on commercially reasonable terms?
The tender documentation generally includes a section in which insurance obligations are defined. Such obligations may distinguish different types of insurance depending on the stage of performance of the PPP (construction or operating phase).
The risk of the insurance becoming unavailable on commercially reasonable terms is allocated to the contractor.
Default and termination
What remedies are available to the government party for breach by the private party?
See questions 20 and 21. Additionally, the government party may agree a temporary seizure of the project in the case of a serious breach of its obligations by the contractor.
On what grounds may the PPP agreement be terminated?
The tender documentation generally sets forth long lists of termination events. According to Spanish regulations, some circumstances that may give rise to termination are the following, among others:
(i) death of the individual contractor or extinction of the contractor’slegal entity;
(iii) mutual agreement to terminate the PPP;
(iv) temporary administration of the PPP beyond the maximum periodset out in the law;
(v) government party’s payment delay of more than six months;
(vii) end of the operation for reasons of public interest;
(viii) impossibility to operate and maintain the infrastructure or serviceowing to agreements signed by the government party after signature of the PPP;
(ix) force majeure; and
(x) contractor’s abandonment or breach of its essential obligations.
Is there a possibility of termination for convenience?
If the PPP agreement is terminated, is compensation available?
Yes. The compensation depends on the cause of termination. Should the termination cause be attributable to the government party, it shall pay the contractor expropriation costs and construction works costs, duly amortised (by applying the linear method). The compensation is calculated by the government party and shall be paid within six months of its determination. The termination cause is not deemed to be attributable to the contracting body in cases (i), (ii), (iv) and (ix) referred to in question 43.
If the termination cause is not attributable to the government party, the amount to be paid to the contractor as termination compensation is equal to the value of the PPP determined in the auction that shall be held in order to re-award the PPP to a new contractor.
In cases (vi), (vii) and (viii) referred to in question 43, the government party shall additionally pay the contractor a compensation for damages.
The mutual agreement that terminates the PPP shall determine the compensation, if necessary.
Does the government provide debt financing or guarantees for PPP projects? On what terms? Which agencies are responsible?
Yes. The government may contribute to PPP financing or grant guarantees, both during the construction of the infrastructure and its operating phase. Nonmonetary contributions are allowed. The tender documentation shall foresee governmental contributions or guarantees, which cannot be increased after the awarding of the PPP.
There are several agencies responsible for providing debt financing, which serve central or regional governments. The most significant central agency is the Official Credit Institute.
Privity of contract
Are lenders afforded privity of contract with the government party through direct agreements or similar mechanisms? What rights will lenders typically have under these agreements?
No. Direct agreements between the government party and the lenders are not required and, customarily, are not used. However, prior authorisation of the government party is required for granting certain securities to mortgage the PPP or to pledge credit rights arising from the PPP in favour of lenders.
Is there a mechanism under which lenders may exercise step-in rights or take over the PPP project? Are lenders able to obtain a security interest in the PPP agreement itself?
In case the PPP is mortgaged in favour of a lender and the government party terminates the PPP owing to a contractor’s breach, the former may take over the PPP provided that the government party deem it compatible with the PPP’s purpose.
Are lenders expressly afforded cure rights beyond those available to the project company or are they permitted to cure only during the same period and under the same conditions as the project company?
Direct agreements are not used (see question 47); therefore, lenders do not have cure rights directly in respect of the government party.
If the private party refinances the PPP project at a lower cost of funds, is there any requirement that the gains from such refinancing be shared with the government? Are there any restrictions on refinancing?
The Spanish Procurement Law does not specifically foresee that the gains from a PPP refinancing shall be shared but the tender documentation may provide for this. In some cases, the tender documentation may establish the rebalancing of the PPP in favour of the government party in case of refinancing of the PPP or of changes in its basic financial conditions implying an upside for the contractor.
There are no restrictions on refinancing; however, the tender documentation usually requires a minimum equity to be contributed to the project.
Governing law and dispute resolution
Local law governance
What key project agreements must be governed by local law?
All PPP agreements entered into by the Spanish government must be governed by the Spanish Procurement Law. Note that, while the Spanish regulation commonly traditionally governed PPP finance agreements entered into between contractors and lenders, it is becoming more common for some finance or re-finance agreements to be governed by English law.
Under local law, what immunities does the government party enjoy in PPP transactions? Which of these immunities can be waived by the government?
The government party has the power to resolve any doubts that arise during the term of the PPP on the interpretation, modification, effects and termination, within the limits and subject to the qualifications set out by the law. Additionally, the government is entitled to sovereign immunity and may waive it according to international public law.
Availability of arbitration
Is arbitration available to settle disputes under the project agreement between the government and the private party? If not, what regime applies?
PPPs entered into with public administrations (as defined in the Spanish Procurement Law) cannot be submitted to arbitration. Central, regional and local government qualifies as public administration. However, disputes arising from PPPs entered into with entities belonging to the public sector that are not considered as public administrations, may be referred to arbitration.
Alternative dispute resolution
Is there a requirement to enter into mediation or other preliminary dispute resolution procedures as a condition to seeking arbitration or other binding resolution?
A resolution rendered by the government party in the exercise of its powers will be immediately enforceable, concluding the administrative proceedings. Therefore, such a resolution may be appealed directly before the administrative court.
Is there a special mechanism to deal with technical disputes?