The Argentine Republic recently enacted the National Law N° 27.328/2016, which establishes a new system of public-private participation (PPP) contracts. The regulation tries to encourage the participation of private investment in various projects promoted by the State. It aims to provide the legal security required to attract private sector investments, mainly in the area of infrastructure. It is expected that the PPP system will be applied to expand the capacity of national routes and for various repaving works. Next, we analyze this key issue to try to solve the complex problem of deficient road infrastructure in Argentina.
1. What is public-private partnership?
National Law N° 27.328, which was approved during November 2016, establishes the regulations related to public-private partnership contracts. Article N° 1 of the law defines public-private partnerships as those that can be celebrated between the bodies and entities that make up the national public sector (as a contracting party) and private or public subjects under the terms established in the aforementioned law (as contractors) in order to develop projects in the fields of infrastructure, housing, activities and services, productive investment, applied research and / or technological innovation.
2. What is the purpose of public private partnership contracts?
The regulation tries to encourage private investment to participate in various projects promoted by the State, granting proper guarantees in the public procurement process. The system seeks to properly distribute the risks between the private contractor and the State, granting legal predictability to the private sector by clearly defining the rights and obligations of the parties according to the terms of the contract.
As indicated by the law, the aim of the tool is to develop projects in the fields of infrastructure, housing, activities and services, productive investment, applied research and/or technological innovation. The projects may have one or more objectives, which could include activities of design, construction, expansion, improvement, maintenance, supply of equipment and goods, operation or operation and financing.
Law N° 27.328 states that the design of the contracts will have the necessary flexibility as to adapt its structure to the particular requirements of each project and its financing, in accordance with the best practices on an international level. PPP contracts may be utilized to develop projects when the State determines that their use is compliance with the project’s objectives and the public interest.
3. Has this figure (PPP), now implemented by Argentina, been used internationally?
Yes. In fact, this figure that has been used in various investment projects in roads, subways, airports, port terminals, hospitals, prisons, community silos, effluent treatment, power plants, drinking water supply, etc. PPP schemes emerged in England in the early seventies. Then its use became widespread throughout Europe and the Americas. Below we detail a set of international experiences that show the use of this figure:
● Subway line 4 San Pablo. Brazil. Estimated investment of US$ 240 million. The Inter-American Development Bank granted a direct loan for US $69 million at 15 years.
● Atotonilco effluent treatment plant. Mexico. Largest effluent treatment plant in the world, providing its services to 12 million inhabitants. 25-year concession with a 49% state contribution.
● IIRSA Amazonas North Peru Highway. Peru. Motorway of 955 kilometers. The system includes operation and maintenance. A bond for US$ 213 million was issued with partial BID guarantee for US $ 60 M.
● Maravilha Port Rio de Janeiro. Brazil. Project of urban renewal and new infrastructure.
● Hospitals Toluca and Tlalnepantla in Mexico.
● Health Care in Peru (Lima-Callao). Peru. Financing through a Bond Portfolio.
● Special Economic Zone in Panama Pacifico. Panama.
● Suburbio Salvador Hospital. Brazil.
● Ciudad Victoria Hospital in Victoria. Mexico.
● Community health centers CLIFF Maharashtra and Tamil Nadu. India. Investment of US $ 7.2 million.
● City of Education in Bhutan Thimphu. Bhutan. Commercial financing and of the International Financial Corporation for US$ 364 million.
● Electric Power Plant Nong Saeng. Thailand. 1,600 megawatt (MW) power plant. Sale of energy to produce.
● Gorai Dumpsite Closure. India. Coal Bonds were used for US $ 4.5 million). DBOOT scheme 25 years (Design, Build, take possession, Operate and transfer).
● NKTI Hemodialysis Project, Quezon City. Philippines.
● Water supply 24/7 Nagpur. India. Concession for 25 years with an investment of US$ 100 million with 70% of state funds.
● Water supply Aurangabad (Maharashtra). India. Length of 1,200 kilometers of pipe.
● Queen Alia International Airport, Amman. Jordan. Investment for US $ 380 million with financing from the International Finance Corporation for US $ 120 million for 18 years.
● Sewage Treatment Plant, Cairo. Egypt. Investment for US $ 130 million.
● Freeway R1. Republic of Slovakia. With a length of 51.6 kilometers and an investment of US $ 1,670 million.
● Amman East Electric Power Plant. Jordan. Power plant of 370 MW with an investment of U $ S 300 million. Political risk guarantee issued by MIGA, the specific entity for this purpose of the World Bank.
● Desalination plant for KAIA airport, Jeddah. Saudi Arabia.
● Pulkovo airport, Saint Petersburg. Russia. Investment for US $ 1,500 million.
4. How are public works executed under PPP schemes financed in other countries?
An interesting work by the OECD (Organization for Economic Cooperation and Development) analyzes the instruments commonly used for the financing of infrastructure projects and the incentives for investors that contribute funds to them (OECD, "Infrastructure Financing Instruments and Incentives" 2015). These tools are commonly used in different PPP projects worldwide. Table 1 shows these instruments.
The table first classifies instruments according to the nature of their expected cash flow, since they can be fixed income (with a flow of funds that is known in advance), equity (whose value future is unknown and, therefore, the flow of funds is uncertain) or mixed. From this classification, it follows that the investor can be both a creditor of the project or an owner of a fraction thereof.
It is possible to channel funds towards infrastructure projects through instruments that specifically fund the project, which are exposed in the Infrastructure Projects column, where the flow of funds would depend specifically on the project. The other alternative is to invest in instruments that finance a company in charge of the infrastructure project, which can be seen in the column on Financing by Balance Sheet. In the latter case, the risk is further diversified since the company might have a portfolio of projects.
When referring to Market Vehicles, the column on the right shows the different types of capital funds that include financial assets linked to infrastructure projects within their investment portfolio. They manage to reduce the risk to the investor by diversifying through different assets, allowing access to instruments of this type without being the only associated risk factor.
The diversity of instruments favors the channeling of savings towards productive investments, a key factor for the execution of infrastructure projects developed by private participants, and its development depends on them being able to access more and better credit.
Obviously, there are many possibilities for the Argentine Securities Market to participate in the structuring and issuance of fixed and / or variable income instruments to finance infrastructure projects under the PPP system.
5. What has the National Government decided to do in terms of road infrastructure projects? Will the PPP system be applied?
The National Government has decided to use the new PPP system in the execution of capacity expansion projects on national routes and repaving works. For this, it has established a total of 13 road corridors and two "mega bridges" that are expected to be executed under PPP contracts. Table 2 shows the road corridors, the national routes included, lengths and annual average daily traffic (AADT) as of 2016.
6. What are the main differences between the new PPP system and the previous road concession scheme?
The traditional systems of public works and/or concession of public works will not cease to exist according to article N° 2 of the PPP law. The PPP contract regime is alternative and the State may choose it or another more convenient system to meet public needs, as the case may be.
In the execution of the road corridors that will be implemented soon by PPP, the current system of concessions of the road network would be abandoned. The Ministry of Transportation of the Nation explained the difference between both alternatives, and we have detailed them in table N° 3.
As can be seen, in the new PPP system the contractual term becomes 15 years, when in the previous road concession system it was no longer 6 years. The extension of this term has to do with the nature of the works. In the previous system, the concessionaire was not in charge of either the execution of capacity expansion works or resurfacing works. In the new PPP system, on the other hand, the contractor is obliged to execute the capacity expansion and resurfacing works. The financing of these works -in the previous system- was 100% in charge of the National State. Typically, private sector contractors will be responsible for these tasks under the new PPP system. In relation to the risks that the concessionaire should assume, in the previous system they were minimal. In the new PPP system, the Construction, Maintenance and Financing risks are open to be totally under the responsibility of the Contractor.In the rest of the differences related to the operation and maintenance cost, tariffs and income of the contractor can be evaluated in table N ° 3 that records the information of the Ministry.
7. What are the road works that the National Government expects to execute in the first stage of the PPP system?
Table 4 shows the main road works planned for the first stage of the Public-Private Partnership system. Works in the first stage would be executed for US$ 8,058 million in six corridors: A, B, C, E, F and Southern Road. With regard to the works that would benefit the Gran Rosario (in terms of the road corridor E), the following works are planned to be carried out in this first stage:
● RN N° 9: Construction of a third lane on the Buenos Aires-Rosario highway between Zárate and Baradero.
● RN N° 9: Construction of a third lane on the Buenos Aires-Rosario highway between San Nicolás and Rosario.
● Connection Work Access to Rosario Airport. Construction of two roads of 3.65 m wide each with a total length of 16 km.
● RN A012: Construction of a highway between the RN N° 9 and the RN N° 11. It consists of the construction of a new roadway of 7.30 m wide (with two lanes) with a total length of 68 km. Expected construction period: 3/4 years.
● New National Route N° 11 (1V-11): New highway by the current route of the Cremeria, the RP 10 and the Estanislao Lopez Avenue up to Timbúes to connect with the National Route 11. This route would allow for better accessibility to ports in San Martín and Timbúes, driving trucks carrying grains away from residential areas.
Another crucial work that would greatly benefit the Greater Rosario Area within the “F” road corridor is the restoration of the slabs on the Rosario-Córdoba Highway.