The recent Argentine PPP law: benefits and challenges

On November 30, 2016, Law 27.328 (“Law”) on Public-Private Partnership (“PPP”) contracts was published in the Official Gazette of Argentina. The Law outlines the general principles and certain mandatory terms to be included in any PPP contract between the National Government and private and public parties. The Law covers PPP contracts for the purpose of developing projects in the sectors of infrastructure, housing, activities and services, productive investment, applied research and technological innovation. Argentina hopes to attract USD 26.5 billion in infrastructure investments by 2022 through PPP contracts.

In this blog post, I review how the Law and other related documents address key PPP issues, such as contracts’ contribution to sustainable development, risk allocation in these contracts, dispute settlement and relationships with international investment agreements (IIAs). In so doing, I will also refer to the model PPP contract and related documents prepared by Argentina’s National Directorate of Roads (Dirección Nacional de Vialidad or DNV) for the contracts to be concluded by that agency. These are the most comprehensive documents concerning PPP contracts so far.

Contribution to (sustainable) development

The potential of PPP contracts to contribute to sustainable development is widely cited in international policy circles. While the message of the Argentine Executive Power to the National Congress at the time of the submission of the draft Law noted that PPP contracts are considered an effective tool to promote economic development, the Law does not refer expressly to (economic or sustainable) development. Instead, it provides that PPP contracts may be concluded under certain conditions. Among others, the competent State organ or entity has to determine that the contract allows to comply with the objectives of public interest it intends to satisfy, take into account the economic and social profitability of the projects, and promote social inclusion and projects that contribute to the preservation of the environment and economic, social and environmental sustainability.

Risk allocation

The Law stipulates that PPP contracts must provide for, inter alia, the equitable and efficient distribution of contributions and risks between the parties to the contract. The State shall analyze the allocation of risks prior to the conclusion of any contract. Contracts shall also establish procedures to preserve the “economic-financial equation” of the contract. Interestingly, the concept of “economic-financial equation” was broadly debated in numerous investment arbitrations involving Argentina. Under the Law the power of the State to unilaterally change contractual elements is limited to a maximum of 20 percent of its value and the State must compensate the contractor for that variation. For the case of early termination of a contract, the Law provides that the State shall fully compensate the contractor prior to taking possession of the assets. These provisions could have an impact on the policy space and in the prerogatives of the State to regulate under Argentine public law.

During the drafting of the Law, a number of suggestions were made, aimed at making the law more conducive to attracting investment. For example, it was suggested that the Law should limit the action of the local judiciary, allocate the currency and political risks to the government and reduce the discretion of the State in case of conflict with an investor.

At the same time, one has to note that there are certain risks that cannot be transferred and the private party will always bear certain political risks. The matrix of risks of contracts concluded by the DNV includes a list of the main risks that have been assigned to each contracting party. For example, risks involving regulatory changes of a general nature are assigned to the contractor, political risks are assigned to the State, while social and environmental risk, exchange rate risks, and risks of force majeure are assigned to both parties.

Dispute settlement

The Law allows the parties to agree that disputes arising from PPP contracts be settled by local tribunals or by recourse to domestic or international arbitration, with the option to first resort to technical panels.

The parties in a PPP contract can agree on national or international arbitration for disputes concerning the execution, application and interpretation of the contract. In case of international arbitration, the law requires that the Executive Power approve, and report to the National Congress on any international arbitration clauses that may be agreed upon. This requirement was introduced during discussions at the National Congress to address concerns that PPP contracts would include ICSID dispute settlement provisions. The Law therefore does not provide advance consent to international arbitration. Also, Regulatory Decree 118/2017 limits international arbitration to those contracts where the contractor includes foreign shareholders with a minimum percentage of shares provided for in the bidding terms and conditions of each project. Decree 299/2018 allows that PPP contracts signed by DNV include clauses establishing the jurisdiction in favor of arbitral tribunals located in a State that is party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958).

In case domestic arbitration is agreed upon, the Law limits the remedies for domestic arbitral tribunals’ awards to clarification and annulment challenges before local tribunals with the exclusion of any other remedy.

Local tribunals are competent to the extent that arbitration is not agreed upon. For example the model PPP contract prepared by DNV limits the jurisdiction of the competent local tribunals to disputes concerning monetary claims below the amount USD 10 million, while for claims exceeding that amount the dispute shall be submitted to arbitration.

For disputes of technical, interpretative, and patrimonial nature the parties can agree on the establishment of a technical panel composed of national or international experts. Regulatory Decree 118/2017 includes basic rules for the establishment and functioning of such panels, which can be modified by the parties. Agreeing to technical panels exempts private parties from having to make an administrative claim prior to submitting a dispute to the panel. If one of the parties is dissatisfied with a panel’s recommendation it can submit the dispute to the competent local tribunal or to an arbitral tribunal when such mechanism was agreed upon.

In sum, the Law and related documents create complex dispute settlement mechanisms for PPP contracts. They appear to be designed, in part, to limit the role of local tribunals in the resolution of disputes. It has to be seen how these mechanisms will deal with issues of public concern, such as costs, consistency and transparency.

Relationship to IIAs

The Law is silent on the link between PPP contracts and IIAs, including Bilateral Investment Treaties (BITs). However, the DNV model PPP contract establishes rules for BIT claims related to the same facts and measures that are the subject in the dispute submitted to arbitration under the contract. In order to initiate an arbitration under the contract, the contractor shall submit (i) a document in which foreign majority shareholders or controllers expressly renounce to submit a claim under a BIT and (ii) a commitment of indemnity of the contractor for the claims of minority foreign shareholders under a BIT.

When determining the interaction between IIAs and PPP contracts recourse should be made to principles of international law, such as the distinction between contract claims and treaty claims. Moreover, certain features of old-generation IIAs, such as “umbrella” clauses, may raise a host State’s exposure to investor claims.

Final remarks

Over the last years, an increasing number of countries have adopted laws regulating PPP contracts as a way to attract investments. On some occasions, the results have been positive but on others were more questionable. For example, it has recently been reported that the United Kingdom has incurred in important extra costs by using this kind of contracts. Past experiences highlight the need to ensure that the risk allocation between the public and the private sector should be balanced and fair, and the fiscal implications of projects transparent. For PPPs to become an effective instrument for financing key economic infrastructure projects, it is therefore necessary that countries have in place the institutional capacity to create, manage and evaluate PPPs. The implications of such contracts require close scrutiny by all stakeholder concerned. An academic project to monitor this kind of contracts in Argentina is good news in this regard.