This content is from: Local Insights

Colombian law on public-private partnerships

Early in 2012, the Colombian Congress enacted a new Law on Public-Private Partnerships, which intends to promote the development of public infrastructure urgently needed in Colombia. Here's how

Carlos Fradique Me´ndezCésar Felipe Rodríguez Parra

Early in 2012, the Colombian Congress enacted a new Law on Public-Private Partnerships (PPP), which intends to promote the development of public infrastructure urgently needed in Colombia. The PPP Law introduced three elements which, if properly regulated and applied by the government, will boost the use of project finance mechanisms in infrastructure projects.

Firstly, the entire cash flow arising from a project, consisting of all future and present assets and liabilities related to the project, must be administered through a trust. This will allow control over the project's financial resources, prioritisation of payments, and the creation of reserves for material disbursements. In addition, the trust structure will provide the main source of payment and serve as a bankruptcy remote security interest to the project lenders.

Secondly, the termination payment in the event of an early termination of a contract must be assessed by a predetermined formula. This will provide additional comfort to lenders that consider those amounts as an important part of the security package. However, it is paramount that in the contracts to be entered into under the PPP Law, the government includes such formula for purposes of any termination events, including those attributable by the private contractor.

Thirdly, the PPP Law states that in case of a contractor's default, lenders may exercise step-in rights and continue performing the project agreements, directly or through a third-party contractor. In this respect, the language of the PPP Law should be construed as setting out that lenders may step-in due to default, not only under the PPP agreement, but also under the credit documents. In addition, it is expected that such step-in rights should be easily implemented either by assignment of the project's material agreements or the enforcement of share pledge agreements.

Although the aforementioned elements have already been used to some extent in Colombian legal practice, the fact that they are being enacted in a public law represents a clear signal of the government's interest in promoting more sophisticated financing structures and bringing new actors into upcoming infrastructure projects.

Carlos Fradique Me´ndez and César Felipe Rodríguez Parra

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