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Public-private partnership law

The Federal Senate of Mexico is discussing the legislative initiative for a public-private partnership law (P3 Law). The P3 Law seeks to promote the development of infrastructure projects, at the federal level, by establishing the legal framework for private investment in public sector services.

The innovative aspect of the P3 Law its the public-private relationship, whereby the private investor will become the provider of the public service, with the obligation of building the required infrastructure, subject to a long-term contract. Further, the P3 Law seeks to include the private sector in the decision making with respect to public needs to be serviced by the creation and operation of infrastructure, allowing the private sector to propose (known as "un-solicited projects") public-private partnership projects (PPPs) which are not initially bided or requested by the government.

The P3 Law will be beneficial to (i) the development of infrastructure in Mexico, (ii) the establishment of the legal framework for private investment in PPPs, and (iii) the delivery of services required by the general population.

The PPPs to be regulated by the P3 Law will follow the form of long-term contracts (as opposed to an authorisation, permit or concession). Contracts allow for a variety of structures, rights and obligations, and risk allocation provisions, favouring flexible means of creation and management of the PPP. This method of documenting the rights and obligations of each of the parties will depart from rigid structures, providing the parties contractual flexibility.

It recognises that infrastructure investment is a long-term investment and therefore the PPPs are to be subject to a long-term relationship, of up to 50 years.

It will not create a joint venture among the parties (or any other form of entity), but is rather a contractual relationship among an entity of the private sector, and a governmental entity. This contractual relationship is subject to termination clauses, such as any other contracts.

It provides that in the event a concession, authorisation or permit is required, in addition to the PPP contract, the concession, authorisation or permit may be assigned or encumbered together with the PPP contract (subject to consent by the authority). Further, also subject to consent of the contracting governmental entity, the PPP contract and the investor may be subject to assignment or encumbrance (allowing the project to be used as collateral for financing).

It provides that any entity of the private sector that wishes to undertake a PPP may, subject to certain requirements, present such project for authorisation to the relevant governmental agency. These "un-solicited projects" open the door for the private sector to participate in projects that have not been required by the government. Such un-solicited projects will have to comply with all the requirements of the P3 Law and be subject to public bidding.

Foreign investment is only restricted in terms of the Foreign Investment Law. The P3 Law does not impose any additional restrictions to foreign investment.

It provides that the private investor participating in the PPPs must create a special purpose vehicle; a limited project company, created specifically and exclusively for the PPP, thus segregating its assets and liabilities from those of the private investor in any other ventures.

The PPPs may be amended with the purpose of (i) providing better infrastructure (including additional works), (ii) increasing the level of services, (iii) adjusting the PPP contract with respect to elements that could not be foreseen at the time the initial contract was prepared, and (iv) re-establishing the contract economic equilibrium, in the event a governmental act (whether administrative, legislative or judicial) increases the project cost or diminishes the benefits of the developer.

It provides that (i) economic and technical disputes must be subject to good faith negotiation followed by a panel of three experts (only binding in the event of a unanimous decision), (ii) contractual legal matters are subject to arbitration, and (iii) legal matters with respect to concessions, authorisations and permits must be subject to federal courts.

In sum, the P3 Law provides for a flexible mechanism for the joint effort of the private and public sectors in building and creating necessary infrastructure for the general population in Mexico, allowing for the private sector to have a return on its investment and at the same time creating jobs, economic growth and infrastructure development.

Ricardo A Gómez-Palacio del Rio

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