Public Private Partnerships Law Decree

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Dear Clients and Friends:

This past June 13 2016, the Decree 2353 that contains the Public Private Partnerships Law of the State of Baja California Sur was published in the Official Gazette of the Government of Baja California Sur (hereinafter, the “Law”).

This Law is a reflection of the federal Public Private Partnerships Law (hereinafter the “Federal Law”), which was published in the Federal Official Gazette on January 16th 2012 and was amended this past April 21st 2016.

I. Concept and purpose of Public Private Partnerships

Public Private Partnerships (hereinafter, “APPs”) are, broadly, long term contractual relationships between the public sector and the private sector for the supply of infrastructure, assets and/or public services that should originally be supplied by the government.

APPs were designed to be financing legal mechanisms with the purpose of making the supply of a public service more economically feasible and efficient, allowing the participation of the private sector. Under this contractual scheme, the private sector develops, finances and operates a project for the supply of public services, receiving a compensation that arises by virtue of the contract with the entity of the public sector.

The APP model has been previously used in Mexico to carry out projects such as the construction of roadways, highways, vehicle bridges, specialized hospitals, governmental offices complexes, wastewater treatment plants, as well as universities and cultural centers, among others.

II. Sphere of Application of the Law

In accordance with article 2 of the Law, the public private partnership projects (hereinafter the “APP Projects”) regulated under the Law are those carried out to establish a long term contractual relationship1 between the public sector and the private sector with the purpose of providing services to the public sector, wholesalers, intermediates or the final user, and under which the infrastructure provided, completely of partially, by the private sector is used with the purpose of increasing social welfare and the levels of investment in the State.

It must be mentioned that this APP schemes are presented by the Law as an option to legally structure only those activities on which the corresponding legislation foresees the involvement of the private sector whether freely of by means of the granting of permits, authorizations or concessions, for the supply of the respective services and/or for the exploitation of public assets.

This Law is applicable to all the APP Projects in charge of the following governmental entities:

I. The Executive Power of the State, directly or through the competent departments that are part of the Centralized Public State Administration;

II. State entities that are part of the Parastatal Public Administration;

III. Autonomous public organisms created by express mandate of the Constitution;

IV. Public state trusts that are not considered parastatal entities;

V. The Municipalities of the State, their departments and decentralized organisms; and,

VI. All other entities that are indirectly part of the Municipal Public Administration (Paramunicipal).

The Federal Law will apply to those APP Projects that are carried out with federal resources, unless the Project at hand is not within those listed by the Federal Law or when in the event both federal and state and/or municipal contributions are made, these latter are considered higher than the federal contributions.

III. Implementation Procedure of APP Projects

An APP Project can be initiated by means of the following two conducts:

i. By initiative of an entity of the public sector of those aforementioned that has interest in promoting a APP Project (hereinafter, the “Promoting Entity”); or,

ii. By initiative of an entity of the private sector, through a non-requested proposal preceded by a manifestation of interest.

By the first conduct, the head of the Promoting Entity shall appoint a Manager to organize, coordinate and supervise the necessary works for the preparation of the project. Once the Project is prepared, the Manager shall present before the Promoting Entity a validation request. The Promoting Entity shall then issue an official opinion by means of which the development of the Project is validated (the “Validation Opinion”).

By the second conduct, a person from the private sector (the “Developer”) presents before a governmental entity a simple brief in which it requests for said entity to manifest itself in favor or against the interest of developing a certain APP Project (the “Manifestation of Interest”). The Entity before which the Manifestation of Interest is presented shall reply to said request either denying it or accepting it. If it accepts it, the Developer can present a Non-Requested Proposal before the Entity. Such Project shall be validated as well by the concerning Entity, through an opinion issued by the same.

The Non-Requested Proposal shall contain, at least, the following:

I. The description of the proposed Project;

II. The description of the authorizations, permits and licenses that, in the case at hand, will be necessary for developing the Project;

III. The studies of legal, economic, financial, technical and environmental viability of the Project;

IV. The documentation that certifies the social profitability of the Project.

V. The convenience of carrying out the Project through a Public Private Partnership scheme;

VI. The investment estimates and contributions, in cash and in kind, both from the state and from individuals, as the case may be, municipal or federal, on those in which reference is made to the estimated cost of the assets’ acquisition and the necessary rights for the Project; and,

VII. The essential features of the Contract to be executed. In the event that in the proposal the participation of two or more entities from the private sector is considered, it shall establish the obligations of each participant of said sector.

Before being presented for its validation and its corresponding approval, every APP Project shall be registered before the Bank of Projects that is managed by the Finance and Administration Ministry of the State of Baja California Sur (the “Ministry”).

Once an APP Project is presented through either of the two conducts, it shall be rotated towards the Ministry when regarding state projects or to the City Council regarding municipal projects2, for their respective budgetary approval.

When income that corresponds to the state is pretended to be affected also, authorization from the State Congress shall be obtained as well.

IV. Awarding of the Contract

Once the APP Project is validated and authorized, and the authorization from the Congress is issued, as it may correspond, the awarding of the Public Private Partnership Contract (the “Contract”) follows.

In order to award the Contract, a tender is carried out by which the APP Projects are presented, previous publication of a calling that shall contain the requirements of the same. The proposals are presented before the Calling Entity and it conducts and evaluation and a comparative analysis among them in order to subsequently issue a ruling by which the Contract is awarded.

Likewise, the Law lists some exceptional circumstances under which the tender can be omitted, conducting an awarding procedure through invitation of at least three subjects or a direct awarding.

Once the Contract is awarded, its drafting and subsequent signing follows.

V. Conclusions

APPs are without a doubt an area of opportunity for both the public sector and the private sector. Nevertheless, the success of the Project that is sought to be done by an APP contractual scheme invariably depends upon the planning and financial and technical structuring of the same. It is for this reason that it is essential to analyze case by case to come to consider the viability of a certain Project through an APP scheme.

Nonetheless, the enactment of this Law entails a considerable progress on the variety of available legal mechanisms for the supply of infrastructure and/or public services from the State; but it is above all a legal vehicle that facilitates the positive impact of private investment in the social welfare of the State.

Note: This document is a summary with disclosure purposes only. It does not constitute a legal opinion and may not be used or cited without our prior written consent. We assume no responsibility for the content, scope or use of this document. For any comments regarding this Memorandum, please contact any member or attorney of Consulbaja S.C.

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