Mexico: Public-Private Associations: A New Regime For Mexican Public Bids

On January 16, 2012, the Law of Public-Private Associations (the "Law") was published in Mexico. This Law will permit private persons to participate jointly with agencies and bodies in "public-private association projects." These projects may take one of two forms: contractual arrangements among the public and private sectors for the rendering of services in which the infrastructure provided (in whole or in part) by the private sector is aimed at increasing social well-being and investment in the country; or arrangements that associate public and private sectors in any manner to develop productive investment, applied research, or technological innovation.

Although this law provides many new opportunities for private persons to participate in these projects, there are several aspects of the new Law that will have to be clarified in the Regulations (which are to be enacted in the next 12 months) and the yet-to-be-issued Guidelines (for which the transitory articles establish no deadline).

The Situation Before the Law

Before this Law, a Mexican private person interested in participating in a project with the government had to do so under the Law of Acquisitions, Leases and Services of the Public Sector (the "Procurement Law") or the Law of Public Works ("Public Works Law").

In either case, such private person had to wait until the agency decided to initiate the project. Once the agency decided to do the project, it would publish the bidding terms in the CompraNet system, and possible vendors or providers would purchase those terms and file a proposal meeting certain formal criteria, including guarantees, which in some instances could be cumbersome. The proposal would require a technical description and an economic description of the project. The proposals would be judged by the agency, and the resulting winner would be awarded with the project.

This created certain issues from the private participant's point of view: being subject to two different regimes (one for construction contracts under the Public Works Law, and another for leases, purchases, and service agreements, regulated in the Procurement Law); and the limited scope of the private person's participation in the project (usually either as an investor, construction contractor, or supplier).

For instance, an airport project under the old regime would require two separate authorizations from the Ministry of Communications and Transport, one for building the airport, specifying the builder's obligations in terms such as minimum airport capacity, regulatory and international approvals, quality of the tarmac, etc., and a second separate one from the same Ministry to operate the airport. Oftentimes, the consideration offered by the federal government for a project consisting purely of the construction of the airport will not necessarily bring sufficient return to be attractive to an investor; particularly because of the way the Public Works Law will tend to favor the most cost-efficient project (from the government's perspective) in a bid. Therefore, the relevant governmental agencies would often negotiate with the winner of the award and sometimes call for another bid, invite at least three persons, or directly award the operation permit to the investor. In theory, this permitted additional profit for the investor because it allowed them to either obtain additional consideration from the government for the services rendered as operator, or to charge those services directly to the users.

In practice, this system posed several risks and additional costs for the investor. Just to mention a few:

  • The filing of two separate offers, and/or the awarding of two separate contracts, would probably signify the payment or delivery of two separate compliance guaranties to the government, with the corresponding increase in costs.
  • The possibility that a bidding investor could be awarded with one of the concessions, but not with the other, which would cause the investor to be obligated under the remaining concession, without being entitled to the additional profits from the lost bid.
  • The possibility that an awarded investor could lose, for any reason (or be expropriated of)1 one of said concessions, but not the other, with the same results as the preceding point above.

Advantages of the Law

The main advantage of the Law is its flexibility, since it allows projects that jointly comprise all the operations contemplated by the other laws2 (construction, lease, and/or operation), and potentially widens the reach of government projects to include any other form of transactions, even technology transfer. The scope of the projects in which the Mexican government may participate, or the nature of the contributions it may solicit from private persons for these projects, is much broader. From the government's perspective, this permits tailor-made projects to meet a specific government need without having to limit the project to the narrow scope of either the Public Works Law or the Procurement Law. From the participants' perspective, this opens many more possibilities for business in Mexico, since the federal government still remains the single largest domestic purchaser of goods and services in Mexico.3

The Law's exposition of motives references certain specific sectors that the proposing representatives believe will be especially benefitted by the entry into force of this Law:

  • Hospital construction and health care services
  • Construction and operation of federal highways and bridges
  • Construction and operation of harbors and airports
  • Construction and administration of infrastructure for certain public services (public education, power generation, administration of justice, etc.)

A first look at these sectors (with the possible exception of health care) seems a clear indication that one key goal of this Law is the creation of a more flexible regime for when one private entity wishes to be both the builder of the project and the operator of the project's final result.

Unsolicited Proposals

A particularly interesting aspect of the Law is that in theory, it allows private persons to file proposals for new projects to any government agency (an "Unsolicited Proposal"). To that effect, government entities may publish a decree indicating the sort of proposals entities are willing to receive or consider, by geographic sector, type of services offered, etc. However, article 26 of the Law provides that when such decrees are published, the governmental entity shall be obligated to study only those proposals comprised in those decrees. The language of the Law is not clear on whether entities that choose not to publish any such decrees are obligated to study all proposals they receive or not.

Unsolicited Proposals are not binding on agencies and do not grant the proposing person any additional rights except the right to receive a certificate (in case the Unsolicited Proposal is accepted) that will entitle the proposing party to participate in the relevant contest or bid or, if not the winner, the right to be reimbursed for some of the expenses incurred in connection with the preparation of the study and the filing of the proposal. At the time the proposing person files the Unsolicited Proposal, that person is required to grant a license or an assignment of all rights that may give it exclusivity with respect to the project, to the eventual winner of the contest, in case it is not the proposing person.

Filing an Unsolicited Proposal requires that the proposing person present a preliminary feasibility study including, among other things, a description of the project; the required governmental and nongovernmental approvals; its technical, legal, and economic viability; a description of the essential aspects of the public-private association agreement that would be entered into; and a study regarding the convenience of doing this project by means of a public-private association rather than by other means.4

Contests and Awards

According to the Law, bids for public-private associations may be awarded, as a general rule, by contest, by invitation to at least three persons, or, occasionally, by direct award. "By invitation" and "by direct award" would occur only in the cases specifically provided in the Law, which include (among others): that only one person holds the patent or some other form of exclusive intellectual property rights; defense and security-related projects, under certain conditions; and projects entailing "strategic alliances (...) with legal entities dedicated engineering, research and technology transfer and development."

Contests will operate as follows:

  • Any federal agency, as well as any federal public trust, states, municipalities, agencies of a state or municipality, and constitutionally autonomous organism (the "Requesting Agency") may call for bids by means of the publication of two documents (respectively, the "Call" and the "Bid Rules") on the web page of the Requesting Agency, the Official Gazette of the Federation, CompraNet, a newspaper of national circulation, and in another newspaper of the state where the project will take place.
  • The Call will contain (among others): a general description of the project, with an indication of the services to be provided or the infrastructure to be built; the estimated commencement date for the Bid, the estimated duration of the services, and the estimated duration of the performance of the infrastructure works, as the case may be; and the time and place for participants to acquire the Bid Rules. Acquiring the Bid Rules is a legal prerequisite for participation in the Bid.
  • The participants will state their intent to participate by the submission of their proposal, which will include both a technical and an economic proposal. The period to file the proposal will never be less than 20 business days as of the publication of the Call.
  • The Requesting Agency, either by itself or by means of an agent acting on its behalf and at its expense, will receive the proposals.
  • Proposals shall then be qualified pursuant to the criteria set forth in the Bid Rules. The Law provides that Bid Rules shall establish "clear and detailed criteria (...) for the evaluation and award of the project...," always provided that the mandatory minimums established in the Bid Rules are met. In the event that there is only one participant, the Requesting Agency may choose to award the project directly, provided that the participant meets the Bid's requirements and the proposal is acceptable to the Requesting Agency. In the event of a tie, the Bid will be awarded to (in the following order):
    • The proposal offering the best economic conditions (from the government's perspective); and
    • The proposal that offers both more employment generation and the use of more goods and services of national origin.
  • The awarding of a bid to any given person, may be challenged by other participants by either: an administrative recourse, pursuant to the Federal Law of Administrative Procedures, or an annulment suit before the Federal Tax and Administrative Tribunal.
  • The relevant public-private association agreement will be entered by the Requesting Agency and the participant, in the terms and conditions set forth in the Bid Rules.

The Awarded Party will be entitled to enter into an agreement with the Requesting Agency. If the Awarded Party's obligations under the relevant agreement require one or more concessions, then the award of the bid will entail award of the concession, but the Awarded Party shall nevertheless continue to be required to meet the legal requirements for the concession provided in the relevant laws.

Goods and Expropriation Regime

The relevant Bid Rules, and the eventual public-private association agreement entered into between the Awarded Party and the Requesting Agency, will dictate ownership of the assets related to the project and how those assets will be used by the government or the general public (when applicable). Acquisition of the goods and rights required for the project may take place either "conventionally" (i.e., by signing private agreements with the relevant third parties) or by means of expropriation, as required.

Goods to be acquired may be appraised by the Institute of Administration and Appraisal of National Goods, Mexican credit institutions (banks) authorized to that effect, public brokers, or professionals with postgraduate studies in valuation.

Conventional acquisition is subject, as a general rule, to negotiation with the Requesting Agency meeting the formalities provided in this Law (a relatively formulaic procedure), or, when expressly provided in the Bid Rules or the relevant public-private association agreement, with the Awarded Party.

The Law also regulates a special expropriation regime for the acquisition of goods required for a public-private association project. It provides that the opinion by the Requesting Agency demonstrating the project's technical feasibility and social profitability will suffice as proof of public benefit for purpose of the Expropriation Law. With that study, the Requesting Agency may make the declaration of public benefit required for the expropriation under Mexican law.

This declaration will be published in the Official Gazette and the relevant state's official newspaper, and notified to the owners. If the domicile of the owner of the goods is ignored, the Law provides that the Requesting Agency may publish the declaration of public benefit in the Official Gazette a second time, and such publication "shall render the effects of a personal notice." Furthermore, Article 78 of the Law provides that such declaration of public benefit "shall have no ordinary means of defense and may only be challenged by an amparo trial." We consider that both of these provisions may be subject to challenge on Constitutional grounds (due process).

Interested parties may object to the declaration of public benefit within the 20 business days following the date on which the declaration was notified (the "Objection Period"), attaching what evidence they consider suitable to their writs. The Requesting Agency will resolve with respect to these objections within the 10 business days following the expiration of the Objection Period.

Limitations and Hindrances

The applicability of the Law has certain specific limitations. Public-private associations cannot exist with respect to state or municipal projects where more than half of the public resources invested in the project are not federal resources, as well as the fields in which private investment is forbidden to participate in Mexico.5

With respect to the state or municipal projects discussed above, we expect that if associations of this type are successful at the federal level, similar legislation may be enacted in each of the states. If this is the case, local projects will require specific legal analysis.

In addition, the limitations discussed above with regard to the filing of Unsolicited Proposals may signify that in practice, the supposed advantage of the right to present an Unsolicited Proposal will be negated for all practical purposes, because government entities are obligated to study only the projects considered in the decrees those entities publish. In addition, the previous studies that the Law requires the proposing person to file imply a significant expense. We do not believe private persons will risk the expense if they have no certainty that their project will be studied.

Of further concern are the provisions of this Law governing payment of multiyear projects. Article 24 of the Law provides that projects have to be authorized by the Intersecretarial Commission of Public Expenses, Financing, and Disincorporation to determine their inclusion into a specific line of the annual federal expense budget (and the consequent approval of inclusion by the Federal Chamber of Deputies). Unless the Regulations and Guidelines provide otherwise, this may mean that, while the projects themselves may be awarded once for multiyear contracts, if any payment from the federal government is expected, such payment will have to be approved on a yearly basis. This contingency may, among other things, result in increased financing costs from banks providing loans to private participants in projects, to account for the risk of noncompliance by the agencies due to lack of budget approval.

Dispute Resolution

The Law provides for the existence of two types of disputes, and different options to resolve said disputes in each case:

Technical and Economic Disputes. The parties may agree to a previous good faith negotiation phase in the event of any such dispute; this phase will have the duration agreed by the parties. Should they fail to resolve the dispute in the agreed-upon period, the affected party may, within the five following business days, notify the existence or continuance of the dispute to the other party in writing, appointing an expert. The notified party shall, within the five business days following receipt, reply on the same terms. These two experts shall designate a third, and the three, acting as experts and not as arbitrators (in other words, being unable to resolve any matters other than technical and economic matters), shall have 60 business days to receive arguments and evidence from the parties, cite the parties to hearings if required, and resolve. Such resolution shall be binding only if taken by unanimous vote.

Legal Disputes. The parties may include, in the relevant public-private association agreement, that any legal dispute shall be resolved by means of conciliation before the Federal Ministry of Public Service and/or by means of final, binding, stricto jure arbitration subject to Mexican law and to the Code of Commerce, held in Spanish.

If the parties do not include these provisions, then the competent courts shall be federal courts of Mexico.

In any event, disputes regarding the validity of administrative acts (such as the granting or revocation of permits or concessions) may be solved only by federal administrative courts.

Notwithstanding the above, investors from countries with which Mexico has signed a Bilateral Investment Treaty may be entitled to the additional dispute resolution mechanisms provided therein. Specific analysis of the terms of the relevant BIT on a case-by-case basis is advisable.

Business Opportunities

If the relevant regulations and guidelines do not prove too stringent, we would expect to see not only important opportunities for the attraction of direct domestic and foreign investment in Mexico (with the ensuing legal considerations), but also important knowledge transfer transactions with the Mexican government that were very difficult to document before the Law's entry into force. This may be of special interest to many entities, from public corporations to universities, that found themselves having difficulties operating with the Mexican government within the preexisting, less flexible legal framework.

However, the limitations discussed above with respect to Unsolicited Proposals still mean that the government has the final word on what projects are studied and carried out. Therefore, this law fails to address the private sector's concerns that business or infrastructure initiatives originating in the private sector requiring commitments from the public sector (such as those that require a concession because they refer to the rendering of a public service or require the use of a public good) may or may not be addressed at the discretion of the relevant agencies.

Footnotes

1 The latter possibility is particularly worrisome in the case of domestic investors and foreign investors from countries with which Mexico has not entered into a Bilateral Investment Treaty.

2 The required studies imply that this new regime is exceptional. All operations not justified by such studies will be subject to either the Public Works Law or the Procurement Law as applicable.

3 See www.infochannel.com.mx/10-h13016/www.dupapier.com.mx.

4 This latter study will be further regulated by the Guidelines, yet to be issued by the Ministry of Finance and Public Credit.

5 Defined by the Mexican constitution as "strategic areas," such as (without limitation): exploration, exploitation, distribution, transport, and first-hand sales of oil (petroleum) and its derivatives; nuclear power generation; sale of electric power, etc.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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