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

Author:Mr Manuel Romano, Manuel Echeverría, Miguel Ishii and Iván Pérez Correa
Profession:Jones Day

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,...

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