One of the major roadblocks which has confronted investors interested in developing Paraguay’s natural resources is the fact that, often, there are no roads connecting those resources with the rest of the country. Now that Paraguay has passed new legislation governing public-private partnerships, the country’s lawyers are heralding both an infrastructure boom and a crucial new phase in the country’s economic development.
The new PPP law was enacted at the beginning of November as part of a government drive to develop an estimated US$10 billion worth of infrastructure in the country, including roads, ports, airport and power distribution networks. With the government’s coffers unable to fund the majority of the infrastructure projects that the country so desperately needs to keep pace with its economic growth, partnering up with the private sector could prove to be what Paraguay needs to kick-start development in a range of fledgling industries. “There is an imperative need in Paraguay to invest infrastructure,” says FERRERE Abogados (Paraguay) partner Carlos. “It’s the lifeblood of the economy and it has been delayed by the government for a long time.”
Out of 80 projects pending, the government has already identified 10 which it considers suitable to be structured under a PPP. “It will be a very useful tool for the government to attract investment,” explains Ferrere partner Néstor Loizaga. Given that the projects will be large scale, Vouga Abogados partner Jorge Figueredo says he expects the law to be of benefit primarily to foreign companies, as their Paraguayan counterparts are unlikely to have the resources, access to financing or technical capabilities. Indeed, the PPP model has generated considerable interest among investors across Latin America, and its introduction in Paraguay will provide them with more of an incentive to look to one of the region’s poorest countries. Shortly after the legislation was announced, local newspapers reported that a series of meetings had taken place between the government and several companies from Spain, Brazil, Chile and Bolivia to discuss the country’s prospects.
The law contains a number of features similar to comparable legislation across the region. It imposes a minimum capital threshold for projects of US$4.8 million, and has allowed for the creation of a public-private partnership project unit to coordinate all related matters, although the Ministry of Finance will have final say on whether a project may be structured as a PPP. Companies are also able to submit proposals to the government, which will the conduct a feasibility study, and if accepted a public tender will be launched. If the party which initiated the process is not selected, it will have the right to compensation for all expenses.
Any bidder awarded a project will be required to establish a joint stock company within a period specified in the contract, in which the bidder must be the majority shareholder. The bidder may also be required to establish a trust. On the government’s side, it will also seek to provide companies with certainty over their investments by setting up government-funded trusts to guarantee all outstanding agreements. “This will act as a kind of insurance for the private sector,” says Loizaga.
Although it is officially enshrined in law, much remains to be ironed out. The legislation is still pending a decree, to be issued within 120 days of the enactment, which will lay out the regulations governing PPPs in Paraguay. According to Figueredo, one of the most important issues to be included in the decree which is currently under discussion is a standardized template for drafting contracts. “In PPP law the contracts are more important than the laws themselves,” he points out.
There are a handful of other aspects of the law which the lawyers think could result in potential hurdles. For one, the contracting authorities are entitled to modify PPPs on public interest grounds. While a structure for compensating the private party is in place, Loizaga cautions that this represents “a red flag” for the private sector.
Similarly, although the law outlines a number of investment protection mechanisms, such as the government trusts that will back the projects, Peroni, Sosa, Tellechea, Burt & Narvaja partner Enrique Sosa Arrúa warns that the decree will have to provide carefully drafted regulations to ensure investors feel secure. “The projects, including the studies, pledges and contracts, will have to be adequately structured and grant sufficient legal security, which will require the development of strong institutional capabilities,” he says.
Figueredo suggests that the best way to implement the new legislation would be for the government to bring on board a consulting group from the multilateral agencies such as the IADB or World Bank with a view to reproducing the best practices in the region – he points to Chile, Peru and Colombia – in a way that suits the Paraguayan reality. He adds that the government should consult foreign companies to find out what they expect from a PPP law.
Regardless of how the regulations play out, the lawyers predict that the new law will see the entry of a number of major regional players into Paraguay. “There’s a lot of excitement both abroad and locally,” says Figueredo. “This is perhaps the main, and the only, tool to bring Paraguay into the 21st century and narrow the huge gap we have in infrastructure and public services.”
That investor enthusiasm in turn will trickle down to the country’s lawyers. While Figueredo expects law firms which have a large number of foreign clients on their books to lead the way, he adds that the impact is likely to be so significant that there will be additional space for the smaller local firms. “Companies generally prefer the biggest firms which are used to sophisticated legal and financial tools, so they will have an advantage, but I’m sure there’s also a space for boutique firms that can set up this knowhow and be able to attract investors from abroad,” he says.
As Sosa, who is working on the drafting of the law, points out, “any new and powerful legal instrument without doubt has a great impact on the legal community.” He counsels lawyers interested in capitalizing on work arising from the new law to carefully study the framework, as well as taking note of the experiences from other countries. “This will require a greater exchange of information among law firms,” he suggests.
In terms of practice areas which are likely to benefit, because of the provisions outlined in the law for the creation of trusts, this could prove an important area for lawyers to lend their skills to. Furthermore, arbitration lawyers will see their expertise in demand given that foreign companies will certainly request conflict resolution clauses in the PPP agreements.
More generally, Figueredo says he believes that the entry of foreign players will have an important impact on the legal profession. As local lawyers will be attending to demands of foreign clients, they will be brought up to speed on the more sophisticated legal structures that are common elsewhere.
Loizaga hopes that Ferrere will be able to capitalize on the work thanks to its Uruguayan branch, which has more experience on PPP projects and international investors, although all the country’s larger firms are likely to benefit. “It will have a big impact,” he says. “Investors will for sure require legal advice on the bidding process and many aspects of the process which have previously been unheard of in Paraguay but which are common in the region.”
While Paraguay is set to benefit from the new legislation whatever happens, the key to the country’s development will be ensuring that it can keep reeling in foreign investment in the long term. Given that most major infrastructure projects have a duration of 15 to 20 years, they will not be started and finished under the current administration, meaning that Paraguay will have to convey a message to investors that it is a stable country in which to do business. “The success of this new framework will depend a lot on the government and what they convey to the private sector,” Loizaga says.
Article published in Latin Lawyer on Tuesday, November 26, 2013.