Daniel Barros of Philippi Prietocarrizosa & Uría in Santiago looks at the issues surrounding concession terminations
General overview of the Chilean regime for enacting private concession of public works
The granting of private concessions to build and operate state-owned public works experienced a vertiginous development in Chile during the 1990s and the first decade of this century. Under Chilean Law, a concession may relate to any public works project. The government grants infrastructure concessions through the Ministry of Public Works (MOP, for its initials in Spanish). Generally, a concessionaire undertakes to construct or improve a specific facility and then to operate, profit from it via tolls, payments, subsidies or a combination thereof, and maintain it for a specified term. The Government provides the concessionaire with a referential design of the project and monitors its construction and operation. Concession contracts typically last from 10 to 30 years, although the Concession Law allows for periods up to 50 years. Although the first concession of this type in Chilean history was granted in 1993, the first law that specifically regulated these types of public-private agreements was not enacted until 1996. This law established clear and known rules which attracted investors, including foreigners, to participate in the bidding processes called by the Government. Between 1993 and 2009, more than 50 concession agreements for the execution and operation of public works were awarded by the Chilean State, including projects such as toll roads, airports, prisons, hospitals, reservoirs and public buildings. The majority of these projects (26 of them) corresponded to toll roads.
In January 2010, during the last year of the first presidency of Michelle Bachelet, and in part due to an analysis that the former law was too favourable to concessionaires in certain aspects, an amendment to the Concessions Law was enacted and became effective in April 2010. This amendment intended, among other matters, to improve the dispute resolution mechanism through the establishment of a Technical Panel and changed the regulation of the Arbitral Commission to resolve conflicts arising out of the concession contracts in law and not in equity, which limited the ability of concessionaires to claim for compensations. Likewise, based on the fact the Chilean State had entered into many and very onerous agreements for complementary works with concessionaires for the execution of complementary works needed for the correct operation of different public works, this amendment regulated and limited the ability of the Chilean State to make amendments to the concession contracts already awarded without calling for a new bidding process, setting forth that the maximum amount of new investments agreed with the concessionaire, at the construction stage, may not exceed 20% of the official budget for the works and that, during the exploitation stage, when the value of these investments would exceed 5% of the official budget for the works, its execution will be carried out by a third party selected through a mandatory bidding process and not directly by the concessionaire.
In the years immediately preceding and after the enactment of the Concessions Law amendment in 2010, the Chilean State significantly slowed down the granting of new concessions and the current Government, lead again by Bachelet, has publicly announced that the utilisation of the concession scheme will be revised with respect to hospitals and prisons, in order to asses if the same is profitable for the Chilean State. For other types of projects such as toll roads, airports, reservoirs, etc., the Government has reaffirmed its belief that the concession regime is suitable for the interests of the State.
Notwithstanding this scenario, some very important projects have been awarded to private concessionaires during the past years. On December 13 2013, the Government announced an international bidding process to construct a bridge to connect Chiloé, Chile’s largest island, with the mainland. A bidder was selected on February 17 2014 with an estimated cost of $606 million; construction is expected to take approximately 81 months. On February 2015, a bidder was selected to build and operate a new terminal in the Santiago’s Airport with an estimated investment of $700 million. Construction is expected to take approximately 60 months and the concessionaire shall operate the airport for a 20 years period in which will be entitled to an approximately 25% of the total incomes of the airport. The bidding documents issued by the MOP for this last project include provisions regarding early termination by the Chilean State for convenience that will be further analysed in the following sections below.
The ability of Chilean State to unilaterally terminate early concession contracts for convenience
Among the modifications that were introduced to the Concessions Law on 2010, there is a new article 28 ter, which reads as follows: “If so demanded by public interest, the President of the Republic, following the appropriate report of the Concessions Committee, and through a substantiated decree of the Ministry of Public Works, which shall also be signed by the Minister of Finance, may early terminate the concession when a change in circumstances would render the works or service unnecessary for meeting public needs, or would require its redesigning or supplementing so that any additional investments needed to adapt the works to the new conditions would exceed 25% of the official budget for the works”. The same article emphatically adds that “this power may only be exercised during the construction stage”. Likewise, this provision requires the concessionaires to be fully compensated for such termination.
By interpreting this article in harmony with the Chilean Constitution and the Chilean Civil Code, which respectively state that (i) no one may be dispossessed of its property or its ownership rights be essentially affected unless a special or general law authorises so due to public interest grounds, interest which should be so qualified by Congress and that (ii) over the non-corporal assets, such as rights in a contract, there is also a type of property, which has the same protection as the one on physical assets. Most of Chilean lawyers have concluded that the specific grounds and manner set forth in article 28 ter of the Concessions Law is the only lawful situation where the Chilean State may terminate early a concession contract for convenience, unless a specific law is enacted in such sense, since such termination would essentially affect the property of the concessionaire over its contractual rights, therefore requiring a specific or general law authorising the expropriation and qualifying the public interest grounds which motivated it.
Although such interpretation, in the past two or three years, the Ministry of Public Works have been including in the bidding documents issued for new public works a faculty of the Chilean State to early terminate the concession which exceeds the rules set forth in article 28 ter of the Concessions Law . Basically, these bidding documents establish that the MOP, for reasons that limit the correct operation of the works or development of the region or that are deemed necessary to increase the technical standard and/or service levels, or for other reasons of public interest, may early terminate the concession contract when at least an important part of the concession term (70 to 80%) has elapsed since the publication of the relevant Awarding Decree.
As we already know, according to the Concessions Law, the State shall only be entitled to order the early termination of the Concession due to reasons of public interest during the Construction Stage. Nevertheless, in these cases, the bidding documents entitle the State to order the early termination of the Concession during the exploitation stage and contemplate a compensation mechanism different from the one provided by the Concession Law.
Analysis of the lawfulness of these provisions in the bidding documents recently issued by the MOP.
There are at least two powerful arguments the MOP may use to defend the lawfulness of this provision.
First, the Concessions Law specifically sets forth in its Article 1 that the execution, repair, maintenance or exploitation of state-owned public works, through the concessions system “will be governed by the regulations established in this statutory decree, its regulations and the bidding conditions regulating each particular contract prepared by the Ministry of Public Works to said effect”. Likewise, such law includes, in its article 27, among the reasons why a concession may be terminated, “those as provided in the bidding documents”. Therefore, it can be said that Congress has already authorized the MOP to establish events that would give raise to early termination of the concession, different form the ones expressly provided in the law.
However, this first argument can be easily contested if we consider the express text of Chilean Constitution when it requires not only a general or special law authorizing the expropriation, but also that Congress specifically qualifies the public interest grounds used to decide the expropriation. Therefore, the qualification made only by the MOP is not sufficient to comply with Constitutional standards. Likewise, the Concessions Law is very clear when it provides that the State may only exercise the ability to terminate the concession if so demanded by public interest during the construction stage, so it seems difficult to argue that such Law authorises the MOP to exercise precisely the same ability in different cases and during the exploitation phase.
The second argument that can be used to defend the lawfulness of this provision is, in our opinion, much stronger, and consists in pointing out the fact that the concessionaire, when it participated as bidder and when it presented its offer, was aware of this provisions included in the bidding documents, so that it should be deemed to have agreed on such provisions, being understood that the ownership rights acquired by the concessionaire were acquired with this limitation and risk incorporated to it from the beginning, and that the exercise by the MOP of its contractual rights mutually agreed with the concessionaire would not constitute in any manner a subsequent expropriatory event.
As mentioned, this argument seems stronger since it is unquestionable that the concessionaire would have known this ability of the MOP at the moment of presenting its offer, thus having the opportunity to assess the risk and to freely decide to bid or not subject to such conditions. Nevertheless, in our opinion the issue is not that simple, since this is not an agreement entered into between private entities, but a relationship between the administration and private entities. In this regard, article 21 of the Concessions Law is clear on separating the regulation applicable to the relationship between the concessionaire and the MOP (as representative of the Chilean State) and the relations between concessionaire and third parties. In this regard, such provision states that all legal relationships among the concessionaire and the MOP are based on principles of public law while the legal relations between the concessionaires and any third party (users, contractors, employees) are ruled by private law. This is relevant for our analysis, since the argument described above regarding the acceptance by the concessionaire of rules which exceed the Concessions Law is an argument eminently arising from private law principles. Within public law principles, the Government is only entitled to act as expressly authorised by law and generally, the rights of private entities are not renounceable in favour of the administration. Taking this into consideration, the analysis gets more complex.
Despite this, the ones arguing in favour of the lawfulness of these provisions may state that, as described above, the exercise of this ability by the MOP does not constitute an expropriation event and, thus, it is not subject to the Constitutional limitations described in section 2 above. If this argument is accepted, the legality of the eventual exercise of this ability by the MOP will be based on the bidding documents authorizing it to do so, but we will still need to determine if those bidding documents exceeded or not the provisions of the Concessions Law, when it limits the early termination for convenience in the construction stage.
In this respect, we are of the opinion that a concessionaire would at least have a strong case to oppose an eventual exercise of this ability by the MOP, arguing that the Ministry is only allowed to exercise expropiatory rights subject to the provisions of Chilean Constitution and/or that the referred ability is contradictory with the Concessions Law, the application of which should prevail over the bidding documents due to its greater regulatory hierarchy.
We will still need to wait for several years to see how these provisions are actually applied since, due to its recent incorporation of bidding documents, these types of provisions have never been applied on any concession contract in Chile. Moreover, the eventual exercise of this ability by the MOP would happen several years from now since, as already explained, this ability is to be exercised when at least an important part of the concession term (70 to 80%) has passed since the publication of the relevant Awarding Decree. Nevertheless the fact that the General Comptroller of the Republic (the organism in charge of certifying the lawfulness of all acts of the administration in Chile) has approved all the bidding documents containing these provisions certainly gives a stronger base to the legality of the same, although such certification is not binding to Chilean courts nor to any private entity.
Philippi Prietocarrizosa & Uría
About the author
Daniel Barros is a lawyer at Philippi Prietocarrizosa & Uría at the Santiago office. He joined the firm in 2010.
His legal practice focuses on banking, finance and capital markets, corporate / M&A, and infrastructure and projects.
He went to Law School at Universidad de Chile, and was granted his Law Degree by the Supreme Court of Justice in 2014.