Public works concessions

CONCESSION MODEL

The concession model and its legal framework

INSTITUTIONS

Institutions

Ministry of Public Works Bids, awards, oversees and supervises concessions and executes the contracts. Prepares the bidding terms, inspects the work and grants provisional and final commissioning authorizations.

Public Works Concessions General Directorate Unit specializing in infrastructure through public-private partnership. Created by Law No. 21,044, published on November 25, 2017, which raised the former Concessions Coordination Office to a general directorate.

Concessions Council Advisory body created by Law No. 20,410 that reviews projects and rules on the concession modality. Under Article 1 bis of MOP Supreme Decree No. 900, it comprises the Minister of Public Works, a councilor designated jointly by Public Works and Finance who chairs it, two Finance councilors and two Public Works councilors. It only advises.

Technical Panel and Arbitration Commission. The system’s two dispute-resolution bodies (see below). The system’s two dispute-resolution bodies, introduced and strengthened by Law No. 20,410. Developed further later in this chapter.

CONCESSION PROCESS

The concession process

Any person, individual or legal entity, Chilean or foreign, may participate. The process originates in two ways that define who bears the studies.

Public initiative. The project originates in the Ministry or another authority and is submitted to the Concessions General Directorate. Before the call for tenders, Finance and Social Development approval is required; once approved, the bidding process is called and published in the Official Gazette and a national newspaper.

Private initiative. A private party proposes the project to the General Directorate, which verifies it is unique, not already under development, and of public interest. Once so declared, a procedure is set with minimum studies, reporting deadlines, a government inspector and the guarantee under Article 10 of the Regulation. The proponent does not obtain the award; the project is tendered competitively, with reimbursement of studies and an evaluation bonus. Bidding terms, prequalification and award. For complex projects, Law No. 20,410 introduced a prequalification stage assessing technical, legal and financial capacity before allowing bids; the tender combines technical and economic offers.

Award rule. Transparent tender, with no direct bilateral negotiation, as a general rule to the bidder whose economic offer receives the best evaluation while meeting the technical requirements. Factors usually include the tariff, term, subsidies and payments for preexisting infrastructure. It is formalized by supreme decree of the Ministry of Public Works, cosigned by Finance. Concessionaire company. Once awarded the contract, the winning bidder protocolizes the decree and incorporates a Chilean single-purpose company or registers a local branch as the bidding terms require; only then does it execute the contract and become a concessionaire. The single-purpose requirement isolates assets, cash flows and risks.

ECONOMIC REGIME

Economic regime, guarantees and insurance

Tariffs or tolls. The primary income source in concessions charging the end user, such as highways. Their structure, adjustments and caps are set in the bidding terms and are an award variable.

State subsidies. Contributions the Treasury commits when demand does not sustain the investment; their amount is usually an award variable.

Minimum guaranteed income. Ensures the concessionaire a revenue floor and covers the shortfall if actual revenue falls below the threshold, shifting part of the demand risk to the Treasury. In exchange, the bidding terms usually incorporate revenue sharing in favor of the State when collection exceeds certain levels; check its formula case by case.

FINANCING

Financing and modification of works

Financing is generally structured under project finance principles: the concessionaire company takes on debt repaid from the project’s cash flows, not the sponsor’s balance sheet. The piece that sustains the scheme is the special pledge on the public works concession. The contract may be pledged in favor of financiers or bonds the concessionaire issues, and includes the rights arising from it, the concessionaire’s revenue and the payments the State has committed. The law also recognizes the procedure for changing the concessionaire and enforcement upon default, allowing creditors to protect their claim without halting the work.

TERMINATIONANDDISPUTES

Suspension, termination and dispute resolution

The Regulation allows the concession to be suspended for force majeure, destruction of the works preventing their use, or other causes set in the bidding terms. During suspension all payments to the concessionaire are paused, including subsidies and tariffs, and losses are compensated through term extension, greater contributions or tariff adjustment.

In the normal course, the concession ends upon expiry of its term or by mutual agreement. In early termination, especially with a special pledge in place, the pledgee creditors’ rights and release of the security must be considered. It may also end for serious breach; the Ministry requests the declaration from the Arbitration Commission, appoints an intervenor and, with Treasury approval, reassigns the remaining term through a new tender. Early termination for public interest during construction also applies, following a Concessions Council report and Public Works and Treasury decrees, when a change in circumstances makes the works unnecessary or adjustments require investments exceeding twenty-five percent of the official budget, with statutory compensation.

Two-tier dispute resolution The system offers a two-tier architecture, resolving technical and economic aspects first and only afterward, if the dispute persists, legal ones. Law No. 20,410 strengthened it. Technical Panel. It has existed since 2010 to resolve technical or economic discrepancies during execution. Either party may request it and it issues a reasoned recommendation with no binding force. It comprises five members, under Article 36 of MOP Supreme Decree No. 900: two lawyers, two engineers and one professional in economic or financial sciences.

Arbitration Commission. Regulated in Article 36 bis of Decree No. 900. Disputes over the contract’s interpretation or application may be brought to the Commission or, at the claimant’s choice, to the Santiago Court of Appeals; technical or economic aspects go first to the Technical Panel. It comprises three members appointed from panels of the Supreme Court, for the lawyers, and the Antitrust Tribunal, for the technical experts. It acts as an arbitrator ex aequo et bono and weighs evidence per sound judgment; its ruling is issued in accordance with law and admits no appeal.

R I S K A L LO C AT I O N

Risk allocation

The Chilean concessionaire faces recurring infrastructure risks, allocated through mechanisms in the bidding terms, such as time and cost relief provisions, cost-overrun sharing schemes and minimum guaranteed income, plus the Technical Panel and the Arbitration Commission.

· Incomplete engineering designs delivered by the · Delays in expropriations authority

· Delays in environmental authorizations · Conflicts with communities

· Rigidity of some contracts · Lack of a clear tariff policy

· Exposure to political-cycle changes