Legal Framework for Investment in Infrastructure Projects in Peru
January 23, 2024 by Jorge Saldaña
I. Introduction
In general, Peru’s legal framework promotes foreign investment equality. Infrastructure projects follow various public procurement regimes, including Public-Private Partnerships (“PPPs”). Legal Stability Agreements are used to protect foreign investors. Financing via PPPs offers multiple securities.
Peru has a legal framework that promotes foreign investment in infrastructure projects, which has been pivotal for the country’s significant growth over the past three decades. The Political Constitution of Peru ensures equal rights and obligations between national and foreign investors. National laws and regulations do not restrict the use, convertibility, and remittance of capital are unrestricted, and there are no foreign exchange restrictions. There are, however, several specific sectoral and land-ownership restrictions on foreign investment that are discussed at the end of this article, mainly related to guaranteeing the sovereignty of the Peruvian government.
II. Participation in the execution of public infrastructure
Article 76 of the Peruvian Constitution establishes the foundation for public procurement in Peruvian law, demonstrating that every public entity must follow a special regime, which includes procurement or bidding procedures when using public funds or resources.
In this context, in Peruvian law, various public procurement regimes exist for executing infrastructure projects.
- (a) Government Contracting regime. This regime involves government contracting procedures and the execution of public procurement agreements in which a contracting public entity pays a price to a contractor (government supplier) for the supply of goods, the provision of general services, the execution of consulting services for a project, or the execution of a public work (i.e., a bridge, a road). To participate in bidding procedures under this regime a party must: (i) be registered in the National Supplier Registry (“RNP” as its Spanish acronym), (ii) not be disbarred from contracting with the Peruvian government under the applicable laws and regulations, and (iii) satisfy technical requirements related to the procurement.In the public works field under this regime, it is necessary to consider the following information: (i) the RNP distinguishes four chapters for government suppliers, including the “Public Works Contractor” chapter. Registration in this chapter involves submitting documents that demonstrate the company’s experience in executing public works, and it defines the so-called “Maximum Contracting Capacity” of the respective company. For that reason, (ii) for a “new” company seeking to register in the “Public Works Contractor” chapter to obtain a significant “Maximum Contracting Capacity” allowing participation in large infrastructure projects under this regime, it is advisable to substantiate relevant technical experience through its parent company. This will require the “new” company to establish itself as a branch of the parent company in Peru. If the “new” company were to become a subsidiary, the experience from the parent company could not be transferred to it. Therefore, the participation of this subsidiary would be restricted to public works with a reduced contracting amount.
- (b) Public-Private Partnership (PPP) regime. This regime defines public-private partnerships as a form of private investment participation through long-term agreements involving the Peruvian government, public entities, and one or more private investors. Important requirements to participate in bidding procedures under this regime are the following: (i) legal requirements: documentation related to the company intending to participate in the bidding procedure; (ii) technical requirements: documentation intended to demonstrate the company’s experience in the execution, operation, and/or maintenance of projects similar in nature to the object of the bidding procedure, and (iii) economic-financial requirements: documentation intended to demonstrate a minimum net worth of the company intending to participate in the bidding procedure.Regarding this regime, it is important to consider that the public entity responsible for the bidding procedures of PPPs, namely the Private Investment Promotion Agency (“ProInversión” as its Spanish acronym), provides participating companies with the opportunity to conduct a pre-filing of the documentation that will be part of their qualification envelope and/or their technical or economic proposal during each bidding procedure. This faculty is highly advantageous for both the companies and the bidding procedures. It encourages diverse participants in each bidding procedure and helps prevent their exclusion from the competition due to non-compliance with formal and procedural requirements.
- (c) Works-for-Taxes regime. This regime involves signing agreements between private companies and public entities for the financing and/or executing of infrastructure projects, among other types of special investments such as operation and/or maintenance activities related to these projects.The “Works-for-Taxes” mechanism involves a bidding process before the contracting public entity, which has similar requirements to those mentioned for the Government Contracting regime. Under the Works-for-Taxes regime, the Peruvian government or the corresponding public entities make payments for Works-for-Taxes projects through certificates of public investment, which can, in turn, be used to offset the income tax owed by a particular company. These certificates can also function as transferable securities. Therefore, no direct payments in money are made from the contracting public entity, but the avoidance of having to pay the same amount provided in the certificate in taxes.Under this regime, companies can propose “private initiatives” for infrastructure projects and/or operation and/or maintenance activities so that these can be considered and potentially called upon by the relevant public entities. These usually are unsolicited proposals.
Another regime that has been used by the Peruvian government in recent years is the Government-to-Government regime (“G2G”). The Peruvian government has executed many infrastructure projects through this mechanism, such as sports infrastructure for the Pan-American Games of 2019 and bridges and roads to reconstruct the north of Peru with the United Kingdom before the Brexit. This regime is regulated under the scope of international trade and according to the norms and principles of international law. G2G agreements are a contracting mechanism by which one government contracts goods, services, or works to be provided by another government according to the agreed-upon terms and conditions. This allows for a wide range of objectives and benefits to be achieved by both governments. It is common for the government in charge of providing goods and services or of executing public works contracts with a private company to deliver them to the contracting government.
III. Legal Stability Agreements for Private Investment
According to Law 27432, which regulates legal stability agreements for private investment, legal stability agreements are available for local or foreign investors and recipient companies of the corresponding investments. Legal stability agreements are contracts signed between local or foreign investors or companies in which they invest and the Peruvian government.
These agreements guarantee the stability of the right to non-discrimination, the applicable tax regime, and the regime for the availability of foreign exchange and dividends applicable to foreign capital. To enter into these agreements, a minimum investment of US$ 10 million in mining and hydrocarbons or US$ 5 million in other sectors is required, provided the investment is channeled through the Peruvian financial system.
Other kinds of legal stability agreements are provided for in specific sectors. For example, the Peruvian General Mining Law has established special legal stability agreements for executing mining activities like exploration or exploitation.
IV. Private Financing of Infrastructure Projects
The typical scenario for private financing in Peru’s infrastructure projects occurs within the Public-Private Partnerships (“PPP”) framework.
In general terms, concession agreements under the PPP framework allow two types of securities for financing infrastructure projects. The first one, as in a typical project financing scenario, is in which any lender can access securities provided by the sponsor of a specific project. The second one, particularly for PPPs, is the so-called Permitted Guaranteed Debt, which allows lenders with access to this type of financing to qualify as Permitted Creditors under the respective concession contract and secure the funding granted with rights derived from the concession contract. Moreover, the public entity in charge of the corresponding project under the concession contract must authorize the Permitted Guaranteed Debt.
Among the central securities typically available to Permitted Creditors under concession agreements are the following three types: (i) a mortgage on the right of the concession, (ii) on the net revenues of the concession, which are freely available once deductions are taken for contributions in favor of specific public entities, and (iii) regarding the shares or stakes that correspond to the minimum participation of the concessionaire who execute the corresponding project, which they are obliged to maintain for a minimum period once the concession is obtained.
In addition to these securities, Permitted Creditors typically have other rights that arise from the concession agreement, such as the ability to remedy any breaches that the concessionaire may incur during the execution of the concession contract.
Lastly, other standard rights in favor of lenders in the Peruvian market for infrastructure projects developed under concession agreements include what are known as direct agreements or the so-called step-in rights.
V. Restrictions for foreign investors
While foreign investors, both public and private, have the same rights as national investors, and investors are generally authorized to invest in any sector of the Peruvian economy, competing on equal terms with public and private companies, there are restrictions on private investments in air transport, maritime transport, security, private surveillance, and defense (production of war weapons) sectors, as well as protected natural areas. These restrictions are mainly related to guaranteeing the sovereignty of the Peruvian government.
Foreign investors are also prohibited from acquiring land within 50 kilometers of the borders, and from acquiring, mines, land, forests, waters, or energy sources, directly or indirectly, individually or in partnership, unless prior authorization by the Peruvian government.
VI. Conclusion
In summary, Peru’s legal framework supports foreign investment in infrastructure projects, granting equal rights to foreign and national investors while preserving national sovereignty. Different procurement regimes, legal stability agreements, and robust financing mechanisms collectively create a favorable environment for infrastructure development in the country.
Jorge Saldaña is an Attorney at Law from Peru, specializing in Corporate, M&A, and Projects and Infrastructure. LL.M. candidate and merit scholar at Georgetown University Law Center. Research Fellow at the Center on Transnational Business and the Law. LL.M Representative at the Corporate and Financial Law Organization.