The Public-Private Partnership (“PPP”) regime was introduced in Colombia with the issuance of Law 1508 of 2012 and so the concept of functional unit (“FU”) as a mechanism to be able to obtain remuneration in this type of projects.
It is important to recall that the concept of “functional unit” refers to the different stages in which a PPP project may be divided. These divisions are a set of structures and facilities whose execution could have been performed independently but are used in a single project so a concessionaire may obtain its retribution in a shorter time and not until it has finalized construction.
In relation to transport infrastructure, PPPs have been very successful for structuring roads, as the Fourth Generation of Concessions was composed of more than 30 projects, which have significant advances. Unfortunately, this has not been the case for other modes of transport due to the absence of regulation of a FU. However, recent advances have been developed to allow the multimodality that the National Government has as an objective with the Fifth Generation of Concessions.
In July 2021, the National Government issued Decree 655 of 2021 through which FU for waterway or water channel projects was regulated. This week the ANI finally published the draft terms of reference for the Río Magdalena PPP project, aimed to ensure its navigability and which is divided in 18 FU.
In relation to the railway mode, up to date no project has been able to be structured under the PPP scheme due to the absence of regulation of FU for them. Contrary to what happens with FU’s in highway projects, the entry into operation and commissioning of FU in railway projects is much more complex as it only occurs when (i) all infrastructure has been constructed; (ii) other necessary systems for the operation of the project are functioning; and (iii) rolling stock has been acquired. This, in practice, implies that the whole system is constructed in order to begin operation.
On October 13th, the National Planning Department issued Decree 1278 of 2021 to establish the terms and conditions that will govern Railway FU (“RFV”) in PPP projects of this type.
The Firm highlights the effort of the members of our Public Procurement team who, in cooperation with ARUP and KPMG, supported the DNP in the analysis of more that 15 railway projects abroad and, based on best practices, in the drafting of a first draft of this decree as well in the elaboration of a Guide for the Development of Railway Projects in Colombia.
The issuance of Decree 1278 is a significant advance for the use of PPP projects to rethink the concept of FU and implementing it to the railway sector to satisfy the specific complex needs of this type of projects. This, undoubtedly, will provide more alternatives for the participation of the private sector.
Below you can find a brief summary of the most relevant aspects of Decree 1278.
One of the objectives of this Decree was that it was applicable to different types of railway projects (freight, passengers, or mixed), so it was necessary that the concept of FU was sufficiently broad. Therefore, the Decree defined the following terms:
- Railroad Subsystems: Are the components of a rail infrastructure project that make up a set of infrastructure elements necessary for the construction, rehabilitation, improvement, equipping and/or operation of a project (the "RS").
Therefore, this concept illustratively lists the elements that normally integrate the construction of a railway project. In this regard, the provision allows that those who structure a project may define in detail which are the components of a RS for a specific PPP contract, in order for RFU to be adapted to the technical characteristics of each railway system.
- RFU: Consists of a RS or set of RS, if it complies with the minimum investment budget, of which only partial availability and quality standards will be predicated, for remuneration purposes.
When a RFU is composed of several parts of different RS, these parts will necessarily need to be directly related between them in terms of construction and/or operation, precisely so that the criterion of functionality is met.
- Partial Availability: It is understood that there is partial availability when the RS or the set of RS are completed, and they meet the provisions of the PPP contract, including the quality standards.
- Minimum Investment Budget for RFU: The Decree provides that each RFU must have a minimum estimated investment budget equal to or greater than 15.000 monthly minimum wages 1 , excluding operation and maintenance costs.
- Payment Right: The payment right that the concessionaire will be entitled to for the construction/ performance of the RFU will be determined in the PPP contract and will be paid in accordance with the conditions established therein. In any case, the payment may not correspond to the total estimated budget for the investment of the respective RFU. The above so that the concessionaire does not receive all payment until the project is really functional, with the aim to provide an incentive to finalize the works.
The payment right contemplated within a PPP project will be conditioned to the partial availability of the respective RFU.
The estimated budget and payment right for the RFU will be established in the studies and analysis established in Law 1508 of 2012, for the case of public initiative PPPs (Art. 11) and private initiative PPPs (Art. 14). They shall contain a technical, legal, and financial justification of both the estimated budget and the payment right for each RFU.
- Transitory regulation for Private Initiatives PPPs: Those railway projects structured as a Private Initiative PPP that at the entry into force of Decree1278, are NOT yet in the feasibility stage, may be subject to this new regulation.
