Draft Law on Public Private Partnerships (PPP’s) And Incentives for Foreign Investment

All you need to know about the new draft of the public private partnership system (PPP's) in Ecuador This analysis summary is based on the Draft Law approved by the National Assembly and includes the partial veto by the President of the Republic.

The government proposal to open up the private sector, with guarantees of stability and tax exemptions, constitutes an interesting option for domestic and foreign investors. The Draft Organic Law for Public Private Partnerships and Incentives for Foreign Investment seeks to promote domestic and international private investment in Ecuador.

What is the scope of Public Private Partnerships? PPP’s involve the delegation of the management and performance of a specific public project to the private sector, and its full or partial financing for the provision of goods, works or services. In exchange, the State will pay the investor a consideration to offset the investment, risk and work undertaken. The draft provides for: i) Sharing risks; ii) Delegating activities for the provision of goods or public services to private enterprise; iii) Guaranteeing legal stability; iv) Granting long-term tax benefits.

Construction, equipping, operation and maintenance of new public works that provide public services. Rehabilitation, equipping, operation and maintenance of existing public works that provide public services. Construction and sale of real estate projects, social housing and development works. Activities for production, research and development involving the State together with the private sector. New projects in the hydroelectric and alternative energy sectors. Other projects categorized as a priority by the Inter-Institutional Committee of Public Private Partnerships (CIAPP). To which fields does it apply? The Law permits these activities to be extended to other sectors (except strategic areas) approved by the CIAPP, which is directed by the Ministers for Coordination of Production and Economic Policy and the Secretary for National Planning, and which will govern the system and evaluate the proposed projects.

What is the process for establishing Public Private Partnerships? Investors who seek to form part of a PPP may put forward a new project or participate in a previously proposed project. For its part, the delegating public entity that wishes to form the PPP must obtain the approval of the project from the CIAPP. With this approval, the delegating public entity must hold a call for proposals to find a suitable private manager. The call for proposals will not be governed by the usual regulations for public procurement, but by a special system that aims to simplify the award. Delegated Management Contract The selected investor will sign this type of special contract which must establish the method for sharing risk with the public entity, the tax incentives for the investor, the legal stability granted for the investment in the event that local laws are changed, and dispute resolution (international arbitration is allowed at arbitration centers established in Latin America).

What tax incentives are granted? Imports for the performance of the project will be exempt from taxes on foreign trade. Payments for imports will be exempt from the currency remittance tax. No income tax will be paid for 10 years starting from the date on which operating revenue begins to be generated. During the first 10 years as of the generation of operating revenue, dividends or profits will be exempt from income tax without any deduction, regardless of domicile. Dividends or profits that are sent abroad will be exempt from the currency remittance tax, with the exception of those sent to a tax haven. Payments made abroad for the amortization of capital and interest for financing granted by banks or non-financial institutions will be exempt from currency remittance tax. This exemption does not apply if the financing is from related parties domiciled in tax havens. With regards to tax matters, private investors who form part of a PPP will have the following incentives:

Warning: This newsletter by Pérez, Bustamante & Ponce is not and cannot be used as legal advice or opinion since it is merely of an informative nature.