PERTEs stand out as a promising formula for public-private collaboration and project finance in Spain

Spain - 

Spain’s Strategic Projects for Economic Transformation and Recovery (PERTEs) could bring a considerable wave of projects in Spain. They are a new public-private partnership device appearing in the recent legislation on the Spanish Recovery, Transformation and Resilience Plan and to be funded by subsidies and loans from the European Recovery Mechanism (Next Generation EU), which in Spain's case are estimated to amount to €140,0000 million. Professionals practicing in projects and in the particular area of project finance should keep track of how they are taken forward and evolve.

Legal regime for PERTEs

The rules governing PERTEs are in Chapter III of Title II of Royal Decree-Law 36/2020, of December 30, 2020, published in the Official State Gazette (BOE) on December 31, 2020, which presents them as a new public-private partnership device. They are created as a permanent feature for the express purpose of achieving an expedient public-private partnership device although the decree-law states that they will reap particular advantages when utilized in the context of the Recovery, Transformation and Resilience Plan (the “Plan”).

These rules are (at the moment) very concise so for a better understanding of their structure and implications, we will have to wait for the new implementing regulations, in particular the future Order by the Finance Minister and the other ministerial orders contemplated in the Royal Decree-Law, as well as for the Council of Ministers’ approval of the Plan itself.

Their exact details remain unclear for now, since PERTEs have been announced as a public-private partnership instrument. Despite this, the royal decree-law has not actually amended the legislation on public contracts to include a specific type of contract and it appears more like a broad or higher category that will later be able to be set up using any of the existing contractual mechanisms, ranging from a public works or services concession agreement to a public-private investment company.

Types of projects and participants

The preamble to the royal decree-law describes these projects as structural and as a driving force for transformation. The types of projects cover a wide variety of purposes and the requirements mentioned to characterize them are very broad, ranging from an important contribution to economic growth, and remedying deficiencies in the market and social challenges, to their ability to bring innovation and add value to R&D&I or of course their contribution to achieving the goals of the Plan.

A decision by the council of ministers is required for any project to be formally declared as a PERTE. At root, this is a central government tool, along with the new register of entities interested in PERTEs which will be organized by the Finance Ministry. Although there will be powers held by the autonomous community government and local government authorities which will participate in implementing the Plan and they will be able to organize their own activities in relation to their participation.

The royal decree-law is also very flexible concerning the range of entities able to participate in PERTEs, which appears to capture all types of entities, governed by public or private law, as long as they are duly entered on the register mentioned above and in what appear to be its different sections.

Techniques for bringing them into operation and potential use of project finance

However, in the broad scope and generality of the provisions on PERTEs, which appear also to include non-profit initiatives or even not strictly economic activities, we did discern elements that clearly point to the ability to carry out capital intensive, long-term and economic/business projects in the strict sense.

We remarked, in fact, that the royal decree-law makes a distinction between PERTEs that will consist of a single, clearly defined, project, and others that will simply be groups of integrated projects sharing the same strategies or goals. Behind that singularity of purpose we found one of the elements inherent to the project industry and a first requirement for obtaining non-recourse finance.

Also we found that the lawmaker sees in PERTEs a means of undertaking high-risk and innovative projects, thereby overriding the issue of under-investment caused by the private sector’s customary aversion to the high risk often involved in these types of projects and the attendant need for public-private partnership devices. This is a very interesting allusion that might seem to announce the assumption by the public party of risks related to the newness of their purpose or the technology, in a decree-law that uses the term “disruptive” often.

It gives the impression therefore that PERTE sponsors will be allowed to use this instrument to develop an asset or piece of infrastructure of a greater or lesser tangible or intangible nature, by means of assuming considerable investments, funded by the Plan’s loans or aids, in which the public sector retains a notable risk margin.

The royal decree-law does not go into the details of identifying the potential income streams of PERTEs or anything that could be likened to an off-taker.  It is therefore premature to say definitely that PERTEs will be suitable for project finance. We nevertheless believe this is a likely option in view of the references throughout the royal decree-law to the classic public-private contracts, including public works or service concession contracts and, therefore, the potential existence of the same type of remuneration as that allowed for projects of this type (a fee, in other words).

The future is already here

Whatever exact features PERTEs adopt, when the various ministries put theirs out to tender or they otherwise take shape we will be able to see to what extent they will need significant contributions of equity and debt from private sources. We believe that in more than a few cases they will definitely need these contributions and may even receive non-recourse long-term loans to make them viable.

For all PERTEs including those falling outside the classic design, build, operate, and transfer (BOOT) project pattern, special finance needs will emerge to, for example, pre-finance subsidies and secure advances (the royal decree-law broadens and adds flexibility to advance payments in public contracts) related to developments of this type.

Similarly to how Spain's access in the nineties to the European structural funds sparked a spectacular infrastructure finance boom, or the UK’s private finance initiative programs at the end of that decade kick-started a whole range of innovative projects, Spain’s PERTEs and the Plan may also unleash a wave of projects in Spain. An important piece of advice for sponsors, infrastructure funds, banks and other players is to keep track of how this mechanism is taken forward.