Costa Rica | The Use of Fiduciary Guarantees to Secure Investment in the Framework of Public Contracts
The use of fiduciary guarantees to secure investment in the framework of public contracts
The hiring of private companies by state entities remains an attractive model for different economic agents in different sectors, not only due to the size of the state projects or their duration but also due to the financial strength offered by these institutions when guaranteeing payment for the goods or services provided.
There are government projects that, due to their magnitude or budget, require the involvement of different investors who support the capacity of the private company to respond to the specific public contract. This involvement is relevant in some contracts to achieve effective financing and due compliance with the commitments assumed with the State.
However, in a significant number of cases, particularly in medium or large-scale public projects, the companies that inject their investment into this type of project are not necessarily the entity that has directly tendered and assumed the contract with the State or even part of the same economic group as a parent company or sister company.
In this sense, it is important to create mechanisms that allow for legal security and that do not discourage this type of investment that is beneficial for the success of projects of public interest. These mechanisms can provide the necessary assurance to investors that the financial leverage provided will really result in the expected return.
Private companies, thus, should analyze the possibility of proposing, as a useful tool to provide legal security for the possibility of return on this type of investment, the figure of the fiduciary guarantee.
Through this mechanism, the entity that contracts directly with the State can conclude a guaranteed agreement with the investors, in which the economic benefits of a project executed with a public entity within the framework of an administrative contract are directed to whomever the investors determine. Within this framework, the parties can choose the trustee that would exercise the role of administrator of the profits generated by the contract with the State so that the destination of the profits would be assured in favor of the investors.
The Regulations of the General Law on Public Procurement in Costa Rica provide mechanisms that can assist with this scheme, such as the possibility of transferring payments to a third party, which could be a duly constituted trustee (with specific instructions for distributing payments), which is not necessarily the contracting entity. Article 278 of said regulation allows the contract to transfer the collection rights at any time, without even requiring the consent of the Administration to do so but only requiring it to be informed. The transfer of payment does not exonerate the direct contractor from fulfilling its obligations to the Administration, nor would it convert the trustee into a party to the contract.
In this regard, the parties must document this financing and guarantee through at least three contracts: 1) the credit contract, which establishes the general conditions of the financing, such as the amount, term, form of payment, interest, etc.; 2) the contract for the transfer of cash flows from the project, as well as the corresponding collection rights, in favor of the trust; and 3) the guarantee trust agreement, which establishes the trustee that will safeguard the funds, as well as the way to manage and dispose of them.
In relation to the guarantee trust agreement, the parties may choose to structure it in two ways: 1) all project payments made by the State enter the trust and must be managed and distributed by the trustee in accordance with the instructions given by the parties or some party, with payment usually being made to the priority creditor; or 2) all payments made by the State enter the trust in the same way, the trustee makes the payment to the creditor and releases the remaining funds in favor of the debtor to distribute them according to the project requirements. In both cases, the creditor's payment is guaranteed by the entry of the flows into the trust and by receiving the payment on a priority basis.
This figure becomes quite attractive because, as mentioned above, due to the financial strength of state institutions when making payments; however, the most important risk in this type of financing is the failure of the debtor to comply with the commitments acquired with the project, which may ultimately lead to the suspension of payments by the State and, therefore, the lack of funds to meet the financial obligations of the financing.
For more information, please contact:
Luis Diego Obando Peralta
Senior Counsel
ARIAS Costa Rica
Tracy Varela Calderon
Senior Counsel
ARIAS Costa Rica
The information provided by ARIAS® is presented for informational purposes only. This information is not legal advice and is not intended to create, and does not constitute, an attorney-client relationship. Readers should not act upon this information without seeking advice from professional advisers.