Public-Private partnerships for the development of energy projects

Roy Ramos

Roy Ramos

1- Introduction

The constraints of public finances and limited access to state borrowing for socially desirable projects have led to various schemes involving private sector participation in the design, planning, financing, construction, operation, and maintenance of infrastructure projects, particularly in the areas of roads, ports, and airports. Examples of such participation include the concession of works with public services, service management, interested management of airport services, infrastructure trusts, and, in general, procedures promoted within the framework of ordinary public procurement.

These structures allow for the creation of schemes in which the financing of public infrastructure is undertaken at the private sector’s own risk and expense. This facilitates the use of public resources in areas that, due to their characteristics, may not be economically and financially structured to attract private participation.

The Costa Rican legal system provides for some legal structures that have been underutilized and could lead to the promotion of projects in various areas, beyond those indicated, but with enormous potential for social, economic, and environmental impact.

One such possibility is the ability to enter public-private strategic alliances for the development of clean energy projects, bringing together state efforts, rural electrification cooperatives, and private legal entities.

2- Public-Private Partnerships for the Development of Clean Energy Projects.

A- Possibility for ICE to Enter into Public-Private Partnerships for Energy Projects.

With the entry into force in 2008 of the Law for the Strengthening and Modernization of Public Entities in the Telecommunications Sector, Law No. 8660, it was intended, among other things, to strengthen, modernize, and provide the Costa Rican Electricity Institute (ICE), its companies, and its attached bodies with legislation that allows them to adapt to all changes in the legal regime for the generation and provision of electricity services, as well as for telecommunications, infocommunications, products and services, and other convergence services. It aimed to provide ICE with the legal, financial, and administrative conditions necessary for it to continue providing and marketing electricity and telecommunications products and services, both within and outside the national territory.

In line with this purpose, art. 6 of this Law establishes as a competence of the Institute the generation, installation, and operation of networks, the provision, acquisition, and marketing of products and services related to electricity, telecommunications, and infocommunications, as well as other information products and services and others in convergence, either directly or through agreements, cooperation agreements, associations, strategic alliances, or any other form of association with other national or foreign entities, whether public or private.

In the same vein, art. 8 of this Law specifically regulates the figure of business association as follows:

Art. 8 – Business Association

“The ICE and its companies, to promote their competitiveness, are authorized to enter into strategic alliances, within and outside the country, or any other form of business association with other public or private entities, national or foreign, engaged in investment, capital, commercial activities, research, technological development, service provision, and others related to the activities of the ICE and its companies. The terms and general conditions of the alliances will be defined by regulation. The provisions of the previous paragraph should not affect the concentration procedures established by law to prevent, control, and penalize any practices or conditions contrary to effective competition.”

The Attorney General’s Office, in Legal Opinion OJ-105-2005 dated July 28, 2005, defined these strategic alliances as follows: “The needs of the market, and particularly competition, lead different companies to establish forms of cooperation among them. These forms of cooperation arise in the industrial and technological fields, precisely to guarantee the development of the industry and its competitiveness in the globalized world. Hence, its boom in the fields of telecommunications and information technology is not surprising.

Cooperation is considered to provide added value that will allow for better satisfaction of business objectives, as there is a grouping of advantages with companies exposed to the same pressures or that have developed technologies, processes, or strategies in a similar field.

This cooperation can take various forms: joint ventures proper, free association, licenses, or strategic alliances, among others.

A strategic alliance implies an agreement between competing or potentially competing companies to coordinate capabilities, means, and resources; one of which can be information through the commitment to recognize the risks and rewards of the relationship. Thus, the strategic alliance is an organized act of will of competing individuals or companies that collaborate and coordinate with each other to achieve special advantages (economies of scale, financing, advice, training, management, transportation, customer services, vertical integration) for greater competitiveness.

These cooperative agreements between companies, whether medium or long-term, can be different and involve various clauses. It is important that it be an agreement of wills and that its object is to promote cooperation between the parties. The convenience of the contract is motivated by the will of the parties to form a cooperative relationship that does not, in principle, intend a corporate relationship. With this, we emphasize that, in principle, the strategic alliance does not aim to create a new legal entity (as happens in equity joint ventures) or a new company in the economic sense (which can happen in contractual joint ventures). Precisely, the strategic alliance presents itself as a more adaptable and flexible solution for strategic cooperation than the creation, mergers, or acquisitions of companies. In that sense, Osvaldo J. MARZORATI (Strategic Alliances and Joint Ventures, Astrea, 1996, p. 14) indicates:

A strategic alliance typically includes a constellation of agreements that contemplate:

    1. Technology agreements.
    2. Joint research and development.
    3. Sharing complementary assets.

These alliances are embodied in a contractual relationship that does not involve the creation of a separate society or entity. This partially explains why alliances are not permanent and may cease by the decision of one of the parties, particularly if the expected benefits for one of the parties are not met. Hence, these alliances are resorted to when the risk of failure is relatively low or, in its case, tolerable.

Given that the aim is to increase competitiveness, it is not surprising that strategic alliances involve companies competing in the same field. This is where they differ from traditional joint ventures in which companies of different purposes associate, complementing efforts (Marzorati, op. cit., p. 23) to achieve a common goal (C.A. Ghersi: Civil and Commercial Contracts, Vol. 2, Astrea, 1992, pp. 41-47).

It follows from the above that a cooperative agreement can take various forms, one of which is precisely the strategic alliance. This aspect is important because the bill refers to cooperation agreements and strategic alliances between companies. This reveals that ICE would be authorized not only to enter into strategic alliances but also other business cooperation agreements. Agreements whose purpose could precisely be the provision of public service and which, in the absence of a prohibition, could imply the establishment of a new company.”

As can be seen, the concept of a strategic alliance is extremely broad, allowing for the satisfaction of different needs, and formally, it can be structured through different legal figures.

Under the provisions of art. 8 of Law 8660, ICE issued the Regulation of Strategic Alliances and other forms of Business Association, which states: “Business Associations are those forms of association through which ICE joins one or more natural or legal persons, public or private, national or foreign, to develop a new service or specific business within or outside the country, to obtain greater competitive advantages that would not be achieved individually; also, to generate greater value for its customers and Costa Rican society. Each party has its participation as an independent company, without necessarily forming a new entity.” Based on this definition, the following types of business associations are described:

a) Strategic Alliance: This is a type of business association in which ICE joins one or more competing or potentially competing companies, with which it shares markets related to its legal competencies, and whose purpose is to strengthen current markets or penetrate new markets. All this is to achieve competitive advantages that would not be achieved individually. Strategic alliances are characterized by the following:

    • Companies come together to try to achieve a series of agreed objectives or goals and can continue to be independent after the formation of the alliance.
    • Participating companies share the benefits of the alliance and control the results obtained.
    • The expected benefit must be greater than the risk assumed.
    • Participating companies contribute continuously to one or more key strategic areas, such as technology, raw material input, or infrastructure.

In the alliance, all parties make their contributions in proportion to the expected economic benefits, uniting or sharing part of their capabilities and/or resources to establish a higher degree of interrelationship. Through a strategic alliance, the parties share risks according to their participation in the alliance to achieve common objectives in the pursuit of their businesses. For these purposes, the parties will use their competencies, market advantages, as well as the means and resources necessary to compete more effectively or access other markets with new products or services.

The alliance allows expanding the field of action, including the development of new products, increasing the scale of production, obtaining more advantageous prices, having a greater presence and geographical coverage, accessing new technologies, including research and development, and sharing costs and resources for this purpose. To this end, partners develop joint activities that generate value, with each party assuming the risks and benefits of the relationship.

b) Commercial association: These are business associations with public or private companies, national or foreign, to develop and market products or services, whether standardized or not. The purpose is to improve the position of the parties in the market. For this, the strengths of each partner will be leveraged in business development.

c) Association to provide managed services: These are business associations through which ICE, independently or with the participation of one or more natural or legal persons as partners, provides its customers, whether public or private, national, or foreign, with “turnkey” solutions that may include electricity, telecommunications, infocommunications, and related or connected services. In these types of agreements, there is no transfer of ownership of any asset to the customer; instead, payment is made for the received service, which must meet certain quality standards or service levels.

d) Association to provide services in real estate developments: These are business associations that ICE establishes with natural or legal persons, public or private, national or foreign, to provide the customer with solutions that integrate the design, construction, maintenance, and support of networks under certain quality standards defined by ICE in response to the customer’s needs. The purpose of these agreements is to timely address the segment of companies dedicated to the design and construction of infrastructure projects, as well as condominiums, shopping centers, free zones, industrial zones, hospitals, hotels, and technological centers, among others.

Regarding the initiative to create these types of alliances, this regulation establishes that the proponent can be either ICE or a third party, defining “proponent” as follows: “Interested party in carrying out the business association, which may be a department or company of ICE or a third-party potential partner. The initiative provided by the proponent must include the business scheme and its preliminary estimate so that the participation of each party can be comprehensively analyzed.”

This regulation, starting from art. 9, regulates the establishment of the Registry of Potential Partners and the procedure for selecting the strategic ally, where aspects such as knowledge and technical experience, financial capacity, and commercial experience are regulated as criteria for assessing the potential strategic ally.

In art. 12, it regulates the content that the proposal directed by the potential ally must have in its business approach, which must be consistent with the objectives of ICE’s strategy and aimed at strengthening, improving its relative participation in the market, increasing the value that the Institute provides to Costa Rican society, as well as the best possible use of resources from a sectoral perspective.

As can be seen, both legal and regulatory norms enable the Costa Rican Institute of Electricity to enter into agreements and strategic alliances for projects of general interest aligned with the goals, competencies, objectives, and strategic plans of the Institute.

The possibility of entering public-private partnerships must be distinguished from the schemes provided for in the legal system for the development of projects for the construction and operation of electric generation projects, both in their BO and BOT versions, which are regulated in the Law Authorizing Autonomous or Parallel Electric Generation. This law defines autonomous or parallel generation as the energy produced by limited-capacity power plants owned by private companies or cooperatives that can be integrated into the national electrical system, becoming a mechanism for purchasing electricity by ICE from cooperatives and private companies.

B- Public-Private Partnerships with Rural Electrification Cooperatives.

Law No. 8345, the Law on the Participation of Rural Electrification Cooperatives and Municipal Public Service Companies in National Development, aims to regulate the concession for the use of the forces that can be obtained from the waters of public domain in the national territory, under the provisions of art. 121(14) of the Political Constitution, to cooperative associations for rural electrification, consortia formed by these, and municipal public service companies. The law also regulates the generation, distribution, and marketing of electric energy by the entities mentioned above, using renewable and non-renewable energy resources in the national territory, under Law No. 7593, dated August 9, 1996.

This law designates the activities of generation, distribution, and marketing of electric energy carried out by cooperative associations and municipal public service companies as of public interest, providing them with several benefits that purely private companies do not have.

Art. 6 of this law empowers cooperatives for the generation, distribution, and marketing of energy as follows:

Art. 6Sales right. Cooperative associations, cooperative consortia, and municipal public service companies covered by this Law, which generate, distribute, and market energy within the framework of this regulation, may sell energy to users located in the geographical area of coverage defined by their concession and in accordance with Article 13 of Law No. 7593, dated August 9, 1996.

In addition, these entities are authorized to sell their energy to ICE or among themselves at a price that may not exceed what this law stipulates for the regime.

Art. 7 of this law establishes the possibility of national and municipal public enterprises of the National Electric System (SEN) entering into business alliance agreements with cooperative associations. This article states:

Art. 7 – Agreements with national public entities. Authorizes national and municipal public entities and companies of the National Electric System (SEN) to enter into business alliance agreements with cooperative associations and municipal public service companies covered by this Law, leading to the joint development and exploitation of electricity generation works and services. Cooperative associations and municipal public service companies may enter into agreements of this nature among themselves; likewise, they may enter trusts with a bank of the National Banking System for the development of electrical and telecommunications projects; this authorization is also extended to ICE and the National Power and Light Company (CNFL).

It authorizes national and municipal public entities and companies to enter cooperation, investment, and joint operation agreements with cooperative associations and municipal public service companies covered by this Law, to provide complementary services to their activities, under the procedures established in current legislation.

As can be seen, the Law on the Participation of Rural Electrification Cooperatives and Municipal Public Service Companies in National Development enables these cooperatives to enter into association agreements for the joint development and exploitation of electricity generation works and services with both private companies and entities and companies in the public sector.

3- Conclusions

    1. The Costa Rican Institute of Electricity (Instituto Costarricense de Electricidad or ICE) is authorized to enter public-private partnerships within the country and abroad, or any other form of business association with other public or private entities, whether national or foreign, engaged in investment, capital, commercial activities, research, technological development, service provision, and other activities related to the ICE and its subsidiaries.
    2. To facilitate these partnerships, the Costa Rican Institute of Electricity has issued regulations on strategic alliances and other forms of business association. These regulations govern the submission of partnership proposals to the Institute.
    3. The Law on the Participation of Rural Electrification Cooperatives and Municipal Public Service Companies in National Development also enables these cooperatives to enter into business alliance agreements with cooperative associations and municipal public service companies covered by that law. Such agreements are intended for the joint development and exploitation of electricity generation works and services.
    4. Within this regulatory framework, it would be possible to structure a public-private partnership for the development of innovative clean energy generation projects, involving the Costa Rican Institute of Electricity and Rural Electrification Cooperatives in a collaborative effort.