4-7-2018

CASE: CHINCHEROS
AIRPORT:
Critical analysis and lessons learned

COURSE: PUBLIC MANAGEMENT

TEACHER: ENG. ECHEGARAY

MEMBERS:

• CUSI HERNÁNDEZ, Claudia Elizabeth – 09170104

• PACAHUALA AGUIRRE, Mayra Cleyde – 16170231
• TUNQUI CCAPATINTA, Celmira Shakira – 16170181
FACULTY OF INDUSTRIAL ENGINEERING - UNMSM
 INDEX
CASE: CHINCHEROS AIRPORT:........................................................................................1
INDEX.................................................................................................................................1
I. INTRODUCTION....................................................................................................2
II. Goals.........................................................................................................................3
111. Theoretical framework..........................................................................................4
1. Concession Contracts............................................................................................4
d) Value for money:.................................................................................................13
IV. CONTENT...............................................................................................................17
1. Project features:...................................................................................................17
2..................................................................................................................................22
Case description:.........................................................................................................22
V. LEARNED LESSONS....................................................................................28
VI. CONCLUSION:..............................................................................................30
VII. BIBLIOGRAPHY:..........................................................................................31
I.

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 I. INTRODUCTION
One of the main tasks of the State is to provide quality public services and
infrastructure aimed at satisfying the needs of citizens. Consequently, the objective
is to achieve sustainable economic growth that promotes investment and allows the
development of the country.
In this sense, since 2008, Peru has been implementing regulations that encourage
private investment in infrastructure projects under the modality of concessions. With
the issuance of the Framework Law on Public-Private Partnerships, the design of a
regulatory and constitutional framework begins that promotes the financing of
projects that integrate the experience and technology of the private sector with the
public and in turn distributes the risks. Despite the advantages that PPPs can bring
to the infrastructure, problems have been evident in their fiscal and distributive
implementation, which is reflected in the number of contract renegotiations.
In this regard, the Comptroller General of the Republic points out that the causes of
the renegotiations are mostly related to the works (modification of the technical file),
financing and legal clearance of land, and also indicates that their origin is usually
both of an unforeseen nature and due to breach of contractual obligations of the
grantor.
In order to demonstrate the problems in PPP projects and contracts, this work will
analyze and issue an opinion regarding the case of the Chinchero – Cusco
International Airport project, which generated controversy due to the questionable
situation of the signing of the addendum to the concession contract.
Finally, it is necessary to mention that, in this study, additional proposals will be
made on what could have been done to avoid the stoppage of the project.

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 II. Goals
• Analyze the main causes that generated the renegotiation of the Chincheros
concession contract
• Identify the effects of the addendum in terms of efficiency for the State
• Formulate proposals, based on lessons learned, that contribute to efficient
negotiations for future PPP projects.

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 111. Theoretical framework
Legal base

Within the legal framework, there are general and specific regulations that
seek to regulate PPPs:
> Legislative Decree No. 1012: Approves the Framework Law on Public-
Private Partnerships for the generation of productive employment and
dictates regulations for streamlining the processes of promoting private
investment.
> Supreme Decree No. 127-2014-EF: Approves Regulations of Legislative
Decree No. 1012
> Legislative Decree No. 1224 - Legislative Decree of the Framework
for the Promotion of Private Investment through Public-Private
Partnerships and Asset Projects: Seeks to accelerate processes
through the organization and simplification of what already exists and the
generation of capacities in all the entities involved.
> Ministerial Resolution No. 167-2016-EF/15: Guidelines for risk
allocation in Public Private Partnership Contracts
> Supreme Decree No. 410-2015-EF , Regulations of Legislative Decree
No. 1224. c.
> Supreme Decree No. 068-2017-EF , Modifying the Regulation of
Legislative Decree No. 1224, Framework Law for the Promotion of
Private Investment through Public-Private Associations and Asset
Projects.
> Legislative Decree No. 295 – Civil Code – Book VII Section First ,
referring to Contracts in General.
> Law No. 26917 – Law on Supervision of Private Investment in Transport
Infrastructure for Public Use and Promotion of Air Transport Services –
Law Creating OSITRAN.
Theoretical Basis

1. Concession Contracts
a) Definition
It is pertinent to highlight that there are various and very varied definitions of
what a Concession Contract is, most of these indicate that the
aforementioned Contract has an administrative nature. Regarding this,
(BLANQUER: 2012) indicates that: “The concession is an administrative
contract that has as its objective the professionalized and habitual
development of an organized business activity, consisting of the
management of a company or legal entity dedicated to the lucrative
exploitation of a public service. Under the contract, the concessionaire
assumes a result obligation, consisting of the effective provision of a service

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 to users under the quantitative and qualitative conditions agreed upon with
the Administration.3
From the definition it can be highlighted that this contract allows the State to
delegate to a specialized company the management of a public service,
which by its nature corresponds to the State, with the consequence that for
said management the company will receive contractual compensation.
determined, as long as it complies with the conditions previously established
for it. In this way, the Concessionaire will provide a certain public service to
users, subject to the conditions established by the administration, which will
establish minimum service provision standards in favor of users.
That is to say, through this contract a double objective is pursued: the
administration seeks the most efficient and correct provision of the service
and the individual seeks to obtain a profit.4 .
The beneficiary users of the aforementioned service also have a special
participation in the Concession Contract, although they are not formally part
of it because a private law relationship is created, with the traditional legal
implications that this implies.
In the nineties, the Peruvian legal system regulated the Concession Contract
with the issuance of the Single Ordered Text of the Rules with the Rank of
Law that regulate the delivery in Concession to the private sector of public
works of infrastructure and public services, (TUO de Concessions) and its
Regulations approved by Supreme Decree No. 060-96-PCM. Both regulatory
documents are currently repealed, however, we can obtain important data
from them regarding how the Peruvian State conceived the concessions in
the country.
The TUO of Concessions, among its articles, pointed to concessions as a
modality that promoted private investment in the field of public infrastructure
works and public services. And it granted national or foreign legal entities the
execution and exploitation of certain public infrastructure works or the
provision of certain public services for a specific period. Additionally, it
specified 3 types of concession: onerous title; where the concessionaire
contributed money or a share of its profits in favor of the State., free title; co-
financed with initial delivery or during stages, and mixed).
b) Concession System

3 BLANQUER CRIADO, David “The Concession of Public Service.” Tirant Lo Blanch Publishing House. Valencia.
2012. P. 205.
4 CHASE PLATE, Luis; DALLARI, Adilson; DIEZ, Manuel and others. “Administrative Contracts – Special
Contracts Volume II.

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 The concession system in Peru began with the arrival of the nineties in
which the State verified that public companies were severely affected
economically and financially. This, added to the growing inflation of the time,
the low tax collection and the inefficient use of resources, motivated the
beginning of the privatization process of public services in Peru.
As part of the process of promoting private investment, in 1996 the
Commission for the Promotion of Private Concessions (PROMCEPRI) was
created, focused on concessions, particularly public infrastructure and more
specifically, the road and energy sectors.
Given that PPPs have been developed especially in the field of public
services infrastructure, private investment in them was governed in Peru by
the Law for the Promotion of Private Investment in Public Works of
Infrastructure and Public Services, approved by Legislative Decree No. 839,
which defined the institutional scheme and the scheme applicable to
infrastructure concessions. This framework is complemented by various
standards that regulate the sectors, as well as their regulations.
In 2001, COPRI was allowed to advise or carry out infrastructure or public
service concessions at the request of subnational governments, charitable
societies and other decentralized public bodies. Starting in 2002, with the
conversion of COPRI into PROINVERSION 5 , the trend of a predominance of
privatizations over asset concessions was definitively reversed. Indeed, in
this stage, greater importance was given to the concessions of the State's
main assets, whether in natural resources, infrastructure or services.
It is important to highlight that the absence of an adequate provision of public
infrastructure directly affects investment and production costs, such as
logistics costs, inventory levels and the number of goods that do not reach
their destination due to precarious infrastructure conditions. On the other
hand, an insufficient level of investment in infrastructure generates
inadequate provision and coverage of public services, especially for the
population with limited economic resources. In contrast, an appropriate
provision of public services positively affects the health and education levels
of the population, helping to reduce income inequalities.
Investment in infrastructure and public services in our country has not
reached the amounts necessary to ensure the provision of adequate service
levels that allow promoting sustainable economic growth in the medium
term, with tangible social impacts. In view of this deficit, its consequences on
the productivity of the economy and considering budgetary restrictions, the
State promoted the participation of the private sector in investment projects
5 Supreme Decree No. 027-2002-PCM: - Merger by absorption

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 in infrastructure and public services through contracts under the PPP
modality.
c) Institutions Involved

During the process prior to signing the Contract, Proinversión, the granting
entity and the Regulatory Body mainly interact; with the participation of other
entities depending on the project that is intended to be concessioned. In the
present case, this investigation is focused on the Chincheros case and the
addendum as part of a renegotiation of Concession Contracts for
transportation infrastructure for public use, therefore, the granting entity in
the Ministry of Transportation and Communications, and the regulator is the
Supervisory Body for Investment in Public Use Transport Infrastructure –
OSITRAN.
(1) Private Investment Promotion Agency – PROINVERSIÓN

PROINVERSIÓN is a public executing agency, attached to the Ministry of

Economy and Finance, with legal status under public law, technical,
functional, administrative, economic and financial autonomy.
PROINVERSIÓN promotes the incorporation of private investment in public
services and public infrastructure works, as well as in assets, projects and
state companies and other state activities, based on public and private
initiatives of national competence, as well as in support of public entities.
responsible at your request, to whom it provides specialized technical
assistance support.
In accordance with the latest modification made to the Regulations of the
PPP Law, the following functions of PROINVERSION are:
a. Execute the national policy to promote private investment.
b. Within the framework of the established policies, guidelines and
methodologies, issue technical-normative directives that develop the
Evaluation Report; eligibility criteria; admission to processing of private
initiatives; hiring of advisors and consultancies; development of the
Promotion Process regardless of the origin of the project, including
bases, structuring, contract design, standardization of contract clauses
and competition; financial closure and secured indebtedness permitted;
as well as answer queries regarding said directives, which must be
published on its institutional portal.
c. Issue an opinion on the Multiannual Investment Reports in Public
Private Partnerships on the modality proposed by the Ministry,
Regional Government or Local Government.
d. Prepare the Evaluation Report of the projects under your responsibility.

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 e. Conduct and conclude the Promotion Processes under your
responsibility, ensuring compliance with the principles indicated in
article 4 and in section 11.2 of article 11 of the Law.
f. Analyze and declare of Interest co-financed private initiatives, self-
financed private initiatives and private initiatives on projects in assets
under their charge.
g. Conduct the joint evaluation process of contractual modifications in
appropriate cases.
h. Issue conformity to the documents that support the Permitted Secured
Indebtedness or Financial Closing or similar, when applicable.
i. Carry out support, monitoring, facilitation and simplification in the
contractual execution phase of investment projects.
j. Execute capacity-building and technical assistance programs for
members of the National Private Investment Promotion System. k.
Carry out promotional actions to identify potential investors, with the
aim of positioning Peru as an investment location.
(2) Ministry of Transport and Communications

The Grantor acts as a party in the Concession Contracts, representing the

State, in the Transport Infrastructure Concession Contracts the Grantor is
the Ministry of Transport and Communications, which becomes the owner
of the goods and services delivered in the Concession.
The work of the Grantor as part of the Concession Contract extends
throughout the entire Concession period in which it interacts with the
Concessionaire and the Regulator.
In accordance with article 7 of Legislative Decree No. 1224, it is the
function of the Ministry, in its capacity as owner of the project, to modify the
Public-Private Association contracts, in accordance with the conditions
established by the aforementioned standard and its Regulations, therefore
it is appropriate to the Grantor, in compliance with the aforementioned
article, to exercise its function of modifying the concession contracts,
complying with the requirements established for this purpose.
(3) Regulatory Body – OSITRAN

Regulated by its creation rule, Law No. 26917; the General Regulations of
OSITRAN, approved by Supreme Decree No. 044-2006-PCM. From the
aforementioned regulations, we can point out that OSITRAN exercises the
following functions:
a. Regulatory function: dictates autonomous regulations, rules that
regulate the procedures under its charge and other general rules,
applicable to all those administered under the same conditions.

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 b. Regulatory function: regulates, sets, reviews or eliminates through
rules or regulations the rates for services and activities derived from
the exploitation of the infrastructure, by virtue of a legal or
contractual title, as well as access charges for the use of the
facilities. essential. Establishes the rules for the application of rate
adjustments and rate systems, as well as the conditions for their
application, and provisions.
c. Supervises compliance with legal, contractual or technical
obligations by the providing entities, companies or people that carry
out activities subject to its jurisdiction.
d. Supervises and imposes sanctions and corrective measures on
providing entities for non-compliance with the rules, provisions
and/or regulations established by OSITRAN, as well as the
obligations contained in the respective concession contracts.
e. Resolve through administrative channels disputes and claims that,
within the scope of its jurisdiction, arise between provider entities
and between them and users.
(4) Ministry of Economy and Finance

The MEF participates in the development of concession projects by

approving the guarantees that must be granted in favor of the
concessionaire.
In accordance with the PPP Law, the Ministry of Economy and Finance
is the governing body and highest technical regulatory authority of the
National System for the Promotion of Private Investment, ensuring
compliance with the policy of promotion and development of PPPs and
Asset Projects. , with the participation of all State entities, at different
levels of government, within the framework of their powers. If the
Ministry of Economy and Finance does not have the prior favorable
opinion of the final version of the Public Private Partnership contract, the
contract and its award have no effect and are null and void.
(5) Comptroller General of the Republic

The PPP Law establishes that the Previous report of the Comptroller
General of the Republic regarding the final version of the Public Private
Partnership contract may only refer to those aspects that compromise
the credit or financial capacity of the State in accordance with subsection
l) of Article 22 of Law No. 277856 . Likewise, it establishes that said
Previous Report is not binding, without prejudice to subsequent control.
It is important to specify that the aforementioned norm has established in

6 Law No. 27785, Organic Law of the National Control System and the Comptroller General of the Republic

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 its Sixth Final Complementary Provision that the “legally established
power to act discretionally, of the entities that are in charge of approving,
conducting, executing, supervising and supervising the processes of
promotion of private investment is exercised to opt for the duly
supported administrative decision that is considered most appropriate,
within the framework established by law, taking into consideration the
criteria established by the fourth complementary final provision of Law
29622.7 , Law that modifies Law 27785, Organic Law of the National
Control System and the Comptroller General of the Republic and
expands the powers in the process to sanction in matters of functional
administrative responsibility.”
d) Public Private Partnerships
It is vital to point out that in current Peruvian legislation, Public Private
Associations can take the form of a concession, that is, a contract
signed between the State and a company, by which the State grants
the execution and exploitation of certain public works. of infrastructure
or the provision of public services for a specific period.
In accordance with article 11 of the Public-Private Associations Law
approved by Legislative Decree No. 1224 and its amendments (PPP
Law), Public-Private Associations are modalities of participation of
private investment, in which experience is incorporated, knowledge,
equipment, technology, and risks and resources are distributed,
preferably private, in order to create, develop, improve, operate or
maintain public infrastructure and/or provide public services under the
contractual mechanisms permitted by the current legal framework.
PPPs are a type of concession whose objective is to ensure the
provision by a private party of a certain public service or the use of
public infrastructure, respecting quality and coverage criteria.
However, unlike concessions based on the financial profitability of the
project, that is, in cases in which the demand and required rates can
cover the costs and generate profits for the company, in PPPs the
State contributes to the payment. of the aforementioned public
infrastructure service or work; this, in order to promote
decentralization, correct inequalities in access and integrate the
national territory, among others.
Regarding the importance of PPPs, (VASSALLO and IZQUIERDO,

7 Article 22.- Powers

The following are the powers of the Comptroller General:
(…)
l) Inform in advance about the operations, bonds, guarantees and other guarantees granted by the State,
including contract projects, that in any way compromise your credit or financial capacity, whether they are
negotiations in the country or abroad.

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 2010), they specify that “PPPs are based on four principles. Firstly, in
the idea that there are a series of goods and services of general
interest, which, due to market failures (such as natural monopolies,
public goods or the presence of externalities), must be supervised by
the public sector. Secondly, in the idea that the private sector can
contribute enormously to greater efficiency and quality in the
allocation of public resources.
Thirdly, the need to define an adequate distribution of risks between
the public sector and the private sector so that the relationship works
as best as possible. And, fourthly, the idea that the participation of the
private sector in all phases of the project cycle (design, construction,
financing, maintenance and operation) can be beneficial for the
provision of public goods and services. The above principles can be
summarized in four terms: regulation, competition, management
integration and adequate risk distribution.8
For its part, it is important to mention that, under any of the figures
that the PPP may adopt, including the concession, the State is always
responsible for ensuring that public services are provided respecting a
certain level of quality, that appropriate rates are charged. and that
access by the population to public services is favored and
encouraged. The aforementioned are expressly established in the
Concession Contracts signed by the State, thus becoming legal
obligations between the parties, whose compliance is supervised by
the corresponding regulatory body.
In this regard, we must point out that in all stages linked to the
provision of public infrastructure and/or provision of public services
under the Public Private Partnership modality, in accordance with the
current regulatory framework, the following principles established in
the Legislative Decree must be considered. No. 1224:
V Competition: Private investment promotion processes
promote the search for competition, equal treatment among
bidders and avoid anti-competitive or collusive behavior.
V Transparency: All quantitative and qualitative information
used for decision-making during the evaluation,
development, implementation and accountability of a
project carried out within the framework of this Legislative
Decree is public knowledge
V Results approach: Public entities in the development of their
functions adopt actions that allow the timely execution of

8 VASSALLO, José and IZQUIERDO, Rafael. 2010. “Public infrastructure and private participation: concepts
and experiences in America and Spain.” Andean Development Corporation.

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 private investment, and report the existing obstacles that
identify and may affect the development of the projects
regulated under this Legislative Decree.
V Planning: The State, through the Ministries, Regional
Governments and Local Governments, prioritizes and
guides the orderly development of Public Private
Partnerships and Asset Projects according to national,
sectoral, regional and local priorities, considering the
decentralization policy. from the country.
V Budgetary responsibility: The State's payment capacity to
assume financial commitments, firm and contingent, that
derive directly and indirectly from the execution of
contracts, without compromising in the short, medium or
long term, the budgetary balance of public entities. , the
sustainability of public finances or the regular provision of
public services.
Public Private Partnership contracts are long-term, in which
there must be an adequate distribution of risks between the
parties, so that the risks are assigned to the party with the
greatest capabilities to manage them, considering the risk
profile of the project. All phases of development of Public
Private Partnerships must consider the principle of value for
money, seeking the optimal combination between costs and
quality of the public service offered to users, throughout the life
of the project.

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 d) Value for money:
Value for money is one of the most important elements for decision-making
when deciding whether to carry out a PPP or choose some other model in
order to guarantee the provision of infrastructure. This concept aims to
estimate whether public money is used in the most efficient way possible for
society, regardless of whether construction and exploitation tasks are carried
out by the public sector or by the private sector. The value for money
procedure was first developed in the United Kingdom, within the context of
the Private Finance Initiative (PFI) policy, where it is the Government that
sooner or later is responsible for remunerating the contractor or
concessionaire, based on the traffic that circulates through the infrastructure
or on the basis of a series of quality indicators established in the contract. As
a consequence, the Government or the public agency to which this
delegation is delegated has the obligation to demonstrate to society that the
most efficient possible use of public resources is being made.9
In that sense, the evaluation of value for money is absolutely necessary to
determine the convenience of a PPP, as it will allow public managers to
determine if it is more advantageous to choose to execute a PPP or if, on the
contrary, it is more convenient to use another type of modality for the
provision of infrastructure.
On this point, it is pertinent to indicate that the Regulation of the PPP Law,
recently modified by Supreme Decree No. 068-2017-EF, indicates that the
principle of value for money aims to search for the optimal combination
between costs and quality of the public service offered to users, taking into
account an adequate distribution of risks in all phases of the Public Private
Partnership project.
Finally, we specify what, according to the Peruvian regulatory framework,
Public-Private Associations are classified:
V Co-financed
It is that Public Private Partnership project that requires co-financing
or the granting or contracting of financial guarantees or non-financial
guarantees that have a significant probability of demanding co-
financing.
- Self-financed
It is that Public Private Partnership project with its own income
generation capacity, which does not require co-financing and meets
the following conditions:
- Minimal or no demand for financial guarantee by the State. Financial
guarantees are considered minimum if they do not exceed five

9 VASSALLO, José and IZQUIERDO, Rafael. 2010. “Public infrastructure and private participation: concepts
and experiences in America and Spain.” Andean Development Corporation

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 percent (5%) of the Total Investment Cost, and in the case of
projects that do not contain an investment component, said
guarantees do not exceed five percent of the Total Project Cost.
- Non-financial guarantees have zero or minimal probability of
demanding co-financing. Non-financial guarantees have minimal or
no probability, when the probability of demanding co-financing is not
greater than ten percent (10%) for each of the first five (05) years of
validity of the guarantee coverage provided for in the contract. .

e) Modification of Concession Contracts

Regarding the procedure for modifying the Concession Contracts, we can
point out that the PPP Law prescribes the following:
“Article 22.- Contractual modifications
22.1 The State, in common agreement with the investor, may modify the
Public Private Partnership contract, maintaining its economic-financial
balance and the conditions of competition of the promotion process, in
accordance with the conditions and requirements established by the
Regulations.
22.2 Within a maximum period of ten business days of receiving the
request for an addendum, the Ministry, Regional Government or Local
Government convenes the public entities that must issue an opinion on
the proposed addendum, who attend the joint evaluation process, which
may also be the investor be summoned. At this stage, information about
the design of the project and contract can be requested from the Private
Investment Promotion Agency, which was in charge of the promotion
process in which the contract originated, or from the body that takes its
place.
22.3 Once the joint evaluation process is completed, the Ministry,
Regional Government or Local Government evaluates and supports the
contractual modifications; and requests the non-binding opinion of the
respective regulatory body in the projects under its jurisdiction, and in the
case of matters under the jurisdiction of the Ministry of Economy and
Finance, the prior favorable opinion of said Ministry must be required.
Agreements that contain modifications to the Public Private Partnership
contract that do not have a prior favorable opinion from the Ministry of
Economy and Finance, have no effect and are null and void.
22.4 The deadlines and procedures provided in this article are
established in the Regulations. If an opinion is not issued within the

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 established deadlines, they are considered favorable."
Additionally, with respect to the aforementioned process, the Regulation of
the PPP Law indicates that a joint evaluation must be carried out in which
the public entities linked to the contractual modification procedure, the
Ministry that proposes and supports the modification, the Ministry of
Economy and Finance and the corresponding Regulatory Body.
For its part, the aforementioned norm indicates that the modification
process also includes a stage in which the respective regulatory body
issues an opinion that is considered non-binding for the subscription of the
addendum, after said opinion is issued it is up to the MEF to do the same.
with the substantial difference that said opinion must necessarily be
favorable for the subscription of the addendum to proceed. It should be
noted that, to issue such opinions, entities have a period of no more than
ten (10) business days.
In light of the above, the proposal to modify the Concession Contract must
support the convenience of its modification, for which it must respect the
parameters established by the standard, as well as the joint evaluation
procedure indicated above.
For its part, article 28 of the General Regulation of the Supervisory Body
for Investment in Public Use Transportation Infrastructure – OSITRAN,
approved by Supreme Decree No. 044-2006-PCM10 , provides for
OSITRAN to issue a technical opinion regarding the agreement reached by
the parties.
Likewise, the Organization and Function Regulations of OSITRAN
establish that it is the function of the OSITRAN Board of Directors to
approve the technical opinion prior to the execution of concession
contracts, their renewal, modification of the concession term, renegotiation
or review; as well as declare the inadmissibility of requests for
renegotiation or review, in accordance with the regulations of the matter.
On the other hand, the “Guidelines for Interpretation and Issuance of
Opinions on proposals for modification and counterclaim of Concession
Contracts” are also in force, approved by the OSITRAN Board of Directors
Agreement, which establish the criteria to be analyzed in case applications
are submitted. interpretation, modification and reconversion of concession
contracts.
The Concession Contracts recognize the competence of OSITRAN,
establishing that the modification of any of the terms established in the
10 Published in the official newspaper “El Peruano” on July 27, 2006 and its amendments

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 contract requires the prior opinion of the Regulator, who, in accordance
with the current regulatory framework, will rule on the request. and prior
agreement reached by the Parties.
Finally, and without prejudice to the above, the technical opinion issued by
the Regulator is non-binding, in accordance with what is expressly stated
in article 22.3 of Legislative Decree No. 1224 and article 57.1 of its
Regulations.
As indicated in this chapter, Concession Contracts constitute acts that
allow the State to grant in favor of a private party the construction and
management of a public service, whose ownership in principle belongs to
it. Thus, the State has issued a series of rules that regulate its actions, as
well as the entities that comprise it and private parties during the execution
of the aforementioned Concession Contract. Within these regulations, we
find those linked to contractual modifications, which stipulate the
requirements and procedure that the modification proposals must follow,
so that they are duly supported, which would be guaranteed, in
accordance with current regulations. , with the participation of the
corresponding public entities

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 IV. CONTENT
CHINCHEROS CASE

1. Project features:

The Chinchero International Airport would be located in the districts of Chinchero

and Huayllabamba, province of Urubamba, department of Cusco. The track
would be located at 3700 meters above sea level two km from the town of
Chinchero and 15 km from the city of Cusco.
The total investment amount of the project would be US$510 million, considering
the three substages indicated in the attached table. Adding other additional
costs, the cost could have reached US$659 million, according to OSITRAN
projections.
• Sub Stage 1 corresponds to the execution of earthmoving works, which
would be financed by the State and paid to the operator through
Payments for Work (PPO).
• Sub Stage 2 corresponds to the execution of terminal infrastructure
works, which would be financed with funds obtained by the
concessionaire and paid by the State through the Works Progress
Payment Fund (FPAO).
• Sub Stage 3 corresponds to the execution of complementary works that
would not be financed, at the exclusive expense and risk of the operator,
and that would be recovered later from the income generated by airport
and commercial operations.
The competition scheme proposed by PROINVERSION to award the bidder
established two (2) competition factors: i) The Works Progress Payment Fund
(Payment guaranteed by the State). ii) The percentage of reimbursement of the
co-financing offered by the bidder, when the income exceeds US$ 35 million
annually. That is, what percentage of the income generated by the airport above
this value would be returned to the State.
The bidder requesting the smallest amount of Works Progress Payment Fund
and the highest percentage of co-financing reimbursement would win the bid. In
the following table we can see the bidders' proposals:

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 Prüineersln
STAGES OF
DEI (Modek Ltonmmicol Aeropurtunri Imperial U55MN
PROVECT
(US§MN
Sub Stage 1

[Mevimente •e
Land)

Sub Stage Z
onstruockini

Total amount of
investment

glazing
(Jumpsuits > U55 33MM]

Illustration 1: MTC Source

Initially, the State was willing to assume a maximum co-financing amount (Fund for
Payment for Progress of Works - FPAO) of US$ 457.5 million for an airport project
whose total estimated value according to PROINVERSION's financial model is US$
635.6 million. Note that in the base PROINVERSION scheme, the State assumed
95% of the total investment. The Kuntur Wasi SA Airport Society offered the lowest
amount for Sub Stage 2 (US$ 264.8 million), which added to the amount of Sub
Stage 1 gives US$ 410 million, which is the Payment guaranteed by the State. It is
also seen that, in the other competition factor, the Cofinancing reimbursement, the
bidder Kuntur Wasi offered 100%, which is the maximum percentage. The total cost
of the Chinchero Project, with this proposal, would amount to US$ 524.8 million,
consequently, in this case the State assumes 78% of the total investment, an
amount and percentage lower than those anticipated by PROINVERSION for this
process (see following table).

p.
 SUB STAGE Contract __Original___________
(US$ MM) *
Sub Stage 1 (Movement of Terras
145.2 28%
)

Sub Stage 2 (Airport) 264 8 50%

Sub Stage 3 (Private Cost and

Risk) 97.9 19%

Supervision 16.9C) 3%

Investment Amount 524.8 100%

("") Adjusted according to contracting made.

Illustration 2: MTC Source

The Kuntur Wasi Consortium ,1 composed of the Argentine Corporación América
and the Peruvian Andino Investment Holding. The purpose of the Chinchero PPP
was for Kuntur Wasi to build the airport at its own risk and expense in exchange for
usufruct of the concession for 40 years. The winning group requested the
government to co-finance US$264.7 million for the project. This meant a saving of
US$204.1 million for the State, since it would finance 47% and not 78% of the
project as planned.

Kuntur Wasi
Aspects Bidder 2 Bidder 3
Proposal
Construction
Status US$265 US$411 US$348

Remuneration to
the State (%) 100% 100% 44%

(*) Amounts expressed in millions

Illustration 3: Wikipedia Source

p.
p.
twenty-
one
 2. Case description:
On July 4, 2014, the concession contract for the design, financing,
construction, operation and maintenance of the Chinchero Airport was signed
with Kuntur Wasi.
It was determined to pay interest since payments would be made from the
sixth year of the concession, once the airport was already completed and in
operation. Note that in the concession contract the State did not return a cent
of the $265 million to Kuntur Wasi before the airport was completed.
One of the highlights of this contract is that in the Works Program it was
established that the (private) concessionaire was responsible for the financing
of substages 2 and 3, which corresponded to 71.4% of the total budget; while
the grantor (State) was responsible for financing substage 1, which
represented 28.6%.
Another point to highlight was the procedure to calculate the Quarterly PAO
Quota, where the critical variables were i) the definition of the interest rate and
ii) the gap existing on intercalary interests (interest during the construction
period). Unlike other tenders that the Peruvian State has carried out, the
interest rate was not specified or limited in the contest rules.
In June 2015, the regional governor of Cusco, Edwin Licona, indicated that
the works would begin in October, since the technical file contained some
observations that had to be raised by the company.
In September of the same year, Licona assured that the process would begin
in December, as Kuntur Wasi had informed him. The land reclamation for
construction “is in its last phase,” said the regional authority.
In November 2016, the government announced the signing of an addendum
with Kuntur Wasi, in which the observations that were seen by OSITRAN
during the previous government were “resolved.” However, the State's
commitment to assume an investment of 265 million dollars was striking, while
the consortium would only risk 120 million.
The MTC formulated the draft addendum to the contract, which was evaluated
by the Supervisory Body for Investment in Transport Infrastructure for Public
Use (hereinafter, “OSITRAN”) to issue an opinion regarding the content of the
addendum. Thus, through Circular Letter No. 006-17-SCD-OSITRAN dated
January 20, 2017, it was announced that the OSITRAN Board of Directors
agreed in majority to give a favorable opinion regarding the addendum.
Patricia Benavente, president of the Board of Directors of
OSITRAN, was the one who opposed the addendum, because it contravened
the interests of the State, expressing his position in a dissenting vote, and
resigned from his position a few days later.
On February 3, 2017, addendum 1 to the concession contract for the Chinchero
airport was signed between the MTC and Kuntur Wasi, through which
substantial contractual modifications were made, this event triggering questions

p. 22
 at the national level.
CONTROVERSY: ADDENDUM

In relation to the addendum, we must specify that article 54 of the Regulation of

Legislative Decree No. 1224, Law of the Framework for the Promotion of Private
Investment through Public-Private Associations, states that during the first three
(03) years counted from the date of its subscription, no addendums can be
signed to the contracts except in the case of:
a) Correction of material errors
b) The supported requirements of permitted creditors linked to the financial
closing stage of the contract
c) The precision of operational aspects that prevent the execution of the
Contract. In this sense, the aforementioned rule requires that it be the
Concessionaire, at the request of the permitted creditor, who initiates the
process for an Addendum for bankability. Beyond interested journalistic
statements, the official documents of the institutions must take precedence. The
Addendum does not change the modality of the contract, it remains a PPP
contract, since it does not alter the competition factors, the economic balance,
or the risk matrix.
The addendum proposes to change the contractual payment scheme of the
PAO 910 Payment Fund, transforming it into a payment scheme for progress of
works, and also includes the payment of an advance so that the project has
liquidity and thus the concessionaire can begin the stage. of the execution of the
work. Ultimately, the addendum meant that the concessionaire was only
responsible for financing 19.3% of the total budget of the works, while the State
was going to assume the financing of the remainder; that is, 80.7%.
Furthermore, the fact that the State now provides the money (US$265 million)
from the beginning for the concessionaire to execute the work has also
generated criticism that in practice this public-private partnership (PPP) has
become a public work, like any other. But with the difference that, in addition,
the contractor will have the concession for the airport for 40 years.

9
According to the contract, the PAO are the amount in current values established in the Economic proposal that
is part of the contract.

As a result of the signing of the addendum, the allocation of financing risk

was reversed, as evidenced in this graph prepared by the Technical
Management of OSITRAN in Technical Report No. 005-2017-GRE-GSF-
GAJ-OSITRAN:

Original Scheme Proposed Scheme

p. 23
 SubStage1 State-*-----28.6% To Status < 80.7%
Concessionaire Sub Stage +7 71.4% State 4-
Sub Stage Concessionaire V Concessionaires 4— 10.3%

Illustration 4:OSITRAN Source

This signing generated different reactions, both for and against. Even the
MTC minister was questioned by Congress and had to attend to respond to
the parliamentary statement on this topic.
On May 21, 2017, Minister Vizcarra indicated in an interview with Cuarto
Poder that they have the disposition as Executive to "terminate" the contract
and the addendum on the Chinchero Airport in Cusco. Given this
announcement, Kuntur Wasi said that he is considering taking legal action
against the Peruvian State.
The climate surrounding this issue was so difficult that the Minister of
Transport and Communications at the time, Martín Vizcarra, had to resign
from office. Likewise, the Comptroller General of the Republic on May 22,
2017 issued Audit Report No. 265-2017CG/MPROY-AC through which it
concludes that the signed addendum fails to comply with the applicable
regulations that regulate Public Private Associations, which could mean
economic damage to the State. Among the findings of the audit, reported by
Comptroller Édgar Alarcón at a press conference, is that the addendum was
going to generate losses for the country of 40.6 million dollars (133 million
soles).
On May 29, 2017, the Coordination Council of the Cusco region agreed not to
adopt any type of forceful measure until June 12, the deadline for the
government to set up a dialogue table in the imperial city to discuss the
construction of the Chinchero airport. At the meeting it was agreed to demand
the execution of the Chinchero airport as a public work.
Subsequently, on June 4, 2017, the head of the MTC, Bruno Giuffra, on
behalf of the State, indicated that the Government and Kuntur Wasi decided
to terminate the Concession Contract.

p. 24
 Minister or
PERU of Transport and Communications

RELEASE
MTC announces Resolution Agreement by Mutual Dissent of the construction and operation contract
of the Chinchero International Airport

The Ministry of Transportation and Communications announces the agreement on the upcoming
resolution by mutual dissent of the contract for the Construction and Operation of the Chinchero
International Airport (AIC) concluded with the Kuntur Wasi Consortium. This resolution will be carried
out respecting the current contra framework and legal order of our country.

The MTC wishes to recognize the Kuntur Wasi Consortium's willingness to dialogue.

The announced agreement has the following implications:

• The Kuntur Wasi consortium will not participate in the construction and operation of the Chinchero
International Airport (AIC)
• Earthworks for the construction of the AIC will begin in the shortest possible time. I earthworks will
be carried out under the public works bidding modality.
• While the Earthworks stage lasts, the government will study the optimal modality for the construction
(civil works) and operation of the AIC, thus not delaying the execution of this project.

The Government understands the urgency of the population of Cusco and the country to have a
modern and safe airport in our main tourist destination and therefore reiterates its commitment to carry
out this work in the shortest possible time.

Lima, June 4 , 2017

CHINCHEROS PROJECT: CURRENTLY

On January 23, 2018, the head of the MTC , Bruno Giuffra, indicated that the
earthworks will begin in October of this year. Prior to this, an agreement will first be
signed between the MTC and the International Civil Aviation Organization (ICAO) on
Next March 6th.
ICAO will be in charge of carrying out two bidding processes, the first for the
construction of earthworks, drainage and pavement; and the second for the perimeter
fence.
The minutes of the agreement were signed by the Peruvian Vice Minister of
Transport, Rafael Guarderas, and the regional director of ICAO, Fabio Rabbani, in a
ceremony held at the organization's office in Lima, in the presence of the Minister of
Transport and Communications, Bruno Giuffra.
"The collaboration of ICAO will provide the greatest possible transparency and a high

dose of professionalism to the execution of the International Airport project page 25

from Chinchero. It really is a great step towards the construction of the new airport,"
said Giuffra.11
The signing ceremony of the agreement was also attended by the regional
governor of Cusco, Edwin Licona; and the mayor of the Chinchero district,
Gualberto Sallo. Vice Minister Guarderas announced on February 23 that the works
on the new Cusco international airport will begin on August 15.

Illustration 5: Diario el Comercio source

The technical inspection for the construction of the perimeter fence was
planned for the month of May, and in June the technical inspection of the
land for earthworks, drainage and pavement was carried out.

11 Published in Diario El Comercio on March 6, 2018

p. 26
 Illustration 6: Diario el Comercio
source

p. 27
 V. LEARNED LESSONS

1. Poor drafting of the bidding rules, as well as the contract, can lead to finding
inconsistencies or legal gaps that are subject to the interpretation of both
parties. Because a contract cannot be interpreted without analyzing the
bidding rules, winning technical-economic proposal, financial model and
financial plan.
2. Public private partnership contracts are highly technical and complex of
incomplete nature; long periods with uncertainty and technological advances
that cause its evolution and constant updating. That is why this process
needs to be regulated, because otherwise all signed PPP contracts would
be in a condition for renegotiation.
3. The addendum should not have been signed under those parameters, but
rather the concession time should have been reduced. Since the State is
assuming the financial risks, it does not make sense for it to benefit for so
many years.
4. Another way for the addendum to be signed was for the state not to assume
the financial risks and for the consortium to obtain another financing
mechanism.
5. In the event that the concessionaire did not have the means to prove to the
grantor (State), before the beginning of the works execution stage, that it
has the financial resources or signed contracts that establish the financing
commitments necessary for the execution of the aforementioned stage,
since the State could have expired the contract, that is, terminated it due to
non-compliance by the concessionaire, because due to its responsibility it
fails to comply with the financial closing in accordance with the provisions of
clause 15.3.2 of the contract. Thus, in this case, taking into account that
Kuntur Wasi had no way to prove its financial resources, in fact, in the month
of November the permitted guaranteed debt that it presented was rejected,
since the State could consider the contract expired due to non-compliance
with the dealer before signing the addendum
6. A possible solution remains to restart the procedure for the construction of
public infrastructure. In this regard, given that the airport project is large-
scale; since it would definitely be efficient and appropriate for it to be carried
out through the PPP mechanism for the construction and operation of the
infrastructure in this case, the Chinchero Airport in Cusco, but with strict
compliance with the principles that regulate it; which thus allows the State
greater efficiency and lower risks at the time of project construction and in a
faster manner.
7. We recommend that it be through a public-private partnership contract due
to the time it takes for a public work.
8. Public-private partnership contracts must be discussed in appropriate forums
with limits of intervention dedicated exclusively to technically resolving the

p. 28
 problem and not to fueling social conflict. In Chincheros the political agenda
has taken precedence over the technical one.
9. Contracts and addendums cannot be analyzed separately. The Comptroller's
Office should not have issued an opinion on the addendum long before
evaluating the contract. The pre-contractual phase where the ID,
Prioritization, selection, evaluation, structuring, design and transaction of the
investment project under the PPP modality is as important as analyzing the
contract itself and the subsequent addendum, so this phase must also be
the object of study if we want to learn lessons.
10. The need to achieve greater efficiency with respect to time influences the
making of hasty decisions such as the omission of requirements in the
prequalification of bidders and the resolution of conflicts such as the
generation of early addendums that may lead to the termination of the
contract.
11. The financial closure of a project is the equality of its costs and its sources of
financing, distinguished by its stages. The scope of the financial closure
ensures the viability of the project, a closure that in Peru takes an inordinate
amount of time. In Chincheros there was no final or partial closure.
12. To prevent the public-private partnership procedure from being used by
unscrupulous businessmen, the studies of a project should not be carried
out by a supplier who turns out to be the same and only bidder for the
acquisition.
13. The analysis of risk distribution must be based on a risk matrix, which not
only evaluates financial risk but also other variables such as social
profitability.

p. 29
 VI. CONCLUSION:

There was a distortion of the Chincheros Airport PPP contract, resembling it

as a public works regime. An addendum is the modification of the original
contract. As explained in the previous chapter of this work, within the
framework of promoting private investment through public-private
associations, “the State, in common agreement with the investor, may modify
the Public-Private Association contract while maintaining its economic
balance. financial and the conditions of competition of the promotion process.”
In that sense, it is legally permitted that modifications can be made to the
original contract; However, in this specific case of the Chinchero Airport, it is
evident that the signed addendum did not meet the requirements. By including
an advance payment scheme for progress of works, the original conditions of
the bidding process were altered.
Likewise, OSITRAN Management indicated that if this advance payment had
been included from the beginning of the issue, the bidders would not have had
the need to request any financing for the execution of substage 2, thus the
offer of the bidders would have been even lower due to FPAO. With this, it
follows that the addendum alters the conditions of competition.
In conclusion, the modification of the contract through the addendum meant
damage to the State and a clear favor to the concessionaire, violating the
requirements established in the regulations of Public Private Associations in
relation to the requirements to carry out a contractual modification; and the
fact is that, strictly speaking, the conditions of competition are affected and the
appropriate allocation of risks is altered.

p. 30
 VII. BIBLIOGRAPHY:
> https://www.esan.edu.pe/conexion/actualidad/2017/06/07/lecciones-por-
learn-sobre-el-caso-chinchero/ Author : Enrique Cárcamo (June 7, 2017)
> https://peru21.pe/lima/chinchero-cronologia-entender-obra-cusco-claim-
40-anos-77367 Author: Perú21 (June 4 , 2017)
> http://rpp.pe/economia/economia/que-es-el-aeropuerto-de-chinchero-y-
por-que-se-suspendio-firma-de-la-adenda-noticia-1027640

Author:
Wilfredo Angulo (May 22,2017)
> https://gestion.pe/economia/contraloria-conozca-conclusiones-informe-
Aeropuerto-chinchero-135634 Diario Gestión (May 22, 2017)
> https://www.esan.edu.pe/conexion/actualidad/2017/06/07/lecciones-por-
learn-sobre-el-caso-chinchero/ ConexiónEsan (June 7 , 2017)
> http://www.mtc.gob.pe/todosobrechinchero/wp-
content/uploads/2017/05/respuestas-interpelacion.pdf MTC (May, 18,
2017)
> https://peru21.pe/opinion/juan-mendoza-chinchero-cambio-76200 Juan
Mendoza (May, 13, 2017)

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