Navigating the arbitration seas of Chile's concessions system

At the end of the first quarter, there were 78 infrastructure concession contracts in force in Chile. Of the total, 49 were in operation, 19 under construction, and 10 under construction and simultaneous operation.

Despite the dynamism, several contracts have ended up in arbitration over the years.

Last year, 54 discrepancies or claims related to concessions were registered before a technical panel, reconciliation commissions or the Santiago court of appeals, according to data from the public works ministry (MOP).

To learn more about the arbitration system for concessions, as well as the type of conflicts involved, BNamericas speaks with Pedro Zelaya, partner at law firm Zelaya Etchegaray & Co, who was recently selected by the supreme court to be one of 20 expert attorneys who can sit on the arbitration commission for public works concessions.

BNamericas: What do you think are the advantages of the Chilean concessions model when it comes to arbitration?

Zelaya: As a lawyer, I've experienced the development of our public works concessions system since its creation, in 1993, until today. One of the aspects that has had the greatest influence on the success of the entire system has been its dispute settlement regime. The 1993 law established that private concessionaires could resolve their conflicts with the State, not in public courts and subject to ordinary procedure, but through an alternative dispute resolution system, which allowed private arbitration with a more flexible procedure and adjusted to the needs of the industry. This was something quite unprecedented in our legal history, since the Chilean State only litigated before ordinary courts of justice.

BNamericas: What are the main sources of conflict that lead to arbitration processes involving concessions in the Chilean system?

Zelaya: We must distinguish between the construction stage and the operation stage of a project.

Most conflicts arise in the construction stage, in which it's easier for problems to arise that alter the economic balance of the concession contract, which means they impact the profitability with which the project was tendered. For example, when the State demands changes in projects tendered unilaterally, or the execution of extraordinary or additional works that weren't foreseen in the projects tendered.

Likewise, the high level of administrative permitting, especially in environmental matters, has given rise to conflicts when the competent sectoral authorities don't approve the projects, delay approving them or require substantive changes for approval, with the consequent construction and maintenance cost overruns.

On the other hand, during the operation stage, conflicts arise when the State, in the use of its punitive contractual power, unilaterally applies fines to the concessionaire, when the cause of the problem that gave rise to the fine hasn't been attributable to the private company but, for example, to acts of vandalism by third parties.

BNamericas: What non-legislative changes could be applied to encourage early resolution of concession conflicts?

Zelaya: To try to avoid conflicts, or at least reduce their economic impact, we must take care to tender concession contracts with engineering projects that are as finished and definitive as possible. The lack of definition and, even worse, the possible omissions and shortcomings of projects, cause serious problems during the construction of the works.

Another point that helps avoid problems and claims is to try to get projects tendered with the expropriations completed and with the environmental authorizations granted by the competent bodies.

BNamericas: What aspects of the current dispute resolution system could be improved, to bring final solutions to the problem faster and avoid excessive prolongation?

Zelaya: For some, the panel of experts [technical panel] is today quite overwhelmed by the significant increase in its daily work. This is largely due to the greater number and complexity of the claims made.

In this sense, perhaps a legal modification could be thought of that reformulates the current functions of the panel, at least in three ways.

First, it's not mandatory to go before the technical panel to present an arbitration claim since, in practice, many of the claims have one or more legal components, which require a legal qualification of the facts and the contract, and which today oblige the panel to interpret the contract and decide who is obliged, according to the law and the contract, to bear the greatest costs, losses and damages claimed.

Second, that the technical panel serves to help the parties resolve strictly technical problems and/or problems with a marked economic connotation, but in which there are no legal, juridical or qualification and interpretation components of the contract.

In other words, the technical panel should help the parties elucidate and define two types of aspects: those purely technical aspects not defined or clarified in the projects originally tendered or in the projects that have been or are the subject of the agreement. Complementary and purely economic or financial aspects that are not defined in the original contract and with respect to which the parties haven't been able to reach an agreement, such as the determination of the discount rate to be used in a complementary agreement, the definition of what type of insulating or lighting materials the project's underground works should have, etc.

In my opinion, the technical panel can't be required to determine which of the two parties must or is obliged to assume the greater costs or expenses that its recommendation or decision implies since this is a matter of agreement between the parties or a judicial ruling.

Finally, the existence of a technical panel for each concession contract could be considered, whose decisions are binding or obligatory for the parties and that, to act before it, it's not necessary to have the sponsorship or representation of lawyers, since this tends to judicialize the process, with all that it implies.

BNamericas: What other improvements could be made?

Zelaya: In Chile, the environmental impact review system, as it is conceived and applied today, has become one of the main issues of analysis when bidding, awarding and constructing any infrastructure project.

At the end of last year, the council of ministers approved a bill that aims to make this environmental approval system more efficient. I hope this bill comes to fruition and has good results.