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01/07/22

Trends in the use of international standard forms of contracts in the Latin American market

Trends in the use of international standard forms of contracts in the Latin American market

Latin America is forecasted a solid growth for the period 2020-2025. As a result, the region is progressively becoming a destination for foreign capital investment. Additionally, the need for infrastructure makes it a booming area for construction and energy projects. The infrastructure investment gap in the region is estimated1, by the Inter-American Development Bank (IADB), at around 2.5 percent of Gross Domestic Product (GDP), which means a gap of around $150 billion per year.

The existence of multinational clients, consultants and contractors are driving change in the procurement regimes, and this is affecting standards of project delivery and management methodologies within the construction industry. Consequently, the use of standard forms of contract is slowly increasing in the region, being strengthened by some initiatives implemented by multilateral funding organizations and some national governments.


Author: Javier Sánchez Llopes, Driver Trett Operations Director, Madrid, Spain.  

The effect of international investment

The presence and activity of the multilateral development organizations in the Latin American region has been increasing during the last decades.

These organizations, like the World Bank (WB) or the Inter-American Development Bank (IADB), provide financial and technical support for countries working to reduce poverty and inequality, supporting capital infrastructure projects in developing areas.

Recently, both the WB and the IADB signed an agreement2 with the International Federation of Consulting Engineers (“FIDIC”) where the international funding organisation adopted the use of the 2017 FIDIC set of standard contracts for the next five years. The endorsement of FIDIC contracts by these two major international funding organizations will cause an increase of the use and presence of FIDIC contracts in the region. Globally, the use of the FIDIC suite of contracts is being sponsored by other such agreements.

Additionally, some other international organizations like the United Nations Office for Project Services (UNOPS) or Fondo del Milenio El Salvador (FOMILENIO), have been using FIDIC Contracts extensively in the Central America region for some years with very positive outcome.

One of the main features, brought by the use of the 2017 suit of Contracts, is the mandatory implementation of standing Dispute Avoidance and Adjudication Boards within the projects.

The Peruvian experience

Investment in infrastructure in Peru has been crucial for the economic development of the country. Primary investment has been focused on providing essential services, such as water supply, sewage collection and treatment, and access to health, education and electricity.

The Peruvian government commissioned to the The Universidad del Pacífico (UP) the analysis and diagnose of the long-term infrastructure gap (2019-2028) in Peru, and their report3 identified $110 billion infrastructure gap.

In 2019 and in response to these circumstances, the Peruvian government set up a process to adapt Peruvian legislation to the best infrastructure procurement and construction practices resulting, in January 2020, in the publication of the Urgency Decree No 021-20204 (the "Decree") which created a new public procurement framework.

This regime aims to regulate special projects and establishes that each of these projects may nominate a Project Management Office within the framework of Government to Government (“G2G”) agreements. Additionally, the Decree includes conditions for collaboration agreements with international organisations and the implementation of Building Information Modelling (“BIM”).

These projects are now authorised to apply contractual models of international standard use, such as the New Engineering Contract (NEC) or FIDIC, and they are exempt from applying public procurement law and regulations. The Decree emphasises the need for a thorough definition stage for the projects, a balanced risk allocation and the use of collaborative ways of project and contract management.

 

Following the excellent results, in terms of timely delivery of projects and low level of disputes, of the Pan American Games Lima 2019 project, managed under NEC Contracts, the standardisation of contracts has become more and more frequent. In October 2019, the Peruvian government entered into an G2G agreement with the South Korean government for specialised technical assistance in the Chinchero International Airport project in Cusco. Likewise, in June 2020, the government created the “Asociación para la Reconstrucción con Cambios” (ARCC) for the design and construction of 15 hospitals, 74 schools and remedial works for 17 rivers, five dams and a drainage system in seven cities on the north coast, with the specialised technical assistance of the UK and an estimated investment of $2.04 billion.

With regards to dispute boards, since FIDIC 2017 and NEC4 have been used more often in the public and private construction market, more owners have identified the benefits of applying this practice in complex and high-value projects. The use of dispute boards in Peru has proved that disputes can be avoided when following procedures to assess them before the disputes themselves develop further. This generally reduces the risk of delays and cost increases and avoids unnecessary legal expenses.


Conclusions

  1. The Latin American region will continue to see high rates of infrastructure investment in the coming years.
  2. The existence of multinational clients, consultants and contractors are driving change in contracting modalities, and this is affecting standards of project delivery and management methodologies within the construction industry.
  3. Multilateral investment organizations are committed to the use of international standard contract forms. This will increase the knowledge and use of this contracts within the region.
  4. Some governments, like the Peruvian government, are also changing their policies to facilitate the use of international forms together with a more collaborative approach to project and contract management.
  5. These practices are also increasing the use of Dispute Boards within the region as a tool to both avoid disputes and to resolve disputes.
     

International Federation of Consulting Engineers FIDIC | Inter-American Development Bank signs five-year agreement to use FIDIC standard contracts

Brecha de infraestructura en el Perú: Estimación de la brecha de infraestructura de largo plazo 2019-2038 | Publications (iadb.org)

El Peruano - Decreto de Urgencia que establece el modelo de ejecución de inversiones públicas a través de proyectos especiales de inversión pública y dicta otras disposiciones - DECRETO DE URGENCIA - N° 021-2020 - PODER EJECUTIVO -

Americas  /  Articles  /  Digest  /  Europe

Americas  /  Articles  /  Digest  /  Europe

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