Peru creates legal framework to close infrastructure gap

Peru’s current modern legal framework has now been in place for more than 25 years. After several different governments, global economic crises and other phenomena affecting the country, its underlying legal framework has essentially remained the same. Laws may have changed and some experiments may have been conducted but, the country’s principles, laws, regulations and constitution have endured, which is no small feat for a growing developing country that battled domestic terrorism in the 1980s and 1990s. Importantly, throughout these years, the economy was opened up to foreign investors and the country strived to provide a business-friendly and predictable legal regime that welcomes investment.

In early 2016, Peru faces elections once again. We are confident that the legal framework will remain the same, no matter who is elected. Highlighted below is the legal framework for corporate entities, the mining industry, employment and public-private partnerships (PPPs), the rules for which has been recently revamped.

Mining

Historically, Peru has been and still is a mining country. It is among the five top producers of gold, silver, copper, zinc and lead. Mineral resources in Peru can be privately exploited through one the following types of concessions: (i) mining concessions (for exploration and exploitation activities); (ii) processing concessions; (iii) general works concessions; and (iv) a mineral transportation concession.

Mining concessions are property-related rights, distinct and independent from the corresponding surface land. As a result, to conduct mining activities in Peru, mining companies must secure the right to use the surface land on which they carry out operations. Additionally, mining companies must apply for authorisations and environmental permits from different government agencies.

The 1992 General Mining Law approved by Supreme Decree No.14-92-EM (the “General Mining Law”) is the main piece of legislation governing mining activities in Peru. Mining activities involve the exploration for and exploitation of metallic and non-metallic mineral resources, excluding oil and gas reserves.

Environmental Permits

On March 14, 2015, a new environmental regulation to manage mining activities went into effect. According to the regulation, mining concessionaires that have completed the exploration phase and are contemplating exploitation, processing, mineral storage, mining transport or general services activities must obtain an approval from the government called a Detailed Environmental Impact Assessment (Estudio de Impacto Ambiental Detallado, EIA-D”) from the government, which involves a public hearing in the area of the country where the project will be developed.

Indigenous People Consideration

Peru has ratified the International Labour Organisation (ILO) Convention N.169 concerning indigenous and tribal peoples through Legislative Decree N.26253. This treaty has been implemented through the Right to Prior Consultation Law passed by Congress in September 2011. This law acknowledges indigenous and tribal peoples’ right of prior consultation, since they may be adversely affected by a legislative or administrative measure. Mining projects located in areas inhabited by indigenous peoples must first go through the consultation process before the Ministry of Energy and Mines is able to grant an authorisation for exploration or exploitation activities, as well as before granting a processing concessions.

Exploration & Exploitation

Mining concessions allow concessionaires to explore, develop and exploit mining resources. Mining concessions are granted for an unlimited period of time over areas consisting of a minimum of 100 ha and a maximum of 1000 ha (though concessions located at sea may extend to 10000 ha). There is no limit to the number of mining concessions that an individual company may have at one time.

Mining concessions are irrevocable except if the concessionaire (i) fails to pay the good standing fee for two consecutive years, (ii) fails to pay for two consecutive years the mining penalty due when the annual production target has not been met, or (iii) fails to meet the annual production target within 20 years. According to the General Mining Law, mining concessions are granted to persons in Peru or companies incorporated in Peru whose principal business is conducting mining activities. However, such companies may be wholly owned by foreign investors or may be branches of foreign companies that are already established in Peru to carry out mining activities.

Obligations Of The Concessionaire

The concessionaire must pay a good standing fee (Derecho de Vigencia) equal to $3 per year per ha granted. In addition, mining concessionaires are required to put the concession to work. Therefore, they must meet a minimum annual production target established by the General Mining Law equivalent to one tax unit (approximately $1210) per hectare per year in the case of metallic mining concessions. The target must be met by the 11th anniversary of the date the mining concession was granted. If the minimum annual production target is not met by such date, the mining concessionaire is required to pay a penalty equal equal to 10% of the corresponding minimum annual production target per hectare per year, until the concessionaire meets this established target.

Failure to meet the minimum annual production target by the 15th anniversary may lead to the cancellation of the concession, unless the concessionaire can prove that it was not responsible for the failure. If such failure continues until the 20th anniversary, the concession is automatically cancelled.

Cultural Heritage Protection

Peru has a vast archaeological heritage that continues to be discovered. The Peruvian Constitution and the Cultural Heritage Law No. 28296 (Ley General del Patrimonio Cultural de la Nación) protect any pre-Hispanic remains, whether on the surface, under ground or under water, and whether it has been discovered or only identified. During the design and development of mining activities that involve the removal of topsoil, there is always the potential of discovering archaeological sites or features that must be preserved.

As a result, mining concessionaires have to obtain a special certification stating that no archaeological remains are located within the area of the mining project. Once the certificate is issued, the concessionaire must submit an Archaeological Monitoring Plan for the construction phase of the planned project.

Foreign Investment Guarantee

Peruvian legislation recognises several rights and guarantees to local and foreign investors alike. These rights are granted automatically to any private investor that invests in Peru. The following are the most relevant rights and guarantees provided by the government:

• Non-discriminatory treatment: national and foreign investors are subject to the same terms and conditions.
• Freedom of contract: parties can freely agree to any terms and conditions, so long as they are recognised as valid by law.
• Free transfer of capital: the government guarantees the right of foreign investors to freely transfer after-tax profits, including those from the sale of shares and other assets.
• Guarantee of private property: property rights cannot be violated regardless of whether they are owned by a foreign or domestic person.
• Trade: the government guarantees the freedom to trade locally or internationally.
• Beneficial exchange rate guarantee: foreign investors have access to the most beneficial foreign exchange available in the market GENERAL STABILITY

Agreements

Besides these guarantees, investors may seek protection from changes in Peruvian law by entering into “stability agreements” with the Peruvian government. Legal stability agreements are a civil contract that has the force of law and guarantees the continued application of certain laws and regulations in force at the time the agreement was executed. In order to execute a stability agreement, investors are required to guarantee an investment of no less than $5m in any sector, except in mining and hydrocarbons, which require a minimum investment of $10m.

Mining Stability Agreements

In addition to general stability agreements, local and foreign investors in mining projects are also entitled to engage in Guarantee Agreements and Investment Promotional Measures (“Mining Stability Agreements”) with the Ministry of Energy and Mines.

Similar to general stability agreements, mining stability agreements have the force of law and protect investors from changes in certain laws and regulations for a period of 10-15 years.

Employment

Generally, employment law in Peru favours permanent employment contracts, as opposed to fixed-term employment contracts. Fixed-term employment contracts are only allowed in certain cases specified by law. For example, start-up companies or companies that invest in Peru may have fixed-term contracts for a period of no longer than three years.

The law also allows for fixed-term employment agreements in cases where companies export non-traditional products, such as manufactured goods. This allows exporting companies to have a flexible labour force that adjusts according to purchase orders. Companies in other industries have lobbied, without much success, for more flexibility to hire employees for a fixed period of time.

Peruvian employment regulation also establishes a three-month trial period for regular employees. With respect to positions of “trust” or executive managements, this period can be extended, if agreed to by the employee and the employer by six or 12 months. For the duration of the trial period, the employer may freely dismiss the employee. As a result, employers should use this trial period to evaluate employee performance and decide whether the employee should become a permanent employee. After the trial period, an employee may only be dismissed if there is a justified cause established by law.

If an employee is fired without cause, either because there is no legal basis for the dismissal or it was successfully challenged by the employee in court, an employee is entitled to a severance payment equal to 1.5 times the monthly salary for each year of service, up to a maximum of 12 monthly salaries. However, employees (other than executives or those who hold “trust” positions) may reject the severance payment and demand to be reinstated to their former job position.

When considering salaries, bear in mind that employees have the right to receive certain benefits other than their salary.

Additionally, employees have the right to share in company profits if the company declares dividends and receive profits through the distribution of an annual percentage in the company’s income before taxes. Profit sharing applies to companies that have more than 20 employees.

Infrastructure

Closing the infrastructure gap in Peru has been one of the main goals of the government in the past few years. Peru has made a serious effort to create a legal framework that encourages local and foreign investments in infrastructure projects throughout the country.

Recently, the government has passed certain laws to promote PPPs as a way to encourage private investment in public services and infrastructure projects. PPP projects may be initiated by either the Peruvian government or by private investors and can be self-sustaining or co-financed by the government. Typically, sustainable projects generate sufficient revenues from the project, so that they do not need financial support from the Peruvian government. On the other hand, co-financed projects are supported by the government in order to secure a return on investment or to support its financing in the form of guaranties from investors.

The existing legislation provides straight-forward mechanisms to award a project once it has passed the evaluation process. A project can be awarded directly to the investor who proposed the project, if other parties do not express an interest in the project. Alternatively, if there is interest in the project, it will be awarded in a public auction, in which all interested parties may participate. These mechanisms assure that the investor who proposes the project is reimbursed for incurred expenses, so long as such party has validly participated in the bidding process. These policy changes and investment opportunities offered by the government have led investors to propose a series of co-financed private initiatives in 2015 to develop infrastructure projects in various sectors, such as health, education, sanitation and transportation. The projects are in the process of being evaluated by the government to see if they help bridge the infrastructure gap, and promote economic development in the country.

New PPP Regulations

In addition, the government continues to refine the PPP process, and recently passed a new set of regulations that help clarify certain issues raised by investors. On September 25, 2015, the government issued Legislative Decree N0. 1224, which contains the “Framework to Promote Private Investment through PPPs”. This law, which is expected to go into effect as soon as it is passed, creates planning and evaluation functions for different public entities that participate in these projects; gives greater power to the Ministry of Finance to evaluate the projects and proposed amendments to the concession framework agreements; and reaffirms the Ministry of Finance’s role as the guarantor of public finances. In addition, the law precludes investors that have been sanctioned or have other legal impediments from participating in the process, and it establishes the regulations by which projects will be guaranteed by the government.

The law also ratifies the possibility for investors to present sustainable co-financed private initiatives in order to help bridge the existing the infrastructure gap. The conditions and characteristics of this, will be specified further in the regulations. Finally, the law promotes the participation and cooperation of investors in managing government assets through projects, with details to be revealed in the regulations.

Public Works For Taxes

The government has also promoted infrastructure development through its Public Works for Taxes programme, which allows private firms to pay future income taxes (up to a limit of 50% of the taxes paid the prior year) by executing infrastructure projects that are demanded by communities, that have a regional or local impact, and that are in line with national development plans. This novel mechanism, which has caught the attention of other countries in the region, consists of a private firm selecting a project that has been identified as a priority by a municipal, regional or university council, or by submitting a new project that has the System of National Public Investment or SNIP stamp of approval as a priority. The respective sub-national government or university notifies ProInversión about the project’s importance, which in turn promotes the project among various potentially interested companies. Next, the central government, the university council under their commission or ProInversión, undergoes a selection process among the companies that have indicated an interest in the project. The sub-national government or university involved in the project requests that the Ministry of Finance issue a Certificate of Regional and Local Public Investment, known as a CIPRL, which certifies that the private firm has financed the project with its income tax. The certificate serves to reduce its taxes for the next fiscal year, and up to 10 years, in an amount equivalent to the funds contributed to the project.

These mechanisms have been very successful, as evidenced by the co-financed projects for the construction of highways in the Andean region of Peru, and a beltway around the city of Lima proposed as a private initiative, which is currently being evaluated. In terms of public transportation, there have also been many changes in recent years, and there are several projects in the pipeline. In Lima, for example, the Metro Line 1 that links Villa el Salvador and San Juan de Lurigancho is under construction, as is Line 2, which was awarded in 2014, consisting of an approximate investment of $5.6bn. Once completed, it will join the area of Ate with the region of Callao. Moreover, Line 3 is expected to be awarded before July 2016 and is projected to cover a distance of 31.5 km. It will travel from Atocongo Bridge in San Juan de Miraflores, located in the south of Lima, to Stone Bridge in the northern part of the city.

As a result of these measures, the government has a portfolio and a pipeline of projects, many coming from private initiatives. The government has proposals for various sectors, including shipping terminals, hospitals, high-performing schools, technology centres, and water and sanitation proposals, among many others. Once the evaluations of these proposals are complete and are the projects are developed, Peru will have made tremendous strides in bridging the infrastructure gap.

Corporate Law

Investors have several corporate forms to choose from when deciding how to carry out business activities in Peru. The most common type of corporate entities used by investors in Peru are either open or closely held corporations (sociedad anomina or sociedad anonima cerrada), a limited liability company, or a branch of a foreign entity registered in Peru.

A corporation or a limited liability company is usually used by foreign investors who wish to establish a subsidiary in Peru with limited liability. The branch, on the other hand, is an extension of a parent company and does not provide limited liability protection to its parent company.

Subsidiaries

A corporation is the preferred corporate form for doing business in Peru. It provides limited liability and allows for the separation of management and corporate ownership. By law, the corporation requires at least two shareholders, who may be either local or foreign individuals or entities.

The capital of a corporation is represented by shares, and there are no transfer limitations, except as otherwise agreed by shareholders in the by-laws or a shareholders’ agreement. A corporation is governed by shareholder meetings, the board of directors and the general manager.

Peruvian corporate law contemplates two special types of corporations: (i) a closely held corporation and (ii) a publicly held corporation (sociedades anónimas abierta).

A closely held corporation must have at least two shareholders and no more than 20. In addition, shareholders have a right of first refusal with respect to the transfer of shares (although this may be waived in the by-laws or in shareholder agreements). Lastly, a closely held corporation may have a board of directors or it may operate without one, at the time of its election.

Alternatively, publicly held corporations must be registered in the Public Registry of the Securities Market (Registro Público del Mercado de Valores) and have no transfer restrictions.

Any agreement purporting to restrict the transfer of shares would be void. A public company is subject to the supervision of the securities market regulator.

One other common type of corporate form used by foreign investors is the limited liability company (sociedad comercial de to limited liability, and must have a minimum of two and a maximum of 20 partners. In addition to such characteristics, the capital of a limited liability company is divided into quotas which are subject to a right of first refusal of the other quota holders. Any transfer of quotas must be formalised in a public deed registered in the pubic registry. Finally, a limited liability company is governed through partners’ meetings and its management.

Branch

A branch is not an independent legal entity, but an extension of its parent company, which means the parent company is liable for the actions and obligations of the branch. For tax purposes, though, a branch is treated as an independent company separate from its parent company.

A branch must appoint at least one legal representative in Peru, who shall be a Peruvian citizen or a Peruvian resident, as demonstrated with an official Peruvian ID or alien card.