- 1.How common is project finance in your jurisdiction? In what sectors is project financing most common?
Project Finance is commonly used in public sector projects and moderately in private projects. In the public sector, it has helped in the development of public work concessions and public services contracts by private companies to benefit from their experience and skills while controlling high initial investments, reducing tax burdens and allowing long periods of maturity while the lenders have a predictable and reliable cash flow. Project finance techniques are privileged over other types of financing because they allow for the projected cash flows of the project to serve as security rather than rely on the country’s credit ratings for other types of loans.
- 2.What kinds of institutions typically act as sponsors and lenders in your jurisdiction? Why?
Sponsors are usually companies from countries with strong commercial ties with Costa Rica, including the United States, Canada and Spain; Lenders are usually international development banks that work in the Americas such as the Central American Bank for Economic Integration (CABEI), Inter-American Development Bank (IDB) and World Bank (WB). Given the recent establishment of political ties between Costa Rica and China, there has been some activity in project finance involving China where for example in early 2010 Bank of China bought the receivables originally structured by CABEI for the implementation of the first 3G telecom network in the country.
- 3.What structures are most common?
The most common structure is build operate transfer (BOT) and to a lesser extent leveraged leases in the form of trusts set up by the government to develop energy and infrastructure projects.
- 4.Does local law require that the project company be organised under the laws of your jurisdiction? What is the typical legal form of a project company and why? Does local law require that any of the project company’s equity be held by local investors?
It the case of concessions of public works, public services and administrative contracts, the law requires the awardee to incorporate a local corporation, which is subject to Costa Rican law. The most common vehicle is a corporation (Sociedad Anónima). Equity of the project company can be held by local or foreign investors, there is no minimum or limitation in regards to citizenship of investors. The Concessions Law regulates conditions under which the awardee may sell or transfer its equity ownership in the concession company, but as long as control is not changed (51 per cent is maintained), no government approval would be required.
- 5.Please describe the foreign investment regime in your jurisdiction.
The investment environment in Costa Rica is generally open and predictable. The principles of national treatment, no discrimination, economic freedom and private property are defined and guaranteed by the constitution.
Costa Rica is a services and trade oriented economy that has executed several bilateral investment treaties with strategic partners, as well as important bilateral and multilateral free trade agreements. Costa Rica is committed to the improvement of market access for Costa Rican products by means of trade liberalisation. In recent years, Costa Rica has enforced free trade agreements with Mexico, Canada, Chile, the Dominican Republic, Central America, Caribbean Community and with the United States through DR-CAFTA. Treaties with Singapore, Peru, and the European Union are signed and shall enter into force between 2011 and 2012. A free trade agreement with China has been signed and approved by Congress and shall enter into force shortly.
Special notice should be made to beachfront property which is governed by Law No. 6043 (Shoreline Zone Law), administrative regulations issued by the municipalities and by the Costa Rican Tourism Institute (ICT), among others. The shoreline zone is divided in two: a) the public zone (the first strip of 50 meters wide, not available for ownership of any kind); and b) the following 150 meters which may be subject to concession with the local municipality, also known as the “restricted zone”. Unlike regular property, foreigners do not have the same rights as citizens when it comes to shoreline zone concession land. article 74 of Law No. 6043 establishes that foreigners may not be majority holders of concession land. A foreigner may, however, enter into a partnership with a Costa Rican citizen where the Costa Rican national appears as the majority holder of the concession land.
- 6.Are there any restrictions on payments abroad or repatriation of capital by foreign investors?
There are no restrictions on payments abroad or on repatriation of capital by foreign investors. Only withholding taxes would apply depending on the nature of the payment.
- 7.Is it permissible for a project company to maintain offshore foreign currency accounts?
Offshore accounts in general have been the subject of scrutiny by local regulators which has led to the closing of almost all locally regulated financial entities offshore branches and services. Nonetheless there is no legal limitation on local companies having offshore accounts, the limitation deals with those accounts being serviced from Costa Rica.
- 8.What recent measures has your government implemented to make projects in your jurisdiction more attractive to foreign investors? Has this involved making government or other local sources of co-financing more available for projects?
There has been very little to no governmental measures to make project finance more attractive in Costa Rica. There has been some changes to laws to facilitate the use of trusts as a vehicle to carry out projects by public companies (mainly in the electricity sector) allowing for a separation of financial balances.
- 9.Will any of the financing or project agreements need to be registered or filed with any government authority or otherwise need to comply with local formalities to be valid or enforceable? Even if not necessary for enforceability, is there any special advantage in complying with local formalities?
Project finance agreements do not need to be registered or filed with any government authority in order for them to be valid. Project agreements in the public sector need to be filed with the Contraloría General de la República (Comptroller General’s Office) in order to obtain their approval.
- 10.Are there any advantages in having the project company issue promissory notes that are governed by local law in addition to the credit agreement governed by New York?
Yes, promissory notes issued in accordance with local law will allow lenders to execute them through expedited procedures as well as circumventing the validation process of foreign judgments.
- 11.Must any agreements be governed by local law?
Usually project agreements are governed by local law, especially if they involve public infrastructure. Finance agreements can be governed by local or foreign law which is usually determined based on the origin of the lenders.
- 12.May a collateral agent act as the sole secured party for the benefit of a group of lenders whose composition may change from time to time?
Yes, parties may agree for a collateral agent to act as the sole secured party for the benefit of a group of lenders. The possibility of the composition of lenders changing from time to time and the collateral agent remaining should be determined contractually.
- 13.May a security interest be granted with respect to all of a project company’s assets? Are any types of property considered personal in nature or ‘of public interest’ such that granting a security interest therein would not be permissible?
Private sector project companies can grant security interests over all of its assets, except those excluded by law (eg, easements). As for public works and concessions, the rights and works built by the concession company are state property and therefore not subject to be granted as security. Also, the properties and rights that the concession company acquires and are incorporated into the concession, may not be granted as security either unless the State consents to it.
- 14.What costs are associated with registering collateral security interests in your jurisdiction? Are such costs determined with respect to the obligations secured or the approximate value of the property?
Collateral securities (eg, mortgages or pledges) must be recorded with the National Registry. The legal fees and registration costs (filing fees) are calculated based on the value of the obligation that is recorded on the security document. The registration costs are paid in the form of stamp taxes as follows:
National Registry: paid one colón per each thousand colones (¢1.00 x 1000) or fraction (Law 4564 [Law of National Registry Duties])
National Archives: fixed amount of ¢20.00 per transaction (article 6, Law 7202 [Law of National Archive Systems])
Municipal: paid two colones per each thousand colones (¢2.00 x 1000) or fraction. (article 84, Law 7794[Municipal Code])
Agrarian: paid one colón per each thousand colones (¢1.00 x 1000) or fraction (article 14.d, Law 5792 [Agrarian Stamp Tax and Alcohol and Cigarette Tax Creation] modified by Law 6735 [Law for the Creation of the Agrarian Development Institute])
Attorney Bar: has a maximum of ¢50,000 when collateral value (article 109 Decree 32493-J modified by Decree 34442-J])
- 15.Does your jurisdiction require lenders to stipulate the value of their collateral security in the relevant security documents? If so, what happens if at the time of foreclosure the property is worth more? Must such amount be stated in local currency even if the financing is in a foreign currency? If so, what protections may be implemented against devaluation of the local currency?
Yes, lenders must stipulate the value of the collateral security in the relevant documents as well as any possible interest that may apply. If at the time of foreclosure the property is worth more than the outstanding amount, lenders will only take their share and the balance will belong to the debtor. The amount of the collateral security can be stated in local or foreign currency. If necessary foreign exchange swaps can be used to hedge against devaluation.
- 16.Does each item of collateral need to be individually identified in the security document to grant a valid security interest in that item? Or would a general description of the types of collateral covered be sufficient?
Yes, all collateral securities that can be identifiable must be identified in the security document (be it private document or public deed). If collateral securities are also recordable (eg, land, equipment, vehicles) they must be registered at the National Registry.
- 17.How do lenders satisfy themselves with respect to the absence of other liens on their collateral? Are liens centrally recorded or searchable? May contractors file mechanic liens? If so, are lien waivers enforceable?
Liens are centrally recorded and searchable at the National Registry (www.registronacional.go.cr) so lenders can verify that collateral are free of claim and enforceability of their collateral by confirming the recorded information. Title insurance is available in Costa Rica for such purpose as well.
- 18.What steps must a lender take to foreclose on a collateral security interest in your jurisdiction? How does a beneficiary of a guarantee provided by a local entity or granted under local law enforce such guarantee? Are any self-help remedies available? Is a public or private sale permissible or required? Is a judicial sale necessary? May lenders participate as buyers in any such sale, including by bidding the debt owed by the project company to them in lieu of cash? May any such sale be for foreign currency? Is foreclosure on a pledge of the ownership interests of the project company more efficient and less time-consuming than a foreclosure on individual assets of the project company?
Lenders must file a collection process before the specialised civil court. The document that originates the collection must be submitted when filing. Once the claim is filed the court will order the debtor to pay the debt or present evidence of payment or unenforceability of the security document within the 15 days and (if applicable) order a lien to be put on the collateral securities. If the debtor presents strong evidence to the contrary, the court will summon the parties to an oral hearing and decide to confirm the execution or revoke it. If the execution is confirmed, the court will order the auction of the collateral security for the value recorded (base) on the security document and in its absence by the value set by a court appraiser. The auction will be announced by a notice to be published twice, on consecutive days, in the Official Gazette. All bidders must deposit 50 per cent of the base in the form of cash or a bank draft. The auction will be recorded by the court secretary. The collateral will then be awarded to the highest bidder. Lenders can participate in the auction and are not required to make a deposit to participate, considering its offer is a payment to its own credit. However if the lender (creditor) bids an amount that exceeds the obligation plus 50 per cent, then it must deposit in order to participate.
Self-help remedies are not available; therefore a lender may not take direct ownership of the collateral security in satisfaction of the debt without a previous judicial procedure. Sale of the collateral can be for a foreign currency.
The foreclosure on a pledge of the ownership interests of the project can be more efficient and less time consuming than a foreclosure on individual assets of the project company. Nonetheless Law No. 8624 (Law for Judicial Collections) applies to both privileged (eg, mortgage and chattel mortgage) and normal collateral securities and it is aimed at making collection procedures more efficient and less time consuming.
- 19.What creditors would enjoy a higher statutory priority with respect to the collateral security than the lenders?
As long as the collateral security is registered with the National Registry, no creditors would enjoy a higher statutory priority with respect to that collateral security.
- 20.Would the lenders incur any liabilities upon foreclosure relating to project assets?
Aside from recorded first priority rights over the collateral, creditors would not incur any liabilities upon foreclosure relating to project assets.
- 21.What legal restrictions exist with respect to the operation of the project post-foreclosure by the lenders or their designee?
In the event of a foreclosure of a project company that operates a concession right, the bidder will inherit the same rights and obligations of the concession agreement. In order for the lender or third party to take over the project it must meet the same requirements as the borrower. There is no restriction on foreign ownership or operation of the project.
- 22.Would the agreement by a project company’s equity holders to make capital contributions to the project company be enforceable by the lenders in bankruptcy proceedings of the project company?
Yes, said agreement can be enforceable in a bankruptcy proceeding.
- 23.Can a project company organised under local laws validly submit to the jurisdiction of a foreign court?
Yes, it is possible if the parties so agree. The parties can also submit to international arbitration, in which case an arbitral clause is required. Another possibility for conflicts between a foreign investor and a state is to go to international arbitration under a bilateral investment treaty (BIT), for cases when the state of the investor and the state that receives the investment have a BIT in force.
- 24.Is service of process by mail recognised in your jurisdiction or would the project company need to appoint a process agent?
Yes it is. Article 24 Law No. 8687 (Judicial Service of Process Law) states that upon the request of the interested party, process can be personally served by certified postal mail with delivery record through the official postal service of the country. Other service of process alternatives include fax or e-mail, nonetheless the initial service must be served personally, at his domicile or at the companies registered domicile. Companies with agents or representatives that do not reside in the country, require in accordance with article 18.13 Law No. 3284 (Commerce Code) a resident agent that must be an in-country attorney with an office that serves as preregistered process agent.
- 25.Are foreign judgments and arbitral awards enforceable in your jurisdiction? If so, does any process of ratification or additional review need to be carried out in the local court system as a condition to such enforcement? Do sovereign or quasi-sovereign entities have the capacity to arbitrate as a matter of local law?
Yes, foreign judgments and arbitral awards are enforceable in Costa Rica. Costa Rica entered into law the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards on June 10, 1958; it was later ratified on October 26, 1987 and has been in force since January 24, 1988. Costa Rica entered into law the Inter-American Convention on International Commercial Arbitration on January 30, 1975; it was later ratified on January 2, 1978 and has been in force since January 20, 1978. Both conventions recognize the right to refer any dispute to arbitration and the obligation to recognize the arbitral awards.
Costa Rican courts recognize the validity of a foreign judgment or arbitral award provided that they comply with principles of due process. In furtherance to article 705 of Law 7130 (Civil Procedure Code) their enforcement has to be submitted before the Supreme Court. In order for a foreign judgment or arbitral award to be enforceable they must ensure that:
- it is duly authenticated;
- the defendant is properly served of process, represented or declared absent in accordance with the law of the rendering forum state and that he was served of the arbitral award’
- the claim is not a matter of the exclusive jurisdiction of Costa Rican courts;
- no pending procedure exists in Costa Rica or that no res judicata award has been granted by a local court;
- the award is not being executed in the rendering state; and
- it is not against public order.
- 26.Is subordination of debt recognised under the law of your jurisdiction?
Yes, as long as the possible provisions of an agreement between the senior and subordinated lenders pursuant to which the subordinated lenders agree that they will not be repaid (in whole or in part) until the debt to the senior lenders is paid do not contradict or affect third party rights in accordance with the rules of bankruptcy and/or those that are recorded at the National Registry.
- 27.Are there laws in your jurisdiction that regulate how tariffs payable to a service provider must be calculated? If so, please describe briefly.
Yes. The public services regulatory authority (ARESEP) is a government agency in charge of setting the prices and tariffs, and ensures compliance with the standards of quality, quantity, reliability, continuity, and optimal service for the generation, transmission, distribution and marketing of electricity, the provision of the aqueduct and sewer service, including drinking water, collection, treatment and disposal of sewage, wastewater and rainwater, the installation, operation and maintenance of the hydrants, maritime and air services on national ports, irrigation and drainage, fuels, cargo transport by rail, and any means of public transportation (excluding air transportation). The method to determine the price or tariff depends on each service, there are no standard procedures; each service has its own variables and formulas which are periodically reviewed to determine the applicable tariffs.
- 28.Do environmental, tax or other liabilities relating to the project extend beyond the project company to the direct or indirect owners of the project company or to the lenders?
Yes, the awarded party (awardee) in public concessions and contracts has joint and several liability with the project/concession company relating to its obligations. Tax and environmental liabilities can also extend to the individuals.
- 29.Are there any limitations with respect to importation of equipment or materials to be used in the project?
Yes there are. In the case of concession contracts, the concession company has the right to request tax benefits that relate only to the concession (eg, customs tariff, import duties, selective consumption tax and any other tax for both local purchases and the import of goods required to execute the concession). However, all the equipment and materials imported or purchased locally with such exemption, may only be used in the concession. The equipment will be introduced to the country under temporary importation and to enjoy this benefit, it must remain in the country only for the duration of the construction of the works, its maintenance or the provision of public service, as appropriate. To these effects, the concession company must pay a guarantee to the customs administration, through custom pledges exempted from paying any registration costs, fees or any other tax. All of the equipment introduced to the country under temporary importation must be re-exported or nationalized, with previous payment of taxes and fees as appropriate, once the construction stage of the works or its maintenance is completed, or the service is covered. For any exemption, the Ministry of Finance will require the prior recommendation of the state, in accordance with the requirements of the law.
- 30.What land issues might there be in connection with a project financing in your jurisdiction? Are there any restrictions on foreigners’ ownership of land or natural resources? How difficult is it to obtain rights of way?
There are no restrictions applicable to foreigners regarding the acquisition of land, except for maritime zone properties, as mentioned in question 5. If due process is followed regarding permits (eg, municipal and environmental), there should be no land issues regarding project finance endeavors.
If the project requires the acquisition of rights of way, the state must follow the statutory expropriation procedure exercising its eminent domain powers.
- 31.Please describe any other relevant legal considerations relating to project finance in your jurisdiction.
Project finance is still an option mainly reserved for big public infrastructure works, concession projects in particular where the revenue stream can be better assessed by lenders. Furthermore Costa Rica is still relatively new to concession projects, but because of its stable economic climate and growth it remains an attractive business centre and so required infrastructure growth.
- 32.Has specific PPP-enabling legislation been passed in your jurisdiction? If so, and if applicable, has it been passed at the federal, state or municipal level and is it sector-specific?
There has been additions and laws (e.g. Law No. 7762 [General Law for the Concession of Public Works with Services]) that incorporate the framework for PPP projects. It can apply both at national and municipal levels.
There are several important public concessions of infrastructure awarded based on Law No. 7762, that although not technically PPP’s, do allow for the private sector to carry out public works. Despite not being widely used, because of the size of the projects they are very visible.
- 33.What legal limitations, if any, are there on PPP transactions? Are there any limitations on the contracting power of the state, the state’s ability to incur long-term fiscal obligations, or the extent to which certain government functions may be performed by the private sector?
The Costa Rican Constitution in article 121 establishes some limitations on sectors that cannot permanently leave the control of the state. Among them: railways, ports and domestic airports - while in service - which cannot be sold, leased or encumbered, directly or indirectly, or come out in any form from the domain and control of the state. The limitations on the state’s ability to incur in long-term fiscal obligations are a budget matter and currently there is a clear adverse tendency.
- 34.What are the most significant PPP transactions that have been completed to date?
Notwithstanding the comment on question 22, we only currently have one “true” PPP transaction which is Parque Eolico Valle Central, a project that includes several private companies including German Juwi Wind GmbH and government owned Compañía Nacional de Fuerza y Luz (CNFL) in a wind energy project.
As a reference, the major concession projects to date are: the San José-Caldera toll road (completed) and the San José-San Ramón toll road (awarded but has not begun). The Juan Santamaría International Airport (in process) and Daniel Oduber International Airport (in construction) have been awarded under a different concession structure based on the Public Contracts Law.
- 35.What do you see as the primary impediments and drivers, both legal and commercial, to the development of PPP in your jurisdiction?
The main impediments for the development of PPP’s in Costa Rica are the lack of laws promoting this alternative and the lack of significant capital markets. The main drivers are the long established stable political system, a reliable and stable economy, and a strong regulatory system that assures investors their rights regarding public contracts. The youthful experience in concession projects provides for mixed reviews but still an optimistic outlook.
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