Public Private Partnership (PPPs)

An Alternative to Financing Infrastructure Projects in Brazil

Thomas Benes Felsberg thomasfelsberg@felsberg.com.br

• Appeared in England in the 1990s as a result

of the evolution of the Private Finance

Initiatives (PFI).

• Considered in Brazil as an alternative solution

to the need for funds to finance

infrastructure projects and exhaustion of the

privatization process.

PPPs Origin

• Detailed analysis of the project;

• Focus on results;

• More flexibility in contract performance;

• Better solution at the lowest cost, adjusted to the risks;

• Risks are clearly defined and mitigated through cooperation between the public and private sectors;

Characteristics of PPPs

• Remuneration mechanism subject to performance and payment only of the services actually rendered;

• Compliance with disbursement and building schedules;

• Investment by the private sector with long term amortization through commercialization of the services or through direct remuneration by the Public Administration, or both.

Characteristics of PPPs (cont’d.)

• Water;• Basic Sanitation;• Waste;• Education;• Health;• Public Security (Prisons);• Transportation;• Housing;• Energy, oil and gas;• Telecom, among others.

Eligible Areas for PPP Projects

• Shortfall of Investment;

• Water and sewage – legal uncertainty as to

state/municipal jurisdiction over such projects;

• Stagnation of the Transportation Sector;

• Regulatory instability;

• Reduced investment in the Energy Sector; and

• Lack of foreign investment due to political,

economic and regulatory risks.

Current Scenario of the Infrastructure Sector

• Federal Law No. 11,079, dated Dec. 30, 2004 (in force since Dec. 31, 2004);

• Federal Decree No. 5,385, dated March 4, 2005 (CGP);

• Federal Decree No. 5,411, dated April 6, 2005 (FGP);

• PPP Laws enacted by states: MG, SC, SP, GO, BA, CE, RS and PE.

Statutory framework

• PPP is an administrative agreement which encompasses different types of concessions:

(i) sponsored concession – concession for the provision of public services or public works, as set forth in Law No. 8,987/95, involving, in addition to the tariffs charged from the users, a cash consideration from the public partner. E.g.: highways, railways, etc.

Federal Law - Concept

(ii) administrative concession – concession for the provision of public services (with or without construction works or supply and installation of materials) for the Public Administration, whether directly or indirectly, and paid by it in full. E.g.: construction and operation of hospitals, prisons and

schools.

Federal Law – Concept (cont’d.)

• Contract value: minimum of R$ 20 million

• Contract term: not less than 5 and not more

than 35

years, including possible extensions

Federal Law – Concept (cont’d.)

• PPPs do not include:

- ordinary concessions that are governed by Law No. 8,987/95;

- contracts with the sole purpose of: (i) supply of labor; (ii) supply and installation of equipment; or(iii) execution of public works – provision of

public services must exist;

- other administrative contracts with a value and/or terms different from those established in the PPP Law.

Federal Law – Concept (cont’d.)

• Public tender through competitive bids, preceded by a public hearing (at least 7 days prior to the publication of the invitation to bid and allowing at least 30 days for submission of suggestions – public consultations).

• Awards are in accordance with one of the following criteria: (i) lowest tariff to be charged from the user; (ii) lowest consideration requested from the public partner; and (iii) a combination of each of the criteria above with the best technical qualification.

Federal Law – Selection of Contractors

• It is possible:

- to revert the order of the qualification and

award phases;

- to have oral bids, after submission of the

written proposals;

- for the bidder to cure failures, supplement

deficiencies and make corrections of

formal nature during the bidding process.

Federal Law – Selection of Contractors (cont´d)

• Incorporation of a Specific Purpose Company (SPC) by the winning bidder is mandatory before execution of the agreement.

• SPC can be a publicly-held company and must comply with corporate governance

standards. It must also maintain accounting and financial statements according to generally accepted accounting rules.

Federal Law – SPCs

• Risk sharing between the parties (including acts of God, force majeure, acts of state and unexpected economical facts);

• Sharing with the Public Administration the actual gains and benefits obtained by the private partner with reduction of the exposure to credit / financing risks pertaining to credit facilities used by the private partner;

• Possibility of employment of private mechanisms of dispute resolution for controversies arising under PPPs, such as arbitration, provided that proceedings take place in Brazil and in the Portuguese language;

Federal Law – Clauses of the PPP Contracts

• Means of compensation and adjustment of contractual fees and tariffs;

• Objective criteria for evaluation of performance;

• Mechanisms to preserve the quality standard of the services rendered;

• Facts that result in the public partner’s payment default, procedures, time limits and, whenever applicable, the event that will trigger the enforcement of the guarantee.

Federal Law – Clauses of the PPP Contracts (cont’d)

• Lenders’ right to step-in the SPC (step-in-right) so as to ensure the continuation of the services;

• Possibility of issuing “empenho” [pre-order of payment referring to the payments] in the

name of the lenders;

• Lenders’ standing to directly receive damages for early termination of the agreement, as well as direct payments carried out by funds or guarantor state- owned companies.

Federal Law – Clauses of the PPP Contracts - Lenders

• Can be carried out: (i) in cash; (ii) through assignment of non-tax credits; (iii) by granting of rights vis-à-vis the administration; (iv) by granting rights over bens públicos dominicais [assets owned by the government]; and (v) by other means provided by law;

• Possibility of variable remuneration according to the performance and pre-established milestones;

• Obligation to render the service subject matter of the agreement prior to payment.

Federal Law – Consideration to the Private Partner

• Payments secured by blocked revenues;

• Establishment or use of special funds;

• Contracting performance bond (from insurance

companies other than state-owned companies);

• Guarantee provided by international

institutions or financial institutions other

than state-owned companies;

• Guarantees provided by a guarantee fund or a

state-owned company organized for this

purpose;

• Other means provided by law.

Federal Law – Guarantees

• Guarantee Fund for Public-Private Partnerships (FGP) – created to secure the obligations

assumed by the federal public partners.

• Limit established at R$ 6 billion for aggregate participation of the Federal Government, its

Government Agencies and public foundations in the FGP.

• Private nature and entity’s own equity.

• Creation, administration, management and representation by a financial institution controlled directly or indirectly by the Federal Government.

Federal Law – Guarantee Fund for PPPs (FGP)

• Equity of FGP composed of assets and rights resulting from the payment of quotas and the dividends deriving therefrom.

• The payment of quotas can be made in: (i) cash; (ii) government bonds; (iii) bens dominicais [assets owned by the government]; and (iv) movable assets, including shares held in mixed-capital companies (provided it does not imply loss of control on the part of the Federal Government).

Federal Law – Guarantee Fund for PPPs (FGP)

• Continuous expenses incurred with PPPs may not exceed, in the previous year, 1% of the current net income of the fiscal year.

• Annual expenses under the agreements in effect, within the 10 subsequent years, may not exceed 1% of the current net income for the respective period.

• The Federal Government may not provide a guarantee and carry out voluntary transfers of funds to the States, Federal District and Municipalities which have exceeded the limits mentioned above.

Federal Law – Limits for Public Indebtedness

• State Law No. 11,688/04

• Instead of a trust fund, there is a legal entity (corporation) called “Companhia Paulista de Parcerias – CPP”:

- purpose of the CPP: (i) enabling the implementation of PPP projects within the state of SP; and (ii) managing the equity assets transferred to the CPP in order to secure the obligations assumed by the relevant SP public administration division under the SP state PPP program.

São Paulo State Program for PPP

- Assets of the CPP could be used to secure the obligations assumed by the SP administration division under the PPP contracts;

- Administration of the CPP is independent from the state treasury (separate equities);

- Equity already capitalized in assets and cash;

São Paulo State Program for PPP (cont’d)

Campinas – São José dos Campos – São Sebastião Export Corridor (toll roads and port concessions)

Metro Line 4 Subway (building a 13 Km line connecting stations Luz and Morumbi) – biding process is expect to occur in the next days (subject to court decision);

Metropolitan railroads projects (to be announced by the State Government);

Modernization of the Sports Complex of Ibirapuera

Pilot Projects in São Paulo

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