Summarize your observations, early conclusions, reflections, and questions in this discussion.
Brazil turns to PPP for infrastructure investment. (2004). International Financial Law Review, , 1-28. Retrieved December 4, 2012 from http://search.proquest.com/docview/233199294?accountid=34899 Brazil hopes that a new law on public-private partnerships will help pay for improvements in areas such as energy production and transport. Andrea Arean Oncala explains
Following the example of several European and Asian nations, Brazil has begun to consider creating partnerships between government and the private sector. It is hoped that these public-private partnerships (PPPs) will serve as an alternative means of promoting infrastructure development, ensure the economic feasibility of projects in Brazil and help increase investment in energy production, transport and sanitation.
Under a PPP scheme, private partners are responsible for financing and operating projects while the government provides certain guarantees and retains control over activities that are considered to be in the public interest. The concept originated in the UK about 10 years ago, when local governments developed a programme known as the private finance initiative, or PFI. Most of the profits from the privatization of UK government-owned companies had been spent, and the PFI was intended to encourage investment in the public sector by raising funds from other sources. It is estimated that, since 1992, pound(s)56 billion ($100 billion) has been invested in 617 PPP projects in the UK. According to some reports, these schemes have on average scored 10% higher than previous projects in terms of value for money.
Belgium, Portugal, Germany, Spain, Finland, Japan, Norway, Sweden, the Netherlands and Ireland, as well as some Canadian provinces and Chile, have considered or entered into PPP contracts. These have adapted the model used in the UK to fit their own particular circumstances.
In public-private projects, the government is only obliged to pay if the private party achieves certain pre-established results. The programme includes a strict and extensive preliminary analysis of the project so that, from the outset, the scope of the work and what the public sector wants to accomplish is clearly set out and the expected results are determined. Under a PPP scheme, the focus is on the project’s results, not on how the results are achieved, which gives the private sector party more flexibility in carrying out the contract. At the same time, the risks involved in these projects must be clearly stated and mitigated – and shared by both the public and the private sectors according to their respective abilities to manage and control them.
PPP schemes also include a remuneration mechanism, tied to the private entity’s performance, under which the private entity is only paid for services actually rendered and made available, according to certain quality standards and a time schedule. The government is not obliged to pay more for services rendered at higher standards than requested, and may also impose penalties on an operator that offers bad-quality services. The investment is thus supported by a private entity, with long-term amortization through the revenue generated by the service or by remuneration paid directly by the government.
The Brazilian Congress is preparing a bill that will set out a model for the federal government to follow when undertaking PPP schemes. Although the final drafting of the law might change, the version under discussion would enable public bodies to engage in PPP projects with private partners to: (i) delegate (a) all or part of the provision or exploration of public services, whether or not preceded by public works, and (b) the performance of activities originally under the public administration’s competence, again whether or not preceded by public works; or (ii) to contract (a) the execution of public works for the public administration, and (b) the execution of public works to lease or rent to the public administration.
Under the model proposed in the PPP Bill, partnerships providing public services will be subject to a permission or concession agreement, which will be adjudicated by the public body in accordance with a bidding process. The public body may: (i) offer the private partner certain considerations in addition to the tariffs from the user; or (ii) be the sole user, whenever reasonably justifiable, thus encompassing projects that are not economically viable – an innovative feature that builds on the options available under the Concessions Law 8.987/95.
The PPP Bill, as drafted, provides for contracts with minimum and maximum terms of five and 45 years, respectively, and for projects with a minimum value of R$20 million ($7 million).
Under the Bill, PPP contracts must contain, among other things, clauses laying out: (i) the types of compensation paid under the scheme and how contractual amounts can be adjusted; (ii) the frequency and adjustment system for (a) maintaining the economic and financial balance of the contracts, and (b) the use of the most recently available materials and techniques to render the services under the partnership; and (iii) the events that qualify as default on the part of the public partner, and the types and the time limit for regularization. In addition, the contracts may establish the possibility of the public body sharing the earnings arising from the reduction of the credit risk of the partnership financing.
The Bill also sets out how payments are made to the public body as the terms and goals of the PPP are fulfilled. These payments may vary according to the performance of the private partner as it carries out the project in relation to the goals, quality and availability standards established in the bid notice under which the contractor is selected. These payments can be made by: (i) bank order (in cash); (ii) assigning non-tax credits; (iii) granting rights to the public administration; and (iv) granting rights over public assets.
Under the model likely to be adopted in Brazil, contractors will be selected through a controlled bidding process, the features of which differ from those in Law 8.666/93, the General Administrative Contracts Law, but are similar to the model used by the World Bank.
Under the Brazilian method, a preliminary phase would comprise a series of studies of the project’s feasibility, a detailed schedule for the project and the bidding process and, subsequently, the definition of the project through identifying and assigning risks, ascertaining cost and calculating benefits. The contractors would then be selected through a bidding process under the pre-qualification system. The bidders may present new and successive price proposals until one is declared to be the winner under the terms and conditions stipulated in the bid notice. The criteria for selecting bids may be based on the minimum price/technique combination, or on a minimum compensation amount set by the public body.
From the private sector’s point of view, one of the most important and attractive aspects of the PPP Bill is that the public body involved in the schemes guarantees to secure compliance with the obligations it assumes under PPP contracts, relating to the private partner, and those assumed by the private partner with third parties.
Private partner guarantees
PPP projects are subject to a detailed and precise preliminary analysis, involving public hearings and in-depth studies to identify the risks involved in the underlying project. Upon approval, PPP contracts (which are based on detailed budget planning) will have priority over other obligations assumed by the public body for public works not contracted under the PPP Bill. In projects that provide public services, the public entity can unilaterally terminate the PPP contract only on the grounds of the public interest.
Furthermore, the National Congress must pass a specific authorizing law to enable the public body to terminate the contract without affecting any compensation previously earned under the scheme.
Payment obligations assumed under the PPP contract may be secured against certain revenues tied to the underlying project, such as through a surety bond, special fund or the subscription and acquisition of quotas in a trust fund to promote PPPs. The executive branch will regulate the trust fund.
The resources deposited in the PPP Promotion Trust Fund, which will be created to ensure compliance by the public body with its obligations under the PPP contracts, will be separate from the Treasury’s general account and managed by financial institutions that are, directly or indirectly, controlled by the government. The PPP Promotion Trust Fund may be composed of: (i) appropriations provided for in the budget and additional credits; (ii) transfers of rights and non-financial assets; (iii) personal and real property; and (iv) funds from other sources.
Guarantees to the financier
In addition to the favourable private partner guarantees that are provided for in the PPP Bill, specific guarantees for the financiers of PPP projects are also available. These guarantees will presumably only have privity of contract with the private partner. These financier guarantees, as they are known, will include the possibility that the public body will directly pay the amounts originally owed to the private partner to the institution that financed the underlying PPP project. Also, the special purpose company (SPC) – which the private partner will be required to set up to carry out PPP projects – may offer the rights arising from the PPP contract to its financiers as payment guarantee, up to a level that does not impair the operation and continuity of the works and services.
Before the Brazilian federal government’s approval of the PPP Bill, the governments of certain Brazilian states – Sao Paulo, Minas Gerais, Goias and Santa Catarina – had already approved their own state laws regulating PPP programmes. These state governments are also implementing pilot projects focusing on transport, the construction of public jails, water facilities and sewage facilities.
According to Sao Paulo law, for example, the guarantees provided to private partners in the state differ from the private partner guarantees of the federal government project. In Sao Paulo state, instead of creating a trust fund, a legal entity (stock corporation) called a companhia paulista de parcerias, or CPP, is created. The CPP enables the implementation of PPP projects within Sao Paulo state and manages the equity assets transferred to it as guarantee of the obligations assumed by the relevant Sao Paulo public administration division under the Sao Paulo state PPP programme. These assets, the liquidation or encumbrance of which could be used to secure compliance with the obligations assumed by the Sao Paulo public administration division under the PPP contracts, may include real property, shares of state-owned companies, and government bonds.
Under the present legislative regime, public contracting of services or execution of public works is governed by: (i) the General Administrative Contracts Law (8.666/93); or (ii) the Concessions Law (8.987/95).
Contracts issued under the General Administrative Contracts Law that govern the execution of works, services, purchases, sales and leases on the part of public bodies typically include an absence of private funding, remuneration tied to the existence of budgetary funds, payments that are to be carried out during the execution of the programme and a contractual term limited to five years.
In contracts issued under the Concessions Law, which applies only to services and public works programmes, remuneration is paid solely for carrying out services, is based on applying the tariff system, and is paid by the service’s end user.
Although the PPP model has been classified as a type of elaborate concession agreement meant for use in larger projects, it can also be applied to works and services programmes where revenues cannot be obtained by collecting tariffs. It can also be applied to partnerships between private entities and government-owned companies engaged in utility services aimed at developing infrastructure.
Accordingly, the income-generating capacity of each public investment will suggest the preferred model for carrying out that project. PPP projects occupy a position between those with no capacity for generating income and, therefore, with no self-sustainability, which will proceed under traditional public works contracting (as governed by Law 8.666/93) and those that are financially self-sustaining, which are executed under the Concession Law.
Moreover, the public-private partnership differs from privatization, under which the assets are sold, and the title to the operation of a continuing concern or activity is transferred, to a private entity. These partnerships only delegate the right to render a certain public service or infrastructure work for a certain period to a private operator.
PPP schemes can also be confused with more traditional project financings. Project finance is a kind of financial scheme intended to create estimated or established cash flow using the project’s assets, with little or no support on the part of sponsors, the parties being responsible for identifying the estimated risks and attempting to reduce them. This model is best used in relation to public services with a viable outcome and a legal or natural monopoly. However, as the public interest is the most important factor in PPPs, there will be no cash flow or it may be unpredictable or even insufficient for the scheme to be implemented.
Public interests prevail over individual interests in PPPs because these schemes involve administrative contracts governed by public law, in contrast to project financings that are governed by private law. Private law requires only equivalence between private and public entities insofar as the public interest does not affect the success of the project. On the other hand, neither model involves the transfer of assets to the private sector, as occurs in privatizations. Both types of partnership are an attempt to better manage public assets through private partners and optimal budget disbursements.
In light of the urgent need for infrastructure investments, both the public and private sectors in Brazil consider PPPs fundamentally important to attract much-needed foreign capital to the country. The approval of the PPP Bill is expected to enable investments in the infrastructure sector of up to R$36 billion, which is equivalent to the amount forecast in the federal government’s Plano Plurianual for 2004 to 2007.
Andrea Arean Oncala is a lawyer with Felsberg, Pedretti, Mannrich e Aidar Advogados e Consultores Legais in Sao Paulo, Brazil
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