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Brazilian Legal Framework for Private Participation in Infrastructure

Mauricio Portugal Ribeiro

Aug 2010

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Introduction

• Vast experience with PPI - Private Participation in Infrastructure and in the provision of services to the public and to the Government

Involved sectors such as steel, petrochemicals, power, telecommunications, highways, railroads, gas, and water supply

• Stable legal and institutional frameworkConstitutional Amendments

National Plan on Privatizations

Standards on concessions contracts and bidding procedures

Sector specific Acts, which creates the respective regulatory agencies, and establishes standards under which they operate

• Variety of contract arrangementsDivestitures/assets sales, BOT, DFBOT, Concessions, joint ventures (with public and private participation), franchises etc.

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Brazil’s past with PPI

Source: Banco Mundial e PPIAF, PPI Project Database. (http://ppi.worldbank.org) Acesso em: 15/08/2008 e Fundo Monetário internacional (FMI), World Economic Outlook Database: Nominal GDP list of countries. Abril de 2008. Dados para o ano de 2007.

Mundo 1990-2007Receitas + Investimentos

(Milhões/US$)

-50,000.00

100,000.00150,000.00200,000.00250,000.00300,000.00350,000.00400,000.00450,000.00500,000.00

LesteAsiático ePacífico

Europa eÁsia Central

AméricaLatina eCaribe

OrienteMédio eNorte da

África

SudesteAsiático

ÁfricaSubsariana

América Latina e Brasil 1990-2007Receitas + Investimentos

(Milhões/US$)

0

10000

20000

30000

40000

50000

60000

70000

80000

América Latina (restante)

Brasil

• From 1990 to 2007 more than U$ 1 trillion was generated with PPI – Private Participation in Infrastructure in the developing world

• Latin America and the Caribe was the region that has generated most revenues/investments from PPI (about U$ 450 billion)

• In the 90’s Brazil was the developing country who has generated most revenues/investments with PPI

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Brazil’s experience with PPI

Fonte: Banco Mundial e PPIAF, PPI Project Database. (http://ppi.worldbank.org) Acesso em: 15/08/2008

Brasil (Receitas + Investimentos)(Milhões/US$)

0

5000

10000

15000

20000

25000

30000

35000

Brownfield (Concession)

Divestiture

Greenfield Projects

Management and LeaseContract

• From 1996 to 2001, the Government has reduced its participation in several sectors in infrastructure

• Telecom and Railroads are now under the control of the private sector

• In the largest ports, the private terminals are responsible for more than 50% of the cargo movement

• More than 2/3 of the power distribution and more than 1/5 of the power generation are operated by the private sector

• In the road sector, some of the main roads are operated by the private sector (still less than 10% of the paved road network)

• In the water and sanitation sector, private participation is still very limited

Brasil 1990-2007

24896.01414%

110521.4660%

46377.4926%

74.90%

Brownfield (concessions)

Divestitures

Greenfield Projects

Management and LeaseContracts

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90’s Legal Framework for PPI

• Competition

For the market Contracts have to be awarded under competitive bidding procedures

In the market They should be awarded under arrangements that allow competition in the market (except in the case of economic impossibility)

Yardstick regulationFostered by the legal and contractual framework

Lack of adequate technical expertise

• Transferring risks, tariffs and economic equilibrium of contracts

Possibility of transferring the responsibility of designing, financing, constructing and operating assets

In several sectors, evolved to contractual arrangements that focus on outputs

The legal framework allows any sort of risk allocation arrangements

The law entitles private partners to economic equilibrium of the contracts, preserved by contract revisions

Judiciary has set precedents in cases that private partners asked courts to enforce their right to the financial equilibrium of the contract

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90’s Legal Framework for PPI

• Fiscal Issues

Privatizations proceeds were extensively used to extinguish debt

Reduced needs of investment outlays, lowering borrowing requirements

Specific legislative authorization was required to allow Government payments or guarantees to concessionaires or private partners

• Private sector investment, quality improvement and network expansion

Evidence that users are satisfied with the quality of the services

Complaints about high tariffs

Privatized companies and service providers were not able to match the desirable level of investment

Telecommunications and the transmission line sectors were exceptions

In some sectors, such as water supply and sanitation this was due to inadequate legal framework

Process of privatizations was limited to projects that were financially self-sustaining without Gov payments

Accounts for limited portions of the network in many sectors

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Challenges of a PPP Program in Brazil

• Improve the institutional framework to coordinate private and public investment

• Rebuild the Government capacity of sector planning and project development to public direct investment or private participation

• Expand private participation to sectors in which it is still limited

Award concessions, which need some sort of Government guarantee or payment to become financially viable (concessão patrocinada)

Implement a PFI-like program to bring private sector capabilities to improve the efficiency of the provision of services to the Government (concessões administrativas)

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Objectives and main features of the 2004 PPP law

• Linked the PPP contracts with the past experience with PPIBrazilian PPP law has several references to provisions of the concessions law and of the law that controls the Government contracts and biding proceduresProtect the powers of the sector planing, project develpment and regulatory agencies while creating specific agencies to run the PPP program

• Allowed Government payments in long term contracts with private sector

• Established mechanisms to enhance the Government credit profilea backstop facility to the Government payments (Fundo Garantidor de PPP) allow the Government to contract its credit enhancement from other entities such as multilateral organizations

• Improved the procuremment procedureMake it less formal while maintaining a formal bidding procedureHiring culture not compatible with competitive negotiation

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Objectives and main features of the 2004 PPP law

• Fiscal IssuesRequired that a proper affordability analysis is done before contracting PPPDefined limits on budget commitments with PPP (1% of Fiscal Net Revenues)

• Required payments to be based on service performancefostered the development of output based contracts fostered development of a proper connection between payment mechanism and performance indicators

• Conflict managementPossibility of financers step in rights (public sector step in was already allowed)Possibility of using arbitration

• Other institutional issues Project selection and development framework Regulatory agencies