Brazil moves towards PPP

Written by Henrique Dias Carneiro. Published in Infrastructure Journal

February 28, 2005

Brazil has a significant lack of infrastructure and South American country has to overcome this deficit for it to enter into a stage of sustainable economic growth. However, the Brazilian government has neither the financial revenue nor the technical capacity necessary to build, operate or maintain the infrastructure or welfare projects that the country desperately needs.

There is much to undertake with regard to communication networks (highways and railways), ports, sanitation, hydraulic and/or energy infrastructure, which are the sectors that most require development.

Moreover, Brazil has enacted a strict Tax Liability Law (Ley de Responsabilidad Fiscal) which prohibits public deficit and strongly limits future borrowing.

The Long-term Investment Plan (Plano Plurianual de Investimentos) of 2004-2007, issued by the federal government, allows for the possibility of opening initiatives and investments of private investors to a significant number of projects listed in the said plan.

Brazil’s ministry of development estimates that in this period, the projects in which private bodies can participate will require an investment of up to €3bn (US$3.9bn). In addition to these projects, those infrastructure projects of the states forming the republic must be added. A significant number of these states already have legislative proposals regulating PPPs, including some states that have already enacted their own law – such as São Paulo, Minas Gerais, Santa Catarina and Goiás.

The State of São Paulo, for example, foresees that an investment of around €2bn (US$2.6bn) will be required for the period of 2004-2007.

Federal Law No11,079 regulates two types of concessions: sponsored and administrative concessions. Sponsored concessions are of particular interest, they are concessions of public works or services which include, in addition to the tariff which is charged to users of public works or services, a cash consideration paid by the public authority.

Thus, this is a type of concession which allows government and private entities to share business risks, and thus, it appears that this concession is addressed to those public works or services that the government cannot undertake on its own and, in addition, do not have the capacity to generate, per se, sufficient resources to guarantee an adequate return on the investment made by the private investor.

Of the many novelties introduced by Federal Law No11,079, there are two in particular which should be highlighted with regard to the private investor:

  • On the one hand, it allows the public authorities to create payment guarantees to secure their obligation to pay private investors – amongst others, earmarking of public revenues and creation, at a federal level, of a PPP guarantee fund, for a total amount of around €1.7bn (US$2.2bn)
  • On the other hand, Federal Law No11,079 creates a series of measures which must facilitate the obtaining of financing for private investors, including the granting of step-in-rights to lenders in the event of a breach, the possibility to pledge credits against the government in favor of the lenders and the possibility of the lenders to receive compensation from the authorities in the event the contract is terminated early

Federal Law No11,079 is a modern law which, after several debates and discussions, has chosen to grant private entities – contractors and lenders – a legal device which appears to protect their interests adequately.

This law is a further step forward in achieving international credibility.

Following the achievements made in inflation, the reduction of debts and credit rating, this law should be the adequate instrument to enable Brazilian infrastructures to contribute to the growth and development of the country.