Brazil: The Brazilian Public-Private Partnership Program

Last Updated: 1 March 2005
Article by Walter Stuber

I - Introduction

The expression Public-Private Partnership has become known worldwide by the acronym PPP. It’s a joint venture between the public and private sectors with the sharing of risks and private funds for the delivery of services or projects of social interest. The PPP has succeeded in countries such as England, Ireland, Germany, Portugal, Spain, and South Africa as a way Governments have to contract in the unavailability of funds for infrastructure and take advantage of the managerial efficiency of the private sector.

Now, the PPP kind of arrangement is possible in Brazil as well. After long negotiations between the Public Administration and the Federal Senate and concerted efforts to pass the bill of law at the House of Representatives, the National Congress finally approved and the President sanctioned Law 11079, of December 30, 2004. This Law lays down the general guidelines to bid and contract under the PPPs modality. In Brazil, the public party in those partnerships are all the instrumentalities, special funds, departments (autarquias), public foundations, public companies (empresas públicas), public-private companies (sociedades de economia mista), and other companies controlled by the federal, state, or local governments, whether directly or indirectly. The private party is, therefore, all other entities performing in the private sector.

The purpose of this law is to render possible private investments in infrastructure projects such as city development, basic sanitation, energy, gas, roads, irrigation and drainage systems, ports and transportation in general, so name a few.

II – Concept

According to the definition given in the new law, PPPs are contracts of concession that, in turn, may be sponsored or administrative. The sponsored kind of contract relates to concession given out for public utilities or works, on the terms of Law 8987 of February 13, 19951 and involves not only the tariffs collectable from users but also the pecuniary consideration of the public partner towards the private partner. Administrative services contracts are those wherein the Administration is the direct or indirect user of the services, irrespective of any performance of work or delivery and installation of property. Common concessions, i.e., concessions given out for those sectors listed in Law 8987/1995, are not PPPs where there is no pecuniary consideration owing by the public partner to the private partner.

A PPP contract will not be made unless the amount involved is R$ 20.000,00, minimum, and the term of services is over 5 years. The PPP modality may under no circumstance be used to contract solely labor, supply and installation of equipment or performance of public work.

III – Guidelines

The following guidelines apply when contracting as PPP: (i) efficient efforts to attain the public goals and efficient use of the partnership funds; (ii) due respect must be given to the interests and rights of the beneficiaries of the services and of the private entities charged with the provision of said services; (iii) the regulation, jurisdictional function, the exercise of the police power and other duties proper of the State may not be delegated to the private partner; (iv) tax liability when engaging in any partnership; (v) transparent procedures and decisions; (vi) the parties must share risks objectively; and (viii) projects must be financially sustainable and show social-economical advantages.

IV – Contracts

Under the terms of Law 8987/1995, the following are indispensable terms of the concession contract:

  1. the purpose, the area and the term of the concession;
  2. the manner, form and conditions of the rendering of the service;
  3. the criteria, indexes, formulae and parameters which will define the quality of the service;
  4. the price of the service and the criteria and procedures for adjustment and revision of the tariffs;
  5. the rights, warranties and liabilities of the granting authority and of the concessionaire, including those related to the foreseeable needs of future alterations and expansion of the service and its consequent modernization, improvement and enlargement of the equipment and premises;
  6. the users' rights and duties for the securement and utilization of the services;
  7. the manner of inspection of the premises, equipment, methods and practices utilized in the performance of the service, as well as the indication of the bodies which are competent to perform same;
  8. the contractual and administrative penalties to which the concessionaire is subject and the manner of their imposition;
  9. the events of extinction of the concession;
  10. the reversible assets;2
  11. the criteria for the calculation and form of payment of the indemnification due to the concessionaire, whenever such comes to be the case;
  12. the conditions for extension of the agreement;
  13. the obligatory nature, form and periodicity of the rendering of accounts by the concessionaire to the granting authority;
  14. the requirement of publication of concessionaire's periodical statements of accounts; and
  15. the venue and amicable manner of settlement of contractual disagreements;

The agreements relating to concession of public service preceded by performance of public work will, in addition: (i) establish the physical-financial schedules of performance of the work connected to the granting; and (ii) require warranty of the faithful compliance, by concessionaire, with the obligations relating to the works connected to the concession.

PPP contracts can contain all these terms, as the case may be, in addition to the following:

  1. contract term compatible with the repayment of investments made, which may not be less than 5 and more than 35 years, included therein any extensions;
  2. applicable penalties imposable to the Public Administration and the private partner in the event of contractual default. Those penalties will be set proportionally to severity of default and the obligations assumed;
  3. risk sharing by the parties, including those resulting from Acts of God, force majeure, acts of the State or extraordinarily special economic circumstances;
  4. types of remuneration and indexation of contractual sums;
  5. mechanisms to ensure that provision of services is consistently updated;
  6. events characterizing pecuniary default on the part of the public partner, manner and deadlines of corrective measures and, if any, how the guarantee will be called in;
  7. objective criteria to assess the private partner’s performance;
  8. the provision, by the private partner, of adequate execution guarantee compatible with the burden and risks involved. For works, services and supplies involving high sums of money and complex technical expertise and significant financial risk as properly substantiated by way of technical report approved by the relevant authorities, the guarantee limit may be increased to up to 10% of the contract value. In the case of contracts that entail the delivery of assets to the public partner, of which the contracts will be the depositary, the warranty amount will be added of the value of those assets. As to the sponsored concessions, the public notice of invitation to bid will contain information about the work, including information about the intended project, and the guarantees required for the performance of the public work, suitable to each case and limited to the work value.
  9. sharing with the public power of effective economic gains by the private partner, resulting from the reduction of credit risk of financing used by the private partner;
  10. inspection of the reversible assets. The public partner may withhold payments owing to the private partner to the extent necessary to correct any irregularity found.

The contractual clauses providing for automatic adjustment of sums based on indexes and mathematic formulas, if any, will be enforced irrespective of any approval of the public partner. The exception to that is the publication on the official gazettes, by the public partner and within 15 days of the submission of the invoice concerned, of reasons supported on Law 11079/2004 or the contract not to accept any such adjustment.

A Specific Purpose Company (SPC) must be organized prior to the execution of the contract to implement and manage the partnership. The transfer of control from the SPC will be conditioned on the express authorization of the public partner, as spelled out in the public notice of invitation to bid and contract. In order to secure such authorization, the candidate must undertake to satisfy all the conditions contained in the contract in force. The SPC may be a publicly-held corporation whose securities are listed for trading in stock exchange and will meet the corporate governance requirements and use standardized accounting practices, as per the regulation. The public partner may not hold the majority of the voting capital in the SPC. Such prohibition, however, does not apply to acquisition of majority ownership in the SPC’s voting capital by a financial institution controlled by the public power, in the event of default under financial agreements, insofar such institution acts as the PPP financer.

The PPP contracts may also contain: (i) the requirements and conditions for the public power to authorize the transfer of control in the SPC to its financers with a view to promoting its financial reestablishment and ensure that services will continue to be provided; (ii) the possible issuance of pledges in the name of those funding the project with respect to the pecuniary obligations of the public partner; and (iii) eligibility project financiers to receive indemnification for early termination of contract, as well as payments made by funds and state-owned companies guaranteeing the PPPs.

V – Consideration

Under the PPP contracts, the consideration, i.e., the remuneration payable by the public partner to the private partner may be paid by means of bank order; assignment of non-tax credits; granting of rights against the Public Administration; granting of rights over public domain;3 or as provided in the law. The contract will make provisions on the payment of to the private partner of variable remuneration based on its performance and the goals, quality standards and cash set under the PPP contract concerned. The consideration by the Public Administration will inescapably be paid upon delivery of the service subject matter of the PPP contract. The Public Administration may, at its discretion and under the terms of the contract, pay consideration pro rata to usable portion of the service under the contract.

VI – Guarantees

The pecuniary obligations undertaken by the Public Administration in a PPP may be guaranteed by: (i) linking revenues, due respect being given to constitutional provisions;4 (ii) creating or using special funds provided in the law; (iii) purchasing of guarantee from insurance companies that are not under public control; (iv) guarantee put by guarantor funds or state-owned company created specially to act as such; and (vi) other mechanisms allowed by the law.

Law 8666 of June 21, 19935 allows contractors to choose one of the following types of guarantee: (i) cash or government bonds, insofar such bonds have been issued as a book entry by way of registration in a centralized system of settlement and custody accredited by the Brazilian Central Bank, considered by their economic value as definition by the Finance Ministry; (ii) guarantee by insurance policy; and (iii) bank guarantee.

Pursuant to Law 8987/1995, the concessionaires may offer, as security under financing agreements, the rights arising from the concession up to a limit that will not jeopardize the operation and continuity of the provision of the services.

VII – Bidding Process

PPP contracts, in order to be executed, will be preceded by competitive bidding. The commencement of a bidding process will be conditioned on the following:

  1. authorization by the relevant authority;
  2. preparation of a budgetary-financial impact estimation in the fiscal years during the contract term;
  3. statement by the entity requesting the expense that the obligations assumed by the Public Administration, during the term of the contract, are compatible with the national budget policy and are indicated in the annual budget law;
  4. estimated inflow of public funds adequate to perform, during the term of contract and by fiscal year, the obligations assumed by the Public Administration;
  5. the purpose must be inserted in a multi-annual plan in force at the level where the contract is to be made;
  6. submission of the drafts of the notice public notice of invitation to bid and contract to public consideration;
  7. prior environmental license or laying down of guidelines for environmental licensing of the work, in the form of regulation, whenever provided in the contract.

The draft of public notice of invitation to bid or of the contract will be submitted to public consideration, by way of publication on the corresponding official gazette, on mass circulation newspapers and electronically. The publication will include the reasons justifying the contract, details of the project, term of the contract and estimated value. Suggestions may be sent in for thirty days, minimum, up to seven days of the expected date of publication of the public notice.

The authorization from the relevant authority mentioned in item 1 above will be supported on technical study. This study will show: (i) the convenience and opportunity of the contract, by giving the reasons that justify the PPP; (ii) that the expenses generated or increased will not affect the tax goals provided in the Tax Goals Exhibit to be attached to the bill of law for the national budget policy. The financial impact will be offset in the following fiscal years against the consistent increase of revenues or the consistent reduction of expense; and (iii) as the case may be, pursuant to rules laid down by the National Treasury Department6, the adherence to the thresholds and conditions for indebtedness 7 resulting from the obligations undertaken by the Public Administration under the contract. The information required in (ii) and (iii) will include the premises and the calculation used, due respect being given to the rules for consolidation of public accounts, without prejudice of the determination of the compatibility of expenses with other rules in the multi-annual plan of the budget policy law.

If the contract is made in fiscal year other than the year of publication of the notice of invitation to bid, the studies and confirmations above (technical study supporting the relevant governmental authorization, estimated budgetary-financial impact, statement from the party requesting the expenses and estimated inflow of public funds) must be current.

Specific legislative authorization is required to give out sponsored concessions where over 70% of the remuneration payable to the private partner is from the Public Administration.

The public notice of invitation to bid will contain a draft of the contract, expressly indicate that the bidding will be governed by the rules in the Law 11079/2004 and will observe, if applicable, the provisions in Law 8987/1995. In this sense, Law 8987/1995 contains the rules we will comment on ahead.

Law 8987/1995 establishes that the granting power will deny proposals that are clearly unfeasible or financially incompatible with the purposes of the bid and that under equal conditions, preference will be given to the proposals by Brazilian companies.

Pursuant to Law 8987/1995, the public notice of invitation to bid must be prepared by the granting authority with due compliance, whenever applicable, with the criteria and general rules of the specific legislation on bids and contracts, and it will contain specially:

  1. the purpose, goals and term of the concession;
  2. the description of the conditions necessary to the adequate rendering of the service;
  3. the term for receipt of the proposals, decision on the bid and execution of the agreement;
  4. the term, place and time of supply of the data, studies and designs necessary to the preparation of the budgets and presentation of the proposals;
  5. the criteria and the list of documents required for the determination of the technical capability, financial fitness and tax and legal regularity;
  6. the potential sources of alternative, complementary or ancillary revenue, as well as those resulting from associated projects;
  7. the rights and liabilities of the granting authority and of the concessionaire with respect to alterations and expansion to be effected in the future, to ensure the continuity of the rendering of the service;
  8. the criteria for adjustment and revision of tariffs;
  9. the criteria, indexes, formulae and parameters to be utilized for the technical and economic-financial decision on the proposal.
  10. the indication of reversible assets
  11. the characteristics of the reversible assets and the conditions in which same will be made available, in cases in which the prior concession will have been extinguished;
  12. the express indication of the entity liable for the burdens of expropriations necessary to the performance of the service or public work or for the creation of a public easement.
  13. the leadership conditions of the company in charge, in those cases in which the participation of companies under a consortium comes to be permitted;
  14. in case of concession, the draft of the corresponding agreement will contain, whenever applicable, those essential clauses referred to in Law 8987/1995;
  15. in case of concession preceded by the performance of public work, the data relating to the work, among which those elements of the basic project, which enable its complete characterization as well the guarantees required in this specific phase of the contract, according to each specific case and limited to the value of the work.

Whenever the participation of companies in consortium is permitted in the bid, the Law 8987/1995 determines that the following requirements need to be met: (i) evidence of a public or private instrument of commitment for the constitution of a consortium, signed by the members thereto; (ii) indication of the company responsible for the consortium; (iii) presentation of the documents required to determine the technical and financial adequacy, the legal and tax good standing and the leadership conditions of the member liable, from each member of the consortium; and (iv) prohibition of the participation of the companies members of a consortium in the same bid, severally or through more than one consortium. The winning bidder is required to organize and register the consortium with the relevant Public Records Office. Without prejudice of the joint liability of the other members of the consortium, the leader company is liable to the granting power for the performance of the concession contract.

Further pursuant to Law 8987/1995, studies, investigations, assessments, designs, works and expenses already incurred, performed by the granting authority or with its authorization, which are connected to the concession and useful to the bid, will be made available to anyone taking interest in knowing them and the winning bidder will reimburse the corresponding expenses, specified in the public notice of invitation to bid.

In addition, under Law 11079/2004, the public notice of invitation to bid may also provide for: (i) guarantee to the bidder’s proposal limited to 1% of the estimated amount of the project; and (ii) use of private mechanisms to settle disputes and conflicts arising our of or in connection with the contract. Arbitration may be one of those mechanisms, to be conducted in Brazil and in Portuguese, on the terms of Law nº 9307, of September 23, 1996.8

Any guarantee of the consideration by the public partner to be given in favor of the private partner will also be specified in the public notice of invitation to bid.

The bidding to engage in a PPP relationship will adhere to the procedures provided in the current laws and regulations, administrative contracts and specific rules we will analyze ahead. The consideration may be preceded by a phase of qualification of technical proposals. Bidders scoring less than the minimum score will disqualify and will not participate in the following phases. When considering the proposals, the following considerations will be made: (i) lower tariff of service to be provided; (ii) best ratio lower tariff - best technique; (iii) lower consideration payable by the Public Administration; and (iv) best ratio lower valor consideration – best technique, based on the weights established in the public notice of invitation to bid. The public notice will define how the economic proposals will be submitted. Therefore, written proposals in sealed envelopes or written proposals followed by outcry bid. Outcry bids will be tendered in the reverse order of the written proposal classification. The public notice of invitation to bid may not limit the number of bids tendered. However, it may limit the number of outcry bids of bidders whose written proposal is up to 20% higher than the value of the best proposal. The public notice may provide for the opportunity to correct faults, complement insufficiencies or even corrections of a formal nature of the course of the procedure, provided that bidders can meet the requirements within the timeframes fixed in the public notice of invitation to bid. The consideration of technical proposals, for qualification or decision purposes will be based on requirements, parameters and indicators of outcomes related to the project to be clearly and objectively defined in the public notice of invitation to bid.

The reversal of the order of the qualification and decision phases may be provided in the public notice of invitation to bid. In this case, upon completion of the proposal classification or bid tendering phases, the sealed envelopes containing the qualification documents of the best classifying bidder for determining the fulfillment of the conditions set in the public notice. If the requirements set in the public notice of invitation to bid have been met, that bidder is declared the winner. If the best classifying bidder does not qualify, the documents of the second best classifying bidder will be considered and so on successively until a bidder meets the requirements set in the public notice of invitation to bid. Following the completion of the bidding process, the project will be assigned to winner under the technical and economic conditions offered thereby.

By operation of Law nº 9074, of July 7, 19959, which also applies to administrative concessions, in biddings giving out concessions and permissions for utility services of use of public asset, the designers or economic supporters of the basis or executive plans may participate, whether directly or indirectly, of the bidding process or performance of the works or services.

VIII – Complementary rules

In addition to the previous rules, administrative concessions shall be also governed by several other provisions spelled out in Law 8987/1995 dealing with duties of the granting power and the concessionaire and when intervention or termination of the concession will apply.

It is incumbent on the granting power to: (i) regulate and regularly monitor the services and their provision; (ii) impose regulatory and contractual penalties; (iii) intervene in the provision of services, as provided in the law; (iv) terminate the concession, as provided in Law 8987/1995 or under the contract; (v) approve readjustments and review tariffs as provided in Law 8987/1995, related rules and the contract; (vi) comply and enforce compliance with the regulatory provisions of the service and contractual clauses; (vii) ensure the good quality of the services, accept, assess and address complains of users who will be informed of the actions taken within 30 days; (viii) declare the public utility nature of the assets necessary to the performance of the service or public work, by arranging for the expropriations directly or by granting powers to the concessionaire, in which case the concessionaire shall bear the applicable indemnifications payable; (ix) declare the need or public utility nature, for purpose of public easement, of the assets necessary to the performance of the services or public work, directly or by granting powers to the concessionaire, in which case the concessionaire will bear all the indemnification payable; (x) encourage the increase of quality, output and environmental preservation and conservation; (xi) boost the competitiveness; and (xii) encourage the creation of associations of users to protect interests related to the services being provided.

During the fiscal year of inspection, the granting power will have access to the concessionaire’s management; accounting; technical, economic and financial resources data. Inspection of the services will be accomplished by way of technical body of the granting power or entity designated thereby, and, regularly, as provided by regulatory rules, by committee made of representatives of the granting power, the concessionaire and users.

It is incumbent on the concessionaire to: (i) provide the services properly, as provided in Law 8987/1995, applicable technical rules and the contract; (ii) keep current the inventory and record of assets linked to the concession; (iii) account for the management of the services to the granting power and users, under the terms of the contract; (iv) adhere and ensure adherence to rules of the service and contractual clauses; (v) allow free access to the inspectors, at any time, to the work sites, equipment and installations related to the services, as well as the respective accounting records; (vi) arrange for expropriations and create any easements authorized by the granting power, as provided in the public notice of invitation to bid and in the contract; (vii) ensure the integrity of the assets linked to the provision of the services, as well as purchase adequate insurance policy; and (viii) raise, invest and manage the financial funds necessary to the provision of the services.

Any agreement made by the concessionaire, including employment agreements, will be governed by the provisions of the private interest law and labor laws and regulations, there being no relationship whatsoever between the contractors of the concessionaire and the granting power.

The granting power will intervene in the concession to ensure proper provision of the services and strict compliance with contractual, legal and regulatory provisions. Any intervention will be accomplished by way of official decree. Such official decree will contain the name of the intervener, duration and objectives and limitations of the intervention.

Upon the announcement of an intervention, the granting power will commence, within 30 days, administrative proceeding to prove the reasons causing the intervention and ascertain liabilities, the right of full defense being ensured to the other party. If the intervention is found not to have satisfied legal and regulatory prerequisites, it will be declared null. In this case, the services will immediately be returned to the concessionaire and the concessionaire will be entitled to indemnification for losses sustained. The intervention administrative proceeding will be completed within up to 180 days otherwise it will be held invalid. Once the intervention completes, and the concession continues, the management of the services will be returned to the concessionaire, after the rendition of accounts by the intervener. The intervener will account for the acts during his/her management.

Concessions will terminate in the following events: (i) expiration of contract; (ii) expropriation; (iii) forfeiture; (iv) termination; (v) voidance; and (vi) bankruptcy or dissolution of the concessionaire.10 Upon termination of the concession, the granting power will be returned all the reversible assets, rights and prerogatives assigned to the concessionaire, as provided in the public notice of invitation to bid and under the contract, and will immediately take over the services, perform the necessary analysis, assessments and liquidations. As a result of taking over the services, the granting power will be authorized to occupy the installations and use all the reversible assets.

If a concession is terminated as a result of contractual provision or expropriation, prior to such termination, the granting power will perform the necessary assessments and calculations to determine the indemnification payable to the concessionaire.

Reversal of assets, in the event of contract termination, will occur upon payment of the installments of investment linked to reversible assets, still unpaid or depreciated, that have been made with a view to ensuring that the services granted would continue and be current.

Expropriation is the return of the services to the granting power during the concession, for reason of public interest, by way of specific law and following payment of indemnification. Said payment will be made as provided for indemnifications owing for termination of the concession due to contract expiration.

At the discretion of the granting power, total or partial non-performance of the contract will result in forfeiture of the concession or imposition of contractual penalties. The transfer of the concession or the concessionaire’s shareholding control, without prior consent of the granting power, will result in the forfeiture of the concession. In the event of forfeiture of the concession, the rules mutually fixed by the parties in the concession contract will apply.

The granting power may hold the concession forfeited in the following events: (i) the performance of services is inadequate or defective, based on the rules, standards, indicators and parameters determining the quality of services; (ii) the concessionaire fails to comply with contractual clauses or legal or regulatory provisions applicable to the concession; (iii) the concessionaire discontinues services or assists in the discontinuation of services, except in the event of acts of God or force majeure;11 (iv) concessionaire is no longer economically, technically or operationally fit to keep the adequate provision of services; (v) the concessionaire fails to satisfy the penalties imposed due to defaults, within the established times; (vi) the concessionaire fails to act on the notification from the granting power and correct the provision of services; and (vii) the concessionaire is convicted, by final decision, for tax evasion, including therein social contributions.

The announcement of forfeiture will be preceded by determination of default on the part of the concessionaire in administrative proceeding, the right of full defense being ensure to the other party. An administrative proceeding will not be commenced unless the concessionaire has been informed, in details, of the respective defaults. The concessionaire will have time to take corrective actions and address the findings and adjust to the contractual terms, due respect being given to applicable provisions in the concession contract. Once an administrative proceeding is commenced and the respective default(s) evidenced, the forfeiture will be announced by means of decree issuing from the granting power, irrespective of prior indemnification. Said indemnification will be calculated in the course of the proceedings and will be payable pursuant to the instructions applicable to the termination of concession due to contractual expiration. Contractual fines and damages caused by the concessionaire will be deducted from the amount paid as indemnification. Upon announcement of the forfeiture, the granting power will have no responsibility whatsoever with respect to charges, sums, obligations or commitments to third parties related to or employees of the concessionaire.

The concession contract may be terminated, in court, by the concessionaire upon failure on the part of the granting power to comply with contractual rules. In this case, however, the services provided by the concessionaire may not be discontinued or interrupted, until the final decision is handed out.

Law 11079/2004 further explains that: (i) sponsored concessions are governed, subsidiarily, by Law 8987/1995 and related rules; (ii) common concessions continue to be governed by Law 8987/1995 and related rules, and are not subject to Law 11079/2004; and (iii) Law 8666/1993 and related rules, exclusively, continue to govern the administrative contracts that do not constitute common, sponsored or administrative concessions.

IX – Management Committee

A management committee will be established for federal PPPs by means of a decree and will have the authority to: (i) set the priority of performance of services in the PPP; (ii) design the procedures to execute contracts; (iii) authorize the commencement of competitive biddings and approve the corresponding public notice of invitation to bid; and (iv) review performance reports under the contracts.

The management committee will be made of members appointed by a permanent and a alternate representative of the Ministry of Planning, Budget and Management and of the Ministry of Finance and Civil Cabinet. The representative of the Ministry of Planning, Budget and Management is tasked with the coordination of committee operations. In order to be better fit to discharge its duties, the management committee may establish a technical support team made of representatives of public institutions.

A representative of the body of the direct Public Administration whose activities relate to the project concerned will attend all management committee meetings held with a view to review and discuss PPP’s projects.

To be able to deliberate about the engagement in a PPP, the members of the management committee will have to have received prior and substantiated instructions: (i) from the Ministry of Planning, Budget and Management about the merits of the project; and (ii) from the Ministry of Finance about the feasibility of putting the concerned guarantee and how, with respect to risks to the National Treasury and the adherence to the limits provided in Law 11079/2004. In this sense, Law provides that the Union may only engage in a PPP or put guarantee and voluntarily transfer to the States, Federal District and Municipalities, if and when the total of continued expenses calculated based on the total number of PPPs already engaged has not exceeded, in the previous year, 1% of the current net revenue in the fiscal year, and provided that annual expenses under valid contracts, in the ten subsequent years, do not exceed 1% of the current net revenues projected for the respective fiscal years. The States, Federal District and Municipalities engaging by way of PPPs will submit to the Federal Senate and the National Treasury Service, prior to contracting, the information necessary to confirm that the revenues and expenses related requirements have been met. When calculating the expense threshold, those deriving from PPP contracts made with the direct Public Administration, instrumentalities, public foundations, public companies, public-private companies and other entities controlled, directly or indirectly, by the respective entity will be considered.

Annually the management committee will submit to the National Congress and the Federal Audit Court performance reports regarding the PPP contracts. For transparency and decision-making purposes and save any confidential information, those performance reports will be made available for public consultation on the Internet.

The Ministries and the Regulatory Agencies, within their respective areas of performance, will submit the draft of the public notice of invitation to bid to the management committee and promote the bidding process and follow up and monitor the PPP contracts. Semi-annually, it is up to the Ministries and the Regulatory Agencies to submit to the management committee detailed reports of the performance of the PPP contracts, pursuant to regulation.

X – Guarantor Fund

Law 11079/2005 authorizes the Union, its instrumentalities and public foundations to hold quotas up to an aggregate R$ 6 billion in PPP Guarantor Funds – FGP, which will be private funds with assets separate from the assets of their members and their own rights and obligations. The purpose of the FGP is to guarantee the payment of pecuniary obligations assumed by the federal public parties under PPPs.

The FGP assets will be made of assets and rights invested in by its members by paying in full the quotas and income earned from its management. The assets and rights transferred to the FGP will be appraised by a specialized company, which will prepare a substantiated report with the appraisal criteria used. This report will attach documents related to the assets appraised. The quotas may be fully paid in cash, public bonds, public real estate, real estate, including shares in the federal public-private company (insofar those shares exceed whatever is necessary to keep the control over the federal public-private company by the Union), or other privileges of equity value. No bidding process will be necessary for paying assets. It is however indispensable the prior preparation of an appraisal and specific authorization from the President, by way of proposal from the Ministry of Finance. The investment of assets of especial or community use in the FGP will depend on their withdrawal from public access and use, individually.

The FGP will satisfy its obligations with its own assets and rights. The members of the fund will not be liable for any obligation of the FGP, save the payment in full of the quotas they subscribe for.

A FGP will be established, managed, run and represented in and out of court by a financial institution, directly or indirectly controlled by the Union.12 It is up to such financial institution to make decisions about the management and disposal of assets and rights of the FGP, ensuring its profitability and liquidity. The by-laws and regulation governing the FGP must be approved at a meeting of members.13

The FGP will put guarantees pro rata to the interest held by each member. No guarantee whose net value, plus the value of any guarantees put in the past and of the other obligations, exceeds the total FGP’s asset is allowed. Guarantees will be pledged as approved at members’ meeting, and may be: (i) guarantee (fiança), without the benefit of the order to the guarantor; (ii) pledge on assets or rights of the FGP, without transfer of possession of the pledged asset prior to the foreclosure of the pledge; (iii) mortgage over real property of the FGP; (iv) trust receipt (alienação fiduciária), being that the direct possession of the assets remains with the FGP or fiduciary agent engaged thereby prior to the foreclosure of the guarantee; (v) other contracts giving same effect as a guarantee, insofar they do not transfer the ownership or direct possession of the assets to the private partner prior to the foreclosure of the guarantee; (vi) in rem or personal guarantee related to the set of assets for public access and use created as a result of separation of assets and rights of the FGP.

The Law allows for the creation of a set of assets for public access and use, which shall be independent of the remaining assets of the FGP. The set of assets for public access and use will be linked solely to the guarantee as a result of which it may have been created and may not be subject to pledge, attachment, seizure, search and apprehension or any other judgment restriction resulting from other obligations of the FGP. The creation of set of assets for public access and use will be accomplished by way of registration with the relevant Public Records Office.

The FGP may even pledge counter-guarantee to insurance companies, financial institutions and international bodies guaranteeing the satisfaction of the pecuniary obligations of members of PPP contracts.

To the extent that the public partner settles each payment of the debt being guaranteed by the FGP the guarantee will be released proportionally. The guarantee may be foreclosed by the private partner starting the 45th day of its expiration, in the event of net and certain credit represented by enforceable instrument accepted and unpaid by the private partner. In the case of debt from invoiced issued and declined by the public partner, the private partner may foreclose the guarantee, provided that, having elapsed over 90 days of its expiration, the debt has not been expressly declined for reason. The settlement of the debt by the FGP will result in the subrogation of rights of the private partner. In the event of default, the assets and rights of the FGP may be subject to judicial restriction and disposal in order to satisfy the obligations being guaranteed.

The FGP will not pay income to its members. However, any member will be entitled to redeem, in part or in whole, its quotas in the assets still unused for guarantee purpose. In this case, the settlement will be accomplished based on the FGP equity condition.

The FGP may only be dissolved after prior settlement of all the guaranteed debt and effective release of guarantees by the creditors and at all times by deliberation of its members. After the dissolution of a FGP, its assets will be shared among the members based on the equity position as of the date of dissolution.

XI – Credit Operations

The National Monetary Council will lay down regulation containing the guidelines applicable to the granting of credit for financing PPP contracts, as well as the participation of pension funds.

Credit operations and contributions to the SPC’s capital are sources of financial funds and are subject to the limits detailed ahead. Credit operations undertaken by public companies or public-private companies controlled by the Union may not exceed 70% of the total sources of financial funds of the SPC. For incentive-supported areas, that is, Northern, Northeastern, and Mid-Western Regions where the Human Development Index – IDH is less than the national average, such ownership may not exceed 80%. Where there is join-participation of pension funds and public companies or public-private companies controlled by the Union, the threshold applicable to transactions they carry out cumulatively will be 80% of the aggregate of sources of financial funds of the SPC or 90% for the incentive-supported areas.

XII – Investment Funds

The last provisions of Law 11079/2004, authorize the Union to grant incentives, under the terms of the Program to Incentive the Implementation of Social Interest Projects – PIPS, created by Law nº 10735, of September 11, 2003, to investments made in investment funds crated by financial institutions, called Senior Quotas of Receivables Investment

Funds (Fundos de Investimento em Direitos Creditórios – FIDC), backed on receivables originating from PPP contracts. One of the PIPS goals is the development and enlargement of the infrastructure basis of basic sanitation, electricity, gas, telecommunications, highways, irrigation and draining systems, ports and transportation services in general, with a view to increase the efficiency of their products and services.

XIII – Conclusion

By creating a regulation specifically for PPPs, the Brazilian government aims at capturing revenues from new sources, which certainly would be impossible were the traditional method of service supply strictly within the standards of the laws and regulations governing competitive biddings and concessions (Laws 8666/1993 and 8987/1995 and related laws) was used. The need to keep elevated primary surpluses, to ensure economic balance and adherence to the Tax Accountability Law impose on the Public Administration strict limits to making investments from public funds at the federal, state and local levels.

PPPs will allow the use of a innovative way of cooperation between the public and private sectors, establishing complementariness in the sharing of investments, risks, liabilities and profits and render feasible infrastructure projects and public services. They may also become a strong ally of the government to capture new foreign investments to our country. If the SPCs that come to be organized in the implementation of such projects are organized as publicly-held corporations, such modality may help improve and strengthen the Brazilian capitals market.

Walter Douglas Stuber, a partner of Stuber – Advogados Associados, is expert at Banking Law, Capital Markets, and Business Negotiations.

Footnotes

1. Law 8987/1995, known as the Concessions Law, makes provisions on the concession and permission giving our procedures in the provision of utility services.

2. Reversible assets are those proprietary of the granting power and are temporarily transferred to the concessionaire in order to enable it to perform the concession contract. These assets must be returned to the granting power upon expiration of the concession or under the terms and conditions of the concession contract.

3. Under the terms of the Brazilian Civil Code (Law nº 10406, of January 10, 2002), public domain is that included in the assets of public entities (the governmental and its divisions), as object of personal, or real, right of each such entity. Except as otherwise provided in the law, public domain is proprietary of public entities (governmental and its divisions) structured as if private they were. Public domain may be disposed of, due respect being given to legal requirements. The following are public entities: the Union, the states, the Federal District and Territories, the municipalities, instrumentalities and other public entities created by law.

4. The Federal allows the putting of collaterals in credit transactions as acceleration of revenues, including by taking on credit transactions, even if by way of acceleration of revenues, under the terms of the law, as well as the tying its own revenues generated by taxes created by the states, the Federal District and municipalities or resulting from the sharing of tax revenues, pertaining to the states, the Federal District and the municipalities, in the pledge of guarantee or counter-guarantee to the Union and for payment of debt to the Union.

5. Law 8666, known as the Bid Law, lays down rules applicable to competitive biddings and contracts with the Public Administration and governs the administrative contracts in general and the regular concession contracts.

6. The National Treasury Department will issue, in the form of law, the general guidelines regarding the consolidation of public accounts applicable to PPP contracts.

7. The adherence is a result of the application of articles 29, 30 and 32 of Complementary Law nº 101, of May 4, 2000, also known as Tax Accountability Law that establish the rules governing public finance based on responsible tax management.

8. Law 9307/1996 creates the arbitration procedures in Brazil (Arbitration Law).

9. Law 9074/1995 sets the rules governing the granting of extensions to public utility concessions or permissions and supplements Law 8987/1995.

10. In the case of an individual company, whose owner is an individual, the concession will terminate in the event of death or disability of the owner.

11. Pursuant to the Brazilian Civil Code, act of God and force majeure occurs when the effects of an event could not be reasonably avoided or prevented.

12. Law 11079/2004 determines that rules established in item XXII of article 4 of Law nº 4595, of December 31, 1964 (which makes provisions on the monetary, banking, and loan policy and institutions, creates the National Monetary Council and other provisions), which determines that it is incumbent on the National Monetary Council, and pursuant to guidelines fixed by the President, to lay down rules applicable to the operation of public financial institutions in order to preserve their solidity and adjust them to the goals of Law 4595/1964.

13. At the meeting of FGP’s members, the Union will be represented by the Head Attorney or by an Attorney of the Federal Treasury Department. Under the terms of item V of article 10 of Decree law nº 147, of February 3, 1967 (which creates the new organic law of the Federal Treasury Department’s Attorney’s Office), it is up to the Head Attorney of the National Treasury Department to represent and defend the interests of the National Treasury, who may delegate authority to an Attorney of the National Treasury: (a) in articles of association and at meetings of public-private companies and other entities, in whose capital the National Treasury is holds ownership; (b) in acts in which the National Treasury Department related to the subscription, purchase, sale or transfer of shares in companies; (c) in tax or financial agreements, arrangements or contracts, wherein or whereto the Union, on one side, and the Federal District, the States, the Municipalities, instrumentalities, public companies, public-private companies or foreign entities intervene or are a party, and the concession agreements; and (e) in other acts, where determined by the Ministry of Finance or as provided in the law, decree or internal regulation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Walter Stuber
 
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