The Brazilian Public-Private Partnership Program

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 pblicas), 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:

the purpose, the area and the term of the concession;

the manner, form and conditions of the rendering of the service;

the criteria, indexes, formulae and parameters which will define the quality of the service;

the price of the service and the criteria and procedures for adjustment and revision of the tariffs;

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;

the users' rights and duties for the securement and utilization of the services;

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;

the contractual and administrative penalties to which the concessionaire is subject and the manner of their imposition;

the events of extinction of the concession;

the reversible assets;2

the criteria for the calculation and form of payment of the indemnification due to the concessionaire, whenever such comes to be the case;

the conditions for extension of the agreement;

the obligatory nature, form and periodicity of the rendering of accounts by the concessionaire to the granting authority;

the requirement of publication of concessionaire's periodical statements of accounts; and

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:

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;

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;

risk sharing by the parties, including those resulting from Acts of God, force majeure, acts of the State or extraordinarily special economic circumstances;

types of remuneration and indexation of contractual sums;

mechanisms to ensure that provision of services is consistently updated;

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;

objective criteria to assess the private partner's performance;

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.

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;

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...