Changes to the current infrastructure law have been proposed in an effort to facilitate and modernize the rules applicable to public-private investment partnerships. The proposed changes are to be made to federal laws and should be followed at state and municipal levels given that Congress holds a constitutional monopoly on the passing of laws regarding contracting with the public administration.
On October 8, 2019, there was a general meeting between Brazil’s Chief of Staff, the Minister of Economy, the Chairman of the House of Representatives and other public figures with direct interest in public-private investment partnerships. The meeting addressed the facilitation and simplification of the regulation of common concessions, sponsored concessions and administrative concessions aimed at attracting more investments and partnerships.
The proposed changes mainly focus on Laws No. 8.987/95 (“Concession Law”), No. 11.079/04 (“PPP Law”) and No. 11.107/05 (“Public Consortium Law), as detailed below:
Changes to Concession Law to adopt or clarify the following topics:
- Simplified Concession: Below a certain value of capex and revenue, the changes shall allow for simplified studies, online public consultation, dismissal of minimal grant and dismissal of reference tariff;
- Adherence Concession: Allows for public contracting under standard contracts (non-negotiable). This provision shall stimulate regional forms of the contracts, which in turn, shall simplify the procedures for concessions with municipal or regional reach;
- Authorization: Establishment of a general regime for obtaining authorization in substitution of concession and permission. This means that the relevant services shall not be exclusive, the prices shall not be regulated and will create no burden on the Government;
- Services and Construction Work attached: Permission for public contracting of multiple projects even in different economic sectors and regions;
- Study Standardization: Simplification of the collection and organization of construction work data base, under a single methodology;
- Risk Matrix: Express detailing of the risk matrix on regular concessions;
- Foreign Entities: Attract foreign entities by allowing their leadership of public consortia;
- Construction Work Certification: Creation of alternatives for the granting power to request verification of the construction work by an independent third party, which verification can be complete or partial;
- Step-out: Facilitation of change of control by the finance party that stepped in, dismissing the need for qualification of the acquirer;
- Reversionary as Security: Allows the offering of reversionary as security to raise finance with special clauses providing that assets will be replaced or indemnified if the concession is terminated by the conceding authority;
- Foreign Consultancy: Allows the contracting of foreign consultancy firms or foreign individual consultants regardless of their registration in Brazil;
- Financing Facilitation: Extension of the use of receivables for other types of transactions (bonds, securitization, etc.) in addition to a typical loan agreement;
- Stimulus of Ancillary Revenues: Government shall not consider the ancillary revenues when calculating the economic balance between contracting parties; and
- Reduction of Unmanageable Risks: Protection for investments against increases of income tax and other excises of general application.
Changes to PPP Law to adopt or clarify the following topics:
- Lift of Duration and Value Limitations: Suppression of minimum and maximum time period of public-private partnerships (currently between 5 and 35 years) and the minimum value of contracts (currently at R$ 10 MM);
- Step-in and Step-out: Limitation of liability of the finance party on step-in and facilitation of change of control, dismissing the need for qualification of the acquirer;
- Tax Bureaucracy: Reduction of bureaucracy through clarification that public-private partnerships are not credit operations or a consolidated debt of the controlling entities above the operating company;
- Environmental Permits: Clarification of guidelines for obtaining environmental permits;
- Bidding Procedure: Simplification of the bidding procedure through the inversion of phases (qualification shall be transferred to the end of the bidding procedure) and implementation of single stage appeal;
- Increase of Public Budgetary Limits for Public-private Partnerships: Allows payments under public-private partnerships to be expensed up to 15% of the current net revenue of the relevant conceding authority, net of payments under public-private partnerships to the extent that original public expenditure is replaced or minimized. See below the main highlights on extra limits under the Public Consortium Law;
- Dismissal of Legislative Approval: Dismissal of approval by specific law for public-private partnerships when public participation is above 70%;
- Dismissal of Reports: Dismissal of reports concerning public-private partnerships to be sent to Congress and other government entities;
- Public Commitment Effectiveness: Imposition of liability on the government agent that breaks commitments previously agreed by parties;
- Guarantee by Conceding Authority Legally Certain: Definition by detailed description of the types of guarantees and securities used by any municipal, state or federal body of government which proved to be successful in past transactions. Creation of new possibilities of revenue sources for guarantees and securities such as funds and earmarked taxes, such as contributions. Clarification of procedural rules for the execution of public guarantees and securities; and
- Freedom of Contracting: Criteria to declare a winning bid involving among other lower contribution or price paid by the administration for the services in addition to criteria which may combine price and technical scores.
Changes to Public Consortium Law to adopt or clarify the following topics:
- Public Consortium Breach by Members: Passing of penalties to be imposed on public entities that leave a consortium agreement and demand for guarantee/security from public entities prior to entering consortia;
- Unified Regulation: Harmonization of public consortia regulations issued by different bodies of the federation. Creation of a sole regulatory agency in connection with public consortia;
- Promote Consortia governed by Private Law by different bodies of the federation: The Public Consortium Law provides for two different types of public consortia, governed by public and private law (i.e., members of a consortium shall still be public entities, but the consortium itself can be a public or private entity). Proposition for increasing public bodies of the administration to gather efforts under consortia governed by private law (as a way of avoiding the intricacies of public procurement);
- Dispute Resolution: Allows for alternative dispute resolution proceedings (mediation and arbitration);
- Concession by contractual adhesion to existing forms: Permission for the use of standardized concessions (no need or requirement of previous negotiations); and
- Legal Representative: Dismissal of the requirement that a consortium is legally represented by the chief executive of the relevant public entity.
- Attraction of Institutional Investors (Foreign and Domestic): Provision of new series of tax-exempt debentures by the issuer;
- Flexibility on Infrastructure Debentures: Adjustments to the characterization of tax-exempt debenture funds and lengthening of the application window (from 24 to 60 months);
- Attraction of Foreign Investors: Reduction or exemption with respect to any withholding tax on remittance of interest and capital gains by foreign investors in connection with the investment in infrastructure debentures;
- Legislative Authorization: Dismissal of the requirement of legislative approval for each new concession;
- Environmental Liability: Imposition of liabilities and pecuniary penalties only upon willful misconduct or gross negligence committed by the finance parties, with a view to limiting the concept of lender’s liability;
- Liability for Flawed Studies: Liability for flawed studies and consulting services provided to the public sector may only result in liabilities and pecuniary penalties upon proof of willful misconduct or gross negligence;
- Fiduciary Agent: Express legal language providing for delegation of powers to fiduciary agent in the financing representing the pool of the financers, as a means of avoiding discussion of procedural nature on the standing in court;
- Foreign Currency: Permission for contracts between project companies and Brazilian exporters as a means of bringing naturally hedged transactions to stabilize currency mismatches in infrastructure projects and create the pillars for a currency swap market in the country;
- Street Lighting Contributions: Permission for revenues obtained from payment of street lighting contributions to be used for funding ancillary services (smart cities); and
- Granting Resources: Permission to use proceeds raised from the granting of concessions to finance voluntary retirement programs in the port industry and the structuring of projects in logistics.
The executive branch of the Federal Government delivered its proposals at the general meeting (October 8, 2019) and highlighted that it is in close touch with investors and all its proposed changes are based on previous experiences. For the above detailed revisions to take place, the proposals must be approved by both houses of Congress through a legislative procedure and then must be sanctioned by the President.
For more information please contact: Luis Antonio Semeghini de Souza (email@example.com), Tereza Marcondes Cidade (firstname.lastname@example.org) or Marcello Ximenes Rodrigues Alves (email@example.com).