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by Júlio César Bueno

Continuing our last discussion on PPPs in Brazil, we should note that PPP LAW applies to government entities (including mixed-capital companies) directly or indirectly controlled by the Federal Government, States, Federal District and Municipalities. Article 2 of PPP LAW defines PPP as follows: “Public-Private Partnership is an administrative concession contract that may assume the form of either a sponsored or an administrative concession contract.” PPPs are expected to be implemented concurrently with existing concession contracts, focusing on infrastructure projects. PPP LAW provides for sponsored concession and administrative concession.

The administrative concession is defined in Article 2, paragraph 2 of PPP LAW as a “service agreement in which the government entity is the direct or indirect user, even if such agreement involves performance of works or supply and installation of assets.” This type of concession is governed by PPP LAW, by Articles 21, 23, 25 and 27 through 39, of Law No. 8987, 1995 [FED. LAW 8987], and by Article 31 of Law No. 9074, 1995 [FED. LAW 9074]. An administrative concession contract is that by which government entities delegate performance of a public service to a private company. Such private company will develop the activity for its own account and at its own risk for the period and on the conditions agreed in the respective contract. In administrative concessions, services are directly or indirectly provided to government entities. For instance, the government entity may open competitive bidding procedures for the construction and operation of hospitals and prisons.

The sponsored concession, as defined in Article 2, paragraph 1, is “the concession of public works or services as dealt with in FED. LAW 8987 when it involves, in addition to the fees charged to users, payment of a compensation from the public partner to the private partner.” A sponsored concession is actually an ordinary concession in which the State gives some type of consideration. This type of concession is governed by PPP LAW by FED. LAW 8987 and related legislation. A sponsored concession may be adopted, for instance, in the cases of railways and highways in general.

Article 2, paragraph 3, of PPP LAW expressly stipulates that “the ordinary concession, i.e. the concession of public works or services as dealt with in FED. LAW 8987, will not be considered a public-private partnership when it does not involve payment of compensation from the public partner to the private partner.” Reflecting a general concern about the manner in which PPPs are to be conducted, PPP LAW also lays down the following guidelines:
(a) Efficiency in complying with the State’s missions and in using the company’s funds (due care in the use of the public funds invested in the activity);
(b) Respect to the interests and rights of service users and of the private entities charged with performing the services;
(c) Non-transferability of regulatory and jurisdictional duties, the exercise of police power and other activities inherent to the State;
(d) Fiscal responsibility in the execution and performance of partnerships, as Article 10, I(b) of PPP LAW stipulates that the rules set out in FISCAL RESPONSIBILITY LAW must be observed;
(e) Transparency in procedures and decisions;
(f) Objective sharing of risks between the parties; and
(g) Financial sustainability and socioeconomic advantages of PPP projects.

These guidelines mirror the spirit of care the legislator wishes government entities to adopt when contracting PPPs, reminding them of certain principles and concepts already contemplated by the legislation applicable to contracting of works, services, and other items by government entities with companies of the private sector.

Generally speaking, PPPs operate as an arrangement between the public and private sectors for execution of works originally entrusted to public concerns, which lack funds and/or expertise. As far as this concept is concerned, PPPs and ordinary concessions may seem to be very similar this is not necessarily true.

Even though both PPPs and ordinary concessions are administrative contracts between the government authorities and a private entity, more specifically concession contracts in a broad sense – concession contracts, in their broad sense, comprise all those in which government entities delegate the provision or performance of services (whether or not preceded by public works) to a private entity, which will perform the activities inherent to the services and assume the business risk under the contractual conditions. Prevalence of the public interest and an assurance of the original economic and financial conditions also constitute essential characteristics of concession contracts – there is a substantial difference between them: while in ordinary concessions, regulated by FED. LAW 8987, the compensation obtained by the contracted concessionaire (private entity) always originates from the service users only, in PPPs the compensation is fully or partially paid by the public partner to the private partner. In sponsored PPPs, the compensation received by the concessionaire from service users is, in principle, supplemented by the compensation paid by the public entity to the private entity, whereas in administrative PPPs all the compensation is paid to the private partner by the contracting public entity itself – Article 2, paragraphs 1 and 2, and Article 6 of PPP LAW.

In other words, PPPs are slated for services and/or public works that do not generate sufficient compensation to the contractor (e.g. expansion and management of highways or railroads with few users) or that do not even involve payment of fees by their users (e.g. construction and management of penitentiaries or public hospitals). Therefore, in addition to dealing with cases requiring investments and/or specialization beyond the possibilities of the public entity, PPPs have another specific characteristic: the venture itself is unable to pay off. These are the basic differences between PPPs and ordinary concessions, and should serve as guiding principles in bidding procedures, analysis of proposals and, particularly, concession contracts regulating PPPs.

Unlike ordinary concession contracts, PPP contracts are subject to more extensive and complex regulations: in addition to traditional clauses such as contractual term (which is considerably longer), PPP contracts must provide for rather specific aspects difficult to be expressed in few general terms. Therefore, PPPs cannot adopt near-standard draft concession contracts, which are mostly adhesion contracts.

The methods of compensation and the guarantees tendered (guarantee fund, insurance, etc.) by the public entity to the contractor, the risk sharing between the parties, the possibility of transferring the special purpose company (a legal entity incorporated to enter into PPPs) to financiers in case of default, the definition of performance evaluation criteria in accordance with the contractual term, among others, will be a matter of concern of those involved in drafting and negotiating PPP contracts. Certainly, this will require a more active involvement of bidders in drafting the contracts, which might result in an ample and detailed document, very probably in similar terms of common law contracts. This obviously strengthens the importance – after the phase of comparative law examination – of studying in advance examples of successful PPP contracts abroad, particularly the pioneering PPP contracts in England.

Having described the fundamental differences between PPPs and ordinary concessions, it is worth dealing once again with their contractual similarities. Both are kinds of administrative concession contracts. For this reason, PPP LAW expressly provides that PPP contracts must meet the general requirements of FED. LAW 8987 for ordinary concession contracts, such as: tariff adjustment mechanisms; methods and standards for service evaluation, expansion and inspection; indemnity calculations; users’ rights and duties; and periodical rendering of accounts by the private party to the public party. As a consequence of this legal provision, the caution taken when drafting PPP contracts must be redoubled, i.e. FED. LAW 8987 must be observed, insofar as applicable, and PPP LAW must be fully observed.

Generally speaking, once this new channel of investments is opened, there are very positive prospects of its use and results. However, it is important to stress the relevant and specific features (which have only been outlined above) of PPPs vis-à-vis ordinary concessions, notably when it comes to the careful drafting of PPP contracts. Hopefully, publication of the PPP LAW will catch the spirit of such date, not only confirming the expectation for a successful future, but also contributing toward a solid and continuous growth cycle in Brazil.

Kluwer Construction Blog