Public-Private Partnerships in Brazil

Recently, the Brazilian Federal Government enacted the Federal Act # 11.079, establishing general rules for Public-Private Partnership (PPP) tenders and contracts within the Public Administration (Federal Government, States, Federal District and Municipalities). However, in 2003, the State of Minas Gerais enacted its own legislation to rule PPP in the state, representing the first experience in the field in Brazil, no matter the application and execution of the law of State of Minas Gerais are subject and governed by the federal law it has some innovative principles and new aspects where focused in such State regulation. Since then, the Public Administration as a whole started a process in order to organize and set up basis for some strategic projects to be developed under the PPP’s methodology, namely in the transportation and logistics areas, according to a list of projects prepared by the Ministry of Planning, Budget and Management.

According to the Brazilian legal framework, PPP is defined as a concession agreement and is essentially a build-operate-transfer concession designed for projects that require additional government support to take off. The federal law establishes that when a service is contracted under a PPP agreement, the Public Administration shall perform direct payments to the private partner, as well as that the payment obligations undertaken by the Public Administration under a Public-Private Partnership contract may be strongly guaranteed. It is important to highlight that the payment provided by the Public Administration shall obligatorily be preceded by service delivery, and according to the terms of the contract, the Public Administration may pay the private sector partner for the portion of the service that is made available. The contract may stipulate a variable payment to the private partner linked to its performance, which shall be assessed against required quality and availability standards.

Additionally, the federal law sets forth that the objective risk sharing among the parties is mandatory in a PPP contract. However, one should notice that PPP regulation as set out by the law does not mean, but seeks to avoid, that all credit risks arising from PPP operations fall exclusively on the public sector. Furthermore, an innovative characteristic of the Brazilian PPP framework consists on the possibility of use private mechanisms for dispute resolution, including arbitration, to be conducted in Brazil and in the Portuguese language in order to resolve conflicts that may arise in relation to the contract.

A PPP may not be contracted in cases where (i) the contract value is lower than R$ 20,000,000.00 (twenty million reais), (ii) the term for the provision of services is less than 05 (five) years, or (iii) the sole scope of the contract is the supply of manpower, the supply and installation of equipment or the execution of public works.

Some important guidelines were established and shall be observed when contracting a PPP: (a) efficiency in the fulfillment of the missions of the State and in the use of public resources; (b) respect for the interests and rights of service users and of private entities responsible for service rendering; (c) non-delegation of regulatory and jurisdictional functions, as well as the exercise of enforcement powers and other State activities; (d) fiscal responsibility when contracting and implementing partnerships; (e) transparency of procedures and decision-making; (f) objective risk sharing among the parties; (g) financial sustainability and social-economic benefits of the partnership projects.

Summarizing: PPP represents an innovative and important possibility in the public procurement, allowing attraction of investments to infrastructure projects that the Public Administration cannot perform by itself.

Azevedo Sette Advogados