Legal Aspects of a PPP Program - Presentation in an IDB Seminar

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Legal issues and framework of a PPP Public Private Partnerships program. Competion, financial equilibrium, risk sharing, fiscal issues, and project development are relevant issues. The presentation closes with the main legal challenges to be faced when developing a new PPP program.
  • 1. Legal Aspects of a PPP Program Challenges Arising out of the Brazilian Experience Mauricio Portugal Ribeiro Primer Seminario del Cluster de Alianzas Público-Privadas (APP) de FOMIN Washington DC, October 2008 1
  • 2. Introduction • Vast experience with PPI - Private Participation in Infrastructure and in the provision of services to the public and to the Government Involved sectors such as steel, petrochemicals, power, telecommunications, highways, railroads, gas, and water supply • Stable legal and institutional framework Constitutional Amendments National Plan on Privatizations Standards on concessions contracts and bidding procedures Sector specific Acts, which creates the respective regulatory agencies, and establishes standards under which they operate • Variety of contract arrangements Divestitures/assets sales, BOT, DFBOT, Concessions, joint ventures (with public and private participation), franchises etc. 2
  • 3. Brazil’s past with PPI • From 1990 to 2007 more than U$ 1 trillion was generated with PPI – Private Participation in Infrastructure in the developing world • Latin America and the Caribe was the region that has generated most revenues/investments from PPI (about U$ 450 billion) • In the 90’s Brazil was the developing country who has generated most revenues/investments with PPI Mundo 1990-2007 América Latina e Brasil 1990-2007 Receitas + Investimentos Receitas + Investimentos (Milhões/US$) (Milhões/US$) 80000 500,000.00 450,000.00 70000 400,000.00 350,000.00 60000 300,000.00 50000 250,000.00 América Latina (restante) 200,000.00 40000 Brasil 150,000.00 30000 100,000.00 50,000.00 20000 - 10000 Leste Europa e América Oriente Sudeste África Asiático e Ásia Central Latina e Médio e Asiático Subsariana 0 Pacífico Caribe Norte da 90 92 94 96 98 00 02 04 06 África 19 19 19 19 19 20 20 20 20 Source: Banco Mundial e PPIAF, PPI Project Database. ( Acesso em: 15/08/2008 e Fundo Monetário internacional (FMI), World Economic Outlook Database: Nominal GDP list of countries. Abril de 2008. Dados para o ano de 2007. 3
  • 4. Brazil’s experience with PPI • From 1996 to 2001, the Government has reduced its participation in several sectors in infrastructure • Telecom and Railroads are now under the control of the private sector • In the largest ports, the private terminals are responsible for more than 50% of the cargo movement • More than 2/3 of the power distribution and more than 1/5 of the power generation are operated by the private sector • In the road sector, some of the main roads are operated by the private sector (still less than 10% of the paved road network) • In the water and sanitation sector, private participation is still very limited Brasil (Receitas + Investimentos) Brasil 1990-2007 (Milhões/US$) 35000 74.9 24896.014 0% 30000 46377.49 14% Brownfield (Concession) 26% Brownfield (concessions) 25000 Divestiture 20000 Divestitures 15000 Greenfield Projects Greenfield Projects 10000 Management and Lease Management and Lease Contract 5000 Contracts 110521.46 0 60% 94 95 96 97 98 99 00 01 02 03 04 05 06 07 19 19 19 19 19 19 20 20 20 20 20 20 20 20 Fonte: Banco Mundial e PPIAF, PPI Project Database. ( Acesso em: 15/08/2008 4
  • 5. 90’s Legal Framework for PPI • Competition • Transferring risks, tariffs and economic equilibrium of contracts For the market Possibility of transferring the responsibility of Contracts have to be awarded under designing, financing, constructing and competitive bidding procedures operating assets In the market In several sectors, evolved to contractual They should be awarded under arrangements that focus on outputs arrangements that allow competition in the market (except in the case of The legal framework allows any sort of risk economic impossibility) allocation arrangements Yardstick regulation The law entitles private partners to economic equilibrium of the contracts, preserved by Fostered by the legal and contractual contract revisions framework Lack of adequate technical expertise Judiciary has set precedents in cases that private partners asked courts to enforce their right to the financial equilibrium of the contract 5
  • 6. 90’s Legal Framework for PPI • Private sector investment, quality • Fiscal Issues improvement and network expansion Privatizations proceeds were extensively used to extinguish debt Evidence that users are satisfied with the quality of the services Reduced needs of investment outlays, lowering borrowing requirements Complaints about high tariffs Specific legislative authorization was required to Privatized companies and service providers were not allow Government payments or guarantees to able to match the desirable level of investment concessionaires or private partners Telecommunications and the transmission line sectors were exceptions In some sectors, such as water supply and sanitation this was due to inadequate legal framework Process of privatizations was limited to projects that were financially self-sustaining without Gov payments Accounts for limited portions of the network in many sectors 6
  • 7. Challenges of a PPP Program in Brazil • Improve the institutional framework to coordinate private and public investment • Rebuild the Government capacity of sector planning and project development to public direct investment or private participation • Expand private participation to sectors in which it is still limited Award concessions, which need some sort of Government guarantee or payment to become financially viable (concessão patrocinada) Implement a PFI-like program to bring private sector capabilities to improve the efficiency of the provision of services to the Government (concessões administrativas) 7
  • 8. Objectives and main features of the 2004 PPP law • Linked the PPP contracts with the past experience with PPI Brazilian PPP law has several references to provisions of the concessions law and of the law that controls the Government contracts and biding procedures Protect the powers of the sector planing, project develpment and regulatory agencies while creating specific agencies to run the PPP program • Allowed Government payments in long term contracts with private sector • Established mechanisms to enhance the Government credit profile a backstop facility to the Government payments (Fundo Garantidor de PPP) allow the Government to contract its credit enhancement from other entities such as multilateral organizations • Improved the procuremment procedure Make it less formal while maintaining a formal bidding procedure Hiring culture not compatible with competitive negotiation 8
  • 9. Objectives and main features of the 2004 PPP law • Fiscal Issues Required that a proper affordability analysis is done before contracting PPP Defined limits on budget commitments with PPP (1% of Fiscal Net Revenues) • Required payments to be based on service performance fostered the development of output based contracts fostered development of a proper connection between payment mechanism and performance indicators • Conflict management Possibility of financers step in rights (public sector step in was already allowed) Possibility of using arbitration • Other institutional issues Project selection and development framework Regulatory agencies 9
  • 10. Conclusion • In Civil Law Jurisdictions, statutory changes are generally not only required but also desirable To provide a stable framework in which the contracts will be developed and regulated To foster/initiate the standardization of contracts and procedures • New legal framework should be based on the past experience of the country specially if it has done PPI Analysis of what work and what did not work Be careful that local culture/aspects sometimes convert international best practices in bad local practices Unsolicited proposals Competitive negotiations Experience on PPI should be threated as a scarce resource in the Government Remember that the bigger the change, more time will be needed to adapt to it and to consolidate best practices on the construction and interpretation of the law • Create or enhance the existent agencies To select and develop projects To regulate contracts and oversee the PPP/PPI program Focus on creating Government technical capacity • Focus on model projects First projects really important to create a standard Chose an easy sector Review local experience in the sector Combine with international experience Having model projects reduce the transactions costs for the next projects Enhances the quality of the project documentation, contract and biding documents 10
  • 11. Contact Thanks! Mauricio Portugal Ribeiro Senior Investment Officer Head of Infrastructure Advisory Services for Brazil 55 21 2525 5866 11
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