The only thing holding Brazil’s PPP market back is government backing, says Rodrigo Amaral.
In February the government of Minas Gerais, one of Brazil’s wealthiest states, launched a project to set up six new one stop-shops that provide public services to the community. A remarkable feature of the initiative is that private companies will build the units, manage them and even provide the public services themselves – which is not, by any means, your usual procurement model in Brazil. But it is not the first time the state’s government has flirted with public private partnerships. Last year, it already delegated to a private company the renovation, maintenance and operation of MG-050, one of the state’s main roads, in a 25-year contract. Other 7,000 km of roads may follow suit.
More partnerships are in the pipeline in Minas Gerais. A project to build two new prisons is at the public consultation stage. PPPs are planned to build a state-of-the-art complex that will host Minas Gerais’ 17 secretaries of government, and a new campus for the main university owned by the state. “We have plans to use PPPs in the future in underground, waste, sewage treatment and health projects too,” says Marco Aurélio de Barcelos, the project director of the Minas Gerais government’s PPP unit.
- Welcome news
Barcelos’ words are good news to companies that have been waiting for the PPP market to finally take off in Brazil.
In several ways, the South American giant has all it takes to generate some tasty pieces of business. Brazil has been posting robust rates of growth in the past few years, and its economic prospects look brighter than ever. But it suffers from even robuster infrastructure deficiencies that threaten to hamper the country’s development. “We need annual investments of at least 5% of Brazil’s GDP in order to meet our demands in infrastructure”, remarks José de Freitas Mascarenhas, the vice president of CNI, Brazil’s influential National Confederation of Industries. “But we’re investing only some 2% of the GDP.”
CNI has been among the advocates of wider use of partnerships to update Brazil’s infra-structure, as the state clearly doesn’t have the financial clout to do it alone. Investments are required everywhere, Mascarenhas points out. Roads all around the country need to be patched up. Experts support the extension of the country’s railways and the upgrade of its ports – and let’s not even start with the chaotic, state-managed airports and air control system. Sewage treatment and waste disposal are precarious in several parts of the country, and the public networks of schools and hospitals need an urgent boost. So surely there are several windows of opportunity for companies with expertise in PPPs.
However, for all the hype that PPPs have sporadically generated among Brazilian officials, the actual market has not amounted to not much. The central government started to invite private companies to help improve the country’s porous roads in the 1990s. But straight-forward concessions, where all risks are transferred to the private sector, and which are not classified as PPPs in Brazil, have been the procurement model of choice when it comes to involving private companies. Which means that only a few profitable stretches of roads – like the madly busy link between Rio de Janeiro and São Paulo, Brazil’s two largest cities – have benefited from private sector investments. Other kinds of projects, from quieter roads to hospitals and schools, have been left behind.
A law that was approved in 2004 tried to change this pattern, making PPPs more attractive to the public and private sectors. For instance, among the reasons why private companies were understandably cautious to get into such schemes, was the fear that a change of government, either at federal or regional level, could represent an early end to a long-term project, as newly-elected officials in Brazil are not know for a tendency to warmly embrace ideas espoused by previous incumbents. The new law has created the possibility to set up guarantees to make sure that officials feel less tempted to act recklessly. One of the alternatives offered is the creation of private entities that manage funds that would cope with the financial consequences of a breach of contract.
As a result, the federal government has set up a fund formed with equities of up to $6bn (Real) to act as a guarantee to PPPs. If contracts are not respected, the fund must pay the private partner, taking over the admittedly heavy burden of fighting the government in Brazil’s snail-paced courts. São Paulo, the country’s richest state, has also created a company, CPP, with assets of over $1bn (Real) in cash, with the same objective. Minas Gerais has linked its guarantees to its gigantic reserves of niobium, a mineral extracted by Codemig, a state-owned company.
Experts believe that, thanks to measures like these, the environment is becoming more favourable to new partnerships. It certainly looks the case at state and municipal levels of government, which have been adopting a more daring attitude towards them. Minas Gerais has been one of the most active, as well as São Paulo. Plans have also been developed by the governments of Pernambuco, Bahia and other states. Cities, both small and big, have also launched a few schemes of their own.
Mauricio Endo, a partner and a PPP expert at KPMG in Brazil, estimates that six schemes have already been signed since the 2004 law: three for sewage treatment, two to renovate roads, and one to expand São Paulo’s underground network. Several others can be found at bidding or consultation stages. Which is not bad, in his view, considering that the new law has been around for a little over three years and PPP projects will always take a long time to become reality, particularly as state officials are still very much learning the trade.
- Curb your enthusiasm
But the progress of the market has arguably been held back by what is seen as a marked lack of enthusiasm by the federal government, on whose whim a lot still depends in Brazil. Actually, hardly any action was taken before the passing of the 2004 legislation. “Although some state governments created their own rules for PPPs before that, the market was waiting for the central government to have its say”, points out Gustavo Eugenio Maciel Rocha, the coordinator of the PPP department at Azevedo Sette Advogados, a law office. That was because there was a fear that state rules might be made void by a different approach to the subject by the federal government, whose views re set to prevail.
Today, even with an adequate legal environment in place, the signs coming out from Brasilia are not the most auspicious. Last year the central government launched a multi-billion package of investments in infra-structure, and PPPs were conspicuous by their absence. Some people argue that the government concluded that the projects included in the package were not really suitable for partnerships, as simpler concessions could do the trick. But there remain suspicions that president Luis Inacio Lula da Silva and his left-wing party, that PT, still harbour antibodies against dealing with the private sector. Still, even at federal some projects have been mooted, including a high velocity train link between São Paulo and Rio de Janeiro.
As a rule, the market expects PPPs to be more widely used. If that is the case, Brazil has strong companies in industries like construction and transportation and they will surely be well-positioned to take advantage of new opportunities. But the expectation is that, as the industry matures, new
international players will get into the market, bringing in welcome know-how and competition. Spanish companies, which have long experience in both PPPs in Spain and abroad and in doing business in Latin America, are clear front-runners and have also made their presence felt in road concessions. But sources say that the likes of Skandia and other heavy hitters have shown interest too. Not surprisingly, considering the trajectory of PPPs so far in the country, though, caution remains a much used word to define how these companies are approaching the market, and alliances with local players might be the way to go. That is what French RATP Développement and Argentine Benito Roggio Transportes did to win the $2.68bn (Real)-worth contract to build and expand São Paulo’s new underground line.
Source: www.pppbulletin.com
Reportagem publicada na revista Londrina PPP Bulletin, 05 de Março de 2008