Public-Private Partnerships and the FGP

1. Public-Private Partnerships and the FGP Isaac Averbuch Washington Oct, 2008

2. PPP in Brazil: a narrow definition • In many countries • Almost any kind of long-term relationship between public and private sectors • Joint ventures, leases, franchises, concessions, PFI (UK), privatization... • In Brazil • The term PPP refers to a special kind of concession • PPP - a concession with user charges and/or government payments • Concession – user charges only • PPP and concessions have similar economic structures

3. PPP Law (December 2004) Establishes general norms for PPP tenders and contracts within the Federal Government, States and Municipalities • PPP is a concession contract: • Sponsored Concession :User charges + direct payment from the public sector Ex.: road, railways, ports, sanitation • Administrative Concession: Direct payment from the public sector only (no possibility for user charges) Ex: prisons

4. PPP Law (December 2004) Complements previous federal legislation: • Procurement Law (1993) • by allowing for longer contract periods (5 to 35 years) • Improves the procurement process for PPP (phase inversion) • Concession Laws (1995) • by allowing government payments in addition to user charges and fees PPP Law, Concession Laws and Procurement Law form the basic legal framework for public investments in Brazil

5. PPP Law: main provisions • Contractors design (green-field), build, finance, operate, maintain and transfer (new bidding is required at the end of the contract period if no renewal is possible) • Long term contracts (5 to 35 years) • Only large contracts (over BRL 20 million, USD 9 million) • Possibility of complementing user charges with government payments • Government payments are due as service is delivered and based on performance indicators (output-based contracts) • Government payments guaranteed by the PPP Guarantee Fund - FGP (to mitigate Government default risk) • Clear risk sharing among parties

6. Challenges of the Brazilian PPP Program • Brazil’s experience with concessions points to substantial gains with: • participation of foreign bidders (ex: roads concessions and electricity transmission lines) and mid-size contractors • watchful anti-trust authorities (ex: Madeira River hydroelectric power plant) • Strong political support and adequate institutional framework is paramount!

7. Challenges of the Brazilian PPP Program • Strong political support and adequate institutional framework is paramount! • PPP changes deeply the ways of designing and procuring a project: • resistance of private sector players (the old way is best!) • resistance within the government (the old way is best!) • the “P” of “Private” is not a charming word (disguised privatization) • Technical capacity building of government staff

8. FGP – Federal PPP Guarantee Fund FGP Guarantees Government Payments GOVERNMENT ProjectsSelection Debt Contracting Authority (Sectorial Ministry) Government Payments Special Purpose Vehicle Company End User User Charges Equity

9. FGP - Federal PPP Guarantee Fund • Main objectives • Protect private partners against the contracting authority default risk • Mitigate the “political risk” to the private partner • Reduce projects costs for the contracting authority • Guarantee only government payments • Does not guarantee other contingent liabilities that may arise during the contract • Does not guarantee State and Municipalities payments

10. FGP - Federal PPP Guarantee Fund Structure and Management • During the discussion of the PPP bill in Congress there was much political resistance against other options such as: a “market solution”, a private bank as a trustee or a multilateral bank facility • FGP was established as a Trust Fund of public assets • Trustee: Banco do Brasil (Federal government owned bank) • For each PPP contract the FGP issues a guarantee letter • In case of default, the FGP covers payment 45 days after it is due, or after 90 days if the public authority does not recognize the debt without a formal justification • FGP is a private legal entity and its assets are separated from those of the Federal Government

11. FGP - Federal PPP Guarantee Fund Financial aspects • Maximum of BRL 6 billion (USD 3,4 billion) in assets • Assets eligible to be used: cash, public bonds, real estate and stocks • The Federal government has transferred USD 2 billion worth of stocks and USD 50 million worth of public bonds • legislation allows for the use of state owned enterprises shares down to the limit of 51% of outstanding shares and private corporations minority shares • No leverage is allowed • NPV of FGP guarantees must equal the NPV of its assets • The guarantee is provided free of charge to the private partner • All FGP costs are paid by the Federal government

12. FGP - Federal PPP Guarantee Fund Fiscal aspects • The funding of FGP with government held stocks implies no fiscal impact according to our accounting standards (IMF 1986 manual) • stocks are treated as non-financial assets • no impact on Public Sector’s below the line deficit • Government payment only and no leverage rules limits FGP’s risk exposure

13. FGP - Federal PPP Guarantee Fund Fiscal aspects • Government payments have a special treatment in the budgetary process as to limit the incentive of line Ministries to default on payment • The legal ceiling of BRL 6 billion limits the use of FGP (not an issue in short-term) • As sovereign risk perception is reduced and a history of payment compliance is consolidated, FGP may not be as important

14. Thank you! isaac.averbuch@planejamento.gov.br +55-61-3429-4683