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Provisional Measure 727: New Horizons for Infrastructure Projects in Brazil

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9/1/2016 4:12 PM Demarest News

Provisional Measure 727: New Horizons for Infrastructure Projects in Brazil

Brazil lives again under the expectation of a new wave of concessions and privatizations. One of the first acts of the Federal Government after President Dilma Rousseff was suspended was the editing of the Provisional Measure 727 ("MP 727"), which created the Program for Investment Partnerships ("PPI" in Portuguese). The main objective of PPI is to broaden and strengthen the interaction between the State and the private initiative, by means of partnership contract and other decentralization measures.

For the purposes of MP 727, the concept of partnership is quite broad, including contracts of common concession, sponsored concession, concessions rules by sectorial legislation, permission of public service, lease of public goods, concession of real right of use and other arrangements that allow public-private businesses.

The question here raised is what differs the PPI of the other programs announced in the past, such as the Growth Acceleration Program (PAC) and the Logistics Investment Program (PIL).

At first sight, the main difference is that there is no closed list of projects that will integrate PPI. The projects will be developed together with private initiative and will be under the PPI Council of the Federal Presidency, currently coordinated by the Executive Secretary of PPI. This is an attempt to centralize the decisions in one body, in order to prioritize the investments in the projects that seem more viable, legally and economically speaking.

For such, the structuring of projects in PPI may be developed in three ways: (i) preliminary proceedings to subsidize the definition of basic characteristics of the project; (ii) Proceeding for Authorization of Studies (PAE); or (iii) directly with the Support Fund for Structuring Partnerships, which is yet to be created.

In the first hypothesis, any interested party may present studies, regardless of authorization, without the right to compensation. In this case, it should be considered as an investment of the private initiative to establish, e.g., a market that is still unexplored in Brazil.

In the second hypothesis, which is more likely to be utilized, the Government intends to receive integrated structuring or specific subject studies as per Section 21 of Law No. 8,987/95 - the Brazilian Concession Law - which is known by PMI - expression of interest proceeding.

In this case, therefore, the compensation for expenses is authorized if and when the studies are used for a future bid. This value must be expressed in the invitation to bid and will be paid by the winning bidder.

The authors of the studies - which may include engineering projects, technical, economic-financial and legal opinions, among others - may also participate in the bid procedure. However, in the event there is only one authorization, it will only be possible if the interested party includes the resignation of the possibility to act in the project bid or even as contracted by the private partner that wins the bid.

There is also the possibility to include a success fee, in addition to the compensation value, to encourage the use of this instrument.

Lastly, there is the hypothesis to contract directly with the PPI Support Fund, which is still to be created and will have BNDES management and legal representation. It will probably have its own rules regarding compensation for the presented studies, participation in the future bid and others.

Although there is a multitude of projects on the agenda, the most concrete ones so far are the ones that were already pre-structured or in public hearing phase, such as the new round of airport concessions, which includes airports in Salvador, Fortaleza, Porto Alegre and Florianópolis.

After the public hearing in these four cities and the Federal District, the Government has received several contributions by different companies, associations and representatives of the workers in this sector. The definitive invitations to bid have not been published yet and will probably only be after the definition of the impeachment process.

Anyhow, the Government has been giving signs for important changes if compared to the previous rounds. Among them, we highlight the following: (i) elimination of Infraero's participation in the future concessionaire; (ii) increase of term for presentation of the proposals, from 45 to 90 days; (iii) institution of triggers for the construction and/or expansion of landing tracks and terminals; and (iv) grace period of up to 5 years to start the concession payment. There is still the possibility of new changes in order to attract foreign investments, the main Government objective in this moment.

Moreover, there are important projects related to the expansion of railroads, an old demand of the country's infrastructure. One of the first aims is to renovate the existing concessions, as long as there is a firm commitment of significant investments to the expansion of the existing railroad network.

The negotiations have already been initiated with the main operators, who do not discard partnerships with foreign investors to comply with such demands.

Besides, there is a project, somehow advanced, for the conclusion of Norte-Sul railroad, linking important countryside regions for the flow of agricultural businesses. Again, it is the Government's desire to attract foreign investment.

Regarding highways, the Government is preparing a big concession pack, aiming important agricultural areas for the integration of different modal to optimize the production flow. In addition, the projects range from the duplication of tracks to greenfield projects, where there is the need of a big investment.

Lastly, as well as the railroads, there are concession agreements which are close to their maturity dates and the Government has been negotiating term extensions with the current concessionaires, demanding expressive investment as an essential requirement for such.

The Government is also looking for executing the expansion and/or lease of organized/public port terminals plan and the concession of new authorizations for the exploitation of private use ports. Regarding the expansion of terminals in the organized ports, the idea is to use the same logic applied to railroads and highways which concession terms are about to end. In order to achieve the expansion of a certain terminal or to extend the exploitation term, it is necessary to present an investment plan with a firm commitment to make significant investments in the next years, which also opens a possibility for the entry of foreign capital.

It is expected, therefore, that such projects may attract new players to the market, especially foreign capital. The infrastructure investment may be one of the main vectors for the resumption of the country's growth, being able to generate thousands of direct and indirect jobs. The success of this new endeavor will depend directly on the quality and viability of the presented projects. The role ​assigned to the private initiative in this moment is just as important as the role played by the Federal Administration, considering it can actively participate in the conception, elaboration and execution of these new projects.

Demarest Advogados

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