Economic Advisory – PPP Unit
Public-Private Partnerships and the FGP Isaac Averbuch
Washington Oct, 2008 1
Economic Advisory – PPP Unit
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
Economic Advisory – PPP Unit
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
Economic Advisory – PPP Unit
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
Economic Advisory – PPP Unit
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
Economic Advisory – PPP Unit
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!
Economic Advisory – PPP Unit
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
Economic Advisory – PPP Unit
FGP – Federal PPP Guarantee Fund GOVERNMENT
FGP Guarantee s Governme nt Payments
Projects Selection
Contracting Authority (Sectorial Ministry)
Government Payments
End User
User Charges
Debt Special Purpose Vehicle Company
Equity
Economic Advisory – PPP Unit
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
Economic Advisory – PPP Unit
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
Economic Advisory – PPP Unit
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
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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
Economic Advisory – PPP Unit
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
Economic Advisory – PPP Unit
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
Economic Advisory – PPP Unit
Thank you! isaac.averbuch@planejamento.gov.br +55-61-3429-4683
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