States lead in public private partnerships

Context

In recent years, Brazil has received only a fraction of the investment needed to maintain and expand infrastructure. The country's roads , ports and railroads have failed to keep pace with growing demand from the export sector, increasing the cost of doing business. The lack of investment in these sectors is not a result of an absence of funds. Billions of dollars have been raised in private equity funding in recent years, with a primary focus on infrastructure investment.

Rather, the lack of investment is due to the limited number of projects structured to receive private investment. The PPP legislation passed in 2004 was designed to facilitate the entry of private investment into infrastructure projects. The federal government has failed to take advantage of PPP mechanisms, in part because of ideological resistance to private investment from within the administration but also because of the challenges in structuring these investments. The PPP model developed by the states of Sao Paulo and Minas Gerais is likely to be replicated in other states and perhaps, eventually, at federal level.

The model includes strong guarantees that the private investor will receive those payments from the government. Another key feature is service quality requirements to ensure that investments in road expansion and maintenance are made. Providing guarantees for the investor is seen as essential to limit the risk of contracts being broken by future state administrations. For the state, the quality control mechanisms seek to avoid past problems of companies receiving payment for public works that were not completed.

Trailblazing road and subway projects

Minas Gerais, which has the country's third-largest economy, recently concluded its first PPP for the MG 050 highway. According to the contract, the winning contractor – Equipav – will spend R$645 million ($337.7 million) on the concession over 25 years. Some of the income generated by the project will come from monthly payments made by the state government and the remainder from tolls.

The state of Sao Paulo has moved ahead with its first PPP, too. It is now in the process of finalizing several other PPP projects. The first project was Line Four of the Sao Paulo subway system. The MetroQuatro consortium – which includes the Brazilian toll road management company Companhia de Concessoes Rodoviarias (CCR), the Banif Primus Infra-Estrutura Fund, RATP Developpement S.A., which operates the Paris Metro, and Benito Roggio Transporte, which is operator of the Buenos Aires Metro – won the tender to manage the line.

For details on the structuring of both these projects, including the arm's length arrangements underpinning the private investors' revenue streams and the quality control provisions, click here .

Future plans

The state of Minas is currently structuring two other PPP projects, including one that will manage state penitentiaries and another that will improve the state university campus. If these projects can be successfully structured, PPPs could expand into areas other than infrastructure and into sectors that do not have clearly defined revenues from user fees. Because PPPs in sectors without defined user fees are more complex, a longer lead time will be needed to bring them to the market.

Sao Paulo is in the final stages of developing a PPP to expand Sabesp's Alto Tiete water treatment system by 50 per cent. Bidding was suspended last year by the state audit court after several companies requested revisions to the rules. Other projects on the table include the expansion of the Congonhas airport, a new train line between the city of Sao Paulo and satellite cities of Santo Andre, Sao Bernardo and Sao Caetano and an express train to the international airport in Guarulhos.

Meanwhile, the state is receiving unsolicited PPP proposals from the private sector. These projects are likely to play a greater role in future PPP project developments because they cost less for the government but tend to address deficiencies in infrastructure that impact company operations.