States lead in public private partnerships

Trusted Judgements

Isabel Franco, senior partner at Demarest and Almeida Attorneys in Sao Paulo.

The PPP law will be an important tool to bring new investment to Brazil's infrastructure sector, which is in desperate need of capital. On the federal level, PPPs have been slow to start because the government underestimated the time it would take to structure these projects, but states are taking the lead, meaning that more and more investments are likely to be forthcoming.

One improvement of the new legislation is the creation of mechanisms to reduce the risks for private investors when committing to long-term projects. The mechanisms are necessary to guarantee that contracts are followed, regardless of which political party is in power. These guarantees also facilitate project finance mechanisms, which had a more limited reach under the previous legislation.

Another advance in the legislation are the guarantees that projects will be concluded. In the past, payments for an infrastructure project could be made before its completion; now the private partner can receive compensation only after completion of the project has been verified by an independent auditor. These mechanisms significantly reduce the risk of fraud.

There is also growing interest from private companies, which are increasingly developing their own PPP proposals and presenting them to state and federal governments. These projects range from bridges, private roads and ports to services provided to governments. Many are being developed by companies seeking to resolve infrastructure deficiencies that impact on their operations. While these projects are required by law to go through a public tender offer process, companies that invest in feasibility studies will be compensated even if they do not win the concession to operate the project.

Even though the federal government has been slow to launch PPPs, given the interest from the private sector the new law will achieve its goal of increasing investment in infrastructure.

Mauricio Endo, Director of KPMG Global Infrastructure and Projects Group

The federal government did a great job developing the PPP legislation and paid careful attention to the regulatory framework established by the law. Unfortunately, PPP projects on the federal level have had a hard time getting off the ground. One problem is that they pass through many different ministries and need to be approved by many people.

These issues could be resolved if the programme had a leader. The lack of leadership has been clear with the BR 116 highway project, which was supposed to come to the market in the second half of 2006 but was suspended because of concerns about returns.

The reality is that although the administration has evolved, there are people in government who think the private sector will exploit the process. When the BR 116 project was up for review in May, cabinet members asked to see the model once again, and it now seems unlikely that the BR 116 PPP will get off the ground this year.

Unlike the federal government, the state of Sao Paulo has advanced quickly and we should see several new projects this year. The team set up by the previous governor (defeated presidential candidate Geraldo Alckmin) has remained in place under the new governor (the former mayor of Sao Paulo Jose Serra). This is a very competent team of professionals which has created a framework to streamline the development of new PPPs. Sao Paulo has really done its homework. It will have the most successful PPP programme in Brazil.