Pioneering PPP projects in the states of Minas Gerais and Sao Paulo

Minas Gerais: MG 050 private toll highway

For the MG 050 project, the state government has created an escrow account, which will receive royalties payments from the niobium mining company Companhia Brasileira de Metalurgia e Mineracao (CBMM). Payments to the concession holder from this account will be made directly to Equipav if the state treasury fails to transfer payments to it. Because royalty payments are made directly into the escrow account by CBMM, the contract is less vulnerable to political transitions.

The government has also set up an independent process for certifying the quality of the highway. The certification is carried out by an engineering company that measures the number of potholes and the quality of the road surfacing, among other factors.

The length of the contract is also important. Before the PPP legislation, public works contracts were limited to five years, with most payments being made to contractors prior to construction. This created myriad opportunities for fraud and corruption. Under the PPP law, the government can pay for public works only after completion. In the case of MG 050, payment will begin one year after the first phase of construction is concluded.

Sao Paulo: Line Four of the city subway

As part of the agreement with MetroQuatro, the consortium which won the tender for the Line Four PPP project, this private investor will operate and maintain the concession for a minimum of 30 years. It will also supply the trains and signalling and control systems.

MetroQuatro will invest an estimated total of $340 million in the project. Its returns will be generated from ticket sales. The company will also receive annual payments of R$75 million ($39.4 million) from the state for operating the concession. The 12.8-kilometre line is expected to transport nearly 950,000 people a day following its completion in 2012. Total construction costs for the new line are estimated at R$3.3 billion ($1.54 billion).

To guarantee the private sector investment, the state of Sao Paulo has created a private company, Companhia Paulista de Parcerias (CPP). To capitalize the company, the state transferred part of its shares in the water and sanitation company Sabesp, along with real estate assets. It has also agreed to provide compensation if use of the new line falls below 90 per cent of forecasts. In addition, the contract will be renegotiated if passenger numbers fall below 60 per cent.

The legal framework for this PPP will likely be tested because of construction delays as a result of the collapse of the tunnel in January 2007, which prompted authorities to suspend work. If the state fails to meet the 2008 deadline for conclusion of phase one of construction, it will be required to make a payment to MetroQuatro proportionate to the length of the delay.