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### Viewing cable 04BRASILIA644, BRAZIL'S ONGOING DEBATE ON PUBLIC-PRIVATE PARTNERSHIPS

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
04BRASILIA644 | 2004-03-17 19:49 | 2011-07-11 00:00 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Brasilia

`

    This record is a partial extract of the original cable. The full text of the original cable is not available.

` `

    UNCLAS SECTION 01 OF 04 BRASILIA 000644

    SIPDIS

    NSC FOR DEMPSEY
    TREASURY FOR OASIA/SEGAL
    PLS PASS FED BOARD OF GOVERNORS FOR WILSON, ROBATAILLE
    USDOC FOR 4322/ITA/MAC/WH/OLAC/WBASTIAN/JANDERSEN/DMCDO UGALL

    SENSITIVE

    E.O. 12958: N/A
    TAGS: EIND EFIN PGOV ECON EINV BR
    SUBJECT: BRAZIL'S ONGOING DEBATE ON PUBLIC-PRIVATE PARTNERSHIPS

    Ref: 2003 Brasilia 3956

    Sensitive but unclassified; please protect accordingly.

    ¶1. (U)  Summary:  The American Chamber of Commerce and "Valor
    Economico" newspaper sponsored a seminar in Brasilia March 10
    to stimulate the national debate on Public-Private Partnerships
    (PPPs), the method by which the GoB seeks private sector
    investment to help fund essential public services and
    infrastructure needs.  The seminar highlighted significant
    differences between government and private-sector expectations
    but also demonstrated a willingness on both sides to find the
    correct PPP recipe for Brazil.  It will clearly not be easy for
    the GoB to provide the kinds of assurances the private sector
    seeks, especially amid concerns about political risk and
    regulatory uncertainty.  The draft bill (PL 2546/2003) remains
    under debate in Congress, but the GoB has designated its
    passage a prime legislative priority.  The bill's sponsor,
    Deputy Paulo Bernardo (PT/PR), expects passage by the end of
    April, despite several controversial points still unresolved.
    The seminar participants included Joaquim Levy, the Secretary
    for the National Treasury at the Ministry of Finance,
    representatives from Sao Paulo and Minas Gerais State
    Secretariats, representatives of civil construction,

    SIPDIS
    sanitation, and highway construction firms, international
    consultants, banks and the IADB.  End Summary.

    The Legislation
    ---------------

    ¶2.  (U)  Federal Deputy Paulo Bernardo started the seminar with
    an update on the status of the PPP bill (PL 2546/2003),
    originally fast-tracked to be approved during Congress's
    extraordinary session from mid-January to mid-February.
    Although a relatively short piece of legislation and not
    opposed by any political party, Bernardo noted the inherent
    complexity of the PPP bill due to its direct links and
    subordination to current laws like the Law of Fiscal
    Responsibility not sure this is accurate characterization -
    dispensable anyway, I think as well as those governing
    concessions and public procurements.  The issue of the
    guarantees to be offered remains among the most controversial.

    ¶3. (U)  Bernardo said that questions over the constitutionality
    of the article stipulating PPP contracts' precedence over the
    State's other contractual obligations forced the removal of
    that article.  However, he assured participants the necessary
    financial guarantees will be present in the final legislation
    through the fiduciary fund (the fund of state-owned assets
    meant to cover shortfalls in the government's PPP obligations)
    and the nature of PPP contracts themselves, even without
    establishment of the explicit precedence of PPP contracts in
    government obligations.  The Ministry of Planning is preparing
    new text to address the issue of precedence that may be voted
    on as an amendment.  The question of defining government PPP
    expenditures as recurring costs or debt is also under
    discussion.  The GoB seeks to have complementary state and
    federal PPP legislation, but already-passed Minas Gerais state
    legislation considers the state's PPP costs as recurring costs
    while Sao Paulo State Secretary for Planning, Andrea Calabi,
    told participants that state spending on PPPs would be
    considered debt and that, therefore, PPP projects would involve
    very little state money.  Many urged flexibility in the law so
    that government could evaluate each project individually.

    A New Concept
    -------------

    ¶4. (U)  Bernardo spoke of the GoB's intention to change the way
    the government is viewed by the private sector, to put an end
    to the history of defaults, late payment, contract breaking,
    and changing of rules after the contract signing.  The MG and
    SP state secretaries also portrayed the PPP as a tool to change
    the culture of suspicion to a culture of trust, characterizing
    the partnerships as a new concept for Brazil, not yet fully
    formed, but an opportunity for the government to gain new
    respect as a reliable partner.  But how to make this admirable
    political will a reality?  Government representatives cited
    their challenges such as providing clear information and
    defined priorities, creating a can-do management style that
    values flexibility and tailors guarantees to the needs of
    specific projects.  Several underscored the point that project
    finance and traditional concessions still merit consideration,
    as PPPs will not fit every situation.

    ¶5. (U)  Joaquim Levy, Treasury Secretary at the Ministry of
    Finance, said PPPs are useful tools for projects with greater
    social/economic gains than financial gains.  The benefits of
    long-term, high-quality service for the government/consumer
    balanced with guaranteed payment and reduced cost of investment
    for the private sector must be achieved while avoiding
    "skeletons" or concealed/unacknowledged liabilities.  Citing
    articles of the bill, he attempted to show that this outcome is
    entirely possible.  He described in general terms the
    regulations to govern the creation of the fiduciary funds (to
    be created by public financial institutions and to contain
    budgeted funds, stocks of state-owned companies, real estate
    and capital goods), noting that the fund will be separate from
    the Treasury and will not conflict with the government's
    primary surplus target.  He also explained that the PPP
    management agency, made up of representatives from the
    Ministries of Planning and Finance and from the Civil
    Household, will devise PPP contract procedures and determine
    priority projects, as well as authorize and evaluate bids for
    PPP contracts.

    ¶6. (U)  Government representatives agreed that the legislation
    and operation of PPPs must offer a flexibility that does not
    currently exist.  The concession law prohibits the public
    sector from making partial payments to private service
    suppliers.  The public procurement law does not allow the
    private contractor to charge user fees and limits contracts to
    five years.  The challenge remains to provide that flexibility
    within the boundaries of fiscal constraints and in an
    atmosphere that the private sector perceives as rife with
    risks.

    Private Sector on Political Risk, Regulation
    --------------------------------------------

    ¶7.  (SBU) The Brazilian private sector participants welcomed
    the opportunity to share their experiences with government
    partnerships and their expectations for PPPS.  All agreed on
    the urgency of restarting investment in infrastructure and
    basic public services to promote economic growth and job
    creation.  Many praised the notions of shared risks and
    responsibilities and "value for money" that the PPP concept
    embodies.  Benefits that the private sector brings to the
    partnership include improved service, timely completion of
    projects, better risk evaluation and application of new
    technologies.  In addition to the payment guarantees that take
    into account the limitations of public debt, business reps said
    that a new regulatory framework is essential for the viability
    of PPPs.

    ¶8. (SBU)  According to private sector participants, the
    framework should include measures that ensure confidence in the
    bidding process, clear project evaluation criteria and contract
    performance requirements, as well as guarantees of faithful
    execution of the proposals.  The PPP management entity should
    be charged with cutting through red tape, facilitating
    environmental permits, for example, and should make regular
    reports to Congress.  One participant cited the recent contract-
    breaking actions of the state of Parana, saying that as PPPs
    will be long-term contracts (10-25 years), they must be able to
    withstand the political winds of change.  Several participants
    emphasized the importance of wisely selecting the first PPP
    projects to build faith in the initiative and attract
    investors.
    ¶9. (U)  Several private sector reps suggested prioritization of
    projects that rely on user fees or tolls rather than government
    payments.  This raised the question of whether rate adjustments
    would be handled differently for PPPs than for concessions.
    One representative of a construction firm suggested that the
    GoB investigate ways to reduce the tax burden on companies that
    undertake PPPs.  Questions arose regarding the selection
    process for projects, if and how PPPs could alter the current
    system of technical pre-qualifications in the public
    procurement law, perhaps exacerbating problems with the current
    law that contribute to collusion.  One international consultant
    suggested that the current public procurement process be
    altered for PPPs to allow for efficiency gains and lower final
    costs through acceptance of alternative technical proposals
    before the evaluation of economic offers.

    ¶10. (U) There was also discussion of the need for separate
    regulatory frameworks for individual sectors.  A rep from a
    major highway construction firm suggested that PPPs for
    highways be complementary to Brazil's existing (and successful,
    according to this source) program for highway concessions,
    which already has its own laws and regulations.  Some expressed
    doubts that PPPs would be viable for ports and railroads as
    well as for hospitals and schools.  Sanitation and water-
    treatment projects are prime PPP candidates, but Brazil lacks a
    regulatory framework for this sector, where municipalities are
    responsible for providing service.  A representative from an
    international firm specializing in sanitation services said
    that creation of sanitation-specific regulatory bodies on the
    federal, state, and municipal levels is required to guarantee
    the sanctity of contracts.  He described difficulties with
    contested rate adjustments and suspended service, and noted
    that Brazil's notoriously slow judicial process compounds the
    problems businesses face when partnering with government
    entities.

    ¶11. (U) Consultants with international PPP experience noted the
    importance of multilateral institutions in lowering perceived
    political risk as well as in providing payment guarantees.
    Brazil's unique situation made it difficult to apply "lessons
    learned" from other countries' experiences with PPPs, but
    consultants advised that greater respect for contracts, more
    emphasis on negotiation, and building trust in the judiciary
    would help.  One emphasized that Brazil would be competing for
    investments and financing with other emerging markets and would
    need to publicize the program abroad.  The IADB Executive
    Director for Brazil said the organization stood ready to
    continue its support of infrastructure projects by offering the
    Brazilian private sector direct loans and guarantees to cover
    commercial and political risks involved in PPPs.  The IADB
    plans to extend US$ 300 million for PPPs in a line of credit
    through BNDES, Brazil's Development Bank.

    COMMENT
    -------

    ¶12. (SBU) The seminar covered a lot of ground and left many
    wondering whether Brazil, with its history of unstable
    currency, inflation, mismanaged debt and business-damaging
    political shenanigans, is really ready and able to live up to
    its side of the bargain in PPPs.  PPPs have worked in developed
    countries with low political risk and respect for the rule of
    law.  One consultant told us that this would have been a pipe
    dream for Brazil in 1998, but conceded that with a few initial
    successes the model could well find its place in the Brazilian
    development model.  The GoB appears unshakable in the certainty
    that their legislation, said to be based on European models,
    provides the best possible framework for successful PPPs in
    Brazil.  While the 23 federal pilot projects for PPPs were
    selected late last year (highways, railways, port upgrades and
    irrigation projects), the delays in approving the bill will
    likely push off the initiation of any projects until early
    ¶2005.

    ¶13.  (U) Attendance at the seminar, held in Brasilia, surpassed
    expectations and demonstrated a desire to dig into the details
    of the subject among local banks, government and various
    service providers and civil construction firms.  The GoB's
    credibility will be on the line with the first PPP projects and
    will presumably give the latter kid-glove treatment to ensure
    initial success.  As many said at the seminar, the real test
    will come years down the road with new administrations, when
    Brazil's business maturity will be fairly judged with regard to
    PPPs -- praised or pilloried.
    HRINAK

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