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    • Legal updates relevant to Brazil, Mexico and Latin America

      Infrastructure Investments in Brazil – Plano Crescer

      Bruno Galvao

      02 November 2016

      Brazil outlines its plans for its infrastructure investment projects for 2017-2018 

      On 31st August, the impeachment procedure came to an end as the Senate voted to oust Dilma Rousseff. With this decision Michel Temer has sworn in as the new president for the remaining two years of government, until the next presidential elections in 2018.

      Attempting to present itself as a more business-oriented alternative, on 13th September the new government presented its plan for infrastructure investments for 2017-2018. The executive council of the Investment Partnerships Programme (Programa de Parceira em Investimento - PPI) also published the deadlines for the public procurements of projects in the airport, railway, roadway, port, energy, oil and gas and water/sewage treatment sectors.

      It is important to bear in mind that the launching of projects in the water/sewage treatment sector and railway sector will depend on the satisfaction of certain regulatory requirements. The sanitation sector lacks the necessary regulation, mainly on the local level, and the project structure has yet to be determined. For projects in the rail sector to be launched, the new concession and operation models still need to be implemented.

      34 projects are listed on the PPI to be auctioned in 2017 and 2018. Out of these, 30 were already part of previous investment plans. The most important aspect of the PPI, therefore, lies in in important changes regarding the financing structure certain procedural improvements.

      Financing

      A key difference in this restructuring is the government’s attempt to have stronger participation from private banks in projects financing, leaving public banks to finance no more than €9bn of the announced projects.

      For the presented projects, the Brazilian Development Bank (BNDES) will require that at least 20 per cent of the amount of investment will come from equity injection. Infrastructure bonds will finance up to 80 per cent, meaning that both BNDES and Caixa (state-own bank) can subscribe up to 50 per cent of the bonds.

      In order to reduce investors’ risks, the projects will need to have long term financing from the beginning of the concession and must avoid bridge loans, which have been considered a problem in previous concession agreements. This is because many of the long term loans required to refinance existing bridge loans were denied midway through projects, which left public banks a debt of over €1bn.

      To secure the infrastructure bonds required in the financing model, the government has allocated €140m to the Infrastructure Guarantee Fund on August 2016.

      Project structure

      This time the PPI will not set out any requirements regarding the return rate of the projects, unlike the past concession round where it was strictly defined by the government. The focus will be set in quality indexes instead.

      Another change from previous projects is that the preliminary environmental license will have to be issued before the tender, to avoid delays in the realisation phase of the project.

      In response to international investors’ requests, the government will publish the notice bid at least 100 days before the proposal submission (and not the average of 45 day from before), with versions in both Portuguese and English.

      To see a table of the auctions, please click here.

       

      Brazil

      Brazil joins foreign public documents convention

      Bruno Galvao

      25 August 2016

      In January 2016, Brazil finally published the federal decree that was pending in order for the country to become part of the Hague Convention Abolishing the Requirement of Legalisation for Foreign PublicDocuments (Hague Convention).

      The new rule came into force on 14 August 2016. The procedure to use foreign documents in Brazil will be simplified considerably. The general process until the approval of the Hague Convention was ruled by Law 6.015/73 , which required a costly (over €370 per document) and time consuming procedure before a diplomatic authority to request a consular seal in order to legalise a foreign document, is no longer be in force for Brazil’s key partners.

      With Brazil’s accession to the Hague Convention, Brazil will apply the same rules as applied in 108 member states, including those in the European Union, the United States, Japan, India, South Africa and Australia. Public documents issued in these countries will be valid in Brazil if the apostille certificate is placed on the document itself or on an allonge, as defined in the Hague Convention.

      In accordance with the convention definitions, public documents are: a) documents emanating from an authority representing the courts or tribunals of the State, including those emanating from a public prosecutor, a clerk of a court or a process-server ("huissier de justice"); b) administrative documents; c) notarial acts; d) official certificates which are placed on documents signed by persons in their private capacity, such as official certificates recording the registration of a document or the fact that it was in existence on a certain date, and official and notarial authentications of signatures.

      It is important to bear in mind that countries that are not part of the Hague Convention, such as China, Canada and Chile, will still have to comply with the procedure stated by Law 6.015/73. Regardless of whether or not a country is a party to the Hague Convention, Brazilian legislation still demands the submission of a sworn translation of foreign documents into Portuguese when presented to government authorities or courts.

      According to official data, the Brazilian ministry of foreign relations opens more than 83,000 legalization procedures per month. In 2014 the Brazilian consulates spread across the world went through 569,000 legalisation procedures for foreign documents. With the new procedure, the certificate will be granted in Brazil through its notary system both on paper and electronically (by using a QR-code that can be easily recognized and verified by mobile phones). With this, the Brazilian authorities are expecting an increase in the country’s international commerce, given the cost reduction and the competitive gain resulting from the alleviations of the legalisation process according to the Hague Convention.

      Please find here the competent authority responsible for the apostille in Brazil and here the one responsible in each member states.

      Brazil

      Infrastructure: new concession agreements

      Bruno Galvao

      07 July 2016

       

      With new infrastructure projects coming in the airport, port and roadway sectors, it is likely that 2016 will still hold interesting opportunities for foreign investors in Brazil.
      The political situation in Brazil is not yet settled, as the interim government awaits the final decision on Dilma Rouseff’s impeachment proceedings, likely to be handed down in August. The acting president, Michel Temer, is willing to present himself as a more business-oriented alternative and accordingly is expected to present his concession plan in the coming month.

      Airports
      With investments of more than €1bn, the first expected concession round includes an auction for the international airports of Fortaleza, Salvador, Porto Alegre and Florianópolis. The Federal Court of Auditors (TCU) approved the feasibility studies (in Portuguese here) for the concession of the four airports on 20 April 2016, with a few conditions to be met by the federal government when publishing the notice bid. Among the most important requests made by TCU is for the future concessionaires to do its best efforts to secure in its staff the current employees of Infraero (state-owned company currently in charge of operating the airports) working on the airports in question.
      The Secretariat of Civil Aviation is working to place under public consultation the draft of the notice bid, in order for it to be published in the coming month. A key change in the project to be presented by the interim government will be the timeframe for the award payment. The future concessionaire will have to pay to the federal government 25 per cent of the award when signing the agreement but will have a five-year grace period for the payment of the remaining part of the award.

      Port Terminals
      The first project to be conceded is the port terminal in Recife, the capital of Pernambuco state. A package of 50 new leasing agreements of port terminals has been put together, but in order to take part, the private initiative demands a better definition of other complementary transport infrastructure projects necessary for the products to arrive in the terminals from across the country, such as the railways, roadway expansions and waterways.

      Roadway
      Another project to be launched in the coming weeks is the 30-year concession of the 437km BR 364/365 roadway connecting the states of Goiás and Minas Gerais (find the documents in Portuguese here).

      More projects to come

      On 30 June 2016, the acting president instated the executive council of the investment partnerships programme created by him, which is the first step toward structuring the new concession plan. The council will be responsible for advising the interim president on the priority projects to be held under private partnership agreements. Contrary to Dilma Rousseff, Michel Temer has made clear to his ministers that “whatever can be transferred to the private initiative, please do it, we’re not biased” (Veja 27.06.2016).
      In the near future, privatisations are expected in the energy sector (i.e. energy distribution companies held by state-owned Eletrobras) and oil & gas sector (i.e. over 20 pre-salt projects with expected investments of €113bn).
      As a residual result of the Federal Police’s ‘car-wash’ investigations (operação lava-jato) the market is expecting a change in the nature of the consortiums that will be taking part in these future bidding processes. Construction companies, who were until now the leading parties of the consortia, may be substituted by investment and private equity funds.

      Brazil

      Airline sector: new limits for foreign investment

      Bruno Galvao 12 April 2016

      The Federal Government has published the Provisional Measure 714/2016 (available in Portuguese here) decreasing the restriction of foreign capital in Brazilian airlines. The maximum participation of foreign investment in the share capital of these companies, once at 20%, has been increased to 49%. The new legislation also allows foreign companies to own up to 100% of the shares of a Brazilian airline, as long as their home country negotiates a reciprocity agreement with Brazil. It is important to bear in mind that there is no impediment for investment funds to hold capital of airlines in Brazil and some national and international investment funds already present in the country participate in the share capital of airlines in Brazil.

      One of the reasons for increasing the possibility of foreign investments in the sector is its growing net debt, which increased from € 449mi in 2014 to over € 1bi in the first nine months of 2015. The Civil Aviation Secretariat expects that this change in legislation will increase the competition in the sector; leading to a significant reduction in the average price of an air ticket, in technological improvements and in the increase in the range of flights.

      Another change made by the legislation in order to attract investments to the sector was the extinction of the surcharge on the airport fee (“Ataero”) as of January 1st, 2017 and the subsequent increase in the airport tariffs of the same amount (35.9%). This will not affect the costs paid by the end user but will result in an increase in the revenue for the airport operators. The main difference is that Ataero was a resource of the National Civil Aviation Fund and, therefore, was not part of the revenues of the airport operators (as airport fees usually are).

      The Provisional Measure is still subject to congressional approval and may lose its validity if not approved in 60 to 120 days.
      Brazil / Economics

      IFC study on project structuring in Brazil

      Bruno Galvao

      02 March 2016

      The International Finance Corporation (IFC) launched a comprehensive study presenting a diagnostic of the Brazilian model of project-structuring a private partnership in infrastructure as well as important proposals for its development.


      Supported by the Brazilian National Bank for Economic and Social Development (BNDES), the study analyses the current know-how in Brazil both in a legal and economic perspective, pointing out its main issues and pitfalls. Part of the work is also to compare other Latin American models by presenting the experience and legislation of Colombia, Peru and Chile.

      One of the biggest differences in the Brazilian system (and also in the models in Chile and Colombia) from the European model is the strong part of unsolicited proposals procedure (PMI) in the structuring of new infrastructure projects. The main reason for this is the understanding that the private parties would be able to conclude the studies faster than the Government and, most importantly, the lack of technical and economic resources.

      The problem is that only 14 percent of the PMI from 2010 to 2014 were successfully tendered. One reason pointed out by the study for such a small return is the high transaction cost to public managers, given the amount of studies to be selected or combined. Another important issue raised was the informational asymmetry and misalignment of incentives between the public and private parties in such procedures. This has a clear impact on the competitive aspect of the future tender as well as on the quality of the project to be placed into a public tender.

      After the extensive research, the group presents several proposals to enhance the Brazilian project structuring procedure, of which two amendments in the regulation of the PMI can be highlighted: the possibility for the government to grant permission to only one institution to conduct the studies, and the definition of a specific situation in which the studies are agreed directly by the government without a previous competitive procedure opened to interested third parties.

      In order to be the only party granted permission to conduct the studies, the institution must waive the right to participate in future bidding procedures for the concession of the project. The party must also be considered neutral in relation to the future bidding procedure.

      The procurement of a project without a bidding procedure demands, nevertheless, a formal procedure for the agreement to take place, in which the government will have to express its intentions and reasons for such a decision. Therefore, the public agent would have to present a situation in which the complexity, specificity, amount of investment and/or risks of the case demand an in-depth and integrated study and a singular specialization of the professionals in charge of it.

      The IFC study can be found here. The executive summary (from page 28 to 33) is in English.

      Brazil