Public Procurement & Government Contracts 2020

Last Updated April 06, 2020

Brazil

Law and Practice

Authors



TozziniFreire Advogados is a full-service firm providing legal services to domestic and international companies in several sectors. With 83 partners in São Paulo, Rio de Janeiro, Brasília, Porto Alegre, Campinas and New York, it has played a major role in many of the most significant transactions in Brazil. The Government Contracts and Projects practice specialises in public procurement proceedings, contractual, regulatory and tax liability disputes arising between private sector businesses and government entities or state-owned companies. It has met the demand for guidance in industries previously barred from the public arena and regularly advises clients on matters involving the privatisation of state-owned companies and infrastructure. The practice also has wide experience in compliance-related matters, including independent investigations related to governmental matters and negotiations of settlements with authorities. In the past years, TozziniFreire has assisted several clients, including Saab, Citéluz Groupe, Red Eléctrica Internacional and Advent do Brasil.

The main legal framework for public procurement in Brazil is Federal Law No 8,666/1993 (the Public Procurement Act, or PPA), which establishes general procurement rules applicable to federal, state and municipal entities.

Other specific laws applicable to public procurement are:

  • Federal Act No 10,520/2002 – reverse auction for acquisition of ordinary/standardised goods and services;
  • Federal Decree No 7,892/2013 – price list system;
  • Federal Law No 12,462/2011 – integrated and alternative procurement proceeding, known as the Differentiated Regime of Public Procurement (RDC), applicable to specific construction services related to urban mobility and public security projects, etc;
  • Federal Law No 13,303/2016 (the State Owned and Mixed Capital Companies Act), regulated by Federal Decree No 8,945/2016 – set guidelines for Brazilian state-owned and mixed-capital companies, as well as their subsidiaries, to set up their own procurement regulation;
  • Federal Decree No 10,024/2019 – electronic reverse auction for acquisition of ordinary goods and services, including ordinary engineering services, and electronic dismissal; and
  • Ministry of Finance Normative Instruction No 10/2020 – sets the registration of foreign companies by SICAF (Brazilian system of registration).

Besides federal rules, states and municipalities may also issue their own public procurement rules, as long as they abide by the general rules established by federal laws.

All government bodies, special government funds, autonomous government entities, state-controlled companies, public foundations and all other entities controlled directly or indirectly by the federal, state, federal district and municipal-level governments are subject to Brazilian public procurement legal rules.

All contracts executed by Brazilian public entities have to comply with the procurement regulation, which covers not only the public procurement proceeding rules (and respective waiver/procurement unenforceability cases), but also the government contract terms and conditions, procurement-associated violations and crimes, and respective penalties.

The applicable laws provide for several situations of waiver of the public procurement process and unfeasible competition. There are a number of cases of waiver, ranging from low-cost products/services to protection of national security. Acquisitions from sole source supplier or specialised services are examples of unenforceability of the public procurement process.

As per minimum value thresholds, the PPA provides that the public procurement process is not required for engineering works and services with a total cost of up to BRL33,000, and other services and purchases with a total cost of up to BRL17,600.

In the case of purchase, works and services hired by a public consortium or autarchies or foundations qualified as executive agencies, the limits above are doubled.

With regard to Brazilian state-owned, mixed-capital companies and their subsidiaries (subject to Law No 13,303/2016), the public procurement process is not required for engineering works and services with a total cost of up to BRL100,000.00, and other services and purchases with a total cost of up to BRL50,000.

The Public Procurement Act assures equal treatment to companies interested in participating in a public procurement process, regardless of their nationality. This law prohibits different treatment of commercial, legal, labour and social security issues, or those of any other nature, between national and foreign companies.

However, the PPA allows margins of preference for manufactured products and national services complying with Brazilian technical standards, and additional margins of preference for manufactured products and services resulting from technological development and innovation in the country.

Depending on the scope of the public procurement, only foreign companies functioning in Brazil can participate. In these cases, the public procurement process is called a "domestic bid" and a foreign company will only be able to participate if it sets up (or has already set up) a registered company in Brazil. In other cases, the decision of whether a public procurement is open to foreign companies without operation in Brazil and local companies is up to the public entity carrying out the procurement.

Also, if a Brazilian and a foreign entity are participating as members of the same consortium in a public procurement proceeding, the leader of the consortium must be the Brazilian company.

Brazilian authorities have recently announced that Brazil should request its approval into the Agreement on Government Procurement (GPA) of the World Trade Organization, whereby the parties agree to remove any restrictions to foreign companies that want to participate in public procurement procedures by the local governments. Brazil has been an observer of this agreement since October 2017.

The main feature of public contracts, in comparison to private contracts, is that they are prepared by the public contracting entities and, as a rule, private parties just adhere to their highly regulated terms and conditions, with little or no room for negotiation.

The following principles govern public procurement proceedings and contracts: equitable treatment to all bidders, selection of the most advantageous proposal, promotion of sustainable national development, legality, impersonality, morality, equality, transparency, administrative probity, enforceability of the request for proposals and objective judgement of the proposals.

Considering that public procurement in Brazil is a formal and strict proceeding, there are several obligations that must be met by the bidders. Among the obligations undertaken by bidders are ones to abide by the terms and conditions of the future contract, to comply with all the qualification requirements indicated in the tender documents and maintain these conditions during the contract performance (legal, tax and labour good standing, and technical and financial requirements). By participating in a public procurement proceeding, bidders agree to all the terms and conditions set forth in the tender documents, which describe all the rights, liabilities and obligations of each party.

Public entities must publish the public notice of the public procurement process (i) in the corresponding Official Gazette (federal, state or municipal depending on the contracting entity jurisdiction); in the case of federal public entities, the public notice is published in the Federal Official Gazette, electronically available at http://www.in.gov.br/web/guest/inicio; and (ii) in a daily newspaper of large circulation in the state and in the municipality/region where the services will be provided, if any.

Public notices are also usually published on official procurement websites (ie, www.comprasnet.gov.br), whenever available, or the official website of the procuring entities.

There are no legal requirements for the information to be disclosed. However, the following information is usually disclosed:

  • the name of the contracting party;
  • the scope of the contract;
  • the estimated amount of the future contract;
  • the legal grounds;
  • the place where interested parties may obtain a full copy of the request for proposals and annexes (including the draft contract); and
  • the deadline to submit the proposals.

It is permissible and common that an awarding authority carries out a preliminary market consultation with at least three potential candidates for the future public procurement proceeding before launching the contract award procedure. However, a formal public consultation period is only mandatory for public procurement proceedings with an estimated cost higher than BRL33 million.

The type of public procurement proceeding to be adopted by the contracting entity depends on the purpose, scope and value of the procurement. The proceedings provided for in Brazilian law are:

  • competitive biddings;
  • price quotations;
  • invitations;
  • contests;
  • auctions; and
  • reverse auctions (regular or electronic).

As a rule, negotiations are not possible under the PPA. Upon the publication of the public notice, all bidders have to abide by all its terms and conditions, including the contract draft, which is an annex of the public notice. In a reverse auction, however, there is a possibility of negotiation of the price proposal with the winning bidder.

Under the State Owned and Mixed Capital Companies Act, there is also a negotiation phase in which the contracting authority must negotiate more advantageous conditions with the bidder first classified in the judgment phase. If the price of the first bidder remains above the estimated budget after the negotiation, the other bidders will be called to negotiate, according to the order initially established.

The PPA provides for the following procedures that depend on the purpose, scope and value of the procurement.

For engineering works and services:

  • invitation letter – tenders up to BRL330,000;
  • price quotations – tenders up to BRL3,300,000; and
  • competitive bidding – tenders higher than BRL3,300,000.

For non-engineering works and services:

  • invitation letter – tenders up to BRL176,000;
  • price quotations – tenders up to BRL1,430,000;
  • competitive bidding – tenders higher than BRL1,430,000.

Competitive bidding is applicable, regardless of the price, in the purchase or sale of real estate, in the concessions of right of use of government real estate and in international bidding processes; also allowed in the latter are (i) price quotations if the entity maintains an international enrolment of suppliers and as long as it complied with the limits above, and (ii) invitation, if there is no supplier in the country.

Whenever the invitation is applicable, the contracting authority may use price quotations and, in any case, competitive bidding.

Other types may apply, such as:

  • a contest is applicable for selecting among any interested parties a technical, scientific or artistic work in exchange for prizes or remuneration to the winners;
  • an auction is the procurement applicable for the contracting entity to sell different types of goods; and
  • reverse auctions are used for the acquisition of ordinary goods and services by the public entity.

The applicable legal framework for public procurement imposes some obligations on the contracting authority as to the timing for publication of documents. For instance, the administration must observe a minimum period between the publication of the notice of a bid/request for proposals and the date of the bidding, which varies according to the type of tender:

  • 45 days or more for competitive biddings;
  • 15 days for requests for quotations;
  • five days for invitations; or
  • eight days for auctions and electronic auctions.

A summary of the public contract resulting from the public procurement process must also be published in the Official Gazette until the fifth business day of the month following the contract execution date. If the public procurement was based on a waiver or non-requirement of the bidding process, the term for publication of the summary of the agreement is five days. The publication of the summary of contract in the Official Gazette is a prerequisite for the effectiveness of government contracts.

The time limits depend on the type of procedure. The minimum period between the publication of the request for proposals and the date of the proposal submission is:

  • 45 days for competitive biddings;
  • 15 days for requests for quotations;
  • five days for invitations; or
  • eight days for auctions and electronic auctions.

For qualifying in a public procurement process, the bidders must submit documentation regarding legal, technical, and economic and financial qualification, as well as fiscal and labour good standing. Sections 27 to 33 of the PPA establish the minimum and maximum requirements but the contracting authority must define in the request for proposals the appropriate requirements for the scope of the public procurement.

The PPA prohibits conditions that restrain competitiveness and create preferences or distinctions based on circumstance that are impertinent or irrelevant to the scope of the public contract.

As a general rule, it is not possible to limit the number of bidders in a public procurement process under the PPA.

However, in the specific case of an invitation to bid, the law limits the minimum number of bidders to three, but it does not establish a maximum limit.

The PPA provides for the following criteria that may be adopted by the contracting authority to evaluate the bidders and must be indicated in the request for proposals:

  • lowest price;
  • best technique;
  • best technique and price; or
  • highest offer (applicable to sale of assets and rights-of-use concessions).

The PPA requires the contracting authority to define objective criteria for the selection of the winning bidder.

The evaluation criteria must be provided for in the request for proposals. The PPA sets forth that in the evaluation of the proposals, the contracting entity must consider the objective criteria defined in the request for proposals and that the use of confidential, subjective or reserved elements that may compromise the principle of equality among bidders is prohibited.

The PPA also establishes that the bidding committee must evaluate the proposals in accordance with the types of bidding procedures, the criteria previously defined in the request for proposals and the factors exclusively referred therein, in order to allow the bidders and controlling entities to assess it.

All the decisions issued by the public administration in Brazil must be duly motivated. For instance, in the standard public procurement process provided for in the PPA, the qualification of the bidders is evaluated in the first phase of the proceeding and the economic proposals (of the bidders classified in the first phase) are only opened after that. In this case, after evaluating the qualification documents, the bidding committee discloses its decision. Bidders then have the five working day term counted as of the notification of the decision or issuance of the minutes to file appeals against that decision.

The opening of the envelopes containing the qualification documents and the proposals must be made in a previously scheduled public session, in which the bidding committee must prepare meeting minutes and collect the signature of all the bidders in attendance.

As explained above, the bidding committee must prepare meeting minutes registering the events and participants of the public session in which the bidders’ proposals are opened and collect the signature of all the bidders attending that public session. After selecting the first classified proposal, the bidding committee must also issue acts of award of the bidding scope and of its approval.

Bidders may file appeals against the contracting authority’s decision regarding the proposals evaluation within five working days counted as of the notification of the decision or issuance of the minutes.

The "standstill period" between the contract award decision and the execution of the public contract must be defined by the contracting entity on a case-by-case basis, with clear rules included in the request for proposals.

There are three different review mechanisms.

  • Administrative review by the contracting entity – administrative appeals must be submitted to the authority that issued the appealed decision (first-tier administrative review). The authority can review the decision or, if maintained, forward it for review by the higher authority (second-tier administrative review). In the case of a blacklisting penalty, interested parties and contractors may request reconsideration to the state ministry or to the municipality and state secretaries, as the case may be.
  • Administrative review by the Courts of Audits – the Courts of Audits are independent controlling entities of federal, state or municipal levels, with authority to review public expenses. As a result of that authority, these courts are entitled to review the public procurement proceedings and public contracts, as well as administrative resolutions and decisions issued in connection to them, directly or upon representation of interested parties.
  • Judicial review – administrative decisions may also be judicially challenged by means of different types of lawsuits.

There are several remedies that can be granted by the entities in charge of monitoring and/or ruling the legality of the public procurement proceeding. However, the applicable laws do not provide for an exhaustive list of possible remedies for breach of the procurement laws. Examples of remedies are fines, prohibition to contract with the public administration for a certain period, termination of the contract, injunctions and declaration of the public procurement proceeding as being null and void.

Administrative and judicial courts may order the suspension of the public procurement proceeding until a measure is adopted by the contracting authority or until a final decision is taken by the court.

In addition, administrative challenges to decisions qualifying or disqualifying bidders and evaluating proposals result in the suspension of the procedure until a decision is issued by the administrative authority. In the case of challenges against other decisions, the administrative authority will decide whether to suspend the procedure.

The PPA provides that any citizen can file a challenge related to the tender documents if any breach of the law is identified. The complaint must be filed up to five business days prior to the date scheduled for opening of the qualification documents of the bidders.

As per the awarding authority’s decisions, the individuals/companies with standing to challenge them depends on the content of the appealed decision and the means by which the decision will be challenged (please refer to the three review mechanisms indicated in 4.1 Responsibility for Review of Awarding Authority's Decisions).

For instance, if the circumstance of the complaint addresses a matter that involves only one of the bidders (disqualification, for example), only the interested bidder can file the complaint.

Complaints can also be filed with grounds based on Federal Law No 9,784/1999 (the Federal Administrative Proceeding Act), applicable to public procurement proceedings on a subsidiary basis. That law entitles the following parties to file administrative complaints:

  • any holders of rights and interests that are parties of an administrative proceeding;
  • holders of rights or interests indirectly affected by the challenged decision;
  • organisations and associations defending collective rights and interests; and
  • citizens or associations.

In regards to lawsuits, individuals or companies with standing to sue also depend on the type of the lawsuit. In the case of a "popular lawsuit", for example, any citizen can initiate the judicial proceeding to request the nullity of acts harming the public administration, as provided for in Federal Law No 4,717/1965.

Time limits for challenging an awarding authority’s decision will also vary according to the type of challenge.

Below are some of the time limits provided for in the law:

  • administrative challenges to the request for proposals – must be filed up to five working days prior to the date scheduled for opening of the bidders’ qualification documents;
  • administrative appeals against the awarding authority’s decisions – five working days counted as of the notification of the decision or issuance of the minutes (or two working days in the "invitations for bid" type of proceeding);
  • a writ of mandamus, applicable in cases of clear violation of rights that can be proved only by documental evidence – up to 120 days after the date on which a party discovered the breach of the right; and
  • a lawsuit to request the annulment of an administrative act or contract – five years counted as of the issuance of the act or execution of the contract.

Brazilian law does not provide for a fixed term for the duration of administrative or judicial proceedings.

An administrative proceeding usually lasts one year and judicial proceedings usually take longer, and may last up to ten years.

This firm does not have access to the number of procurement claims per year but it is common to have some level of litigation in public procurement proceedings. In the administrative sphere, bidders frequently file administrative appeals with the contracting authorities when they consider that they have been harmed by a decision. Judicial claims are less frequent, but also common, mainly when there are relevant public interest issues and/or huge amounts involved in the public procurement.

Administrative challenges do not require the payment of any fees. Judicial challenges involve the payment of fees that vary mainly according to the amount in dispute, in addition to the payment of the attorneys’ fees (since lawsuits require a licensed attorney).

General rules on modifications to the contract during its performance are defined in the PPA, according to which, public contracts may be amended up to the total term of 60 months, including the original term. In terms of scope, contract amendments have to be limited to the equivalent of 25% of the original contract value.

Brazilian laws provide for several situations in which the public procurement process is not required or is not feasible, because of the lack of competitiveness. There are a number of cases of waiver, ranging from low-cost products/services to protection of national security. Acquisitions from sole source supplier or specialised services are examples of unenforceability of the public procurement process.

For the particular cases and further information, see 1.3 Type of Contracts Subject to Procurement Regulation.

In the past year, the Federal Court of Audits (TCU) established that companies that signed leniency agreements with other authorities may still be punished with the lack of good standing penalty (Full court Decision No 1527/2019 – TCU). This decision is being treated as a challenge to legal security because companies usually sign such agreements in order to avoid penalties and the prohibition of contracting with public administration can have a great impact on the company’s income depending on the sector.

Another relevant point before courts is the conflicting understanding between the TCU and the Superior Court of Justice (STJ) regarding the scope of the penalty of suspension to bid. While the TCU (an administrative body) understands that the effects of the suspension of the right to participate in public bids are restricted to the sanctioning organ or entity; the STJ) has been ruling that the suspension should be extended to any public body of any level of the federation.

There are many bills under analysis in the Brazilian Congress regarding changes in the public procurement rules.

However, Bill No 1.292/1995, which proposes some major changes in the PPA, is one of the main bills pending with the House of Representatives that discuss amendments to the PPA.

Recently, Finance Minister Paulo Guedes stated that Brazil will join the GPA, which is focused on transparency and access to national public procurement markets. Brazil joined the GPA as an observer member in 2017 and now intends to submit a request to join the GPA as a permanent member.

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Trends and Developments


Author



Machado, Meyer, Sendacz e Opice has been building its history for more than 45 years, inspired by sound ethical principles, the technical skills of its professionals and a close relationship with its clients. The firm provides innovative legal solutions that anticipate scenarios and make business possible. The firm's key practice areas are aviation and shipping; banking, insurance and finance; capital markets; compliance and integrity; competition and antitrust; contracts and complex negotiations; corporate; crisis management; environmental; financing and infrastructure projects; intellectual property; labour and employment; litigation, arbitration and dispute resolution; M&A and private equity; media, sports and entertainment; public and regulatory law; real estate; restructuring and insolvency; special desks; social security; succession planning; tax; technology; and white-collar crime and investigations.

Introduction

The government in Brazil is still the main driving force behind actions for sustainable economic growth, development of the national infrastructure industry and the reduction of social and regional inequalities. For this reason, the government plays an important role in the economy and therefore adjustments in the public procurement framework tend to be necessary from time to time in order to adopt market practices and solve public sector inefficiencies.

Lack of clarity and poor sense of timing by authorities have been appointed as two major problems in doing business with the government in Brazil. As these two factors are crucial for the success of any transaction, in recent years the government and the Congress have engaged in modifying legislation in order to provide for a more secure and efficient environment in the public sector.

For the purposes of this brief chapter, the author would like to highlight two of the changes recently made in the legislation and one proposed change that is still under discussion in the National Congress: (i) Law 13.303/2016 sets forth new procurement rules for government-owned companies and makes clear the possibility for such entities to engage in strategic partnerships with private companies, using market standards to choose the private partner; (ii) Decree 9.957/2019 finally provided the legal support for the application of Law 13.448/2017 regulated the friendly handover as a new possibility to terminate a concession agreement (relicitação); and (iii) the modification proposed by PL 7.063/2017 that will require authorities to judge economic rebalance requests within 180 days.

These three examples of adjustments in the legislation shall have a positive impact in the public sector environment, as they are answers to problems that have been difficult to resolve in the past. As will be seen in more detail below, government-owned companies will have more flexibility to join new ventures with private companies and explore the market; concessionaires in challenging economic situations will be able to return their contracts to the government, avoiding the declaration of forfeiture and its consequences; and, finally, the law will provide a deadline for authorities to decide on the important matters of a concession.

Law 13.303/2016 (Strategic Partnerships)

Law 13.303/2016 is one of the most positive innovations in terms of public procurement in Brazil. Government-owned companies now have their own legal statute, with more flexible rules and standards than those provided in Law 8666/1993, which better reflects their private legal nature. Despite the public control, government-owned companies have always had a status of a private entity subject to ordinary market practices in a regime of competition with other companies.

In fact, Law 13.303/2016 was approved in the context of public pressure and social unrest as a result of the Car Wash Operation, as a response by the government to address the corruption scandals identified in government-owned companies, especially in Petrobras. The foregoing is confirmed by the explanatory statement (exposição de motivos) of the bill that served for the creation of Law 13.303/2016. In analysing the explanatory statement of Law 13.303/2016, we can conclude that the bill was drafted with two purposes in mind: (i) creating mechanisms to combat corruption practices and (ii) granting more autonomy to government-owned companies when contracting third-party service providers, with the aim of enhancing efficiency in the market.

In view of those purposes, Law 13.303/2016 allows government-owned companies to enter into strategic partnerships with the private sector with no requirement to launch a competitive public bidding process.

A competitive public bidding process is the default rule for all and any contracts entered by the government in Brazil. Such rule is a cornerstone in the Brazilian public procurement legal framework and has its rationale in providing equitable conditions to every and all companies that do business with the government. However, in some situations, the launching of a competitive public bidding process may adversely affect the ability of the government to reach a certain goal – that usually occurs when government-owned companies are in the position of market competitors. As mentioned above, Law 13.303/2016 was enacted to allow government-owned companies to have more benefits of flexibility in order to be in a more equitable position in the market when compared to private ones. In this sense, such Law made it clear (Article 23, § 3º, item II) that government-owned companies may choose private companies in order to explore a given market, based on business criteria.

Business opportunities are usually based on strategic information of the parties and are generally related to unique conditions of the market favorable to both parties. Therefore, the launching of a competitive public bidding process in order to choose the private partner would severely affect the capability of the government-owned company to identify the best partner – most of the competitors would probably avoid participation in processes in which they would be required to disclose strategic and confidential information about their own businesses.

In this scenario, Law 13.303/2016 allows government-owned companies to carry out the process for partnerships with a private partner in a confidential way.

This new rule was tested in the Federal Court of Public Accounts (Tribunal de Contas da União, or TCU) in 2019. A strategic partnership agreement entered into by and between Telecomunicações Brasileiras S.A. (Telebras), a federal government-owned company acting in the telecom sector, and the US company Viasat Inc., by means of its representative in Brazil, Viasat Brasil Serviços de Comunicações Ltda. (Viasat), was the leading case for the new rule of Law 13.303/2016.

Telebras and Viasat combined efforts with the purpose of sharing revenues originating from the use of satellite capacity of the Brazilian Geostationary Defense and Strategic Communications Satellite (SGDC).

According to TCU, Telebras acted properly in choosing Viasat as its business partner, since during the private negotiations that the two companies engaged in during 2018, Telebras identified in Viasat all aspects (business expertise and economic health) necessary to make it a good partner in order to explore the asset together. TCU made a very careful analysis of all the meetings and negotiations that Telebras carried out with other possible partners too, concluding that within the universe of partners, Viasat stood out with its capability and knowledge of the business and showed appetite for the investment. TCU also analysed the agreement entered into by the parties and made some requirements for adjustments that were subsequently discussed and agreed upon between Telebras and Viasat.

Although Brazil has a history of partnerships among private companies and government-owned ones, Telebras and Viasat inaugurated the use of Article 28, § 3º, item II, of Law 13.303/2016 as the new way to engage in strategic partnerships. The deal became the leading case in TCU that made the interpretation of flexibility of the new rule a precedent for all federal entities. Since that judgment, other partnerships have been designed by government-owned companies that now have the possibility of using a more flexible and market-friendly way to engage in partnerships with private parties.

Friendly Handover

Concessions are long-term agreements by which the government transfers to private parties (concessionaires) the obligation to provide good-quality public services in return for the collection of tariffs from the users. There are many examples of public services under concessions in Brazil: water supply, power production, transportation and distribution, and telecommunications, among others.

The economic balance of the concession agreements is based on a risk allocation between the government and the concessionaire. The rationale behind every risk is to allocate to the parties in the best position to treat each risk. So, operational risks, especially the risk of demand for the public service, are usually allocated to the concessionaire; meanwhile, political risks tend to be allocated to the government.

After 2014, Brazil entered into an unprecedented economic and political crisis. The country faced a period of recession and unemployment that impacted concessions directly, especially concessions of the transport sector: toll roads, airports and railways. The business plans for these sectors were all made based on a positive macroeconomic scenario for the years before 2014. So, the concessionaries assumed investment obligations expecting the expansion of the base of users that would therefore pay more tariffs, allowing the depreciation of all investments. However, the expansion of the base of users never happened; on the contrary, concessionaires saw the number of users decline as the economy shrank.

In this scenario, the investment obligations became a nightmare to the concessionaries. Although the demand did not require new investments, some of the obligations assumed by the concessionaires are binding and have to be complied with regardless of the use of the asset. Authorities did not have legal authorisation to waive such investments.

In this sense, concessionaires had to decide between not making the contractual investments and therefore breaching the concession agreements or making all investments and going bankrupt. That was a clear situation that the legislation and the contracts were not prepared to deal with.

Because of that, in 2017, the Congress passed Law 13.448/2017, which authorised concessionaires to return their concession agreements to the government, creating, therefore, a new possibility of concession agreement termination, which was named as the friendly handover process. However, in order for the Law to be fully applied, the government had still to launch a Decree to detail the entire friendly handover process. Such Decree was only enacted in August 2019.

Although it took longer than the market expected, Decree 9.957/2019 finally explained the requirements for the application for a friendly handover process. The concessionaire has to explain that the reasons for the friendly handover were supervening to the signature of the concession agreement. The regulatory agency will then analyse the request on technical grounds followed by the analysis of the Ministry of Infrastructure, the PPI (bureau for investments in infrastructure) and the President of Brazil.

After this preliminary assessment, the regulatory agency and the concessionaire will agree to an amendment of the concession agreement, by which the concessionaire will have the investment obligations suspended and will agree to operate the asset (toll road, airport or railway) till a new concessionaire assumes the asset after a new competitive public bidding process that shall take place within two years from the date of the filing of the request.

In this scenario, the residual payment of the investments made by the concessionaire that are still not totally depreciated will be indemnified by the future concessionaire, which will pay such amount as the grant for the concession. The new concession will have new economic rationale, allowing the future concessionaire to have a healthy business.

The friendly handover process avoids the declaration of forfeiture and the application of penalties to the shareholders of the concessionaire, such as the prohibition of participating in new bidding processes. In any case, the concessionaires and their shareholders are prohibited from participating in the bidding process for the concession of the asset that was returned to the government through a friendly handover.

Recent experience shows that some concessionaires are already using the friendly handover process as a way to terminate unhealthy concession agreements. The federal agency for transportation (ANTT) has already received two requests of such nature and there is an expectation of a friendly handover of Viracopos Airport that will be carried out by the federal agency for airports (ANAC).

The author believes that for the coming years the firm shall have a great volume of work in friendly handover processes, which have two real benefits for the market: they allow the best treatment for concessions that are unbalanced in their economic conditions and give the opportunity to a new concessionaire to operate the asset in contractual conditions that reflect the current macroeconomic scenario.

Rebalance Certainty

As explained above, concession agreements are long-term arrangements guided by a risk allocation matrix agreed between the government and the concessionaire. Sometimes, the concessionaire suffers an economic impact due to the materialisation of a risk that is allocated to the government. In these circumstances, the concessionaire is allowed to request the economic rebalance of the agreement. Please note that in the friendly handover situation, the risk of an unprecedented economic and political crisis was not properly allocated to the parties and a process of economic rebalance did not have legal grounds.

Economic rebalance of the agreement usually occurs whenever a political measure interferes in the collection of tariffs (eg, exemption of payment of tolls by a certain category of professionals) or whenever the conditions of the asset (eg, road, airport, sanitation and water supply systems) do not meet what was represented by the government in the concession agreement and therefore need more investment than expected.

One can easily imagine that situations like the examples above may occur very frequently in an agreement of 30-plus years. So, it is very common for the concessionaire and government to discuss the economic balance of the agreement. However, practice has shown how difficult it is for the concessionaire to see an end to its requests.

Because the economic rebalance of the agreement tends to bring with it some unpopular measures (eg, readjustments of tariffs), the government tends to avoid decisions in such regard. Thus, it is very common to see the government either denying requests that are rather clear on the grounds of rights of the concessionaire (forcing the concessionaire to go to litigation) or simply ignoring the requests for years. Such behaviour causes legal uncertainty and increases unnecessary disputes.

In view of this scenario, one of the other topics that are under discussion in the Congress, PL 7.063/2017, sets forth an article with the purpose of solving this undesirable situation. The solution is simple: by the new bill under discussion in the Congress, all concession agreements shall provide for a deadline of no more than 180 days to the final decision by the government on economic rebalance requests.

Together with the deadline, which seems to be a simple but effective measure to handle the decision blackout matter, PL 7.063/2017 also creates incentives for the concessionaire to request economic reliance only on matters that it does have the right to rebalance; ie, the abusive use of an economic rebalance request will be sanctioned with fines supported by the concessionaire (1 to 10% of the amount requested).

In this sense, the author expects that among the other measures proposed by PL 7.063/2017, the inclusion of the deadline for a decision over economic rebalance requests will tend to be effective regarding a well-known problem in the administration of concessions.

Machado, Meyer, Sendacz e Opice

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machadomeyer@machadomeyer.com www.machadomeyer.com
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Law and Practice

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TozziniFreire Advogados is a full-service firm providing legal services to domestic and international companies in several sectors. With 83 partners in São Paulo, Rio de Janeiro, Brasília, Porto Alegre, Campinas and New York, it has played a major role in many of the most significant transactions in Brazil. The Government Contracts and Projects practice specialises in public procurement proceedings, contractual, regulatory and tax liability disputes arising between private sector businesses and government entities or state-owned companies. It has met the demand for guidance in industries previously barred from the public arena and regularly advises clients on matters involving the privatisation of state-owned companies and infrastructure. The practice also has wide experience in compliance-related matters, including independent investigations related to governmental matters and negotiations of settlements with authorities. In the past years, TozziniFreire has assisted several clients, including Saab, Citéluz Groupe, Red Eléctrica Internacional and Advent do Brasil.

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Machado, Meyer, Sendacz e Opice has been building its history for more than 45 years, inspired by sound ethical principles, the technical skills of its professionals and a close relationship with its clients. The firm provides innovative legal solutions that anticipate scenarios and make business possible. The firm's key practice areas are aviation and shipping; banking, insurance and finance; capital markets; compliance and integrity; competition and antitrust; contracts and complex negotiations; corporate; crisis management; environmental; financing and infrastructure projects; intellectual property; labour and employment; litigation, arbitration and dispute resolution; M&A and private equity; media, sports and entertainment; public and regulatory law; real estate; restructuring and insolvency; special desks; social security; succession planning; tax; technology; and white-collar crime and investigations.

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