Privatizations and concessions
first on the agenda

PRIVATIZATIONS AND CONCESSIONS

Privatizations and concessions first on the agenda

The new context of privatization in Brazil brings learning and new agents

B razil, in its various public spheres, is undergoing a period of transformation that includes, in addition to the agenda of reform, a series of privatizations and concessions.

At the same time, questions are being asked regarding these investments’ risks and returns. International and national players can only prepare if the rules are clear. If the question is how to eliminate the hurdles generated by the complexity of the process, legal advice may be able to identify some good answers.

Among the obstacles Brazil needs to overcome are: improve the feasibility of returns to investors (reducing the risk of the transaction), provide guarantees that are more solid for investors to take on debt and to partner with the legislative branch in the privatization process. Basically, it is essential to reduce the uncertainties in the process.

Another fundamental point is to avoid repeating the mistakes of the past. Many privatizations and concessions that took place in Brazil were by means of consortiums and some of the concessionaire companies were involved in scandals, generating penalties, delays, abandoned works and overpricing. “Many of the examples went wrong, but they served as lessons to learn from. The regulator itself suggests the importance of a market exit in order to avoid returning the burden to the government, but there are still a lot of barriers to be overcome”, is the assessment of Mattos Filho partner Marcelo Ricupero.

A NEW LANDSCAPE OF OPPORTUNITIES

Even with all the challenges, the current situation is favorable. Investors from a variety of sectors have been sharpening their attention on Brazil.

T he fact is that the country’s infrastructure, along with some public services, require investment to be modernized, which in turn requires the enlistment of public and, especially, private resources.

Partner Marina Anselmo puts it into context, “it is a landscape of opportunities. This is the chance for Brazil to improve the quality of its infrastructure, making it more efficient and competitive, and to reduce costs. It is also the opportunity to remunerate investors who want to invest in the country”.

The lessons learned from past privatization efforts are a clear signal that our society is more open to investment. The first point is that there is, now and in reality, the awareness that Brazil has the potential to receive significant international investment. The second aspect is that the country has refined the process of modeling tenders after it has undergone quite a few privatizations and concessions.

Finally, we have learned that submitting the tender value by only taking into account the cost of the service for users (for example, awarding a tender to the investor that presents the lowest price for a highway toll concession) is not the best model because often the operator’s books will not balance.

Added to this expertise that has now been gained is a series of initiatives that have been conducted over the past few years and have made Brazil more attractive to investors. The Investment Partnership Program, or Programa de Parcerias de Investimentos (PPI) in Portuguese, for example, speeds up and simplifies the privatization or concession of new projects by submitting the tender package to Brazil’s federal accountability office, the Tribunal de Contas da União (TCU), before it is offered to the market. This reduces the possibility of interference from government agencies after the privatization process has finished, as the rules are more transparent and, consequently the investment more attractive.

There is also Law No. 12,431 of 2011, which creates infrastructure debentures making the business more attractive to foreign investors by allowing funding to be in US dollars, which previously was limited to Brazilian reais.

The Investment Partnership Program

The Investment Partnership Program was created by Law No. 13,334, of 2016, for the purpose of expanding and strengthening the interaction between the State and the private initiative through signed partnership agreements and other privatization measures.


Read more: here.

The secret is to assess the risks properly and strive for efficiency


T he acquisition of a public company in a privatization or by means of concession of a public services comes with prerequisites, including getting to know the history of the respective company and sector, analyzing past performance, drawing up forecasts for the macroeconomic and industry data, and understanding the rules imposed by law.

Defining a matrix of the real and consistent risk will help investors assess the volume of resources invested, expected demand and revenues, financing costs, taxes, deadlines and a series of other factors that can be used to make the best decision before submitting a bid. “The risk matrix is aimed at mapping out all the potential problems that make up a project and identify, in the tender, the distributed risks that both the public and private sector will be assuming, as well as the measure to which they are shared”, explains Marina.

Another important question that also involves concessions is to ensure that any eventual disputes with public authorities are resolved as quickly and precisely as possible. The current outlook is more favorable, as Mattos Filho partner Pablo Sorj, explains: “Law No. 13,448/17 made it clear which rights are subject to arbitration proceedings in the privatization and concession agreements. This used to be one of the concerns held by both foreign and national investors”.

Among the resources available on the market for the privatization process, of special note is the Golden Share structure, in which shares grant the State veto power for decisions deemed strategic for companies sold to the private sector. Despite potentially limiting the action of the private initiative, there has, to date, been no significant use of this instrument in Brazil’s big privatizations and concessions.

NEW SOURCES OF CREDIT

From the point of view of financing, the National Social & Economic Development Bank (BNDES) will continue to play a central role.

However, the federal government has indicated a reduction on the bank’s participation in large privatization projects. Companies will need to continue submitting themselves to the bank’s rules and regulations, but the role of financing projects should be shared with other players.

“From here on, we will see increasingly mixed sources of financing, including the BNDES, debentures and multilateral promotion agencies”, Pablo predicts.

With new agents entering the market, providing new funding and financing options, the privatization and concession process becomes increasingly complex, which requires skill to negotiate with different parties.

 
 

Privatization trends


Improved communication with the regulator
New sources of financing
Most promising areas:

Infrastructure (especially road network, ports and airports)
Oil and gas
Electricity sector (maintaining the pace of the past few decades)
Non-essential assets of the big six state-owned companies (Banco do Brasil, Caixa Econômica Federal, Petrobrás, Eletrobrás, Correios and BNDES)