Best practices on PPP and concession contracts structuring<br />Brazilian Road Sector<br />Mauricio Portugal Ribeiro<br />...
Contents<br />1.  Introduction<br />Output based contracts<br />Insurance and performance bond<br />Protection of financer...
Introduction and disclaimer<br /><ul><li>Difficulties to consolidate best practices</li></ul>This presentations is based o...
Output based contracts<br /><ul><li>Contracts focused as much as possible on service performance obligations (not on inves...
Output based contractsExample from road sector<br /><ul><li>Pavement and infrastructure indicators</li></ul>IGG<br />IRI<b...
Insurance and performance bonds<br /><ul><li>Insurance</li></ul>Coverage and limits are defined in the contract, by specia...
Protection of financers and monitoring of the concessionaire financial conditions<br /><ul><li>Protection to financers</li...
Risk sharing arrangements<br /><ul><li>Clear risk matrix that in compliance with local best practices</li></ul>Some risks ...
Risk Matrix Example<br />Risk matrix was extracted from the Pontal Project, in Petrolina, taken from the model developed b...
Contract financial equilibrium protection<br /><ul><li>Need of financial equilibrium protection</li></ul>Offset the regula...
Default and conflict management tools<br /><ul><li>Step in rights of the Government</li></ul>For cases that involve safety...
Credit enhancement of the Government and back stop facilities to Gov payments<br /><ul><li>Rating of PPP contract payment ...
Some backstop facilities were created in the PPP law but has never been used
We generally include in the scope of our mandates to reform the law and help the Government to set a guarantee structure a...
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Best practices on PPPs contracts

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Best practices on PPPs contracts

  1. 1. Best practices on PPP and concession contracts structuring<br />Brazilian Road Sector<br />Mauricio Portugal Ribeiro<br />Aug 2010<br />
  2. 2. Contents<br />1. Introduction<br />Output based contracts<br />Insurance and performance bond<br />Protection of financers and monitoring of concessionaire financial conditions<br />Risk sharing arrangements<br />Default and conflict management tools<br />Termination and early termination of contracts<br />Credit enhancement of the Government and backstop facilities to Government payments<br />
  3. 3. Introduction and disclaimer<br /><ul><li>Difficulties to consolidate best practices</li></ul>This presentations is based on our opinion on what is best practice<br /><ul><li>All of the contract features recommended in this presentation were already used in concession contracts, but they are not yet “bullet proof” from a legal standpoint </li></ul>Administrative lawyers still debate whether it is possible to use some of them<br />The Courts have not yet analyzed many of them<br />
  4. 4. Output based contracts<br /><ul><li>Contracts focused as much as possible on service performance obligations (not on investment obligations):</li></ul>Focus on service output has two consequences:<br />Room to produce efficiency gains, as decisions on inputs are left to the private partner<br />Change the traditional public sector activity of supervision of contract<br /><ul><li>Adequate connection between performance indicators and payment system</li></ul>Gov payment<br />Tariff charging<br /><ul><li>For the case of non-compliance of the service indicators by the private partner, shift</li></ul>from the imposition of fines by the Government<br />to non payment by the Government<br />
  5. 5. Output based contractsExample from road sector<br /><ul><li>Pavement and infrastructure indicators</li></ul>IGG<br />IRI<br />Structural number<br /><ul><li>Capacity indicators</li></ul>Expansion of capacity obligations triggered by traffic thresholds<br /><ul><li>Service performance indicators</li></ul>Emergency Rescue and accident cleaning time obligations<br />Monitoring obligation<br />Safety obligations<br /><ul><li>Social and environmental obligations</li></ul>Full compliance with the Equator Principles and with IFC Social Standards<br /><ul><li>Investment obligations remain for some aspects</li></ul>Guardrails<br />Human Crossings<br />Some of the monitoring systems<br />
  6. 6. Insurance and performance bonds<br /><ul><li>Insurance</li></ul>Coverage and limits are defined in the contract, by specialist based on assets values and availability of coverages in the insurance market<br />Requirement of insurers investment grade credit rating <br /><ul><li>Performance bond</li></ul>To produce contract compliance incentives in a context in which applying fines is not easy<br />Required minimum coverage and value are established in the contract for each year based on the estimated investments for that year <br />In the cases in which the assets are transferred back to the Government at the end of the contract, requirement of higher coverage values in the last years of the contract so as to create incentives to keep the assets in the proper conditions<br />Requirement of investment grade credit rating of performance bond providers<br />
  7. 7. Protection of financers and monitoring of the concessionaire financial conditions<br /><ul><li>Protection to financers</li></ul>Concessionaire can assign revenues streams and other rights to the financers<br />Government payments<br />Tariff payments<br />Protected debt (principal, interest and fees) in any case of early termination of the contract<br />Step in rights<br /><ul><li>Monitoring of the concessionaire’s financial conditions by the Government</li></ul>SPC’s accounting have to comply with the local GAP for listed companies (although there is no requirement to list the SPC)<br />Concessionaire have to deliver all its financial contracts to the Government<br />Concessionaire have to deliver quarterly financial statements and disclosure all financial information to the Government<br />Financers have the obligation to notify the Government of the non-compliance with any covenant or provision of the financing contract<br />The Government have to notify the financers of any non compliance of the concessionaire with the concession contract<br />
  8. 8. Risk sharing arrangements<br /><ul><li>Clear risk matrix that in compliance with local best practices</li></ul>Some risks are allocated by the law (vg. creation of new taxes)<br />Most of the risks are allocated by the contract<br /><ul><li>Risk sharing criteria</li></ul>Criteria 1<br />Who is able to (at the lowest possible cost) decrease the expected loss or increase the expected gains of a given situation? <br />Criteria 2<br />Risks should not be attributed to agents that are able to externalize losses<br />Governments may transfer burden to tax payers, and for this reason the risk of loss does not produce the right incentives<br />Criteria 3<br />Risks should be attributed to the Government if<br />If there is no insurance coverage for that risk in the market<br />Insurance market are underdevelopment or premiums are too high<br />
  9. 9. Risk Matrix Example<br />Risk matrix was extracted from the Pontal Project, in Petrolina, taken from the model developed by the IFC – International Finance Corporation<br />
  10. 10. Contract financial equilibrium protection<br /><ul><li>Need of financial equilibrium protection</li></ul>Offset the regulator powers<br />Compensation of risks that are allocated by the contract to the other concessionaire<br />Benchmarking<br /><ul><li>Main concern in Brazil is to define a methodology that does not change or distort the risk matrix</li></ul>Due to the asymmetries of information, traditional rate of return regulation has many times distorted the risk matrix of concession contracts<br />The tendency is to use a methodology that is connected with the risk matrix and that uses as a reference the marginal impacts in the cash flows of events that have caused the disequilibrium of the contract<br />Use, when possible, market costs<br />Define a formula in the contract to calculate the discount rate<br /><ul><li>Procedures for contract review</li></ul>Annual price adjustments against inflation <br />Ordinary revisions (periodically, each 2-5 years, etc.)<br />Extraordinary revisions <br />
  11. 11. Default and conflict management tools<br /><ul><li>Step in rights of the Government</li></ul>For cases that involve safety of the users and of the environment<br />For cases that risk the continuity of the service provision<br /><ul><li>Step in rights of financiers</li></ul>In both cases breach of the financing agreements or of the concession contract<br /><ul><li>Mediation and arbitration for all matters between the Gov and the concessionaire to avoid going to the Judiciary</li></li></ul><li>Termination and Early Termination of Contracts<br /><ul><li>In the case in which assets are transferred to the Government</li></ul>Obligation to pay to the concessionaire of all non-depreciated or non-amortized assets<br />Payment should be previous to the transfer of the assets<br />Contract should foresee clearly which assets will be transferred to the Government<br />Contract should foresee procedure and methodology to account for amortization/depreciation of assets that will be transferred back to the Government<br /><ul><li>Early termination of contracts</li></ul>In all cases, protection of the debt payment<br />Protection of the investors (equity holders) in the case of early termination because of nationalization or expropriation of assets, and in the case of termination for non compliance with the contract by the Government<br />
  12. 12. Credit enhancement of the Government and back stop facilities to Gov payments<br /><ul><li>Rating of PPP contract payment obligation of the Federal, State and Local Governments are very low</li></ul>Because of the different legal frameworks that controls the treasury bonds payments and the contract payments of the Government, the bonds rating is very different from the contract payments rating<br />Although the Federal Government bonds and some of the States bonds are investment grade, their PPP contract debts are not <br /><ul><li>Federal and States Governments have created backstop facilities
  13. 13. Some backstop facilities were created in the PPP law but has never been used
  14. 14. We generally include in the scope of our mandates to reform the law and help the Government to set a guarantee structure adequate to the project</li></li></ul><li>Main challenges<br /><ul><li>Develop and consolidate new financial equilibrium model and methodology
  15. 15. From a legal standpoint, consolidate:</li></ul>The protections to financers specially in the case of early termination of contracts<br />The possibility of requiring minimum credit rating level from the insurers and performance guarantee providers<br />That payment for non depreciated assets of the concessionaire can be done before transferring of them to the Government<br />That the backstop facilities structures to do the credit enhancement of the Government payment are valid<br />

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