IFC contributions to road concessions best practices in brazil


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IFC contributions to the road concessions best practice in Brazil through the BR 116/324 concession, and BA 093 concession.

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IFC contributions to road concessions best practices in brazil

  1. 1. BR 116-324 and Road Concession Best Practives<br />Mauricio Portugal Ribeiro<br />Aug 2010<br />
  2. 2. Contents<br />1. Introduction<br />Main features of the project<br />Development impacts<br />The partnership that developed the project<br />Main contributions of IFC to best practices in the road sector in Brazil<br />Tariff structure<br />Output based contract<br />Variable term of concession<br />New contract model <br />New financial equilibrium protection clause<br />Contribution to address barriers to competition<br />
  3. 3. BR 116/324 – main features<br /><ul><li>Concession of about 700 Km of Federal roads linking the Northeast and Southeast of the Brazil
  4. 4. BR 324 is the main link between the city of Salvador (about 4 million habitants) and the rest of the country. It also connects Salvador to Feira de Santana, the second biggest city of the State of Bahia
  5. 5. Includes also two State road segments (BA526 and BA528) that link the BR 324 to the Port of Aratu
  6. 6. Contract term of 25 years
  7. 7. Estimated investments of R$1.4 billion during the contract and about R$ 600 million during the first 5 years
  8. 8. Winning bidder was Isolux in a consortium formed with 2 local players and it offered a tariff 21% lower than the roof price in Jan 2008</li></ul>BR-324<br />BR-116<br />
  9. 9. BR 116/324 – Development impact<br />More than 50% of the GDP of is produced in the influence area of the road<br />More than 50% the population of the State of Bahia lives in the influence area of the roads<br />Improvements in the road will enhance<br />Security (specially in BR 324 there were high rates of accidents) – reduction of social costs of mortality and morbidity<br />Reduction of operational costs: maintenance, fuel and also emissions<br />User’s time savings<br />
  10. 10. PSP Development Program<br /><ul><li> BR 116/324 was developed under a cooperation agreement between IFC, BNDES and the Ministry of Planning
  11. 11. It was the pilot project for the current partnership between IFC/BNDES/IDB
  12. 12. The PSP Development Program
  13. 13. provides advisory and project structuring to the public sector
  14. 14. Focus on developing innovative projects
  15. 15. Bears the risk of project feasibility
  16. 16. Capacity: 4 simultaneous projects
  17. 17. Currently: 1 project under bidding; 1 new mandate; 8 mandates in the pipeline</li></ul>5<br />
  18. 18. Objectives and principles of IFC infrastructure project development<br />IFC is committed to develop and spread local and international best practices for private participation in the infrastructure sectors<br />Transparency and competition for the projects are key to develop the PPP market<br />IFC focus on results<br />Provide assistance to the Government from the development of the project idea until the closing of the PPP contract<br />Most of IFC payment for the advisory services are success fees paid by the private partner that gets the award<br />Commitement to the development of the country<br />Transactions are structured to generate high development impact<br />IFC is committed to get the best deal for the Government<br />Training of Government officers<br />Structuring PPP transactions is a learning by doing activity<br />IFC is committed to train the Government officers on best practices of structuring PPPs while providing project advise<br />
  19. 19. BR 116/324 – Main contributions of IFC to best practices<br />New tariff structure based on the recommendations of AASHTO (not adopted)<br />Performance indicators for services and pavement that are related to the payment system<br />Capacity expansion indicators<br />Variable term of the concession (not adopted)<br />Development of a new contract model that enhanced the existent ones in the sector<br />Changed the standard requirements for financial and technical qualifications to remove hidden entry barriers that did not allow international players to participate of the bidding procedures <br />This has changed the way bidding procedures in this sector are done<br /> it was used for the 2007 Federal Gov second round of concessions<br />Also for the 2008 State of Sao Paulo Gov second round of concessions<br />
  20. 20. Tariff structure<br />Developed new tariff structure based on the recommendations of AASHTO (not adopted)<br />In the current tariff structure, trucks pay by the number of axels <br />The tariff structure suggested by IFC trucks would pay by expected weight by axel, considering its maximum permitted cargo capacity<br />Government decide not to adopted cargo because of difficulties of changing the current structure<br />
  21. 21. Output based contract<br /><ul><li>Contract 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
  22. 22. Tariff value can be reduced if performance indicators are not complied (“desconto de reequilíbrio)</li></li></ul><li>Output based contract<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>Investment obligations remain for some aspects</li></ul>Guardrails<br />Human Crossings<br />Some of the monitoring systems<br />
  23. 23. Variable term of concession<br />Traffic studies pointed the need of relevant expansions of capacity in the years 15-17 <br />Due to uncertainties on traffic growth and costs of this expansion, IFC suggested a variable term of the concession<br />If a certain traffic threshold was reached, then the contract would terminate, so the Government would be able to include the expansion of capacity in a new concession with more certainty and control of costs<br />This would also avoid to transfer to private sector the obligation of doing a big investment in the year15th to 17th year of concession <br />Together with IFC, the Government decided to set capacity triggers and to transfer the expansion of capacity risk to private sector<br />
  24. 24. New contract model<br />Development of a new contract model that enhanced the existent ones in the sector<br />New insurance and performance bond provisions<br />Performance guarantee proportional to the estimated investment obligations<br />Higher values of performance guarantees in the last years of contracts in order to put in place the incentives for the concessionaire to transfer the assets back to the Government in good condition<br />Enhanced protection to financiers in the case of early termination of contract<br />Step in rights of financiers <br />Enhanced monitoring tools for the regulator<br />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 />
  25. 25. New financial equilibrium protection clause<br /><ul><li>Brazil has a strong tradition of protection of financial equilibrium protection</li></ul>Offset the regulator powers to change contract features<br />Compensation of risks that are allocated by the contract to the Government<br /><ul><li>Main concern was to define a methodology compatible with the risk matrix</li></ul>Due to the asymmetries of information, traditional rate of return regulation many times change 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>New methodology was used for investments that are included in the contract afterwards
  26. 26. The traditional methodology was used for the other cases</li></li></ul><li>Contributed to address barriers to competition<br />IFC suggested new standard requirements for financial and technical qualifications to avoid entry barriers that would hamper international players to participate of the bidding procedures<br />Due to the variety of entrees of this sector in Brazil<br />Focus the selection of players on the financial capacity and not in the technical capacity<br />Roads is a technically mature sector; all players can hire capable construction companies in the market <br />Avoid traditional financial indexes and worked with signs of financial capacity, such as requirement of high initial equity contribution of the concessionaire, relevant bid bond and performance bond<br />Financial indexes may create disparities when you have to compare companies that operates in different environments/sectors<br />The idea was to use the market to evaluate the financial capacity of the players <br />This has changed the way bidding procedures in this sector are done<br />It was used for the 2007 Federal Gov second round of concessions<br />Also for the 2008 State of Sao Paulo Gov second round of concessions<br />