PPP framework can benefit 150 projects – 04/19/2023 – Market

The government of Luiz Inácio Lula da Silva (PT) estimates that the new framework for PPPs (public-private partnerships), which will be announced this Thursday (20), could already benefit 150 projects that are currently being structured in states and municipalities. For the secretary of the National Treasury, Rogério Ceron, the investment promotion action plan can yield over R$ 100 billion.

The initiative seeks to unlock works in subnational entities, with the Union as guarantor as its central pillar. In the proposed model, the National Treasury will act as guarantor of PPP projects carried out by states and municipalities. That is, the Union will assume the risk of default if subnational entities do not honor their commitments to private investors in the execution of contracts.

So that the Union does not end up with the loss, the mechanism proposed by the government establishes that, in case of default, the values ​​assumed by the National Treasury are deducted from federal transfers to the FPE (State Participation Fund) or to the FPM (Fund of Participation of municipalities).

According to Rogério Ceron, secretary of the National Treasury, the big problem for PPPs to move forward is the guarantees for the considerations.

“When you have the Treasury’s endorsement, the cost of the operation is much lower because the risk is lower. If the entity does not pay the loan, the Treasury honors and triggers the counter-guarantees, there is a constitutional provision for this, the Treasury can trigger FPE and FPM , it works relatively well,” he says.

Ceron points out that both the Treasury and financial institutions already know how to work very well with the administrative bureaucracy of states and municipalities.

“We made a guarantee instrument anchored in the same logic of the credit operation with the backing of the Union. We will provide a credit operation under condition, the financial institution will make a guarantee for the subnational entity. It will only have disbursement if there is default with the the concessionaire”, he explains.

The mechanism will follow the same rite of other credit operations with the Treasury, that is, the entities –to be eligible– must be included in categories A and B of Capag (Ability to Pay). This means that four Brazilian states –Rio Grande do Sul, Goiás, Minas Gerais and Rio de Janeiro– will not have access to this type of operation at first.

The Treasury says it has already received positive signals from the IDB (Inter-American Development Bank), the World Bank and the Bank of Brazil regarding the availability of this format of operations. In addition, the BNDES (National Bank for Economic and Social Development) would also be interested, and the conversation with two private financial institutions would be at an advanced stage.

The government thus hopes to increase the attractiveness to the private sector for project execution. In the Treasury’s evaluation, the sovereign guarantee will make foreign groups and large national private groups start to look more closely at state and municipal PPPs.

“More competition enables projects that today would not get off the ground, it reduces the cost of the project”, says Ceron.

Before the modeling was closed, Minister Rui Costa (Casa Civil) said that the strategic investment program in infrastructure, which has so far been called the new PAC (Growth Acceleration Program), will work through PPPs (Partnerships Public-Private) and concessions.

The Treasury package also provides for credit operations backed by the Treasury for infrastructure project contributions during the construction phase. Until then, the private partner can only receive consideration for the service after completion. Now, you can partially make the contribution in the construction phase to reduce the future consideration.

“The state or municipality already allocates a part of the resource to reduce the value of the consideration and makes the project more viable, because it reduces the requirement of financial leverage from the private sector”, says Ceron. “There may be a mix between the contribution during the construction phase and the contribution that the private sector itself will make with its own resources or raised in the market.”

Another measure that will be announced by the government this Thursday is the expansion of the possibility of issuing incentivized debentures —debt securities that count, with the benefit of tax exemption—for social and environmental infrastructure projects, such as building schools and preserving parks.

Currently, the mechanism is used in economic infrastructure projects, such as energy generation and transmission, road and rail construction, basic sanitation, among others.

According to Marcos Barbosa Pinto, Secretary of Economic Reforms at the Ministry of Finance, the idea is to make it clear with the modification that social projects are also infrastructure projects and will be able to enjoy the tax benefit.

“We will have a great demand for credit in this area, infrastructure debentures are being consecrated, it has a large volume. We intend to make it clear that it can also be linked to social infrastructure”, said the secretary, adding that it is intended only for the Public sector.

The National Treasury will also publish an ordinance this Thursday dealing with the 5% limit of commitment of the Current Net Revenue of States and municipalities in concession projects developed in the PPP format

“Today you end up carrying out PPP projects for the construction of new infrastructure. It is very difficult to make PPPs viable in existing infrastructure”, says Ceron.

The idea is that, if the entity makes explicit in the project structuring phase the expense that previously existed with a given structure, what will count towards the commitment limit will only be the additional expense.

“There was a lack of standardization, this gives a lot of legal and accounting security and helps with the speed of projects”, says the secretary. “This measure helps a lot to make PPPs of already existing infrastructure assets viable, thinking about modernizing schools and hospitals.”