IFC contributions to road concessions best practices in brazil

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Image in public domain

BR 116-324 and Road Concession Best Practives

Mauricio Portugal Ribeiro

Aug 2010

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Contents

1. Introduction

2. Main features of the project

3. Development impacts

4. The partnership that developed the project

4. Main contributions of IFC to best practices in the road sector in Brazil

5. Tariff structure

6. Output based contract

7. Variable term of concession

8. New contract model

9. New financial equilibrium protection clause

10.Contribution to address barriers to competition

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BR 116/324 – main features

BR-116

BR-324

• Concession of about 700 Km of Federal roads linking the Northeast and Southeast of the Brazil

• 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

• Includes also two State road segments (BA526 and BA528) that link the BR 324 to the Port of Aratu

• Contract term of 25 years

• Estimated investments of R$1.4 billion during the contract and about R$ 600 million during the first 5 years

• 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

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BR 116/324 – Development impact

More than 50% of the GDP of is produced in the influence area of the road

More than 50% the population of the State of Bahia lives in the influence area of the roads

Improvements in the road will enhanceSecurity (specially in BR 324 there were high rates of accidents) – reduction of social costs of mortality and morbidity

Reduction of operational costs: maintenance, fuel and also emissions

User’s time savings

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BR 116/324 was developed under a cooperation agreement between IFC, BNDES and the Ministry of Planning

It was the pilot project for the current partnership between IFC/BNDES/IDB

The PSP Development Program

provides advisory and project structuring to the public sector

Focus on developing innovative projects

Bears the risk of project feasibility

Capacity: 4 simultaneous projects

Currently: 1 project under bidding; 1 new mandate; 8 mandates in the pipeline

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PSP Development Program

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Objectives and principles of IFC infrastructure project development

IFC is committed to develop and spread local and international best practices for private participation in the infrastructure sectors

Transparency and competition for the projects are key to develop the PPP market

IFC focus on resultsProvide assistance to the Government from the development of the project idea until the closing of the PPP contract

Most of IFC payment for the advisory services are success fees paid by the private partner that gets the award

Commitement to the development of the countryTransactions are structured to generate high development impact

IFC is committed to get the best deal for the Government

Training of Government officersStructuring PPP transactions is a learning by doing activity

IFC is committed to train the Government officers on best practices of structuring PPPs while providing project advise

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BR 116/324 – Main contributions of IFC to best practices

New tariff structure based on the recommendations of AASHTO (not adopted)

Performance indicators for services and pavement that are related to the payment system

Capacity expansion indicators

Variable term of the concession (not adopted)

Development of a new contract model that enhanced the existent ones in the sector

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

This has changed the way bidding procedures in this sector are done it was used for the 2007 Federal Gov second round of concessions

Also for the 2008 State of Sao Paulo Gov second round of concessions

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Tariff structure

Developed new tariff structure based on the recommendations of AASHTO (not adopted)

In the current tariff structure, trucks pay by the number of axels

The tariff structure suggested by IFC trucks would pay by expected weight by axel, considering its maximum permitted cargo capacity

Government decide not to adopted cargo because of difficulties of changing the current structure

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Output based contract

• Contract focused as much as possible on service performance obligations (not on investment obligations):

Focus on service output has two consequences:Room to produce efficiency gains, as decisions on inputs are left to the private partnerChange the traditional public sector activity of supervision of contract

• Adequate connection between performance indicators and payment system

• Tariff value can be reduced if performance indicators are not complied (“desconto de reequilíbrio)

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Output based contract

• Pavement and infrastructure indicatorsIGGIRIStructural number

• Capacity indicatorsExpansion of capacity obligations triggered by traffic thresholds

• Service performance indicatorsEmergency rescue and accident cleaning time obligationsMonitoring obligationSafety obligations

• Investment obligations remain for some aspectsGuardrailsHuman CrossingsSome of the monitoring systems

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Variable term of concession

Traffic studies pointed the need of relevant expansions of capacity in the years 15-17

Due to uncertainties on traffic growth and costs of this expansion, IFC suggested a variable term of the concession

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

This would also avoid to transfer to private sector the obligation of doing a big investment in the year15th to 17th year of concession

Together with IFC, the Government decided to set capacity triggers and to transfer the expansion of capacity risk to private sector

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New contract model

Development of a new contract model that enhanced the existent ones in the sector

New insurance and performance bond provisionsPerformance guarantee proportional to the estimated investment obligationsHigher 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

Enhanced protection to financiers in the case of early termination of contract

Step in rights of financiers

Enhanced monitoring tools for the regulatorSPC’s accounting have to comply with the local GAP for listed companies (although there is no requirement to list the SPC)Concessionaire have to deliver all its financial contracts to the GovernmentConcessionaire have to deliver quarterly financial statements and disclosure all financial information to the GovernmentFinancers have the obligation to notify the Government of the non-compliance with any covenant or provision of the financing contract

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New financial equilibrium protection clause

Brazil has a strong tradition of protection of financial equilibrium protection

Offset the regulator powers to change contract features

Compensation of risks that are allocated by the contract to the Government

Main concern was to define a methodology compatible with the risk matrix

Due to the asymmetries of information, traditional rate of return regulation many times change the risk matrix of concession contracts

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

Use, when possible, market costs

Define a formula in the contract to calculate the discount rate

New methodology was used for investments that are included in the contract afterwards

The traditional methodology was used for the other cases

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Contributed to address barriers to competition

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

Due to the variety of entrees of this sector in BrazilFocus the selection of players on the financial capacity and not in the technical capacity

Roads is a technically mature sector; all players can hire capable construction companies in the market

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

Financial indexes may create disparities when you have to compare companies that operates in different environments/sectors

The idea was to use the market to evaluate the financial capacity of the players

This has changed the way bidding procedures in this sector are doneIt was used for the 2007 Federal Gov second round of concessions

Also for the 2008 State of Sao Paulo Gov second round of concessions