US embassy cable - 05BRASILIA1168

UNCLAS SECTION 01 OF 03 BRASILIA 001168 
 
SIPDIS 
 
NSC FOR BREIER, RENIGAR 
TREASURY FOR OASIA - DAS LEE AND FPARODI 
STATE PASS TO FED BOARD OF GOVERNORS FOR ROBITAILLE 
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D 
USDOC FOR 3134/ITA/USCS/OIO/WH/RD/DDEVITO/DANDERSON/EOL SON 
 
E.O. 12958: N/A 
TAGS: EINV, ECON, PGOV, EFIN, BR 
SUBJECT:  BRAZIL MOVING FORWARD WITH PUBLIC-PRIVATE 
PARTNERSHIPS 
 
REF: A) BRASILIA 521    B) SAO PAULO 262 
 
1. (SBU) Summary:  The GoB is close to launching an inter- 
agency review of its first two Public-Private Partnership 
(PPP) proposals for major infrastructure investments, 
according to Ministry of Planning Chief Economic Advisor 
Antonio Alves and special PPP coordinator Mauricio Ribeiro. 
These projects would be reviewed by the Ministers of 
Planning and Budget (Paulo Bernardo), Finance (Antonio 
Palocci) and the President's Chief of Staff (Jose Dirceu), 
who together comprise the PPP Management Committee.  The GoB 
hopes PPPs will make more attractive otherwise marginally 
profitable investments in infrastructure through 
arrangements such as cost sharing, joint investments or 
operating subsidies.  Our interlocutors stated that a decree 
creating the guarantee fund, which would provide PPP 
investors a guarantee in case the GoB fails to meet its 
contractual obligations in a particular project, is close to 
being issued.  Many of the details of PPPs would still have 
to be negotiated in the individual project contract.  Even 
if all goes well, these first two projects would not go out 
for bids until, at the earliest, end-2005.  To help close 
the widening public infrastructure deficit, the GoB is 
seeking substantial involvement by foreign firms and 
investors in PPP projects.  In our view, however, the GoB 
likely has oversold PPPs as the solution for long-standing 
infrastructure bottlenecks and its past lack of public 
investment.  Many states and municipalities also plan to 
sponsor PPP projects based on state and local-level statutes 
that vary from the federal legislation and from each other. 
End Summary. 
 
2. (U) The GoB has set up a PPP Management Committee (MC), 
consisting of the Ministers of Planning and Budget (a rough 
OMB-equivalent), Finance, and the President's Chief of 
Staff, Alves and Ribeiro told Econoffs in an April 18 
meeting.  The MC will act based on technical-level 
assessments from all three ministries.  Alves and Ribeiro 
anticipated that the GoB shortly would issue a decree 
creating the PPP guarantee fund, consisting primarily of 
stock in large state-owned companies, such as Petrobras, 
which have been partially privatized and whose stock trades 
freely on the Sao Paulo exchange.  The guarantee fund will 
serve as a security for investors if the GoB fails to meet 
its contractual obligations under a PPP.  Alves stated that 
the GoB does not plan to issue a decree with implementing 
regulations, but rather will tackle these issues in the 
individual project contracts. 
 
3. (U) The GoB has created a multi-stage process to select 
and structure PPP projects, the first stage of which is a 
screening by the technicians working for the MC, according 
to Alves.  Those projects that receive clearance at the 
technical level would be forwarded to the three MC 
ministers.  If approved by the ministers, projects would 
then be farmed out to a consulting firm for formal study, in 
coordination with the relevant regulatory agency or sectoral 
ministry (e.g. transportation).  The former are involved 
because, in many areas, the regulatory agencies retain the 
formal authority to grant concessions (PPPs formally are 
considered a modified form of concession contract). 
Finally, the consultant's study would be presented to the MC 
for its final approval, a stage that Alves envisioned as a 
formality in most cases, since most kinks in projects would 
be worked out in the study phase.  After the MC's final 
approval, projects would be put out to bid.  Alves and 
Ribeiro were proud of the bidding procedures contemplated in 
the PPP law, saying that the GoB was working to reform its 
general procurement rules to incorporate some of the 
innovations in the PPP legislation. 
 
4. (U) Alves anticipated that the technical level MC would 
meet in May to consider the first two proposed PPP projects. 
He thought it likely these would be forwarded to the MC for 
their approval relatively quickly, since the projects in 
question are long-standing proposals that the technicians 
know well.  But, given the need to hire consultants through 
a formal bid process and then allocate four to five months 
for them to study the projects, obtain MC approval and then 
prepare formal bid documents, the minimum time frame for the 
two projects to make it to bid would be eight months.  Alves 
noted that the projects in question, which he characterized 
as transport-related, would speed through the review process 
as they already had advanced environmental impact studies. 
He nevertheless characterized the eight-month-timeframe as 
"optimistic." 
 
5. (U) Alves expected that the Ministries of Planning and 
Finance would play a more circumscribed role in future 
projects as the sectoral ministries and regulatory agencies 
improved their capacity to prepare project proposals.  Once 
the whole review apparatus was up and running, Alves thought 
that the system would be able to process about two projects 
every three to four months.  The bid specifications 
contained in the first two projects, he explained, would 
likely serve as a model for those that followed. 
 
6. (U) The Planning Ministry, Ribeiro noted, would like to 
complete a study of obstacles that foreign construction 
firms face in doing business in Brazil.  They would like to 
reduce at least some of these barriers in order to increase 
competition in bidding on these large infrastructure 
projects, which only a handful of Brazilian firms had the 
capacity to take on.  This would help improve the terms of 
the PPP projects for the GoB and also address a perceived 
lack of capacity among the large Brazilian firms to take 
very many of these projects onto their balance sheets. 
Alves and Ribeiro emphasized that there were no legal 
restrictions on foreign firms bidding on PPP projects, and 
encouraged U.S. companies to seriously consider this market. 
 
7. (U) Finally, Alves observed that the latest Budget 
Directives Law (LDO, in its Portuguese acronym), which lays 
out the GoB's three-year spending plan, currently in 
Congress, already envisions PPP counterpart spending.  This 
was a prerequisite for inserting the specific PPP 
counterpart line items in the annual budget law, which would 
be approved at end-year. 
 
8. (SBU) Several individual states are pursuing their own 
state-level PPP projects.  Sao Paulo, Goias, Minas Gerais, 
Bahia, Santa Catarina and Espirito Santo, among others, have 
passed laws governing state-level PPPs.   Sao Paulo may well 
initiate an export-import corridor PPP project before the 
national level PPP project kick-off (ref B).  Sao Paulo 
Econoff met on March 22 with attorneys Ricardo Sanches and 
Troy Petit of the Sao Paulo-based law firm Felsberg and 
Associates to discuss PPPs.  They expect to see the export- 
import corridor kick-off this year.  Sao Paulo state also 
has created a guarantee fund, CPP, in the form of a holding 
company dedicated to PPP projects.  CPP also will play a 
role in assessing project viability.  Sanches noted that 
federal, state and municipal governments will all sponsor 
PPP projects, with a mix of different regulatory approaches. 
He cautioned that many other states were less prepared than 
Sao Paulo and Minas Gerais to prepare and launch PPP 
projects.  The quality of state and municipal level 
guarantees also might vary widely.  Sanches emphasized the 
importance of the GoB and the states taking a prudent 
approach to the first PPP projects, as their success or 
failure would likely prove a bell-weather for future PPPs. 
 
9. (U) PPPs may not be as necessary for some states as 
others.  In a meeting with Rio Econoff, the State Secretary 
for Economic Development of Espirito Santo (ES) said that 
despite the fact that ES has approved a PPP law, it is 
counting on its hospitable and investment friendly business 
environment and fiscal incentives to attract much needed 
investment and that PPPs are not its priority right now. 
ES's belt tightening also means that it can invest in those 
projects that are truly public in nature, i.e., low return 
on investment. 
 
10. (SBU) Comment.  The GoB long has been talking up PPPs as 
its answer to falling public infrastructure investment and 
the ongoing problem of infrastructure bottlenecks, which are 
holding back productivity growth.  In moments of candor, 
however, members of the GoB economic team admit that PPPs 
likely have been oversold as the answer to this set of 
problems.  And, while the jury obviously is still out on 
their ultimate effectiveness, PPPs look to be more of a band- 
aid solution to investment rather than the sort of broader 
measure -- such as overhaul of the Byzantine tax system or 
efforts to reduce regulatory uncertainty -- necessary to 
attract the quantity and quality of investment, both 
domestic and foreign, that Brazil needs. 
 
11. (U) This cable was reflects input from Consulates Sao 
Paulo and Rio de Janeiro. 
 
DANILOVICH