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Cablegate: Brazil Moving Forward with Public-Private

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 BRASILIA 001118

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 to 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-2006. 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.

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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

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