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Cablegate: Brazil: Movement On Public-Private Partnerships

VZCZCXRO8760
PP RUEHRG
DE RUEHBR #1775 2351318
ZNR UUUUU ZZH
P 231318Z AUG 06
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC PRIORITY 6452
INFO RUEHRG/AMCONSUL RECIFE 5330
RUEHSO/AMCONSUL SAO PAULO 7839
RUEHRI/AMCONSUL RIO DE JANEIRO 2730
RUEHSG/AMEMBASSY SANTIAGO 5704
RUEHBU/AMEMBASSY BUENOS AIRES 4213
RUEHAC/AMEMBASSY ASUNCION 5603
RUEHMN/AMEMBASSY MONTEVIDEO 6414
RUEHQT/AMEMBASSY QUITO 1945
RUEHPE/AMEMBASSY LIMA 3135
RUEHLP/AMEMBASSY LA PAZ 4802
RUEHCV/AMEMBASSY CARACAS 3396
RUEHBO/AMEMBASSY BOGOTA 3893
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDO/USDOC WASHDC
RHEHNSC/NSC WASHDC

UNCLAS BRASILIA 001775

SIPDIS

SENSITIVE
SIPDIS

STATE PASS USAID FOR LAC - JOHN GARRISON
STATE PASS OPIC FOR VP R.DRUMHELLER
NSC FOR FEARS
TREASURY FOR OASIA - D.DOUGLASS, J.HOEK
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/SHUPKA

E.O. 12958: N/A
TAGS: ECON PGOV PREL EFIN EINV BR
SUBJECT: BRAZIL: MOVEMENT ON PUBLIC-PRIVATE PARTNERSHIPS

REF: 05 BRASILIA 1118

This cable is sensitive but unclassified, please protect
accordingly.

1. (SBU) The GoB is close to launching a much-delayed inter-agency
review of its first Public-Private Partnership (PPP) proposals for
major infrastructure investments. These projects would be reviewed
by the Ministers of Planning and Budget (Paulo Bernardo), Finance
(Guido Mantega) and the President's Chief of Staff (Dilma Rousseff),
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. The GoB now
expects that the first project bid will be for the repair and
rehabilitation of a federal highway (BR-116) in the states of Bahia
and Minas Gerais, the investment in which would be partially
recovered through tolls, with the remainder paid by the GoB. A
federal fund, endowed with assets such as stock in
partially-privatized oil parastatal Petrobras, will guarantee GoB
performance of its PPP contract obligations.

2. (SBU) Although the GoB initially billed PPPs as the solution for
Brazil's long-standing infrastructure bottlenecks and lack of public
investment, implementation of the December 2004 PPP law has been
very slow. After years of tight investment budgets, the GoB's
ability to evaluate projects of this size and complexity has
withered. To evaluate projects, therefore, the GoB had to hire
consultants through a standard public bid (a process that can take
as much as year). Having hired a consulting firm to evaluate the
first two projects put forward by GoB technicians (completion of the
north-south railway and a port expansion project) the consultants
reported back after several months that the two projects were
commercially viable without subsidies, and therefore not appropriate
to the PPP framework, but rather for simple concessions.

3. (SBU) According to Andrew Gunther of the World Bank's
International Finance Corporation (IFC), the IFC is proposing to
help the GoB deal with these bureaucratic limitations by creating a
fund, to be financed jointly by the Brazilian Development Bank
(BNDES), the IFC and other donors such as the Inter American
Development Bank (IDB), which would help the GoB select projects and
then finance the consulting work necessary to put the projects out
for bid. By avoiding substantial portions of the Brazilian
bureaucratic bog, this approach could speed substantially the
process of getting PPPs out to bid. The IFC, Gunther told us, also
will be approaching other donors to sound out their interest in
supporting the fund.

4. (SBU) The GoB is interested in seeing substantial involvement by
foreign firms and investors in PPP projects. It hopes that
involvement by foreign investors and construction/engineering firms
will increase competition and improve financing terms. Foreign
business will still have to navigate bureaucracy, as 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. The quality of the guarantees offered to investors by
sub-national governments may vary widely.

5. (SBU) Comment: Although it is ironic that the GoB faces a
bottleneck in its capability to evaluate PPP projects, themselves
aimed at addressing infrastructure bottlenecks, the IFC fund
nevertheless presents a useful opportunity to assist the GoB move
more quickly on projects that ultimately may prove attractive for
U.S. investments and exports, both of engineering services and
equipment. End Comment.

SOBEL

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