After months of discussion, the Brazilian Federal Government published last Friday (November 25) a Provisional Measure ("PM 752") establishing alternative solutions for ongoing concessions. These solutions are basically two: (i) contract term extension followed by a commitment of new investments by the concessionaire (applicable to toll-roads and railways), and (ii) the re-tendering of concession projects - including public private partnerships – PPP (applicable to toll road, railway and airports).
The main innovation brought by PM 752 is the possibility of the contracting public entity and the interested concessionaire agreeing upon the early termination of the concession agreement in force. As a consequence, the project can be re-tendered and granted to a new operator.
Only concession contracts currently under default or whose concessionaires do not have the capacity to comply with contractual obligations are eligible for early termination. Terms and conditions of the termination and of the re-tender process will be regulated on a case-by-case basis.
PM 752 also regulates the conditions under which a concession may have its term extended. The term extension can apply either at the original contractual term or during the life of the original agreement. In both cases, the concessionaire has to comply with certain conditions and request the extension at least 24 months prior to the original expiration date, unless otherwise regulated on a specific provision.
The extension on concession terms will be submitted to public consultation and to the analysis of the Federal Court of Audits prior to the Grantor's approval. Only concessions whose current terms ranges between 50% to 90% of their original term and whose concessionaires undertake the commitment to make new investments are eligible for the early term extension set forth in PM 752. Eligibility may also depend on additional conditions, such as the commitment to new KPI levels for railway concessions; and the performance of, at least, 80% of the works initially set forth in the contract for highway concessions.
Like any Provisional Measure, PM 752 produces effects immediately, but still needs to be approved by Congress to be converted into law. With the new rules, the Brazilian Government expects to generate a new wave of investments in infrastructure projects, either by allowing the re-tendering of some projects or by allowing new investments by current operators, in exchange of a longer concession period.
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