Copyright 1996
InterAm Database
National Law Center for Inter-American Free Trade

August 31, 1995

CONCESSIONS IN BRAZIL
BRIEF COMMENTS
 
Ricardo Barretto Ferreira da Silva
Antonio Oscar de Calvalho Petersen Filho
Carvalho de Freitas e Ferreira - Advogados Associados
 
For decades, the Brazilian State maintained a significant state participation in 
the infrastructure and services related to the necessity of developing the 
country's productive sector. This generated a great dependence of the private 
sector on the services supplied by the State.
 
With the end of the economic crises which devastated Brazil in recent decades, 
the Brazilian Government initiated a restructuring process of the public sector, 
offering partnership opportunities to the local and foreign private sectors, based 
on the reinforcement of investments and technology for improving the 
performance of public services.
 
The first step was the regulation, at the beginning of this year, of the 
concession and permission regime for the provision of public services, as set 
forth in Article 175 of the Federal Constitution, through Law Nr. 8.987 of 
02.13.95, also known as the Law of Concessions, and Law Nr. 9.074 of 
07.07.95.
 
This regulation enables the State to delegate the provision of public services to 
third parties. In this way, the concessionaire invests at his own account and 
risk, in the name of the State, while receiving remuneration for the collection of 
rates.

Since the Law of Concessions is generic, establishing the directives for the 
delegation of public services at the federal, state and municipal levels, there is 
need for specific regulations for each sector. This Law does not apply with 
respect to the concession, permission and authorization for radio and television 
broadcasting services.
 
The Law establishes that any legal entity, including state-owned companies or 
consortiums of companies, may be concessionaires or licensees of public 
services.
 
The rules established by Law Nr. 8.987 for the concession of public services 
also apply to the permission for public services, with the exception of the 
following points:
 
  individuals may be licensees of public services but can not, however, be 
concessionaires;
 
  the permission to exercise public services will be formalized by an 
adhesion contract and can be revoked at any time by the conceding party; 
 
  competitive type bidding is not required for permissions to render public 
service.

Outlined below are the principal points of Law 8.987 and Law 9.074:
 
Following are the considerations for the concession and permission of public 
services:

  conceding party: the Union, States, Federal District or Municipalities;
 
  concession of public services: the delegation of its provision, by the 
conceding party to legal entities or consortiums of companies, by means of 
a competitive bid;
 
  concession of public services preceded by the execution of public 
works: the total or partial construction, conservation, restoration, 
expansion or improvement of any works of public interest, under the same 
conditions as the item above, in such a manner that the concessionaire's 
investment is remunerated and amortized with the exploration of the 
service or works over a determined period of time;
 
  permission for public services: the delegation, of a precarious nature, of 
the provision of public services, by the conceding party to the legal entity 
or individual by means of bidding.
 
 l.  ADEQUATE SERVICE
 
The concession presupposes that services will be adequately executed, insofar 
as satisfying conditions of regularity, continuity, efficiency, security, up-to-date 
methods, generality, courtesy in their provision and moderateness of
rates.
 
2. THE RIGHTS AND OBLIGATIONS OF THE USER
 
The Law establishes as the rights and obligations of the user the following:
 
  to receive adequate services;
 
  to receive from the conceding party and concessionaire information for the 
protection of individual or community interests;
 
  to obtain and use the service, with freedom of choice, observing the norms 
of the conceding party;
 
  to bring to the notice of the public administration and concessionaire any 
irregularities in the service rendered;
 
  to communicate any illicit acts practiced by the concessionaire in the 
provision of the service to the competent authorities; 
 
  to contribute to the maintenance of public property in good order.
 
3. THE RATES
 
The rates of the public service conceded will be determined by the price of the 
bid winning proposal; and the possibility of foreseeing mechanisms for the 
revision of rates, in order to maintain the economic-financial equilibrium.
 
4. THE BID
 
All public service concessions will obligatorily be the object of prior bidding.  
The judgment criteria adopted will be: the lowest rate value for the service to 
be rendered; the greatest offer, in cases where payment will be made to the 
conceding party by the grantee of the concession; and by the combination of 
these two criteria when stipulated by the bidding announcement.
 
The proposals which presuppose benefits or subsidies not previously authorized 
by Law or available to all the competitors will not be accepted.
 
The bidding announcement should contain:
  
  a description of: the object; goals; documents; judgment criteria and 
reversible property;
 
  time limits for: concessions; the receipt of proposals; judgment and signing 
of the contract;
 
  the possible sources of alternative revenue, complementary or accessory, as 
well as those derived from associated projects;
 
  the rights and obligations of the conceding party and concessionaire; the 
readjustment criteria for the revision of rates;
 
  a draft of the contract (in the case of permission, the terms of the adhesion 
contract);
 
  explicit indication of the party responsible for the onus of any 
expropriations required for the execution of the service, public works or 
public easement;
 
  the condition of leadership of the company responsible in the case of a 
consortium.
 
Bidding is not required for the granting of telecommunications services which 
are exclusively for the use of the grantee and not subject to commercial 
exploitation.
 
5. CONSORTIUM OF COMPANIES
 
In the case of the participation of companies in a consortium, the leader 
company is responsible to the conceding party for abiding to the contract, 
which should observe specific rules, without thwarting the solidary (sic) 
responsibility of the other consortium members.
 
Consortium companies in the same bidding process are impeded from 
participating through more than one consortium or individually.
 
6. THE CONTRACT

The necessary clauses of the concession contract are:
 
  the object, area and duration of the concession
 
  the type, method and conditions of the service rendered;
 
  criteria which define the quality of the service;
 
  price of the service and criteria for the readjustment of rates;
 
  rights, guarantees and obligations of the conceding party, concessionaire 
and users of the service;
 
  methods of inspection;

   when applicable, the conditions for: reversible property; the extinction of 
concessions; contractual penalties; extension of the contract; rendering of 
accounts; time schedule of the works.
 
It is incumbent upon the concessionaire to execute the service conceded, and 
answer for all the losses caused to the conceding party, users or third-parties.  
Without exempting itself of its responsibilities, the concessionaire may contract 
with third-parties the development of inherent activities - accessory or 
complementary to the service conceded, or the implementation of associated 
projects.
 
7. SUB-CONCESSION
 
The concession contract may provide for sub-concession as long as it is 
explicitly authorized, in which case the sub-concessionaire will subrogate all 
the rights and obligations within the limits of the sub-concession.
 
The transfer of concessions may be offered in guarantee of the rights arising 
from the concession, providing they do not affect the provision of the service.
 
8. INTERVENTION
 
The conceding party may intervene, via decree, stipulating the appointment of 
the intervention and the duration, object and limit of the intervention, with the 
objective of assuring the adequate provision of the service.
 
9. THE SERVlCES
 
The following are subject to the concession or permission regime established by 
Law Nr. 8.987/95:
 
  federal high, rail, water and airways, whether preceded by the execution of 
public works or otherwise;
 
  the exploration of federal works or services of dams, containment 
reservoirs, locks, dikes and irrigations, whether preceded by the execution 
of public works or otherwise;
 
  customs posts and other customs terminals of public use, not installed in 
port or airport areas, whether preceded by public works or otherwise;

The Union, States, Federal District and Municipalities may execute public 
works or services by means of concession or permission, providing they are 
duly authorized by law.
 
No legal authorization is required in the case of basic sanitation and urban 
cleaning services or in the cases referred to by the Federal and State 
Constitutions and Organic Law.

The following modes of transport do not require concession or permission:
 
  waterway passenger transport not carried out between organized ports;
 
  highway and waterway transport of people, undertaken by tourism 
operators in the exercise of their activities;
 
  of people, of a private nature, of public or private organizations, even 
though in a regular way;
 
  of cargo by the highway mode (the latter does not require authorization). 
 
l0. ELECTRIC ENERGY SERVICES
 
The Law in question regulates the provision of public electric energy service, 
specifying the concession, permission and authorization criteria; the 
independent producer of electric energy; options for the purchase of energy on 
the part of consumers; transmission implementation, generation consortiums 
and the extension of concessions.
 
11. PRIVATlZATION
 
When the public service is provided by a legal entity controlled directly or 
indirectly by the Union, States, Federal District or Municipalities, the Union 
may, with the exception of the public telecommunications services, and in order 
to promote the privatization simultaneously with the grantee of the new 
concession or extension of the existing concessions:
 
  utilize auctions in the bidding process, observing the necessity for the sale 
of minimum quantities of quotas or shares to guarantee the transfer of 
stockholder control;
 
  previously stipulate the value of the quotas or shares of its ownership to be 
alienated, and proceed with the competitive bid.
 

12. EXTINCTION OF THE CONCESSION
 
The concession is extinguished in the following cases:
 
  maturity of the contractual terms;
 
  expropriation (recovered by the conceding party for reasons of public 
interest);
 
  forfeiture (recovered by the conceding party due to non-compliance with 
the contract);
 
  rescission (on the initiative of the concessionaire, through a judicial 
proceeding, in the case of non-compliance with the contract);
 
  annulment;
  bankruptcy.
 
 THE IMPACT OF THE LAW OF CONCESSIONS
 
Concessions have become a priority for the Government given the current 
situation of the Brazilian economy and the lack of public resources for 
investment.
 
The chief objective of the new Law of Concessions is to rapidly increase the 
supply of services in deficient sectors and put an end to the system which 
maintained the old concessionaires with a kind of market reserve, in strategic 
sectors, with the conviction of the immutability of the system.
 
This new regulation creates an institutional framework which enables private 
enterprise to feel more secure about participating in partnerships with the 
Government. The principal candidates are contractors and capital goods 
industries.  The major banks are already announcing their participations, with 
the formation of consortiums for the privatization of public services.
 
International financial institutions have also demonstrated an interest in 
assuming projects, especially in the generation of energy (both hydric and 
thermal) and transport areas, and with excellent perspectives (sic) for the other 
areas.
 
The new perspective (sic) of modernizing ports, building highways to charge a 
toll, generating and selling electric energy and rendering waste collection, basic 
sanitation, transport and numerous other services, has stimulated all the 
domestic and foreign private sectors into establishing partnerships with the 
Government.
 
The new legislation includes among the public services which have become the 
object of concession:
 
a) the generation, transmission and distribution of electric energy;
 
b) collective municipal, and interstate and international highway transport of 
passengers, and air, rail and waterway transport;
 
c) the possibility of exploring airport, airspace, dam, dike and lock 
infrastructures, and highway works, with or without the execution of port 
works;
 
d) such services as basic sanitation, urban cleaning, waste treatment and 
funeral services.
 
 TELECOMMUNICATIONS
 
The Law of Concessions does not include public telecommunications services, 
with the allegation of guaranteeing the opening of the sector through an ample 
negotiation among society and principally in Congress, particularly after the 
approval of the constitutional changes.
 
The Ministry of Communications, aware of the need to establish a new set of 
rules for the process of granting concessions and permits for the exploration of 
Telecommunications Services, and with the objective of participating jointly 
with society, published, for public comment, through Administrative Rule     
Nr. 223 of  09.01.1995, the Regulations for Granting Concessions or 
Permissions for the Exploration of Telecommunications Services on a 
Commercial Basis.
 
In the same way, Regulations for Cable TV Services, for public manifestation, 
were published through Administrative Rule Nr. 119 of 04.13.95, which was 
the object of numerous comments and suggestions, resulting in its re-
publication, for public comment and with the pertinent modifications, as 
Administrative Rule Nr. 224 of 09.01.95.
 
TRANSPORT AND CIVIL CONSTRUCTION
 
The transport and civil construction sectors are keeping a sharp eye on the 
principal federal and state highways crossing the whole of Brazil, especially 
those of the State of Rio Grande do Sul, which prioritize trade between the 
member countries of Mercosul and are a priority of the government of this state 
to be transferred to the private sector, with the objective of creating a 
production outlet highway package.
 
ELECTRIC ENERGY
 
For the electric energy sector, the new Law of Concessions creates important 
progress, permitting the inclusion of independent producers of energy in the 
market and even their supply to other states.  It also allows for the merging, 
spin-off, stockholder transformation into concessionary companies, and permits 
the existence of consortiums with private enterprise for the conclusion of 
unfinished works.
 
The electric energy sector was very concerned with the generalization of the 
bidding procedure for public concessions and the lack of consideration for the 
specific characteristics of each sector. Nevertheless, the enactment of Law 
9.074 provided more specific regulations for this sector, to the satisfaction of 
the government, the private sector, and the present concessionaires, 
guaranteeing the latter, the extension of concessions for a further twenty years.
 
It is the understanding of both the Union and private sector that it is necessary 
to have specific regulations for each sector, in order to define the characteristic 
points which should be observed for each type of concession.
 
The current scenario is favorable for the Government and even more so for 
private enterprise, which is demonstrating a great interest in creating new 
partnerships with the Government in all the sectors of the economy.
 
Sao Paulo, August 31, 1995.