The opening of airport concessions in Brazil

By Geir Sviggum, Wikborg Reinand and Georgia Souza, Vieira Rezende Barbosa e Guerreiro Advogados
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The next five years are going to be busy in Brazil. With the 2014 FIFA World Cup and the 2016 Olympic Games in Rio de Janeiro rapidly approaching, the Brazilian federal government has identified infrastructure development as an area of key importance. With a large number of overseas visitors expected at the two largest sporting events in the world, transport-related infrastructure has become a priority.

Geir Sviggum, Wikborg Rein
Geir Sviggum
Managing Partner
Wikborg Rein

As a result, the federal authorities made the move to include the airport sector in the national privatization programme (PND) as they seek to modernize the country’s airports and ensure they operate in an efficient and customer-focused manner. The opening to private participation of airport assets, traditionally run by the public sector, will be achieved through the awarding of concession agreements.

The Brazilian Aviation Code establishes that public airports may be built, maintained and operated by means of concession or authorization (Law 7.565/86, article 36).

The state has clearly indicated that private sector airport concessions will be granted pursuant to the abovementioned article 36. This adds a great deal of certainty in the overall process and means that no further laws need to be enacted, as there is already sufficient legal provision to back private concessions.

Concessions, all awarded following a public tender process, will entail signature of a bilateral and commutative agreement which will create reciprocal obligations between the Brazilian state and the concessionaires. This adds further transparency to the process and gives private investors another layer of protection.

The government’s move opens up considerable opportunities for investors and overseas operators to take a majority stake in, what are essentially, public-private partnerships.

The role of foreign capital

Georgia Souza, Vieira Rezende
Georgia Souza
Associate
Vieira Rezende Barbosa e Guerreiro Advogados

Brazil has currently 67 main airports, which are operated by Infraero, the national Brazilian authority of airport infrastructure. Infraero is a public company acting on behalf of the federal government. It is also linked to the National Civil Aviation Agency, Brazil’s agency responsible for the regulation and safety oversight of civil aviation.

Under the proposed model, Infraero will hold the State’s minority holding in any privatized airport assets.

Brazilian law does not prevent foreign companies, or Brazilian companies controlled by foreign capital, from participating in the public tender process for construction and/or operation of the country’s airports. The invitation to bid for future airport concessions clearly allows foreign companies, both individually or as part of a consortium (whether established in Brazil or elsewhere), to take part in this process.

Successful bidders will be required to constitute a Brazilian special purpose company in association with Infraero, observing the minimum proportion of 51% of private capital and a maximum of 49% of public capital, held by Infraero.

São Gonçalo do Amarante Airport

The international airport of São Gonçalo do Amarante, located in the metropolitan area of Natal, in the Rio Grande do Norte State, is currently under construction. It was the first airport concession granted in Brazil under the new legislation.

In order to establish the legal framework for the privatization of the São Gonçalo do Amarante Airport, the federal government first enacted Decree 6373/2008, including the airport in the PND. Subsequently, the Federal Union enacted Decree 7.205/2010 to establish the terms and the procedures for the public tender that would result in the privatization of the airport.

In effect, the result of the São Gonçalo do Amarante project will be used as a reference to refine the legal framework for a number of other important infrastructure projects that will be tendered in the next few years.

Rules for the next round

The World Cup and Olympics have fixed start dates and thus present immovable deadlines. To speed up the tender process and give successful concessionaries sufficient time to achieve the intended targets, the government has established the Differentiated Regime of Public Contracting (RDC) which has adopted special rules that alter and simplify processes required under the Public Tender National Law.

The RDC provides more clarity around the bidding process and aims to implement public sector procurement best-practice.

The successful bidders for the first three Brazilian airports to be privatized in 2012 – Guarulhos, Brasília and Campinas – will also have to comply with certain targets to meet the requirements of the 2014 World Cup.

The bidders shall pay a minimum bid amount to the government; make minimum investments, and give a percentage of their annual revenue to the government during the concession period. Minimum investment levels are also required over the next 18 months to meet the Government’s commitments to the 2014 World Cup.

Furthermore, the government’s main objectives in privatizing Brazilian airports have been defined in greater detail and include:

  • attaining private sector efficiency in the provision of airport services;
    sharing the gains with the users of the services (better quality with more reasonable tariffs), by selecting the company that demonstrates through its bid proposal that it is the most efficient operator;
  • ensuring regulatory stability and business attractiveness; and
  • establishing a minimum level of infrastructure standard and service.

On 13 October, a series of studies into the Guarulhos, Brasília and Campinas projects were presented to the Brazilian Audit Court (TCU). These included technical, economic and financial studies into the airport concessions. After the analysis by TCU, the invitation to tender should be published. The TCU analysis aims to ensure that the concession models are financially, technically, and environmentally sustainable.

As part of the airport development initiative, the Brazilian Development Bank, BNDES, will finance between 50% and 70% of the investments of the companies that win the tenders for Guarulhos, Brasília and Campinas.

According to recently published news, the call for tenders which was scheduled to happen next month is now expected to occur in the first months of 2012.

Geir Sviggum is managing partner of Wikborg Rein in Shanghai. Georgia Souza is a an associate at Vieira Rezende Barbosa e Guerreiro Advogados, an associated law firm of Wikborg Rein, in Rio de Janeiro

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