by Giuseppe Giamundo Neto and Fernanda Leoni

Problematic concessions are real bottlenecks for the government. In addition to compromising the proper delivery of public services and their enjoyment by the population, they hold back investment and frustrate investors. Because these are very long-term agreements, it is natural — and even expected — that supervening events significantly affect the economic and financial equation of these contracts. And it is healthy for the contracting parties to have instruments to respond immediately to such extraordinary situations.

The imminent approval of the tax reform illustrates this scenario well. The change in taxes and the respective burden on concession projects will require contracts to be reviewed. And preventing the necessary discussions and studies involved in this process from dragging on excessively, compromising the health of the concession, should be a goal of contracting entities. Hence the relevance of the subject of this article: the example of the State of São Paulo in regulating interim rebalancing as a mechanism to mitigate exceptional imbalance events.

In the first half of this year, the São Paulo State Department of Investment Partnerships (SPI-SP), also recently created, published SPI Resolution No. 19/2023, which regulates measures to mitigate the impacts of economic and financial imbalances in public service delegation contracts governed by Decree No. 67,435/2023.

As a positive novelty, the rule regulated the concept of “interim rebalancing” which, although generally classified as a prerogative of the Granting Authority, thus not creating a subjective right for the concessionaire — as established in article 2, item I of the Resolution — presents itself as a potential instrument for reducing the impacts of the prolonged negotiations to which many rebalancing requests end up being subject.

Note that the rule, and the resulting openness to discussing the model, addresses a problem which, although long faced by the public administration, was certainly exacerbated during the pandemic, when the government’s lack of a prompt response jeopardized the continuity of a number of contracts, at least with regard to their initial equilibrium point. In the case of concessions, the issue is even more sensitive because of the longevity of these contracts and the serious harm caused by delays in responding to imbalances, creating a real long-term “snowball” effect.

The idea behind the resolution, therefore, is to prevent this discussion from dragging on excessively, to the detriment of current contracts and the public service itself, without departing from the natural complexity of the assessments involved in a contract rebalancing process. At the same time, the seriousness of the rebalancing assessment process can be maintained, while stemming those immediate losses which, if not remedied promptly, end up deteriorating the course of the agreement, in addition to increasing the losses to be compensated by the Granting Authority.

This is therefore an important development of the general principle of the duty to mitigate one’s own losses — or the duty to mitigate the loss, in the jargon commonly used by legal scholars — and of objective good faith itself, which leads to swift, effective and, why not, consensual decisions. Likewise, the resolution is in line with the most recent provisions of the Law of Introduction to the Norms of Brazilian Law, especially regarding the possibility of compensation for undue benefits or abnormal losses [1].

Thus, in practical terms, the rule recognizes that, even before the final conclusion of the procedure to assess the imbalance — naturally lengthy due to its complexity — some remedial measures may be brought forward to prevent any loss from worsening due to delays in compensation; and the resolution, although initially of discretionary adoption, also regulates cases of mandatory action by the government.

In this context, the following are authorized as interim mechanisms: bringing forward, postponing or canceling investments, including additional investments, suspending the enforceability of payments owed to the Granting Authority or supervisory agent, increasing or reducing these amounts, as well as tariffs, paying compensation, increasing or relieving charges and transferring costs [2]. However, the rule falls short in that it gives no indication of any possibility for the concessionaire to have even a minimal say on the measures to be adopted, or even on their effectiveness for compensation [3].

As for the limitation of discretion mentioned above, the rule establishes the situations in which an assessment of the suitability of the mitigation measures provided for in the resolution will be mandatory. These are cases of potential compromise of the continuity of the services or of the concessionaire’s solvency; cases in which the approaching end of the concession term indicates a remaining regulatory balance; and cases in which the projected imbalance corresponds to an annual or consolidated impact of more than 5% of gross revenue, for imbalance events with continuous effects over time or not projected into the future, respectively [4].

Once the situation has been classified and the procedure initiated, the bodies or autonomous agencies responsible for regulating or managing the contract must present a preliminary estimate of the impact of the imbalance event, as well as indicate the appropriate interim measures, the final choice of which will rest with SPI-SP [5].

Once again, it should be stressed that interim rebalancing measures will, as a rule, be discretionary, except where the occurrence of the imbalance has been definitively recognized by the competent body or can be presumed; where one of the interim measures can be adopted; or where there is no proven unavailability of funds to meet the State’s budgetary and financial obligations or to preserve the financial autonomy of the regulatory agency responsible for overseeing the performance of the contract [6].

Precisely because of their interim nature, any measures applied may not exceed 80% of the estimated economic and financial impact of the imbalance event, nor may they result in funds being received before the actual financial impact of the imbalance event [7]. This ensures that the concessionaire does not unduly benefit from compensation exceeding what would ultimately be owed to it at the end of the process.

Finally, it is established that, where the interim measure is granted, the respective administrative proceedings will be given priority, with a view to the final measurement of the imbalance and the consequent adjustment of the compensation measures; and the progress of the work will be assessed quarterly by SPI-SP, upon receipt, from the body or autonomous agency responsible for regulating and managing the contract, of a detailed report on the activities carried out for the final measurement of the imbalance [8].

Thus, even without more consolidated results to test the effectiveness of the mechanism, there is no doubt that the rule has become an important precedent on interim rebalancing, and its example deserves to be extended to other entities and spheres of government. It is an important mechanism for legal certainty and predictability in long-term business with the government, attracting new investment in infrastructure. May this regulatory model spread nationwide.

[1] See: “Art. 27. The decision in the proceedings, in the administrative, oversight or judicial spheres, may impose compensation for undue benefits or abnormal or unfair losses resulting from the proceedings or from the conduct of those involved”.

[2] The interim measures are detailed in article 2, item III, of the Resolution.

[3] In fact, the concessionaire does not even have standing to request the initiation of this procedure, as established in article 2, item IV, of the Resolution.

[4] As established in article 3 of the Resolution.

[5] See article 5 of the Resolution, which also sets a deadline of ten business days for taking these steps.

[6] See article 6 of the Resolution.

[7] See article 6, sole paragraph, of the Resolution.

[8] See article 7 of the Resolution.