What should be the level of detail and binding nature of concession and PPP projects?
by Diogo Albaneze Gomes Ribeiro
An issue that frequently raises questions and doubts in structuring concessions and public-private partnerships (PPPs) concerns the extent to which Bidders are bound by the technical and investment assumptions set out in these models.
To what extent, for example, should the technical solutions or the amount of investment set out in concession or PPP models bind the contracting parties? After all, in these contracts, does the concessionaire undertake to carry out works/investments exactly as defined by the grantor, or to meet service targets (for quality, expansion and universal access) and, to that end, undertake to make the investments necessary to achieve these targets?
So, what should be the level of binding effect and detail of concession projects tendered by the Government?
Answering these questions requires a correct understanding of the nature of these contracts, as well as of what is considered an appropriate allocation of risks in each specific case.
The necessary recognition that concession contracts are results-based contracts
Under the Federal Concessions Law (Law 8,987/95), the delegation of the operation of services presupposes the provision of adequate service to fully serve users (art. 6).
Adequate service, in turn, is service “that meets the conditions of regularity, continuity, efficiency, safety, up-to-dateness, generality, courtesy in its provision and reasonable tariffs” (§1 of art. 6 of Law 8,987/95). Ultimately, adequate service is service that meets the service targets agreed in the contract.[1]
It follows that the concession contract must be understood as a results-based contract, not a contract of means. So much so that failure to achieve this result (or the stipulated targets), if due to the concessionaire’s fault, may, after due administrative process, lead to forfeiture of the Contract (art. 38 of Law 8,987/95).
This same understanding has long been defended by legal scholars: “In providing the conceded service, it is not enough for the concessionaire to apply to the activity ‘the diligence of a good family man’, in the words of Italian civil law scholar Alberto Trabucchi. The objective of the concession must be achieved, which only occurs when the concessionaire provides users with ‘adequate service’, throughout the entire term of the contract. This is what characterizes the concession as a results-based contract, and not a contract of means.”[2]
The relationship between how binding the concession’s designs and feasibility studies are and the contract’s risk allocation
Since it is a results-based contract, it is inefficient or even mistaken to consider the envisaged technical solutions as binding, since how binding the design (or the studies) is directly affects the concession’s risk matrix. Not for nothing, the governing legislation removed the need to prepare a basic design beforehand in order to grant concessions (see item ‘c’ below).
In other words, the more binding the studies and technical assumptions, the more risk is transferred to the Government for the technical adequacy of the studies it provided.
If the technical solutions designed to achieve the project’s result are binding, the private partner will have to follow them to the letter. In this case, if the initially planned investments prove inadequate to achieve the targets agreed in the contract, the concessionaire may claim that these assumptions were wrong — which will give rise to claims for contractual rebalancing.
On the other hand, if the technical assumptions presented by the Government are merely indicative/for reference, then the ordinary risks of the project (and its costs) should lie with the private partner — which will also be responsible for correcting any errors or flaws, at no cost to the Government.[3]
After all, what reduces the chance of opportunistic requests to restore the economic and financial balance is precisely the efficient allocation of design and construction risks.[4]
No need to prepare a basic design to tender concession and PPP projects
Under the ordinary contracting regime provided for in the Federal Procurement Law (“Law 8,666/93”), the preparation of a basic design is a mandatory requirement for publishing a call for bids (art. 6, item IX, of Law 8,666/93).[5]
The basic design must contain significant detail on the financial aspects of the service or work to be contracted by the Public Administration, consisting of an exhaustive list of the materials, goods and equipment to be used to perform the administrative contract, including details of (i) unit costs and prices and (ii) Indirect Costs and Profit (BDI).
In the context of Law 8,666/93, the basic design is extremely important, given the need to properly characterize the contracted object, price it for budget allocation purposes and also indicate to contractors the maximum prices accepted by the Public Administration for the intended contract, so as to guide the bids submitted.
In concession contracts, the logic is clearly different.
Under Law 8,987/95 (art. 18, item XV), the tender for granting concessions must be preceded by “elements of a basic design”. The Federal PPP Law provides that “engineering studies to define the value of the PPP investment must have the level of detail of a preliminary design, and the value of the investments to define the reference price for the tender will be calculated based on market values considering the overall cost of similar works in Brazil or abroad, or based on cost systems using market values for the project’s specific sector as input, assessed, in any case, through a summary budget prepared using an expedited or parametric methodology” (art. 10, §4).
Since there is no definition of “elements of a basic design”, we follow the understanding that “elements of a basic design” means anything less detailed than a basic design.[6]
The lack of need to prepare a basic design to tender concession or PPP contracts stems from the following reasons: in concessions, the concessionaire’s managerial autonomy should prevail in identifying, in accordance with the minimum mandatory guidelines set out in the contract, the best way to implement the contracted infrastructure and provide the conceded services.
In other words: the concession entails a greater transfer of risks to the private party for the construction and management of the project, including the preparation of engineering designs and the quality of their implementation for the provision of the conceded services. The logic here is to shift to the private partner some responsibility for preparing the more specific aspects of the project, since it is the party that will bear the risks inherent in carrying out and operating the project.[7]
In this context, it is essential that concession and PPP models reflect the results-based nature of these contracts and, considering the particularities of each sector, allocate the project’s risks as appropriately and efficiently as possible.
[1] Bearing in mind that, provided the contract’s economic and financial equation is preserved, the targets may be adjusted over the course of the contractual relationship, always with a view to achieving the purpose of the delegation, which is the provision of adequate service.
[2] AMARAL, Antônio Carlos Cintra do. A Concessão de Serviço Público como “Contrato de Resultado”. Available at: <http://celc.com.br/wp-content/uploads/2015/08/C-206-A-Concess%C3%A3o-de-Servi%C3%A7o-P%C3%BAblico-como-Contrato-de-Resultado-20.08-2015.pdf>. Accessed on: October 20, 2020.
[3] RIBEIRO. Maurício Portugal. Concessões e PPPs (Melhores Práticas em Licitações e Contratos), São Paulo: Ed. Atlas, 2011, p. 45.
[4] Op. Cit., p. 45.
[5] IX – Basic Design – the set of necessary and sufficient elements, with an adequate level of precision, to characterize the work or service, or set of works or services, that is the object of the tender, prepared based on the indications of the preliminary technical studies, ensuring the technical feasibility and proper treatment of the project’s environmental impact, and enabling the assessment of the cost of the work and the definition of the methods and execution period, which must contain the following elements:
a) development of the chosen solution so as to provide an overall view of the work and clearly identify all its constituent elements;
b) overall and localized technical solutions, sufficiently detailed, so as to minimize the need for reformulation or variations during the preparation of the detailed design and the performance of the works and assembly;
c) identification of the types of services to be performed and materials and equipment to be incorporated into the work, as well as their specifications ensuring the best results for the project, without undermining the competitive nature of its performance;
d) information enabling the study and deduction of construction methods, temporary facilities and organizational conditions for the work, without undermining the competitive nature of its performance;
e) input for preparing the tender and work management plan, including its scheduling, procurement strategy, inspection rules and other data required in each case;
f) detailed budget of the overall cost of the work, based on properly assessed quantities of services and supplies;
[6] RIBEIRO. Maurício Portugal. Concessões e PPPs (Melhores Práticas em Licitações e Contratos), São Paulo: Ed. Atlas, 2011, p. 43.
[7] GUIMARÃES, Fernando Vernalha. Parceria Público Privada. São Paulo: Saraiva, 2012, p. 173.
Article originally published on Portal Jota (in Portuguese), on 11.12.2020.
