Giuseppe Giamundo Neto and Fernanda Leoni

Although the debate on guarantees provided by private parties in contracts with the public administration is well established, with equally broad regulation, the reverse — guarantees provided by the government — is the subject of a much narrower discussion, usually using a vocabulary specific to Infrastructure Law, which often hinders a broader understanding of the concept and its possibilities. The aim of this article is to discuss more broadly what contractual guarantees provided by the government are, what types exist and how they work.

Also known as a “sovereign guarantee”, the guarantee provided by the granting authority has both a common purpose — avoiding or mitigating the risk of public default — and an extracontractual one: attracting private capital to long-term, higher-risk projects. With risk controlled by this instrument, in addition to others commonly provided for, such as the risk matrix, the interest of investors and lenders can be increased by a scenario of greater security and stability.

Law 11,079/2005 expanded the possibilities

Federal Law No. 8,987/1995, which governs concessions and permits for public services, already provided for this possibility, albeit timidly, by establishing in item V of its article 23 that the essential clauses of concession contracts would govern matters relating “to the rights, guarantees and obligations of the granting authority and the concessionaire, including those related to the foreseeable needs for future change and expansion of the service and the resulting modernization, improvement and expansion of equipment and facilities”. However, it was Federal Law No. 11,079/2005, which governs public-private partnerships, that expanded the possibilities on the subject.

Under article 8 of the law, the obligations assumed by the public administration in a PPP contract may be guaranteed through (1) earmarking of revenues; (2) the creation or use of special funds; (3) performance bonds contracted with insurance companies not controlled by the government; (4) guarantees provided by international organizations or financial institutions; (5) guarantees provided by a guarantee fund or state-owned company created for this purpose; and (6) other mechanisms permitted by law.

Earmarking of revenues and use of special funds

Among the types provided for, earmarking of revenues is certainly the one that generates the most debate, and its constitutionality has often been questioned. Since it is a budgetary guarantee, in which public revenues are specifically allocated to cover obligations under the contract, there has been much discussion about whether it might circumvent the court-ordered payment (precatório) system or compromise other public obligations. Currently, the effectiveness of this type of guarantee is understood to be much more about removing political risks than financial ones, since releasing these funds faces a series of practical obstacles [1].

Another inherently public and equally questioned guarantee is the creation or use of special funds, in which public resources are reserved for a specific purpose, very similar to the previous type. For some scholars, the provision for creating or using these funds did not introduce a guarantee in the proper sense, but a “payment method with budgetary earmarking”, constituting objective rather than subjective guarantees, as is usually the case with this legal institution [2].

Guarantee fund and performance bond

Along the same lines are guarantees provided by a guarantee fund or state-owned company created for this purpose, the main difference from the previous item being that these entities have legal personality, which also gives the contractor advantages when enforcing amounts not paid by the government, as they are not subject to the court-ordered payment regime. The matter has been regulated by different federative entities, in addition to the Federal Government, which created the Public-Private Partnership Guarantee Fund (FGP).

Performance bonds and guarantees provided by international organizations or financial institutions, better known for their use in other types of public contracting, fall into the category of personal guarantees, in which a third party, for a fee, assumes the risk of compensating the beneficiary in the event of delay or default by the government. Although widely known in the market, they are used less often by granting authorities, quite possibly because they involve a direct and recurring maintenance cost.

In addition to establishing specific types, the PPP Law, as mentioned, also authorized the use of “other mechanisms permitted by law”, providing flexibility for guarantee formats compatible with more modern concession and public-private partnership structures. Thus, in addition to the guarantees best known in Private Law [3], such as suretyship, pledge, mortgage and fiduciary transfer, the door was opened to more innovative forms, such as the fiduciary assignment of credit rights held against the financial institution holding the funds from the FPE and FPM (State and Municipal Participation Funds) [4] and the use of part of the efficiency gain as a source of funds for an escrow account [5].

Final considerations

In general, although the challenges associated with sovereign guarantees cannot be ruled out, such as increased fiscal risk and greater moral hazard, there is no doubt that their benefits are significant, above all making it possible to attract private investment, with the consequent feasibility of important public projects, improvement of public services and economic and social development. Expanding their use, together with control instruments and good governance practices, will certainly lead to more robust and reliable partnership structures, which must be preceded by a broader understanding of these different institutions, their challenges and their opportunities.

[1] RIBEIRO, Maurício Portugal; PRADO, Lucas Navarro. Comentários à lei de PPP – Parceria Público-Privada: fundamentos econômico-jurídicos. São Paulo: Malheiros, 2007, p. 226.

[2] GUIMARÃES, Fernando Vernalha. Parceria público-privada. 2nd ed. São Paulo: Saraiva, 2013, p. 365.

[3] On this subject, see: SCHIRATO, Vitor Rhein. Os sistemas de garantia nas parcerias público-privadas. Fórum de Contratação e Gestão Pública FCGP, Belo Horizonte, year 10, no. 109, p. 2955, Jan. 2011.

[4] To understand this type of guarantee, see: SILVA, Fernanda Alen Gonçalves da, GARCIA, Daniel; FAJARDO, Gabriel. A constitucionalidade de garantias públicas de PPPs estruturadas com receitas oriundas dos FPE e FPM (Fundos de Participação dos Estados e Municípios). Portal Infra. Available at: https://agenciainfra.com/blog/a-constitucionalidade-de-garantias-publicas-de-ppps-estruturadas-com-receitas-oriundas-dos-fpe-e-fpm-fundos-de-participacao-dos-estados-e-municipios/. Accessed on 7/29/2024.

[5] On this subject: OLIVEIRA, Rogério Ceron de, SILVA, Maíra Madrid Barbosa da; SELLIN, Victor Bueno. Estruturação de garantias sob ambiente de restrições fiscais: a utilização de parcela do ganho de eficiência como fonte de recursos para conta garantia (escrow account). Cadernos da Escola Paulista de Contas Públicas. V. 77, 2021.

Originally published by Conjur (in Portuguese).