By Daniel Stein and Juliana Santos Pinto Coelho

Extending the term of concessions and PPPs can ensure financial balance, even without provision in the tender notice, but faces legal and doctrinal resistance.

Laws 8,987/1995 and 11,079/04 establish the conditions for extending the term as an essential clause of concession and PPP contracts, accepting extension as an institution of contract law, provided that this possibility is already contemplated in the respective tender notice: this is the extension of the contract term in the strict sense, in which the choice to extend is a discretionary decision of the Public Administration and takes into account factors related to convenience and timeliness.

Given the principle of adherence to the call for bids (art. 14, Law 8,987/1995), the majority of legal scholars consider that the absence of a provision for extension in the tender notice means it is prohibited. In this sense, Celso Antônio Bandeira de Mello states that any extension of the contract would be unfeasible unless referred to in the tender notice1.

However, extension of the term in the strict sense should not be confused with extension of the term as a means of economic and financial rebalancing of agreements – which we will call “prolongation” here solely to distinguish them.

This is a common strategy in concessions and PPPs, given their long duration and greater exposure to countless supervening social, political and economic variables. Prolongation is generally the most suitable instrument to ensure economic rebalancing, as opposed to possible disbursements by the granting authority or increases in the tariff charged to users.

For example, the 10th Amendment to the sewage concession contract in Salto/SP used the extension of the contract term as one of the mechanisms to rebalance the agreement, avoiding excessive financial impacts on the Administration.

The same occurred under Concession Contract 011/CR/00, for the operation of the highway system comprising Lot 6 of the State of São Paulo. In 2006, amendment 14/06 rebalanced the contract with a 95-month extension, and in 2023 a new amendment was signed with similar solutions.

In other words, it is undeniable that extending the term is a legitimate mechanism for maintaining the economic and financial balance of contracts. What is up for discussion is precisely whether to accept the interpretation that such an extension, for the express purpose of maintaining economic balance, would not be possible if not provided for in the tender notice.

The principle of maintaining the economic and financial balance of public contracts is enshrined in the Federal Constitution, which requires that the “effective conditions of the proposal” be maintained (item XXI, art. 37). Thus, if an event during contract performance upsets the agreed economic and financial equation, its restoration must be sought2.

There would therefore be an apparent conflict between the prohibition of extension when not provided for in the tender notice or contract (even when used for rebalancing) and the duty to preserve economic and financial balance.

Legal scholars are not unanimous on the matter. Some argue that, even for contract rebalancing purposes, the tender notice must provide for the possibility of extending the term3.

On the other hand, some understand that contractual prolongation, because it stems from unforeseeable events, does not depend on an explicit provision in the tender notice. Along these lines, Fernando Vernalha Guimarães4 considers the extension of a concession legitimate when unforeseeable situations arise, in which case no contractual provision is required.

TCU case law seems to follow the part of legal doctrine opposed to extending the term without provision in the tender notice. Judgment 738/17 is the most emblematic in this regard. On that occasion, the Court ordered ANTT, regarding the 1st Stage of the Federal Highway Concessions Program, to refrain from “extending public service concessions, even for economic and financial rebalancing, without express authorization in the call for bids and in the original concession contract”.

In our view, the possibility of extending the term to correct a possible imbalance cannot be ruled out merely because it is not provided for in the tender notice.

First, the principle of reasoned decision-making in administrative law requires the Public Administration to set out the factual and legal grounds for its decisions, showing the logical relationship between what happened and the measures adopted, after examining the available alternatives.

The Law of Introduction to the Rules of Brazilian Law (art. 20) requires administrative decisions to consider their practical consequences, ensuring an appropriate solution for the public interest. Theoretical reasoning for the decision is not enough; different scenarios must be compared and consequences weighed.

Moreover, prolongation differs from a pure and simple extension, because it does not concern extending the term in the normal course of the agreement at administrative discretion, but the occurrence of supervening events that cause losses to the parties and affect the sustainability of the projects, or even new factors arising during contract performance.

Contractual prolongation is therefore an extraordinary case, in which factual changes in the conditions established when the contract was signed have been identified. When the previously established rules change, the applicable solutions will certainly not be the same as those imposed in the normal course of the contract.

It cannot be accepted that the prohibition of contract extension also means giving up a contract rebalancing instrument that, depending on the specific case, may prove more advantageous. Prolongation is a way of implementing the constitutionally guaranteed economic and financial balance; it has no relation to the rules on pure and simple contract extension, nor does its use require express permission.

We are not advocating the unrestricted use of prolongation as a means of contract rebalancing, but rather its inclusion among the solutions available to the Administration, without the need for permission in the tender notice — which, in fact, is mitigated by the natural review expected in concession contracts, generally provided for in the tender notice and contract. Any form of contract rebalancing entails benefits and drawbacks. Since the economic and financial equation of contracts is constitutionally protected, the Administration should be able to use all the means necessary to resolve impasses in contract performance.

Notes

[1] BANDEIRA DE MELLO, Celso Antônio. Curso de direito administrativo. 32nd ed. São Paulo: Malheiros, 2015, p. 752.

[2] JUSTEN FILHO, Marçal. Considerações sobre a equação econômico-financeira das concessões de serviço público: a questão da TIR. In: MOREIRA, Egon Bockmann (coord.). Contratos Administrativos, equilíbrio econômico-financeiro e a taxa interna de retorno. A lógica das concessões e parcerias público-privadas. Belo Horizonte: Fórum, 2016, p.418/419.

[3] Among the proponents of this view: “We understand that extending the term of concessions, although possible to restore the concession’s economic and financial equation, can never be decided arbitrarily, even if the necessary criteria have not been established by law, and must be provided for in the tender notice and in the contract, because otherwise it is inconsistent with the legal system, resulting in an offense to the Constitution of the Republic, either by perpetuating a concession or by circumventing impersonality, excluding for a time others interested in providing the service” (HARB, Karina Houat. A revisão na concessão comum de serviço público. Malheiros. São Paulo: 2012. p. 113.)

[4] GUIMARÃES, Fernando Vernalha. Concessão de serviço público. 2nd edition. São Paulo: Saraiva. 2014, p. 307.

Originally published by Migalhas (in Portuguese).