No 12May, 2020

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TRANSACTIONS HIGHLIGHTS ARTICLES

This bulletin is meant for general informational purposes only andshould not be relied upon as legal advice on any specific deal ormatter. If you need more information, please contact our lawyers orvisit our website www.pinheironeto.com.br.

The Infrastructure electronic newsletter provides information on transactions, laws and court precedents in the area of infrastructure, including highlights on regulations, auctions, proceedings, investments, and acquisitions. This publication is prepared by the Infrastructure practice team of Pinheiro Neto Advogados.

PUBLICATION FREQUENCYMonthly

SUPERVISING PARTNERRicardo Simões Russo

CONTRIBUTORSRicardo Simões Russo | Adriano Drummond Cançado Trindade | Roberto Zilsch Lambauer | Heloísa Figueiredo Ferraz | Samuel Lopes Parmegiani

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▪Transactions ▫Public Notices and Auctions ▫ Investments

▫Federal government launches work and partnership program for socioeconomic growth ▫COVID-19 pandemic and the economic and financial rebalance of concessions

TRANSACTIONS

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Infrastructure Debentures as a Financing Mechanism: recent data

Infrastructure debentures are popular sources of funding for projects in general, more specifically infrastructure investment projects. The favorable tax treatment for projects dealt with as priorities is an attractive feature of this alternative long-term funding, via the capital market, when compared to traditional funding mechanisms.

It is needless to say that the Covid-19 pandemic has also affected this financing mechanism, so much so that in April 2020 only one infrastructure debenture was offered with restricted distribution efforts in the market, specifically in the transport sector (urban mobility). The total volume of the

offering came to R$ 700 million. The volume of infrastructure debentures distributed between 2012 and April 2020 totaled R$ 87.7 billion.

These figures were published in the Incentivized Debenture Newsletter, released April this year by the Economic Policy Office of the Ministry of Economy and which can be accessed at [https://www.gov.br/economia/pt-br/centrais-de-conteudo/publicacoes/boletins/boletim-de-debentures-incentivadas/2020/boletim-debentures-incentivadas-abril-2020.pdf].

The Newsletter contains detailed information on the growing role of the capital market in project finance transactions.

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INVESTMENTS

Public Call Notice for the Development of Concession Projects by FEP-Caixa in the urban solid waste sector

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PUBLIC NOTICES AND AUCTIONS

Proposals should be submitted on or before July 15, 2020 under the public call notice issued for selection of public consortia interested in utilizing resources from the Fund to Support the Structuring and Development of Concession Projects and Public-Private Partnerships (FEP), administered by the Federal Savings Bank (FEP-Caixa). This program is aimed at structuring concession projects in the sector of urban solid waste from household activities. It will be coordinated by the Investment Partnership Program (PPI), jointly with the Ministry of Regional Development, and operated by the Federal Savings Bank.

Click here to view the full text of the news report.

New Railway Concession Contract signed for Malha Paulista

On May 27, 2020, the new Railway Concession Contract was signed for Malha Paulista between the National Land Transport Agency (ANTT) and Rumo S.A. The original contract would be effective until 2028 and was renewed in advance for 30 years.

Click here to view the full text of the news report.

▫Transactions ▪Public Notices and Auctions ▪ Investments

▫Federal government launches work and partnership program for socioeconomic growth ▫COVID-19 pandemic and the economic and financial rebalance of concessions

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ARTIGOS

Federal government launches work and partnership program for socioeconomic growth

and priority actions of the Government Authorities. Pró-Brasil will rely on two-pronged approaches: order and progress. The prong “order” will deal with initiatives to review and shape applicable laws and regulations as a means of encouraging private investments in the pandemic recovery environment, and offering the necessary legal security for productivity. This prong is intended to improve the business setting and mitigate the socioeconomic impacts of the pandemic in today’s scenario. For its part, the prong “progress” will involve the implementation of public works and partnerships with the private sector. According to the Ministry of Infrastructure, the works are estimated at around R$ 30 billion up to 2030, while the concessions and partnerships will involve around R$ 250 billion in the same period.

Pró-Brasil will cover initiatives in diverse economic sectors, in the areas of infrastructure (transport, logistic, energy, mining, regional and urban development, telecommunications) and production (agribusiness, industry, services, tourism). It will also involve actions for the development of human capital and technology. To implement these initiatives, the Federal Government should consider such elements as finances, taxation, legislation, control, and environment.

The program should be structured in the next months. The Pró-Brasil projects are expected to be detailed in August and September this year, so that they can be implemented in large scale effective from October 2020. By the same token, proposals for changes in rules should be released soon to be considered by the production sector in an environment involving dialogues with the mutual aim of promoting socioeconomic development in the pandemic recovery scenario.

Written by Ricardo Simões Russo and Adriano Drummond Cançado Trindade, partners at Pinheiro Neto Advogados

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The Ministry of Infrastructure and the Chief of Staff disclosed on April 22, 2020 the so-called Pró-Brasil, a strategic program under development by the Federal Government involving several ministries, aimed at integrating and enhancing important actions for the recovery of socioeconomic growth. This initiative was already discussed some months ago by the Federal Government, but had to be adjusted in response to the impacts caused by the COVID-19 pandemic.

The program, which is still to be structured and detailed by the Federal Government, will involve actions through a structured governance model conceived to improve productivity, based on structuring-wide investments

▫Transactions ▫Public Notices and Auctions ▫ Investments

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▫Federal government launches work and partnership program for socioeconomic growth ▫COVID-19 pandemic and the economic and financial rebalance of concessions

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No 12May, 2020

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COVID-19 pandemic and the economic and financial rebalance of concessions

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the operator and/or to the Granting Authority risks related to events with the potential of disrupting the economic and financial balance of the concession. In contracts with no risk matrix – in general old instruments that only reproduce generically the rule that the private party executes the concession "on its own account and risk" (article 2, II of Law 8,987/1995) -, there prevails the stand that the concessionaire will be accountable for ordinary events, whereas the Granting Authority will be accountable for extraordinary events.

The claims for economic and financial rebalance will call for a specific analysis of contractual provisions and of the reality faced by the operator during the pandemic. In general, contracts allocate to the Granting Authority the effects resulting from acts of State (for example, decrees of public calamity) and events of force majeure. Therefore, the rules issued by several states during the pandemic will be examined in the future as to the lawfulness and proportionality of the respective measures, especially their effects on public service concessionaires.

When it comes to force majeure, some instruments provide that events not insurable in Brazil may qualify for indemnification by the Granting Authority, thus calling for review of specific policies and availability of this coverage in the market.

This point could also be examined considering the risk of change in demand, which is usually allocated to the concessionaires. However, the fall in demand following the current crisis was so hard for some sectors that went beyond the ordinary risks inherent to contracts, so it must be assessed in accordance with the provisions regarding acts of State and events of force majeure. In addition, in some contracts the demand risk is shared between the Granting Authority and the concessionaire. With respect to administrative concessions, for instance, remuneration is assured for minimum service levels.

In response to the current crisis, the Legal Advisory Office for the Solicitor General of the Federal Government - AGU within the Ministry of Infrastructure

The restriction on the movement of people due to the Covid-19 pandemic has strongly impacted on several infrastructure sectors. This is the case of airport and highway concessionaires, whose demand and revenue have fallen sharply. The effects of the pandemic will be assessed over time based on the particularities of each sector. Meanwhile, the private sector has placed focus on future claims for economic and financial rebalance of concession contracts as a means of ensuring the continuity of public services in the aftermath of the pandemic.

The rule is that each contract should contain a risk matrix allocating to

▫Transactions ▫Public Notices and Auctions ▫ Investments

▫Federal government launches work and partnership program for socioeconomic growth ▪COVID-19 pandemic and the economic and financial rebalance of concessions

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TRANSACTIONS HIGHLIGHTS ARTICLES

general concepts of Administrative Law, it is certain that the current crisis demands mediation efforts and reasonableness between concessionaires and the Granting Authority as not always are there regulatory agencies. So, the current pandemic background translates into an opportunity to better overcome the hurdles which are usual in claims for rebalance, such as long development periods and difficulty in establishing consensual solutions.

In this context, the National Civil Aviation Agency (ANAC)’s decision to extend payment of grant fees by airport concessionaires and to establish operating flexibilities is much welcome. Similarly to ANAC, the São Paulo State Transport Agency (ARTESP) has held discussions with highway concessionaires to cope with the issue.

In a webinar promoted by Agência iNFRA on April 24, 2020, the National Secretary of Ports and Waterway Transport of MINFRA voiced favorably to recovery of the economic balance of leasing agreements under his sphere of authority. The secretary signaled that leasing terms may be rescheduled, which measure would also preserve the position of port authorities in view of the budget limitations that will follow as a result of the current exceptional scenario. Other measures proposed in the short run would comprise the suspension of investments and payments of grant fees.

In fact, there is flexibility in the rebalancing measures to be adopted in each case, in diverse sectors, which may involve for example: (i) payment of an indemnity; (ii) time extension for payment of and/or reduction in grant fees; (iii) extension of the concession period; and (iv) relaxation of targets, times periods for fulfillment of investment obligations and operating rules.

Hopefully, the competent authorities and public service concessionaires will find swift and reasonable solutions as a way of ensuring the continuity of public services and the alignment of contracts with the post-pandemic reality.

Written by Roberto Zilsch Lambauer, Heloísa Figueiredo Ferraz and Samuel Lopes Parmegiani, associates and assistent at Pinheiro Neto Advogados.

(MINFRA) issued Opinion No. 261/2020/CONJUR-MINFRA/CGU/AGU, defining the Covid-19 pandemic as an extraordinary event, which gives the right to apply for economic and financial rebalance of contracts based on the rebus sic stantibus doctrine (unforeseeability doctrine). Issued in response to the consultation submitted to the Development, Planning and Partnership Office (SFPP) of MINFRA, the opinion concluded that the spread of SARS-CoV-2 and its effects could not have been predicted or avoided by the concessionaires operating transport infrastructure in Brazil, therefore falling within the meaning of an extraordinary risk to be borne in theory by the Granting Authority.

The opinion also states that, if the situation is recognized to be abnormal, its characterization as a fortuitous event, force majeure or even act of State would lose weight once in any such case the related risks would be borne by the Granting Authority. But the opinion itself emphasizes it is necessary to examine the risk allocation mechanism of each contract, as the treatment afforded to each such event can be different (please refer to the example concerning the insurability of events of force majeure dealt with in some contracts). In those circumstances, it may become important to assess the specific effects of possible government acts separately from the general effects of the pandemic, which would require a thorough review of the situation of each concessionaire.

Another point in the opinion that should be interpreted with certain caution is the assertion that only concessionaires whose revenues or expenses have been significantly impacted will be eligible to contractual rebalance. The rebus sic stantibus doctrine does not require the contractor to suffer excessive losses or undue hardship, whereby a disruption in the economic and financial balance agreed with the Granting Authority will be enough to trigger the right to contractual rebalance. Aside from these specific points, the Legal Advisory Office’s definition of the pandemic as an event qualifying for contractual rebalance is quite positive. Although the opinion refers to land transport, it provides a legal basis for initiating discussions over other infrastructure sectors.

Though the discussions over the economic and financial rebalance of concessions may be based on the interpretation of contractual clauses and

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▫Transactions ▫Public Notices and Auctions ▫ Investments

▫Federal government launches work and partnership program for socioeconomic growth ▪COVID-19 pandemic and the economic and financial rebalance of concessions