Brazil’s TCU authorizes renegotiation of ongoing rebid concession agreements

After a brief proceeding, on August 2, 2023, Brazil’s Federal Court of Accounts (TCU) ruled on a consultation first submitted on May 12, 2023, by the Ministry of Transportation and Ministry of Ports and Airports involving the possibility of renegotiating concession agreements already qualified in the context of rebidding proceedings (relicitação).

TCU judge Vital do Rêgo was assigned as the rapporteur of the case. The TCU’s trial started on July 5, 2023, however, it was suspended due to the request of TCU judges Walton Alencar Rodrigues and Jhonatan de Jesus for further opinion review.

After the trial resumed, the TCU concluded that it is possible that the Public Authorities and the Concessionaires decide to terminate the rebidding proceeding by mutual agreement and, thus, initiate a renegotiation of the original concession agreement, aiming at allowing the current Concessionaire to continue providing the public service in question. For that purpose, however, the TCU established 15 necessary conditions, which can be organized into three categories.

Key conditions

Firstly, the Public Authorities must clearly demonstrate the public interest and the benefits of the renegotiation as an alternative to the rebidding or a forfeiture proceeding by means of specific studies that examine the upsides and downsides of each possibility. Once the studies are concluded and approved by the TCU, the respective Granting Authority must justify the decision of moving forward with the renegotiation with technical arguments, and clearly state the advantages for doing so when compared to any other possible alternative.

Secondly, only Concessionaires in compliance with all obligations under Conduct Adjustment Agreements (TAC) that may have been entered into with the Granting Authority are eligible for the renegotiation of the original concession agreement. Concessionaires must also waive the right to dispute any issues that took place prior to qualifying for the rebidding proceeding, such as administrative, judicial or arbitral matters.

Lastly, there are guidelines that both parties must observe in the renegotiation amendment. In this regard, the TCU emphasized that the new amendment may provide adjustments regarding investment obligations, and reevaluate service provision parameters and the basic toll value, as long as the nature of the object of the concession agreement and the guiding principles of the risk matrix are maintained intact. In any case, the Net Present Value (NPV) of the original concession agreement must be maintained.

Considerations from Secex-Consenso

In his ruling, TCU judge Bruno Dantas raised two considerations brought forward by the TCU’s Office for External Control of Consensual Resolution and Conflict Prevention (Secex-Consenso).

Secex-Consenso referred to a recent precedent of its own case law (Rota do Oeste case) to establish that it is possible to modify obligations of the original concession agreement even in the event those modifications involve investments, tolls or the NPV.

Although the entity recognized that promoting changes to those elements may be vital to reach a feasible agreement for both parties, it is necessary to observe the guiding principles of risk allocation set forth in the original concession agreement, as well as to make efforts to maintain the original provisions to the best possible extent.

Outlook for ongoing bidding processes

In Brazil, there are currently nine concessions with ongoing rebidding proceedings, in road, airport, and railway sectors. In some of these assets, the decision to return the concession was not due to operational, managerial, or financial incapacity of the Concessionaire, but rather due to difficulties arising from the structure of the project itself, that were established while modelling it. Therefore, by allowing the renegotiation of such agreements, the TCU has provided an innovative alternative to help projects move forward.

It is highly positive that the TCU has reviewed its original position to allow adjustments to the original risk matrix, the NPV and even to the basic toll established in the concession agreement. This provides more room for public and private parties to renegotiate terms and conditions that make it possible to continue the partnership and the provision of the respective public services in view of the collective interest.

For further information on this topic, please contact Mattos Filho’s Infrastructure & Energy practice area.