In order to meet the need for better financing conditions and attract foreigner investors to new projects, the Brazilian government has been debating methods of compensating investors for losses due to exchange rate fluctuations by means of mechanisms established in concession contracts.

Some concession contracts currently in force contain an economic rebalancing provision, which is applicable in exceptional cases of changes in the financial conditions to which the projects are subjected. In these cases, the concessionaire must demonstrate the unexpected nature of currency depreciation in order to obtain rebalancing. There are no firm precedents that define clear criteria in determining whether a macroeconomic change is part of the ordinary risk of the project or if it is an exceptional event.

The requests for bids published by ARTESP in 2016, related to international bids for the Paulista Midwest Highway and the Calçados Highway, were the first to provide specific currency hedging rules, applicable to the contracts, by the concessionaire, for financing in a foreign currency. These bids are planned for the first half of this year.

The adoption of the mechanism is the concessionaire’s option, as long as the financing is contracted for during the first years of the concession and the funds are intended for payments under the concession or investment in assets. There are also limits on the amount subject to the mechanism and the term of the financing.

Comparison is provided between the actual fluctuation of the Brazilian Real and the US Dollar, on the one hand, and fluctuation in the IPCA, on the other. In the event of devaluation of the Brazilian Real, there will be a reduction in the percentage of the variable sum to be paid by the concessionaire to the Granting Authority. In the event of appreciation of the Brazilian currency, the percentage charged by the public authority will be greater.

Thus, for example, per the draft concession contract for the Paulista Midwest Highways, the variable concession fee provided for is 3% of gross revenue. If the concessionaire chooses to adopt the currency hedging mechanism, this percentage may vary from 0% to 6% of the annual gross revenue (with it being less than 3% if the Brazilian Real devalues and greater than 3% if it appreciates). If the devaluation of the Brazilian Real causes a financial loss greater than the amount due under the variable concession, or if the appreciation of the Brazilian Real is greater than the amount corresponding to the increase in the concession to 6%, the concessionaire or Granting Authority, as appropriate, will keep the balance to offset in subsequent years. In this case, compensation is limited only to the future flow of the variable concession. Once the concessionaire has chosen to use this mechanism for a given financing operation, it cannot cancel it, except with the approval of the Granting Authority.

At the federal level, a similar mechanism is provided for airport projects in the draft Ordinance of the Ministry of Transport, Ports, and Civil Aviation, available to the public as of February 10 of this year.

The Ordinance sets forth general rules and provides that the concession contracts will establish specific rules on the currency hedging limits. It also foresees the possibility of adopting the mechanism for bids in progress by already defining the specific rules to be adopted for bids relating to the airports in Porto Alegre, Salvador, Florianópolis, and Fortaleza, scheduled for March 16, 2017.

The need for this mechanism extends to other infrastructure segments. We have yet to see whether similar formulas will be adopted in future calls for bids and whether other entities of the Federation, such as municipalities, will have the ability and intent to adopt a similar mechanism.

Júlia Rodrigues Coimbra, Larissa Gebrim e Tamiris Guimaraes