A) The Angra 3 Nuclear Power Project

Nuclear energy provides about 3% of Brazil’s electricity. In 2007, gross production was 445 billion kWh, with net imports of 39 billion kWh being required. Of the total generated in the country, 84% of power was from hydro, 3.5% from gas, 4% from biomass, just over 5% from coal and oil, and 3% (12.4 million kWh) from nuclear. In 2009, nuclear power generated 13 billion kWh of electricity. Per capita electricity consumption in Brazil has grown strongly since 1990 – from under 1500 kWh/yr in 1990 to nearly 2200 kWh/yr in 2007.

The high dependence on hydro gives rise to some climatic vulnerability which is driving policy to diminish dependence on it. Despite this, in February 2010 the government approved $9.3 billion investment in the new 11.2 GWe Belo Monte hydro scheme, which will flood 500 sq km of the Amazon basin and supply about 11% of the country’s electricity. About 40% of Brazil’s electricity is produced by the national Eletrobrás Systema. About 20% of electricity is from state-owned utilities, and the rest is from privately-owned companies.

Angra 1 suffered continuing problems with its steam supply system and was shut down for some time during its first few years. Its lifetime load factor over the first 15 years was only 25%, but since 1999 it has been much better. Civil works on Angra 2 started in 1976 and, due to a lack of financial resources and a lower than expected growth in demand, only commenced operation at the end of 2000. Angra 3 was designed to be a twin of unit 2, with a 1,400MW generating capacity. Work started on the project in 1984 but was suspended in 1986 before full construction began. Around 70% of the equipment is on site, full construction did not begin and work on the project was suspended in 1986.

In November 2006 the government announced plans to complete Angra 3 and also build four further 1000 MWe nuclear plants from 2015 at a single site. Angra 3 construction approval was confirmed by Brazil’s National Energy Policy Council in June 2007 and received Presidential approval in July. Environmental approval was granted in March and all other approvals by July 2009. In December 2008, Eletrobrás Termonuclear S/A (Eletronuclear) signed an industrial cooperation agreement with Areva, confirming that Areva will complete Angra 3 and be considered for supplying further reactors. Areva also signed a services contract for Angra 1. First concrete for Angra 3 was due in 2009. A construction licence was granted by the National Nuclear Energy Commission (CNEN) at the end of May 2010, and construction resumed two days later, in June. The plant is expected in operation at the end of 2015 after 66 months.

B) Financial challenges

Economically, power from existing nuclear plants is about 1.5 times more expensive than that from established hydro, and power from Angra 3 is expected to be slightly over twice as expensive as old hydro, about the same as that from coal and cheaper than that from gas. Overall, including Angra 3 in projections reduces network prices slightly. Plans to build two new nuclear plants in the northeast and two more near Angra in the southeast are underway1. At the end of 2009, Eletronuclear commenced initial siting studies at four potential locations in the northeast2, and is aiming to present a list of 40 possible sites to the Mines & Energy Ministry by mid-2011. Eletronuclear is looking at the Westinghouse AP1000 (which is reported to be favoured), the Areva-Mitsubishi Atmea-1 and Atomstroyexport’s VVER-1000.

In December 2010, The Brazilian Development Bank (BNDES) approved BRL 6.1 billion (US$ 3.6 billion) in financing for Angra 3, covering almost 60% of the BRL 9.9 billion estimated cost. This month Eletronuclear received an offer for a EUR1.5bn (US$2.02bn) loan from a pool of five French banks led by Société Générale to develop its Angra III nuclear power plant in Rio de Janeiro state. This is only one of many recent developments in the country’s nuclear sector. Sustained by strong economic and demographic growth, Brazil’s power demand is indeed expected to increase significantly in the coming years and the country is planning to boost nuclear generation along with its more developed hydro generation. Brazil’s Senate still has to approve the loan, and a decision on the matter is not expected until the second half of 2011. Construction of Angra 3is currently underway and the new nuclear power plant is expected to start production by 2015. The total investment for the project has been estimated at BRL9.9bn (US$5.91bn).

C) About Eletronuclear and BNDES

Eletronuclear was established in 1997 for the purpose of operating and building thermal nuclear power plants in Brazil. A subsidiary of Eletrobrás, Eletronuclear is a government-controlled company that accounts for the generation of approximately 3% of electric power consumed in Brazil. By the interconnected electric power system, such power reaches the main consumer centers in Brazil and corresponds, for example, to more than 50% of electric power consumption in the State of Rio de Janeiro, a proportion to be considerably expanded on completion of the third unit of Admiral Álvaro Alberto Nuclear Power Station (CNAAA). At present, nuclear power plants Angra 1 – with a generating capacity of 657  electric megawatts, and Angra 2 – rated at 1350 electric megawatts are in operation. Angra 3, to practically be a replica of Angra 2, (incorporating the technological advances made since the construction of the latter) is also planned

BNDES is the main financing agent for development in Brazil. Since its foundation, in 1952, the BNDES has played a fundamental role in stimulating the expansion of industry and infrastructure in the country. Over the course of the Bank’s history, its operations have evolved in accordance with the Brazilian socio-economic challenges, and now they include support for exports, technological innovation, sustainable socio-environmental development and the modernization of public administration. The Bank offers several financial support mechanisms to Brazilian companies of all sizes as well as public administration entities, enabling investments in all economic sectors. In any supported undertaking, from the analysis phase up to the monitoring, the BNDES emphasizes three factors it considers strategic: innovation, local development and socio-environmental development. The BNDES’ disbursements reached R$ 168.4 billion in 2010, a 23% increase when compared to the previous year. The result takes into consideration Petrobras’ R$ 24.7 billion capitalization operation. When this operation – a one-off and non-recurring – is not considered, the Bank’s disbursements ended 2010 at R$ 143.7 billion, a 5% increase when compared to 2009, growth which is compatible with previously made projections. Industry accounted for 47% of the Bank’s total disbursements, followed by Infrastructure, with 31% presence, and by Trade and Services, at 16%. In all areas of activity (agriculture, industry, infrastructure, trade and services) disbursements grew in 2010, resulting mostly from the successful Investment Maintenance Program (PSI). Launched in July 2009 and expected to last until next March 31, 2011, PSI guaranteed the return of investment to the country amidst the global financial and economic crisis.

As the ninth largest economy in the world – expected to reach fifth place in the next decade – and the largest of Latin America, Brazil is today one of the best markets for foreign investment and an increasingly important operator in the international geopolitical stage. Despite that, three recent reports have described the quality of Brazil’s transport infrastructure – including the airport system – as ranking among some of the worst in the world, despite growing demand from international manufacturers for goods produced in the country.

a) The first report, by the Brazilian economic consultancy LCA Consultores – which analyzed results from a competitiveness poll conducted among attendees at the 2009/2010 World Economic Forum in Geneva – indicates that compared to another 20 countries with which it competes on a global scale, Brazil hangs on to the 17th slot in infrastructure quality in general. On a 1-7 rating scale, Brazil scored 3.4, below the world average of 4.1.

b) The second report, by Brazil’s Applied Economics Research Institute (IPEA), indicates that a number of airports are on the edge of an operational collapse, meaning there is a considerable threat of a logistics blackout in the airport sector unless investment is initiated immediately. The IPEA report said demand for air travel is expected to triple in the next 20 years, especially with the World Cup and 2016 Olympics putting additional pressure on the country’s transport infrastructure, making the situation all the more pressing.

c) The third report, by consultancy company McKinsey, indicates that investment of BRL25-34bn (US$15-20bn) is needed to meet growing demand in the airport sector over the next 20 years. The study found that Brazil’s 20 main airports need massive investments in upgrades to enable them cater for the growing passenger traffic demand up to 2030. The study further concludes that airports such as the Viracopos international airport in Sao Paolo may need up to BRL4-6bn (US$2-3bn) reals to enhance its capacity to handle passenger traffic in its metropolitan area, the most congested in the country. On the other hand, the state’s Congonhas airport was said to be in dire condition, with capacity levels already exceeded, revealed the study. Only tow Brazilian airports were found to be in better condition, the Galeão airport in Rio de Janeiro, and the Curitiba airport in Paraná state.

With these findings in mind, President Dilma Rouseef wants to make a firm position that the country’s airport system will indeed improve in a fast track model. In her 3rd day in Office the new President has decided to privatize the construction and operation of 2 new airport terminals in the State of São Paulo. President Dilma also decided to open up the capital of INFRAERO (the Brazilian Airport Infrastructure Company) and create an special Secretariat – directly attached to the the Presidency’s Office – to oversight civil aviation business in Brazil.

President’s Office has already started meeting with companies interested in the construction and operation of the 2 new terminals in the State of São Paulo. Those companies have been informed that concession agreements for the new terminals will be of at least 20 years and will have BNDES’ (the Brazilian Development Bank) participation in the financing. The BNDES Credit Lines comprise long-term financing, at competitive interest rates, for the development of investment projects, the commercialization of machinery and equipment, and the growth of Brazilian exports. Credit lines and programs provided by the BNDES serve the investment needs of companies of any size and sector set up in Brazil.

Other investments recently announced shall be placed in the airports at Belo Horizonte, Brasília, Cuiabá, Curitiba, Fortaleza, Manaus, Natal, Porto Alegre, Recife, Rio de Janeiro and Salvador, the other 11 host cities of the 2014 World Cup. The Government expectation is that all work shall be completed between June 2013 and April 2014, so that the airports shall be ready to welcome the large number of tourists that should visit the country in this period.

Auction date has been defined

The meeting held between Dilma Roussef, the Brazilian President-elect and members of the State Office and the Government transport sector sealed the date for the auction for the bullet train that will connect Campinas-São Paulo-Rio de Janeiro. According to Dilma’s decision, it will take place on November 29, 2010.

Requests had been made by businessmen to postpone this date, and in view of this, the meeting was held yesterday been the President-elect and the members of the government responsible for the auction.

According to allegations of interested parties, the administration had delayed in disclosing the rules due to the electoral process, which allegedly had impaired companies from taking this decision and from concluding feasibility studies on the project.

Notwithstanding these complaints, the decision was made to maintain the date set on the invitation to bid. Bids will be delivered by the November 29 and the winner will be disclosed 18 days afterwards.

The works, which are now estimated to cost US$ 20 billion awakened the interest of South Korea, China, Japan, Germany, France and Spain.

Funding

The Government published a provisional measure to guarantee funding of up to US$ 12 billion for Banco Nacional de Desenvolvimento Econômico e Social – BNDES financing for the project.

Provisional Measure 511 included a clause that permits the Federal Government cover up to US$ 3 billion should income for the project fall below what has been forecast for the first 10 years of operation.  This measure seeks to guarantee the interests of foreign investors in the project.

BNDES has held discussions with Japanese, Korean, Chinese, Spanish, German and French investors. The cap for the tariff has been set at US$ 115 for the segment between Rio and São Paulo.  The trip will take one hour and thirty minutes (1:30) and the extension of the bullet train is 511 km.

“Thus the future American Business will require the highest degree of sensitivity to the political framework in which it functions and to the great coming changes in the World political process.” KISSINGER, Henry A. (1977). Speech before the Future of Business Project of the Center for Strategic and International Studies. Georgetown, Virginia, Washington, D.C.

“First, it is clear that managers consider political instability and/or political risk, typically quite loosely defined, to be an important factor in the foreign investment decision. Second, It is just as clear that rigorous and systematic assessment and evaluation of the political environment is exceptional. Most political analysis is both superficial and subjective and not integrated formally into the decision making process. It would appear that the resulting subjective perceptions of ‘political instability’ are equated on almost a one to one basis with a poor investment climate. The response frequently is avoidance; firms simply do not get involved in countries or even regions, they perceive to be risky. Last, managers appear to rely primarily on internal (to the firm) sources for environmental information. Wlien they look for outside data, they are most likely to go to their banks or the general and business media.” KOBRIN, Stephen Jay (1978). Political risk : a review and reconsideration. Cambridge, Mass. : Alfred P. Sloan School of Management, Massachusetts Institute of Technology.

In any cross-border financing, parties (banks specially) take a political risk in the sense that a collapse of the existing political order in the borrower’s country or the imposition of new taxes, exchange transfer restrictions, nationalisation or other laws may jeopardise the prospects of repayment and recovery. In project financing, the political risks are more acute for many reasons, including:

a) the project itself may require governmental concessions, licences or permits to be in place and maintained, particularly where the project is for power generation, transport, infrastructure or the exploitation of the country’s natural resources – oil, gas and minerals; and

b) the project may be crucial to the country’s infrastructure or security and accordingly be more vulnerable to the threat of expropriation or requisition – power projects, airports, seaports, roads, railways, bridges and tunnels are obvious examples.

The term political risk is widely used in relation to Project Finance and can conveniently be defined to mean both the danger of political and financial instability within a given country and the danger that government action (or inaction) will have a negative impact either on the continued existence of the project or on the cash flow generating capacity of a project. Different projects and different project structures will obviously encounter different types of political risk. However, examples of events that might be classified as political risks are set out below:

a) expropriation or nationalisation of project assets (including the shares of a project company);

b) failure of a government department to grant a consent or permit necessary for starting, completing, commissioning and/or operating a project or any part of it;

c) imposition of increased taxes and tariffs in connection with the project, including products generated by the project, or, perhaps, the withdrawal of valuable tax holidays and/or concessions;

d) imposition of exchange controls restricting transfer of funds outside of the host country or availability of foreign exchange;

e) changes in law having the effect of increasing the borrower’s or any other relevant party’s obligations with respect to the project, e.g. imposing new safety, health or environmental standards or other changes in law that result in changes being necessary to the design of any equipment or process;

f) politically motivated strikes; and

g) terrorism.

There is no single way in which a lender can eliminate all project risks in connection with a particular project. One of the most effective ways of managing and reducing political risks, however, is to lend through, or in conjunction with, multilateral agencies such as the World Bank, the European Bank for Reconstruction and Development and other regional development banks such as the African Development Bank and the Asian Development Bank.

There is a view that, where one or more of these agencies is involved in a project, then the risk of interference from the host government or its agencies is reduced on the basis that the host government is unlikely to want to offend any of these agencies for fear of cutting off a valuable source of credits in the future. This is a persuasive argument and certainly one that has some historical basis. For example, when countries such as Mexico, Argentina and Brazil were defaulting on their external loans in the early 1980′s, they went to some lengths to avoid defaulting on their multilateral debts, whether project-related or not.

Other ways of mitigating against political risks include:

a) private market insurance – although this can be expensive and subject to exclusions. Further, the term that such insurance is available for will rarely be long enough;

b) obtaining assurances from the relevant government departments in the host country, especially as regards the availability of consents and permits;

c) the Central Bank of the host government may be persuaded to guarantee the availability of hard currency for export in connection with the project; and/or

d) as a last resort, but an exercise which should be undertaken in any event, by a thorough review of the legal and regulatory regime in the country where the project is to be located to ensure that all laws and regulations are strictly complied with and all the correct procedures are followed with a view to reducing the scope for challenge at a future date.

In some countries, host governments (or their agencies) may be prepared to provide firm assurances on some of the above matters to foreign investors and their lenders. Obviously such assurances are still subject to a performance risk on the host government concerned, but at a minimum they can make it very difficult, as well as embarrassing, for a government to walk away from an assurance given earlier in connection with a specific project and on the basis of which foreign investors and banks have participated in a project.

As indicated by ASHLEY and BONNER:  ”Political risk identification, measurement, and management are key to successful international construction contracting. Multinational contractors are particularly sensitive to quick, unexpected change in the political environment that affects principal cash-flow elements of their projects. Traditional political risk analysis used by manufacturing or heavy industrial firms for capital investment decisions does not adequately address contracting risks. An alternate approach is presented to fill this important gap. Essential to this treatment is the identification of the primary political source risks and their impacts on project cash-flow elements. Recognition and planning, rather than gambling, is emphasized as a contractor’s best approach to successful international construction.” Let’s learn with them.

Reference:

AHARONI, Yair (1966). The Foreign Investment Decision Process. Boston, Harvard University Press.

ALFARO, L., KALEMLI-OZCAN, S. and VOLOSOVYCH, V. (2008). Why doesn’t capital flow from rich to poor countries? An empirical investigation, Review of Economics and Statistics, Vol. 90, pp. 347–368.

ASHLEY, David B. and BONNER Joseph J. (1989). Discussion of ‘Political Risks in International Construction’, Journal of Construction Engineering and Management, Vol. 115, Issue No. 1 (March/April, 1989), pp. 161-161.

FITZPATRICK, Mark (1993). The Definition and Assessment of Political Risk in International Business: A Review of the Literature, The Academy of Management Review, Vol. 8, No. 2 (April, 1983), pp. 249-254.

FRYDMAN, R., GRAY, C., HESSEL, M., and RAPACZYNSK, A. (1999). When does privatization work? The impact of private ownership on corporate performance in the transition economies, Quarterly Journal of Economics, Vol. 114, No. 4, pp. 1153-1191.

GLEASON, K. C., MCNULTY, J. E., and PENNATHUR, A. K. (2005). Returns to acquirers of privatizing Financial Services Firms : An International Examination, Journal of Banking and Finance, Vol. 29, pp. 2043-2065.

KOBRIN, Stephen J. (1979). Political risk : A review and reconsideration, Journal of International Business Studies, Vol. 10, pp. 67-80.

KOBRIN, Stephen J. (1980). Foreign enterprise and forced divestment in the LDCs, International Organization, Vol. 34, pp. 65-88.

LEWIS, M. (1979). Does political instability in developing countries affect foreign investment flow?, Management International Review, Vol. 19, No. 3, pp. 59-68.

REEB, D. M., KWOK, C., and BAEK, Y. (1998). Systemic Risk of the Multinational Corporation, Journal of International Business Studies, Vol. 29, No. 2, pp. 263-280.

SCHMIDT, D. A. (1986). Analyzing political risks, Business Horizons, Vol. 29, No. 4, pp. 43-50.

With the loss of capability of investment by the public sector, there was a global tendency in 80’s and 90’s to diminish the role of the State, with the privatization and concession of public services to the private sector. In Brazil, The Brazilian Privatization Program – PND, was instituted under the Law No. 8,031, of 04/12/1990, when the concept of privatization became an integral part of the economic reforms initiated by the Federal Government. At that time, all effort was concentrated on the sale of productive state owned companies, tied to strategic sectors, which allowed the inclusion of steel manufacturers, petrochemical and fertilizer companies in the PND.

Between 1990 and 1994, the Federal Government privatized 33 companies, 18 of which were controlled companies and 15 minority shareholder participations of Petroquisa and Petrofertil. Other eight auctions of minority shareholdings were held under Decree No. 1,068. Through these operations the Government obtained receipts of US$ 8.6 billion that, along with the US$ 3.3 billion in debt transferred to the private sector, brought the total to US$ 11.9 billion.

Due to the large amount of funds needed for the viability of infrastructure projects, private companies were incapable of compromising their budgets during the long course of maturation of such projects. The transfer of part of the infrastructure to private initiative, demanding substantial investments in its planning, development and operation, began to be financed by other agents and other sources, due to the integration of the partners in the respective projects.

Commercial banks, multilateral agencies, export credit institutions, pension funds, insurance companies and participants in international capital markets became important financiers of infrastructure projects in Brazil through Project Finance. As a financial model which adapts itself to the need of funds for projects developed by the private sector, Project Finance represents an important instrument to make investments in infrastructure viable in developing countries viable.

The Practical Use and Importance of Project Finance

Project Finance is usually defined as the financing of long-term infrastructure, industrial projects and public services based upon a non-recourse or limited recourse financial structure where project debt and equity used to finance the project are paid back from the cash flow generated by the project. In this context, it represents a financing technique which generally allows a company to raise funds to set up a project based on the feasibility of such a project and its ability to generate revenues at a level sufficient to cover construction and operational costs, as well as debt service and a return for the investor (cf. FINNERTY, John D. Project Financing: Asset-Based Financial Engineering. London: John Wiley and Sons, 2007, p. 4).

Projects like power plants, toll roads or airports share a number of characteristics that make their financing particularly challenging. Large-scale projects might be too big for any single company to finance on its own. On the other hand, widely fragmented equity or debt financing in the capital markets would help to diversify risks among a larger investors’ base, but might make it difficult to control managerial discretion in the allocation of free cash flows, avoiding wasteful expenditures. Project Finance is than used to strike a balance between the need for sharing the risk of sizeable investments among multiple investors and, at the same time, the importance of effectively monitoring managerial actions and ensuring a coordinated effort by all project-related parties.

Project Finance transactions require joint efforts from lenders, investors, suppliers, off takers and sponsors of the project in order to make feasible the implementation of a project, dealing with special challenges, such as:

(1) They require large indivisible investments in a single-purpose asset: Project Finance than deals have contemplated the creation of a special purpose vehicle with bankruptcy remoteness features, as a ring fencing technique, which usually results in credit enhancement for financiers and cost reductions for sponsors, although the creation of a project company is not necessarily a rule inherent to project finance;

(2) Projects usually undergo two main phases (construction and operation) characterised by quite different risks and cash flow patterns: Construction primarily involves technological and environmental risks, whereas operation is exposed to market risk (fluctuations in the prices of inputs or outputs) and political risk, among other factors. Most of the capital expenditures are concentrated in the initial construction phase, with revenues instead starting to accrue only after the project has begun operation; and

(3) The success of large projects depends on the joint effort of several related parties so that coordination failures, conflicts of interest and free-riding of any project participant can have significant costs: From the construction company to the input supplier, from the host government to the off-taker, all parties have substantial discretion in allocating the usually large free cash flows generated by the project operation, which can potentially lead to opportunistic behaviour and inefficient investments.

Trends of Project Finance Structures in Brazil

A. Detailed Financial Structure

In project finance, several long-term contracts such as construction, supply, off-take and concession agreements, along with a variety of joint-ownership structures, are used to align incentives and deter opportunistic behaviour by any party involved in the project. The definition of the advantages and limits of a Project Finance structure requires a detailed analysis of the various aspects must be made by those interested, involving, amongst others:

(1) A study of the structure that comprises Project Finance, detailing the advantages, the disadvantages and limits of each model;

(2) The criteria of evaluation and requirements established by the agents in charge of classification of credit and the respective impact on the composition of the interest rate of the financing;

(3) Identification, allocation and development and implementation of the criteria and methods to manage the risks involved;

(4) Formulation of an accurate economic-finance model to obtain the resources on the international market;

(5) Techniques and implications of the necessary due diligence; and

(6) Monitoring the project during its building and operational phases and respective management of financial documents, also contemplating the securitization of the receivables.

In Project Finance equity is held by a small number of sponsors and debt is usually provided by a syndicate of a limited number of banks. Concentrated debt and equity ownership enhances project monitoring by capital providers and makes it easier to enforce project specific governance rules for the purpose of avoiding conflicts of interest or suboptimal investments. The use of non-recourse debt in project finance further contributes to limiting managerial discretion by tying project revenues to large debt repayments, which reduces the amount of free cash flows. Moreover, non-recourse debt and separate incorporation of the project company make it possible to achieve much higher leverage ratios than sponsors could otherwise sustain on their own balance sheets.

Nonrecourse debt can generally be deconsolidated, and therefore does not increase the sponsors’ on-balance sheet leverage or cost of funding. From the perspective of the sponsors, non-recourse debt can also reduce the potential for risk contamination. In fact, even if the project were to fail, this would not jeopardise the financial integrity of the sponsors’ core businesses. One drawback of non-recourse debt, however, is that it exposes lenders to project-specific risks that are difficult to diversify. In order to cope with the asset specificity of credit risk in project finance, lenders are making increasing use of innovative risk-sharing structures, alternative sources of credit protection and new capital market instruments to broaden the investors’ base.

Hybrid structures between project and corporate finance are being developed, where lenders do not have recourse to the sponsors, but the idiosyncratic risks specific to individual projects are diversified away by financing a portfolio of assets as opposed to single ventures. Public-private partnerships are becoming more and more common as hybrid structures, with private financiers taking on construction and operating risks while host governments cover market risks.

There is also increasing interest in various forms of credit protection. These include explicit or implicit political risk guarantees, credit derivatives and new insurance products against macroeconomic risks such as currency devaluations. Likewise, the use of real options in project finance has been growing across various industries. Examples include: refineries changing the mix of outputs among heating oil, diesel, unleaded gasoline and petrochemicals depending on their individual sale prices; real estate developers focusing on multipurpose buildings that can be easily reconfigured to benefit from changes in real estate prices.

Finally, in order to share the risk of project financing among a larger pool of participants, banks have recently started to securitize project loans, thereby creating a new asset class for institutional investors. Collateralised debt obligations as well as open-ended funds have been launched to attract higher liquidity to project finance.

B. Partnering Construction Contractual Structure

Within time and the more use of Project Finance structures, parties have evolved to the use of Engineering Procurement Construction (EPC) – the favourite contract model for the lenders – and Engineering Procurement Construction Management (EPCM). Nevertheless, because the EPC contract approach shifts all the risk of project completion cost and performance onto the contractor’s shoulders, it tends to trigger an adversarial project team relationship, potentially leading to a breeding ground for conflict, contractual disputes and major claims that undermine the project’s financials and its ultimate successful outcome. Therefore, the challenge in Project Finance has been the adoption of the Alliance contracting as a viable, proven alternative to adversarial business-as-usual contracts.

Alliance contracting offers a unique system of project delivery whereby risks are shared between owner and contractor. They are incentive-based relationship contracts in which the parties agree to work together as one integrated team in a relationship that is based on the principles of equity trust, respect, openness, no dispute and no blame. Alliance contracting can relieve the pressure of the short-term demands on the industry and set the foundation for longer term structural improvement in the way the industry works. Also, significantly reduces, the risk of claims and disputation between the parties through the use of inclusive and collaborative legal and commercial arrangements. These arrangements enable the parties to work together in an open and generative manner and to strive to achieve the business goals of everyone in the relationship and can provide a bankable project delivery method even for project financing.

C. Submission to the Equator Principles

Project Finance transactions may encounter social and environmental issues that are both complex and challenging, particularly with respect to projects in the emerging markets. Large industrial and infrastructure projects, such as for power generation, are becoming increasingly conditioned to social and environmental risk assessments in order to be approved. In this context, Brazil is following the international trend to adopt the Equator Principles for Project Finance transactions.

Equator Principles represent a set of socioenvironmental guidelines adopted by 61 banks worldwide for financing projects amounting to US$10 million or more and are intended to serve as a common baseline and framework for the implementation by each lender of its own internal social and environmental policies, procedures and standards related to its project financing activities.

Today, 7 banks are signatories of the Equator Principles in Brazil. They work to ensure that the projects they finance are developed in a manner that is socially responsible and reflect sound environmental management practices. By doing so, negative impact on project-affected eco-systems and communities should be avoided where possible, and if this impact is unavoidable, it should be reduced, mitigated or compensated for, or both, appropriately.

Conclusion

The success in the financing of an infrastructure project, by means of Project Finance, depends on all the parties involved satisfactorily complying with their various contractual obligations under the Project Finance Documentation. Lenders, as well as the other participants, in accordance with the level of risk being assumed and in proportion to the benefits received from the implementation of the project, will undertake the due diligence needed to adequately measure the risks involved.

The viability of the Project Finance model, in short, is based on the consistency and efficiency of its network of agreements. Such documents must be structured and negotiated in a consistent manner with the respective legislation applicable in the jurisdictions involved, and be constructed in such a way as to allow full implementation of their respective terms and conditions, notwithstanding the natural complexity of the same, in a form which will satisfactorily identify, mitigate, allocate and allow the adequate management of the various risks involved in the Project Finance.

On July 13th 2010 Brazilian Federal Government launched bidding documents regarding the concession regime and procedures for implementation and operation of the High-Speed Rail (TAV – Trem de Alta Velocidade) that will connect the cities of Rio de Janeiro, São Paulo and Campinas. The project, the most ambitious infrastructure project under the country’s Program to Accelerate Growth (PAC – Programa de Aceleração do Crescimento), specifies that the construction, operation, and maintenance will be granted to the consortium that provides the lowest fare for service.

The concession contract establishes the limit of six years to complete the entire stretch Campinas – São Paulo Rio de Janeiro. The final schedule calls for the railway to be completed by 2017, although the Brazilian Federal Government anticipates the line will be partially open before the 2016 Summer Olympics in Rio de Janeiro.

TAV is worth US 20 billion. The Brazilian Federal Government will invest, through a new state-run entity, US$ 1.5 billion in the project and extend loans worth 60% of the total cost by the Brazilian Development Bank (BNDES – Banco Nacional de Desenvolvimento Econômico e Social).

Potential customers in the parcels market can be classified into two main groups:

- existing logistics companies, interested in moving consolidated loads, using rail as part of the chain – principal players in this field are the Brazilian National Post Office (Correios – Empresa Brasileira de Correios e Telégrafos) and Courier Companies; and

- end users, such as businesses, or individuals.

The construction of TAV will create a very large site, which will directly require numerous professional skills and directly or indirectly generate employment upline and downline The commissioning of the railway and, in particular, the development of land traffic and associated commercial zones served by the railway will create jobs in a progressive manner during the first 10 years’ of operation.

It is estimated that the railway will generate around 30,000 jobs throughout the area affected within about 10 years after commissioning. In addition a further 30,000 jobs could be generated by around 2050 in response to more fundamental shifts in the regional economy.

The choice of consortia contractor by the end of 2010

The Brazilian Federal Government will pick the contractor for the TAV in December 2010. Competitors must submit their proposals before November 29 and the winner will be announced on December 16 at the headquarters of Sao Paulo Stock Exchange (BOVESPA – Bolsa de Valores de São Paulo). Term of the concession is 40 years.

The line will be built and run on a concession basis and the government will rank bids based on the lowest fare, with a maximum permitted price of US$ 0.28 per kilometre. That would translate into economy class ticket fares up to US$ 115.00 for the 430 kilometres (270 miles) stretch between Rio and Sao Paulo.

International interest

The bidding is open to both Brazilian and foreign firms. News report that several countries and international companies have expressed interest in participating of the project:

- Austria;

- China (China Railway Materials);

- France (Alstom);

- Germany (Siemens);

- Italy (Ansaldobreda);

- Japan (Hitachi, Kawasaki, Mitsui & Co, Mitsubishi and Toshiba);

- Spain;

- South Korea (Hyundai and Samsung); and

- United Kingdom.

A new company called ETAV

Federal Government also proposed the creation of the Company of High Speed Rail (ETAV – Empresa de Transporte Ferroviário de Alta Velocidade), With the objective of planning and promoting the development of other high-speed rail lines in the country.

ETAV will be linked to the National Agency of Terrestrial Transports (ANTT – Agência Nacional de Transportes Terrestres) and will be also responsible for managing the technology used by the contractor that wins the High Speed Rail bidding process, in addition to monitoring the project’s deadlines.

Speed, locations and planned route

TAV proposal calls for trains to run at speeds of up to 350 kph (217 mph) and the trip between São Paulo and Rio de Janeiro is expected to last 93 minutes. Seven mandatory stations are be built on the line:

- City of Rio de Janeiro downtown area;

- Rio de Janeiro International Airport;

- City of Aparecida, State of São Paulo;

- São Paulo/Guarulhos International Airport;

- City of São Paulo downtown area;

- Campinas/Viracopos International Airport; and

- City of Campinas downtown area.

The planned route will include 90.9 km tunnels and 103 km bridges and viaducts. An extension to Campinas, 70 kilometres from Sao Paulo was planned with the purpose of reaching the heartland of Brazil’s richest manufacturing and farming state.

The planned route is as follows:

According to a survey recently disclosed by the Ipea – Institute of Applied Economic Research (www.ipea.gov.br), while private capital injections have grown steadily during this period, State investments have faltered. In 1999, public initiative counted only R$ 20.9 million in railways while private initiative channeled R$ 232.8 million. Public initiative’s peak occurred in 2007 with R$ 352 million when, at the same year, private initiative have soared and exceeded R$ 1 billion in 2004. In 2008 private initiative came to R$ 4.3 billion (led in Brazil by mining company Vale, steel company CSN, and logistics company ALL) and State’s investments downsized to R$ 237 million.

As public investments have not changed significantly during the last decade, railway works and network expansion have primarily counted on the funds raised by private concessionaires. The overwhelming presence of highway transportation has caused the railway system to account for only 30% of total transports in volume terms in 2008, as compared to more than 50% in other countries. This is one of the Brazilian infrastructure bottlenecks that impair long-term investments, since it is difficult to make country’s agricultural output flow smoothly.

The Brazilian railway network comprises 12 railways for cargo transportation stretching along circa 28 thousand km. Between 1999 and 2008, the cargo volume carried soared 79.6%, with emphasis on iron ore, pit coal, soybean, corn, sugar, and others. These products are primarily carried through the Vitória-Minas and Carajás railways, and by MRS Logística (controlled by Vale and CSN). For the sake of comparison, thanks to hefty public investments, China can already count on a railway network that stretches along 86 thousand km, and is planning to expand it to 125 thousand km in the next few years.

Ipea estimates that 141 new infrastructure railroad projects would be required to improve efficiency and competitiveness in this industry. Such priority works comprise, among others, the Transnordestina network linking the Brazilian ports of Pecém (CE) and Suape (PE); the North-South railway extension up to the Brazilian port of Rio Grande (RS); and the additional route along this same network to the interior region of São Paulo. Current Brazilian network could be expanded to at least 40 thousand km by 2020. At least R$ 40 billion (around US$ 22 billion) would have to be invested in these projects in the next 10 years.

Basic notes on some of the major projects to come:

1) North-South Railway (EF 151)

1st Parcel – 50% of the winning Auction bid, at the time of financial settlement, upon the signature of the Sub concession Contract and the delivery of the railroad section defined as: Palmas (TO) – Anápolis (GO), scheduled for December 2010.

2nd Parcel – 25% of the winning Auction bid, upon the delivery of the railroad section defined as: the Ouro Verde de Goias (GO) – Rio Verde (GO), scheduled for July 2011.

3rd installment – 25% of the winning Auction bid, upon the delivery of the railroad section defined as: Rio Verde (GO) – Estrela D’Oeste (SP), scheduled for December 2011.

2) West-East Integration Railway (EF 334)

1st Parcel – 40% of the winning Auction bid of financial settlement, upon the signature of the Sub concession Contract and the delivery of the railroad section defined as: Ilhéus (BA) – Caetité (BA), scheduled for July of 2012.

2nd Parcel – 30% of the winning Auction bid, upon the delivery of the railroad section defined as: Caetité (BA) – Correntina / Barriers (BA), scheduled for December 2012.

3rd Parcel – 30% of the winning Auction bid, upon the delivery of the railroad section defined as: Figueirópolis (TO) – Correntina / Barreiras (BA), scheduled for July 2013

Procurement conditions for participation in the railroad projects:

• Acquisition of the Bidding Documents (www.valec.gov.br)
• The participation of individual Brazilian and Foreign Companies is permitted
• The participation of consortiums between Brazilian and / or Foreign Companies in one Consortium is also permitted
• The presentation of a commitment to form a consortium indicating the participation of each member of the consortium and the leader
• The members of the Consortium will reply jointly and individually for all the actions taken with joint responsibility
• The Consortium can not alter its composition without the prior consent of VALEC (VALEC – Engenharia, Construções e Ferrovias S.A., a public company supervised by the ANTT – National Transport Agency and which has the concession for the North South Railway and the West-East Integration Railway)
• Competence in Public Administration
• Unconditional Acceptance of the Conditions in the Procurement Documents

The administrative concession is defined in Article 2, paragraph 2 of PPP LAW as a “service agreement in which the government entity is the direct or indirect user, even if such agreement involves performance of works or supply and installation of assets.” This type of concession is governed by PPP LAW, by Articles 21, 23, 25 and 27 through 39, of Law No. 8987, 1995 [FED. LAW 8987], and by Article 31 of Law No. 9074, 1995 [FED. LAW 9074]. An administrative concession contract is that by which government entities delegate performance of a public service to a private company. Such private company will develop the activity for its own account and at its own risk for the period and on the conditions agreed in the respective contract. In administrative concessions, services are directly or indirectly provided to government entities. For instance, the government entity may open competitive bidding procedures for the construction and operation of hospitals and prisons.

The sponsored concession, as defined in Article 2, paragraph 1, is “the concession of public works or services as dealt with in FED. LAW 8987 when it involves, in addition to the fees charged to users, payment of a compensation from the public partner to the private partner.” A sponsored concession is actually an ordinary concession in which the State gives some type of consideration. This type of concession is governed by PPP LAW by FED. LAW 8987 and related legislation. A sponsored concession may be adopted, for instance, in the cases of railways and highways in general.

Article 2, paragraph 3, of PPP LAW expressly stipulates that “the ordinary concession, i.e. the concession of public works or services as dealt with in FED. LAW 8987, will not be considered a public-private partnership when it does not involve payment of compensation from the public partner to the private partner.” Reflecting a general concern about the manner in which PPPs are to be conducted, PPP LAW also lays down the following guidelines:
(a) Efficiency in complying with the State’s missions and in using the company’s funds (due care in the use of the public funds invested in the activity);
(b) Respect to the interests and rights of service users and of the private entities charged with performing the services;
(c) Non-transferability of regulatory and jurisdictional duties, the exercise of police power and other activities inherent to the State;
(d) Fiscal responsibility in the execution and performance of partnerships, as Article 10, I(b) of PPP LAW stipulates that the rules set out in FISCAL RESPONSIBILITY LAW must be observed;
(e) Transparency in procedures and decisions;
(f) Objective sharing of risks between the parties; and
(g) Financial sustainability and socioeconomic advantages of PPP projects.

These guidelines mirror the spirit of care the legislator wishes government entities to adopt when contracting PPPs, reminding them of certain principles and concepts already contemplated by the legislation applicable to contracting of works, services, and other items by government entities with companies of the private sector.

Generally speaking, PPPs operate as an arrangement between the public and private sectors for execution of works originally entrusted to public concerns, which lack funds and/or expertise. As far as this concept is concerned, PPPs and ordinary concessions may seem to be very similar this is not necessarily true.

Even though both PPPs and ordinary concessions are administrative contracts between the government authorities and a private entity, more specifically concession contracts in a broad sense – concession contracts, in their broad sense, comprise all those in which government entities delegate the provision or performance of services (whether or not preceded by public works) to a private entity, which will perform the activities inherent to the services and assume the business risk under the contractual conditions. Prevalence of the public interest and an assurance of the original economic and financial conditions also constitute essential characteristics of concession contracts – there is a substantial difference between them: while in ordinary concessions, regulated by FED. LAW 8987, the compensation obtained by the contracted concessionaire (private entity) always originates from the service users only, in PPPs the compensation is fully or partially paid by the public partner to the private partner. In sponsored PPPs, the compensation received by the concessionaire from service users is, in principle, supplemented by the compensation paid by the public entity to the private entity, whereas in administrative PPPs all the compensation is paid to the private partner by the contracting public entity itself – Article 2, paragraphs 1 and 2, and Article 6 of PPP LAW.

In other words, PPPs are slated for services and/or public works that do not generate sufficient compensation to the contractor (e.g. expansion and management of highways or railroads with few users) or that do not even involve payment of fees by their users (e.g. construction and management of penitentiaries or public hospitals). Therefore, in addition to dealing with cases requiring investments and/or specialization beyond the possibilities of the public entity, PPPs have another specific characteristic: the venture itself is unable to pay off. These are the basic differences between PPPs and ordinary concessions, and should serve as guiding principles in bidding procedures, analysis of proposals and, particularly, concession contracts regulating PPPs.

Unlike ordinary concession contracts, PPP contracts are subject to more extensive and complex regulations: in addition to traditional clauses such as contractual term (which is considerably longer), PPP contracts must provide for rather specific aspects difficult to be expressed in few general terms. Therefore, PPPs cannot adopt near-standard draft concession contracts, which are mostly adhesion contracts.

The methods of compensation and the guarantees tendered (guarantee fund, insurance, etc.) by the public entity to the contractor, the risk sharing between the parties, the possibility of transferring the special purpose company (a legal entity incorporated to enter into PPPs) to financiers in case of default, the definition of performance evaluation criteria in accordance with the contractual term, among others, will be a matter of concern of those involved in drafting and negotiating PPP contracts. Certainly, this will require a more active involvement of bidders in drafting the contracts, which might result in an ample and detailed document, very probably in similar terms of common law contracts. This obviously strengthens the importance – after the phase of comparative law examination – of studying in advance examples of successful PPP contracts abroad, particularly the pioneering PPP contracts in England.

Having described the fundamental differences between PPPs and ordinary concessions, it is worth dealing once again with their contractual similarities. Both are kinds of administrative concession contracts. For this reason, PPP LAW expressly provides that PPP contracts must meet the general requirements of FED. LAW 8987 for ordinary concession contracts, such as: tariff adjustment mechanisms; methods and standards for service evaluation, expansion and inspection; indemnity calculations; users’ rights and duties; and periodical rendering of accounts by the private party to the public party. As a consequence of this legal provision, the caution taken when drafting PPP contracts must be redoubled, i.e. FED. LAW 8987 must be observed, insofar as applicable, and PPP LAW must be fully observed.

Generally speaking, once this new channel of investments is opened, there are very positive prospects of its use and results. However, it is important to stress the relevant and specific features (which have only been outlined above) of PPPs vis-à-vis ordinary concessions, notably when it comes to the careful drafting of PPP contracts.

Firstly introduced in the Anglo-Saxon world as an alternative to privatization and to the former system, under which the government administration was responsible for ownership, maintenance and operation of assets of public interest, PPPs are now a widespread concept in many countries, operate as an arrangement between the public authorities and the private sector for the performance of large-sized works and utility services, by means of sponsored or administrative concessions, sharing the venture risks and primarily counting on private funding.

The bill of the PPP LAW as “an indispensable alternative for economic growth in view of Brazil’s critical needs on the social and economic fronts, to be addressed by a positive cooperation between the public and private sectors” and it was passed by the Congress at a fast pace. This serves as a good measure of the urgency and importance that the Federal Government has attached to this matte, certainly in response to the pressure brought to bear by state governments, notably the States of Minas Gerais and São Paulo, in addition to the private initiative, but may also give a false impression that the issue has not been sufficiently discussed by the Brazilian Legislative.

The driving force behind this expeditious congressional passage of the draft bill into PPP LAW was probably the well-known critical shortage of public funds to sponsor infrastructure works and utility services and to meet the demand resulting from the country’s announced economic growth spurt. This shortage of public funds, coupled with the private sector’s lack of interest in taking over such works and services under the traditional concession system, may help explain why infrastructure investments have come to a near halt.

Contrary to the fears of a supposed lack of in-depth discussions over this issue, justice should be done to the numerous debates among the political forces and civil society concerning the most controversial points underlying the PPPs, notably in relation to:
(a) Bidding procedures; the origin of public funds to make up the Public-Private Partnership Guarantee Fund under Article 16 of PPP LAW;
(b) The priority given to settlement of financial obligations under PPPs;
(c) The role of Special Purpose Companies in the venture;
(d) The limitations imposed by Federal Law No. 101, 2000 [FISCAL RESPONSIBILITY LAW]; and
(e) The possibility of adopting arbitration as an alternative dispute resolution mechanism for PPPs.

The introduction of legal mechanisms of such a magnitude conceivably arouses a number of doubts and questions. However, approval of PPPs has undoubtedly represented a great victory for the Lula da Silva’s Administration, especially by offering a wide array of possibilities for the presence of private concerns in key sectors of the Brazilian economy, the reason why the great expectations and discussions over the role of PPPs in Brazil are far justifiable.

In fact, according to data published by the Ministry of Planning, Budget and Management, based on the Government’s Multiyear Plan, it has been estimated that investments equalling 21.7% of Brazil’s Gross Domestic Product will be required to resume and sustain the country’s economic growth (Source: www.planejamento.gov.br). The studies conducted to prepare the Government’s Multiyear Plan, which is aimed at resuming economic growth and has as its greatest challenge to expand investments and exports without hindering the commitment of increasing domestic consumption, evidence the Government’s need of tools that can help it overcome the obstacles to economic growth.

To achieve its purpose, the Federal Government prepared a portfolio containing projects that should be developed with the participation of the private sector. Investments needs were estimated at approximately hundreds of billions of US Dollars in the transportation (railways, highways and ports), irrigation and water resources areas in the country’s five major regions (www.planejamento.gov.br).

For the last decade or so, development of arbitration as an effective method for out-of-court resolution of disputes in Latin America has been intense, with new local legislations being adopted in several countries of the region. In many of these countries, consolidation of and credibility on arbitration have been dependent on the support given by local courts. This is exactly what happened in Brazil.

Arbitration finally came to place in Brazil

The Brazilian Arbitration Law was enacted in 1996 (Law 9307, of September 23, 1996) and brought the long hoped-for binding power and compulsory enforcement of the arbitration clause. The new Law makes a clear distinction between the arbitration clause, on the one hand, and the arbitration agreement, on the other, both being different species of the genus “arbitration arrangement”. Thus, if the parties wish to refer their dispute to arbitration, they must enter into an arbitration arrangement, which initially will be an arbitration clause inserted in the contract, and then, if a dispute arises, an arbitration agreement.

The Brazilian Arbitration Law dispenses with the previously required recognition of the award by a competent state court. Consequently, as from 1996 the arbitration award has the same validity and effectiveness as a court ruling, and can be enforced directly against the defeated party without prior ratification by the Judiciary. This also applies to foreign awards, which no longer have to be recognized by the Judiciary of the country where they are rendered.

In addition, the Brazilian Arbitration Law permits the parties to agree, under an arbitration clause and/or in an arbitration agreement, to adopt the rules of an institutional arbitration body or specialized entity, whether Brazilian or foreign. The parties are further allowed to establish the place of arbitration, which can be in Brazil or abroad, as well as the language in which it will be conducted.

The great innovation in this new Law lies in its Article 7, which provides that: “If there is an arbitration clause but resistance as to the commencement of the arbitral proceedings, the interested party may request the Court to summon the other party to appear in Court so that the submission to arbitration may be signed; the Judge shall order a special hearing for this purpose.” This action has therefore been introduced in the Brazilian legal system for compulsory or specific performance of the arbitration clause.

The constitutional challenge has been overcome

Shortly after the Brazilian Arbitration Law was published, a great controversy arose as to the constitutionality of its Article 7. The constitutionality of arbitration itself did not come into question, but rather the judicial enforceability of the arbitration clause as provided for in Article 7 of the said law.

This is because Article 5, XXXV of the Brazilian Federal Constitution warrants the right of judicial access. Thus, some could contend that the obligation to submit to private arbitration would be violence to that constitutional precept.

This issue was taken to the Brazilian Federal Supreme Court, upon consideration of an incident of unconstitutionality raised in the judgment of recognition of an arbitral decision brought in Spain. This was the first — and decisive — test for the consolidation of arbitration in Brazil.

The Supreme Court took five years to render a decision, and the use of arbitration was practically put on hold in Brazil during such period. Judgment finally ended on November 12, 2001 and, by opinion of seven against four of the Federal Supreme Court Justices, the constitutionality of the Brazilian Arbitration Law provisions on specific performance of the arbitration clause was duly recognized.

The prevailing view was that Article 5, XXXV of the Constitution only prohibits the law from barring judicial access, but not the parties from establishing out-of-court means of settling their conflicts, either present or future (Opinion of Justice Nelson Jobim).

The Federal Supreme Court held that the act by which someone undertakes to refer certain disputes to arbitration does not constitute the (inadmissible) waiver of any and all rights of action, but rather a simple contractual clause by which the parties to a certain agreement involving a disposable economic right resolve at their own free will that any dispute over the said agreement will necessarily be settled by a trustworthy third party or parties whose decision they will be bound to accept (Opinion of Justice Ilmar Galvão).

Following this rationale, the Federal Supreme Court noted that denying the validity and specific performance of an arbitration clause would favour the defaulting party by allowing it to escape referral of a dispute to the expeditious settlement to which it had freely agreed (Opinion of Justice Ellen Gracie).

Important characteristics of the Brazilian Arbitration Law

Apart from the important Article 7, which provides that: “If there is an arbitration clause but resistance as to the commencement of the arbitral proceedings, the interested party may request the Court to summon the other party to appear in Court so that the submission to arbitration may be signed; the Judge shall order a special hearing for this purpose”, other points should also be noted:

a)      The submission to arbitration is the judicial or extrajudicial agreement through which parties submit a dispute to arbitration by one or more persons;

b)      At the parties’ discretion, arbitration may be conducted under the rules of law or in equity;

c)      The interested parties may submit the settlement of their disputes to an arbitral tribunal by virtue of an arbitration agreement, which may be in the form of either an arbitration clause or a submission to arbitration (acte de compromis);

d)      If the parties, in the arbitration clause, select the rules of an arbitral institution or specialized entity, the arbitral proceedings shall be commenced and conducted pursuant to such rules; it being also possible that the parties determine in the arbitration clause itself, or in a separate document, the agreed procedure for instituting the arbitral proceedings;

e)      The arbitration clause is autonomous from the contract in which it is included, meaning that the nullity of the latter does not necessarily imply the nullity of the arbitration clause (Kompetenz- Kompetenz);

f)        The parties may, by mutual agreement, define the rules for the appointment of arbitrators, or adopt the rules of an arbitral institution or specialized entity;

g)      Any legally capable individual, trusted by the parties, may act as an arbitrator;

h)      The arbitral procedure shall comply with the procedure agreed upon by the parties in the arbitration agreement, which may refer to the rules of an arbitral institution or specialized entity, it being possible for the parties to empower the sole arbitrator or the arbitral tribunal to regulate the procedure;

i)        The arbitral award shall be made within the time limit stipulated by the parties. If no express stipulation is made thereon, the award shall be made within six months from the date of the commencement of the arbitral proceedings, or from the date of the substitution of an arbitrator;

j)        A party wishing to raise issues as to the jurisdiction, suspicion or impediment of an arbitrator or arbitrators, or as to the nullity, invalidity or ineffectiveness of the arbitration agreement, must do so at the first possible opportunity after the commencement of the arbitral proceedings;

k)      A foreign arbitral award shall be recognised or enforced in Brazil pursuant to international treaties effective in the national legal system, or, if non-existent, strictly in accordance with the present Law (a foreign arbitral award is an award made outside of the national territory);

l)        In order to be recognised or enforced in Brazil, a foreign arbitral award is subject only to homologation by the Federal Supreme Court / Superior Court of  Justice; and

m)    An arbitral award is null and void if:

I – the submission to arbitration is null and void;

II – it is made by a person who could not be an arbitrator;

III – it does not comply with the requirements of Article 26 of this Law and the mandatory requirements of the awards;

IV – it has exceeded the limits of the arbitration agreement;

V – it does not decide the whole dispute submitted to the arbitration;

VI – it has been duly proved that it was made through unfaithfulness, extortion or corruption;

VII – it is made after the time limits established in the Terms of Reference; and

VIII – it disregards the principles dealt with in Article 21, that are the principles of adversary proceeding, equal treatment of the parties, impartiality of the arbitrator and freedom of decision.

Recent trends in Arbitration in Brazil

The growing support received from Brazilian courts has played a key role in the actual and efficient development of arbitration in Brazil, which has translated into a quicker alternative for settlement of disputes by means of expeditious decisions, many times even more specialized than those handed down by the Judiciary.

The Federal Supreme Court judgment – together with ratification of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention“) by the Brazilian Government in July 2002 – gave the green light to arbitration as a reliable mechanism in Brazil.

Since then, the reliability of arbitration as an effective means of settling conflicts – specially in the area of Construction – has found growing support in the Brazilian Judiciary. All these developments soon prompted Brazil to emerge as growing and important centre for arbitration in Latin America, for example having assumed the first position in Latin America in terms of parties involved in ICC arbitrations in recent years.