Brazil: Framework Analysis for Public–Private Partnerships in Irrigation

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Brazil: Framework Analysis for Public–Private Partnerships in Irrigation Public Disclosure Authorized Brazil: Framework Analysis for Public–Private Partnerships in Irrigation Public Disclosure Authorized January 2009 ——————————— Daniele La Porta Arrobas José Virgílio Lopes Enei Public Disclosure Authorized The World Bank Latin America and the Caribbean Region Sustainable Development Department Public Disclosure Authorized This report was prepared under the direction of Musa Asad (Senior Financial Analyst, SASAD), Jennifer Sara (Sector Leader LCC5C) and Manuel Contijoch (Senior Water Resources Specialist LCSSD).The coordination of the report was done by Daniele La Porta Arrobas (Irrigation & PPP Sp, LCSEN), with the collaboration of a group of core team members and consultants, including Alberto Ninio (Lead Attorney, LEGLA), Elmar Wagner (Agronomist), José Virgílio Lopes Enei (Attorney), Larry Simpson (Water Resources Management Specialist), Octavio Damiani (Economist), Paula Freitas (Operations Analyst, LCC5C), Luiz Gabriel Azevedo (Sector Leader, LCC5C) and Ronaldo Seroa da Mota (Economist) without whose support and hard work the results summarized here would not have been possible. This activity was funded by a grant from the Public Private Infrastructure Advisory Facility - PPIAF and undertaken by the Environment and Water Resources Sustainable Development Department of the Latin America and Caribbean Region of the World Bank. We would also like to extend a special thank you to our World Bank colleagues Joshua Gallo (PPIAF) and Amanda Schneider (LCSEN) whose input, support and advice helped us finalize this document as well as to Janice Molina, Judy Wolf and Anja Kampf for the editing. _______________________________________________________________________________________________ The findings, interpretations, and conclusions in this document are those of the authors, and should not be attributed to the World Bank, its affiliated organizations, members of its Board of Executive Directors or the countries they represent. Additional copies may be obtained from Amanda Schneider ([email protected] or tel. 202-473-3092). ii Table of Contents Page No. Acronyms v Executive Summary vii 1. Introduction 1 1.1 The Irrigation Subsector: In Brazil and the Semi-Arid Region 2 1.2 Irrigated Agriculture and Private Investments in the Sector 3 1.3 Principal Weaknesses and Needs 3 1.4 Lessons Learned 4 2. Legal and Institutional Framework 5 2.1 National Irrigation Policy 5 2.2 Irrigation in Public Projects 7 2.2.1 Irrigation Infrastructure in Public Projects 7 2.2.2 The Irrigated Perimeter in Public Irrigation Projects 9 2.3 Water Resources Management 10 2.4 Environmental Management 12 2.5 Occupation of the Irrigated Perimeter 15 2.6 Agriculture 17 3. Public–Private Partnership Legal and Regulatory Framework 19 3.1 Public–Private Partnership: Concept and Understanding 19 3.2 Context of Public–Private Partnership and the PPP Act 21 3.3 General Considerations on Public–Private Partnerships 21 3.4 Scope of the PPP Act in the Public Sector 23 3.5 Public–Private Partnership Modalities 24 3.5.1 Sponsored Concession 24 3.5.2 Administrative Concession 24 3.6 Objective of the Public–Private Partnership 24 3.7 Guiding Principles for the Contracting of PPPs 24 3.8 Public–Private Partnership Contracts 25 3.9 Special Purpose Entity 26 3.10 Bidding for Public–Private Partnership 26 3.11 Public Guarantees and their Relevance 26 3.12 Guarantee Modalities 27 3.13 The Partnership Guarantor Fund 28 3.14 Regulation of the Partnership Guarantor Fund 28 3.15 Limitations of the Partnership Guarantor Fund 30 3.16 Alternatives for Strengthening the Partnership Guarantor Fund 30 3.17 Management of Public–Private Partnerships at Federal Level 31 3.18 Restrictions to the Contracting and Financing of Public–Private 32 Partnerships 3.19 Control and Monitoring of Public–Private Partnerships 32 3.20 Administrative Rule 614 of the National Treasury Secretariat – Public 33 Accounting Rules 4. PPP Models for the Irrigation Sector 39 4.1. Brief Diagnosis of the Traditional Public Irrigation Project Model 39 4.1.1 2004 Report 39 4.1.2 The Traditional Model 40 4.2. Agribusiness as the Basis of a New Model 42 4.3. Legal Justification for PPPs and CDRUs in the Irrigation Sector 43 4.3.1 The Irrigation Service 43 4.3.2 Agricultural Production–Irrigated Agriculture 45 4.4. The Models 46 4.4.1 Dual Model: Sponsored PPP combined with CDRU 46 4.4.1.1 Dual Submodel: Simultaneous Bidding for PPPs and CDRUs 50 4.4.1.2 Dual Submodel: PPP Bidding prior to CDRU Bidding 51 4.4.1.3 Dual Submodel: PPP Bidding after CDRU Bidding 52 4.4.2 The Vertical Model 53 4.4.3 Administrative PPP 56 4.4.4 The first PPP experiences in the irrigation sector 57 4.4.4.1 Pontal Project (Pernambuco) 57 4.4.4.2 Baixio do Irecê Project (Bahia) 58 4.4.4.3 Salitre Project (Bahia) 60 5. Economic Criteria for the PPP Model in Public Irrigation Perimeters 60 5.1. The Economic Objectives of PPPs 61 5.1.1 Private Management 62 5.1.2 Demand Risk 63 5.2. Risk Analysis in Irrigation PPP Projects 64 5.2.1 Bases and Concepts of the Economic Analysis 65 5.2.2 Productive Efficiency and Risk in Irrigation PPP Projects 67 5.3. Regulatory Framework 73 5.3.1 System 73 5.3.2 Governance Structures 77 6. Final Remarks 79 6.1 Conclusions 79 6.2 Recommendations 80 Glossary 87 ACRONYMS ANA Agência Nacional de Águas (National Water Agency) APU Agricultural Production Unit BGL Budget Guidelines Law BL Budget Law BNB Banco do Nordeste (Bank of the Northeast) BNDES Banco Nacional de Development Econômico e Social (National Bank for Economic and Social Development) BOT Build, Operate and Transfer CDRU Concessão de Direito Real de Uso (Concession of Right in Rem to Use) CF Conversion Factors CNPq Conselho Nacional de Desenvolvimento Científico e Tecnológico (National Council for Scientific and Technological Development) CODEMIG Companhia de Desenvolvimento Econômico de Minas Gerais (Minas Gerais Development Company) CODEVASF Companhia de Desenvolvimento dos Vales do São Francisco e Parnaíba (São Francisco and Parnaíba Valleys Development Company) CONAB Companhia Nacional de Abastecimento (National Supply Company) CONAMA Conselho Nacional do Meio Ambiente (National Environment Council) CUI Common-Use Infrastructure CVM Companhia de Valores Mobiliários (Securities Commission) DNOCS Departamento Nacional de Obras Contra as Secas (National Department for Drought Relief Works) EIRR Economic Internal Rate of Return EMBASA Empresa Baiana de Águas e Saneamento (Water and Sanitation Company of Bahia) EMBRAPA Empresa Brasileira de Pesquisa Agropecuária (Brazilian Agricultural Research Company) EMBRATER Empresa Brasileira de Assistência Técnica e Extensão Rural (Brazilian Agency for Technical Assistance and Rural Extension) ERR Economic Rate of Return ESW Economic and Sector Work FAO Food and Agriculture Organization of the United Nations GDP Gross Domestic Product GoB Government of Brazil IBAMA Instituto Brasileiro do Meio Ambiente e dos Recursos Naturais Renováveis (Brazilian Institute of Environment and Renewable Natural Resources) IBRAF Instituto Brasileiro de Frutas (Brazilian Fruit Institute) IBRD International Bank for Reconstruction and Development ICMS Imposto sobre Circulação de Mercadorias e Prestação de Serviços (State Tax on Goods and Services) ID Irrigation District IDB Inter-American Development Bank HDI Human Development Index IFC International Finance Corporation IGF Insurance-Guarantee Fund IGPM Índice Geral de Preços de Mercado (Overall Index of Market Prices) IMT Irrigation Management Transfer IPA Instituto de Pesquisa Agropecuária (Agricultural Research Institute) IPEA Instituto de Pesquisa Econômica Aplicada (Institute for Applied Economic Research) IRR Internal Rate of Return MG State of Minas Gerais MIN Ministry of National Integration MIGA Multilateral Investment Guarantee Agency NEAD Núcleo de Estudos Agrários e Desenvolvimento Rural (Center for Agrarian Studies and Rural Development) NGO Non-Governmental Organization NMCI Novo Modelo Conceitual de Irrigação (New Conceptual Irrigation Model) NPV Net Present Value NSPV Net Social Present Value O&M Operation and Maintenance PGF PPP Guarantor Fund PIP Public Irrigation Perimeters PMC PPP Management Committee PPA Plano Plurianual de Investimentos (GoB Multiannual Investment Plan) PPIAF Public–Private Infrastructure Advisory Facility PPP Public–Private Partnership PROFIR Programa de Financiamento da Irrigação (Irrigation Financing Program) PROVÁRZEA Projeto Manejo dos Recursos Naturais da Várzea (Project for the Management of Floodplain Natural Resources) PR Permanent Reserve SBU Strategic Business Unit SPE Special purpose entity SRD Sustainable Rural Development SUDENE Superintendência de Desenvolvimento do Nordeste (Northeast Development Agency) Executive Summary Irrigated agriculture is expected to play an important role as a means of addressing the need for food, fiber and bioenergy stemming from both ongoing population growth and increased incomes. Brazil’s irrigation is a key instrument for the promotion of the economic and social development of the poorest areas of the country in the Northeast and Semi-Arid Regions, where the rational use of water is critical for fostering sustainable development with social inclusion. This development, which is boosted by irrigation, may bring about a substantial increase in the human development indexes of poor local communities. Opportunities for finding well-paying jobs for these communities will also greatly increase. The entire region will benefit through the reduction of rural migration, the development
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