OREANDA-NEWS. January 26, 2016. Brazilian public private partnerships (PPPs) administered by local and regional governments (LRGs) need to improve their structural features before they will attract investments from private operators, Fitch Ratings says. Several LRGs do not have enough headcount dedicated to the structuring, launching and monitoring of PPPs and oftentimes lack clarity of their responsibilities. Furthermore, Brazil's economic turmoil is also slowing down the launch of new PPPs given LRGs' widespread revenues constraints. Fitch estimates that the 25 PPP projects in the two most active states (Sao Paulo and Minas Gerais) could be halved over the next two years.

According to Fitch's methodology, if a PPP obligation is ratable, the grantor's IDR (in this case the LRG) is the starting point in the rating process. The rating assigned to the grantor's PPP obligation may be notched down from the LRG's IDR to distinguish the undertaking from its direct debt obligations. Based on standard Brazilian law, there is little chance that a PPP obligation would be equalized to the grantor's IDR without additional supportive structural elements.

In Fitch's view, these states should prioritize their support according to the most critical projects. For projects requiring counterparty payments, some LRGs have used guarantee funds to attract private investors. However, these funds may not fully mitigate the political risks. Cross-default clauses between PPP obligations and the financial debt of the grantor would level the obligations both maintain, mechanisms that Brazilian LRGs typically do not use. If an LRG fails to service a PPP-related obligation, the debt likely becomes a judicial ruling debt (precatorio), which adds additional costs to government balance sheets.

Law prohibits states from allocating more than 5% of their revenues to service PPP projects. Our analysis indicates that current and planned projects would not exceed this allocation. Minas Gerais currently operates eight projects and plans to allocate the equivalent to 0.8% of its revenues to PPP payments in 2016, pledging state-owned assets, federal securities and credit facility agreement of the state's development bank as guarantees. The largest Brazilian state, Sao Paulo, pays approximately 1.7% in annual PPP-related payments.