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Performance-based Contracting for Roads in Brazil

1. Country	Brazil
2. Year when the first performance-based contract was awarded	A pilot contract was awarded in 1997
3. What government organization promoted/initiated a PBC approach in the country?	Departamento Nacional de Estradas de Rodagem (DNER) - (National Roads Department)
4. What were the reasons for switching from the traditional unit price-based to PBC for road maintenance?	(1) Difficulty to supervise and administer too many admeasurement contracts; (2) Fiscal constraints: MoF tended to allocate only a portion, e.g. 60%, of the budget approved by the Congress, insufficient to cover all road needs; (3) transfer some risk of design to the contractor; (4) let DNER have more flexibility (5) See more in the Additional Comments.
5. Name of the organization that is currently in charge of management of road maintenance	DNER
6. Supervision of the contractors is done by	Local consulting firm
7. Sources of the current funding of PBC	External funding (WB and Inter-American Development Bank) Central funding
8. Number of contractors currently executing PBCs	80 contactors. Subcontracting to small contractors is very common, especially when the contractor is based, e.g. in the North of the country, but the contracted area is in the South.
9. Cost per km per year	It varies from $ 20,000 to 70,000 per km per contract
10. The contract size (km)	100-700 km
11. Dispute resolution mechanism	The parties try to use: Mutual consultation/direct negotiation (site inspection, progress meetings and collaborative discussions of each party’s position); Arbitration (e.g., Dispute Review Board).
12. Procurement process applied	International Competitive Bidding, but foreign contractors are not interested as they do not see much scope to submit bids lower than those of local contractors.
13. Was prequalification used?	No, because activities outsourced under PBC are the simplest civil works.
14. Payment mechanism for some services	Rehabilitation is paid based on the number of km rehabilitated.
15. Types of delivery services under lump sum payment	Rehabilitation and routine maintenance
16. Types of roads covered under PBC	Federal highways and state roads
17. Percentage of this type of road in the entire network under PBC	9.5% or 6,393 km of 67,000 km of the federal highway network 10.5% or 2,104 km of 199,000 km the state highway network

Additional comments

Reasons of switching from the traditional unit price-based to PBC of road maintenance

Prior to 1970, the routine maintenance of the federal highway system was carried out directly by DNER using its own personnel and equipment. However, because of the large maintenance backlog accumulated over 20 years, as higher priority was given to paving and new construction, labor shortages and insufficient maintenance equipment in the field residencies made it impossible for DNER to continue routine maintenance exclusively by force-account. In 1975, in addition to reorganizing and structuring a limited core of force-account unit, DNER shifted its policy to maintenance by contract, and, where appropriate, to delegation of these activities through agreements with State Highway Departments, or exceptionally with the Army. In 1990, the distribution between the three types of maintenance were as follows: contract maintenance 60%, delegated maintenance 25%, and force-account maintenance 15% of the total length of the federal network.

To a large extent, till 1995, the 25-year experience with maintenance by contract has been successful, and today 80% of the federal system (excluding 13,000 km of earth roads) i.e., about 44,000 km, are being maintained through individual three-years contracts with private contractors.

These admeasurement-type contracts, however, are becoming more and more difficult to manage, not only in the preparation stage, but also during execution. Items to be quantified and measured for payments sometimes reach 200 to 300 in number, and DNER lacks personnel to supervise efficiently the quantity and quality of the works performed by the contractors on site. Therefore, there is a growing tendency to measure and monitor on a sample basis with all the shortcomings and uncertainties that such a system entails. The situation is further compounded by the deficiencies in resource allocations: not only do maintenance budgets tend to be insufficient, but activities are difficult to plan and program since resources are released by the Treasury on an unpredictable basis.

The need was therefore felt to go one step further in order to improve the system and to ensure better service to road users. Solutions had to be sought to the problem of cumbersome measurements and supervision procedures by DNER, while attending the necessity to bestow more responsibility and initiative to the contractors. To that effect, DNER has envisaged the possibility of adopting performance-type contracts that are already being implemented with success in Argentina. These would make it possible to reduce considerably the work-force needed for preparation and supervision, while allowing the contractors to be more creative and more directly involved in the design and quality control of the maintenance program.

One system concerns essentially routine maintenance and applies to roads in good to regular condition. The other system, which integrates both rehabilitation and routine maintenance, applies to small networks in regular to bad condition, necessitating some prior strengthening or resurfacing works before routine maintenance can be effectively carried out. The first system would normally be awarded for a period of 5 to 10 years. The contracts would not define the type and quantities of works to be executed and paid on a unit price basis, but rather a desired level of service. The performance categories include, for example, the riding quality of the pavement, the presence and efficiency of drainage and safety features, or the friendliness of the road’s immediate environment. Payments would be made on a km/month basis, following regular inspections carried out to identify any deficiencies which, unless corrected within a given time period, would give rise to penalties, that would be deducted from the payments to be made to the contractors. The second system (integrated rehabilitation and maintenance) comprises initially a rehabilitation component paid, upon execution, on a lump-sum basis, provided the specified results are achieved. The rehabilitated network would then be maintained according to the km/month system.

Lessons learnt

1. Restraint should be used in the selection of contractual performance indicators. The DNER started with too many performance indicators, which placed a heavy load on supervisors. Later on, having gone through a priority-setting exercise, the list of indicators was reduced.
2. Design of penalty mechanism should take into consideration the culture of the country. In the course of the program, it was noticed that Brazilians are reluctant to pay fines. For this reason, in the second round of PBCs, a modified penalty mechanism was introduced: suspension of a specific amount in the monthly payment in case of non-compliance and further subtraction of this amount from the monthly payment if corrective measures have not been undertaken.
3. Longer term contracts, e.g. 5 years, should be used. Short-term contracts (e.g. 1-year long) made it hard for contractors to survive when their payments were delayed.

Sources:

1. World Bank. 1997. “Staff Appraisal Report: Brazil – Federal Highway Rehabilitation and Decentralization Project.” May 20, 1997. Infrastructure and Urban Development Division. Latin America and the Caribbean Regional Office. Washington, D.C.: World Bank.
   Available at: http://wwwwds.worldbank.org/servlet/WDS_IBank_Servlet?pcont=details&eid=000009265_3970818102345
   
   
2. Interview with Aymeric-Albin Meyer, Sr. Transport Specialist, World Bank Latin America Region. April 2005.
   
   

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