The Company operates in a highly regulated environment and its operating results may be adversely affected by government measures.
Invepar’s main commercial activity is the operation, exploration and maintenance of highway and subway services that constitute public services delegated to private enterprise and are therefore highly regulated. In addition, the granting authorities possess considerable discretionary powers, with which they can, for example, oblige Invepar to reduce its tariffs or increase its mandatory investments, while still observing the right to subject the agreements to economic and financial rebalancing. Attitudes such as these or the establishment of even more rigid rules may adversely affect the Company’s results.
The Company may also be affected by federal, state and municipal government decisions on the development of Brazil’s road system, especially in regard to the granting of new concessions, as a result of which competition may increase. In addition, a decision not to proceed with the highway concession program may limit the Company’s capacity to grow and implement its commercial strategy. The same situation may occur in the case of the subway system and vehicle inspections.
Growth through bids or the acquisition of concessionaires may be adversely affected by future regulatory measures or government policies related to Brazil’s highway concession program.
The granting power, in its bid notices, imposes certain requirements which must be complied with by all bid participants, including the financial stability indicators of those taking part, or their shareholders. Invepar cannot be certain that, in the future, it will be able to comply with all the requirements imposed by future bids, especially since some concessions were obtained before the Company was constituted based on the capacity of the shareholders to comply with the stated requirements. Additionally, any acquisition involving the transfer of control from an existing concessionaire to Invepar must be submitted to the approval of the granting authority.
Decisions on public service concessions, as is the case with highways, change in accordance with public policies. The bidding rules for public service concessions are also subject to change in the federal, state and municipal government spheres. Federal and state bids are scheduled to occur in the future, but the Company cannot guarantee that they will actually be implemented. If they do not take place or are insignificant, not economically feasible or unattractive to Invepar, the expansion and diversification of the business may be adversely affected.
The Company’s business, financial situation and operating results may be adversely affected if the economic and financial rebalancing mechanisms following an increase in cost or reduction in tariffs do not generate cash flow in a timely manner.
The concession agreements determine the toll tariffs to be charged and envisage periodic adjustments to offset inflation. However, these tariffs are subject to approval by the granting power and Invepar cannot be sure that it will act in a favorable or diligent manner.
In case of adjustments that are not a result of tariff increases in order to offset the effects of inflation, the Company relies on a mechanism envisaged in the concession agreements (the so-called economic and financial balancing mechanism), which allows Invepar and the granting authority to seek adjustments to accommodate unforeseen changes following the execution of the agreements affecting the economic elements agreed upon when the concessions were granted. Such adjustments may result, in accordance with the terms of each contract and based on the prevailing legislation, in compensation through tariff alterations, adjustments to the envisaged investments or an extension of the concession term, among others, including a combination of such offsetting mechanisms.
The procedure for re-establishing economic and financial equilibrium is at the discretion of the respective granting power. Consequently, if the re-establishment of economic and financial equilibrium does not result in an adequate increase in cash flow, as in the case, for example, of a change in the concession term, the Company’s businesses, financial situation and operating results may be adversely affected.
The Company is subject to environmental laws and regulations which may become more rigid in the future, resulting in larger obligations and an increase in capital investments.
Compliance with this legislation is monitored by government bodies, which may impose administrative penalties in the case of non-compliance. These penalties may include fines, the revocation of licenses and even the temporary or definitive suspension of Invepar’s operations.
The approval of more rigid environment laws and regulations may force Invepar to allocate greater capital investments to this area, resulting in a change in the planned investment distribution. Such changes may have a material and adverse impact on the Company’s results and financial situation. In addition, if the Company does not comply with the environment protection legislation, it may suffer penal sanctions, without prejudice to the obligation to repair any damage resulting from said non-compliance. Penal sanctions may include, among other measures, the loss or restriction of tax benefits and the cancellation or suspension of financing lines from official credit agencies, as well as a ban on government loans, which may have a negative impact on the Company’s revenue or make it difficult to obtain funding in the financial market.
Any delays or deferrals on the part of the environmental licensing authorities in regard to the issuance or renewal of licenses, or an eventual inability to meet the requirements established by said authorities during the environmental licensing process, may damage or prevent, depending on the case, the installation and operation of the Company’s businesses.
Without prejudice to the above, any non-compliance with the environmental legislation or the obligations assumed by the Company through conduct adjustment instruments or judicial agreements may have a material and adverse impact on the Company’s image, revenue and operating results.
Future acquisitions may be contested by the Brazilian fair trading authorities.
In accordance with Law 8884 of June 11, 1994, as amended, which deals with the economic order, any operations aimed at any type of economic concentration, whether through the merger or acquisition of companies, the constitution of a company to exercise control over other companies, or any other form of corporate grouping that leads to a company or group of companies retaining 20% of an important market, or if any of the participants recorded annual gross revenue of R$400 million or more in the previous fiscal year, may be submitted to the SBDC (Sistema Brasileiro de Defesa da Concorrência), a Brazilian fair trading authority.
The SBDC determines if a given operation would have a negative impact on competitive conditions in the Company’s market or on the latter’s consumers. In this context, although Invepar holds public concessions with regulated tariffs, future acquisitions may not be approved or may be subject to costly conditions, such as restrictions on how the Company operates in the market, which could negatively affect its operating and financial results.
It is worth noting that, as a result of article 90, sole paragraph of Law 12529 of November 30, 2011, which became effective on May 29, 2012, the execution of associative agreements, consortiums or joint ventures between two or more companies in order to participate in direct or indirect government bids (or agreements resulting from these bids) will no longer be considered as acts of concentration.
Unfavorable judicial or administrative decisions may have an adverse effect on the Company.
The Company’s subsidiaries are party to judicial and/or administrative processes in the civil, tax and labor areas, whose results may be unfavorable. Decisions against Invepar’s interests that result in the payment of substantial amounts or prevent a given business from developing as initially planned, may have an adverse effect on the Company.