Caducidade and Encampação: When the Government Takes a Service Back

This page is a translation of the original Portuguese text, provided for convenience. It deals with Brazilian law. If there is any discrepancy, the Portuguese version prevails. Read the original in Portuguese

A public service concession is not permanent, and the law sets out distinct paths for the granting authority to take the activity back: encampação (buyout for public interest), with compensation paid in advance, and caducidade (forfeiture), as a response to the concessionaire’s failure to perform the contract.

The six grounds for termination under Law 8.987/1995

The rules governing concessions and permits for public services are found in Law 8.987/1995, which covers both the delegation of a service and its end. Article 35 lists six grounds for termination: expiration of the contract term, encampação (buyout of the concession for public interest), caducidade (forfeiture for the concessionaire’s default), rescission, annulment, and the bankruptcy or dissolution of the concessionaire, along with the death or incapacity of the owner in the case of a sole proprietorship.

Each ground has its own cause. Expiration of the term is the natural end of the contract period. Encampação starts with a decision by the granting authority. Caducidade presupposes a failure by the concessionaire. Rescission is initiated by the concessionaire against the government. Annulment results from a legal defect in the delegation itself. Bankruptcy and the owner’s personal events remove the contract’s subjective foundation.

Once a concession ends, the reversible assets return to the granting authority, which takes over the service immediately and may occupy the facilities needed to keep it running. When the term expires or in a case of encampação, the law requires that the assessments for calculating compensation be done in advance, so that the takeover does not depend on an improvised appraisal.

The practical distinction matters to three groups: users, who need the service to keep running; the concessionaire, whose assets and investments are at stake; and the granting authority itself, which answers for the formal path it chooses to take the service back.

Encampação: public interest, a specific statute, and payment before the takeover

Article 37 defines encampação as the granting authority’s takeover of the service during the concession term, for reasons of public interest. It is not a penalty. The concessionaire may be performing the contract flawlessly and still have the service taken back because the government concluded that the delegation no longer serves the public interest.

Precisely because it is not a punishment, the law surrounds the measure with two heavy conditions. The first is a specific enabling statute, which takes the decision out of the exclusive realm of administrative action and submits it to the legislature. The second is prior payment of the compensation, calculated as provided in Article 36.

The compensation under Article 36 covers the portions of investments tied to reversible assets that have not yet been amortized or depreciated. The reasoning is straightforward: a party that invested in reliance on a given contract term, and lost that term through someone else’s decision, should not absorb the loss of capital not yet recovered through tariffs.

Paying first has an important practical consequence. Without a specific statute and without the amount paid before the service is taken, the takeover is exposed to court challenge, and the concessionaire has a strong argument either to contest the act or to demand full reimbursement of what it invested.

Encampação is not a punishment. It is the government’s choice, and that is why payment comes before the takeover.

This logic explains why the mechanism is rare. Encampação requires political coordination, a budget allocation, and a willingness to pay out money now for a service that will only later be operated directly, with all the administrative structure that direct operation demands.

Caducidade: the contract’s answer to nonperformance

Caducidade is different in nature. Article 38 provides that total or partial nonperformance of the contract authorizes the granting authority, at its discretion, to declare the concession forfeited or to apply the contractual penalties. Takeover is the most serious of the available responses, never the only one.

Paragraph 1 of Article 38 lists the situations that justify a declaration of forfeiture, including:

• providing the service inadequately or deficiently;
• breaching contract clauses or the legal and regulatory provisions governing the concession;
• suspending the service, except in cases of unforeseeable events or force majeure;
• losing the economic, technical or operational capacity to maintain adequate service;
• failing to pay penalties imposed for violations within the required deadlines;
• failing to comply with a formal notice to correct the provision of the service;
• failing to submit, within 180 days, the documentation showing tax compliance during the concession.

The first situation refers back to Article 6, § 1, which defines adequate service as service that meets the conditions of regularity, continuity, efficiency, safety, up-to-date quality, generality, courtesy in delivery, and reasonable tariffs. Inadequacy, then, is not a manager’s subjective impression: it is measured against criteria the legislature itself listed.

None of these situations permits an immediate takeover. Paragraph 2 requires that the declaration be preceded by a finding of default in an administrative proceeding, with the right to a full defense. Paragraph 3 goes further and bars opening that proceeding before the concessionaire has been notified, in detail, of the breaches, with a deadline to correct the problems identified.

The sequence is staged: detailed notice, a deadline to cure, an administrative proceeding with the opportunity to defend, and only then the declaration. Once default is established, Paragraph 4 requires that forfeiture be declared by decree of the granting authority, without prior compensation, with the amount calculated in the course of the proceeding.

Compensation still exists, but its timing and size change. Under Paragraph 5, it follows the method of Article 36 and the contract, minus the amount of contractual fines and of damages caused by the concessionaire. Paragraph 6 completes the picture: once forfeiture is declared, the granting authority bears no liability for the company’s charges, burdens, obligations or commitments to third parties or to its employees.

Intervention and rescission: paths that do not end the delegation

Before ending a concession, the law offers an intermediate measure. Intervention allows the granting authority to temporarily take over management of the service in order to ensure adequate performance and compliance with contractual, legal and regulatory rules. It is formalized by decree, which appoints the intervenor, sets the term, and defines the objectives and limits of the measure.

Intervention also has its own procedure. Once the measure is declared, the granting authority must open an administrative proceeding within 30 days to establish its underlying causes and determine responsibility, with a full defense guaranteed. That proceeding must be completed within 180 days, or the intervention is considered invalid.

If the intervention ends without the concession being terminated, management of the service is returned to the concessionaire, after the intervenor renders accounts and answers for the acts performed during the intervenor’s administration. The measure is meant to correct course, not to informally anticipate a permanent takeover.

The reverse path exists as well. When the granting authority is the one in breach, the concessionaire cannot hand the service back on its own: Article 39 requires a lawsuit specifically filed for rescission and prohibits interrupting or suspending the service until a final, unappealable judgment. Continuity prevails over the dispute.

Later legislation created, for partnership contracts in specific infrastructure sectors, mechanisms for the negotiated return of the asset, followed by a new bidding process for the same project. These solutions are designed for long-term contracts in trouble, where a consensual exit tends to protect the service better than a fight over who failed first.

What a takeover means for users, creditors and workers

For users, the practical answer is continuity. Under any ground for termination, the granting authority takes over the service and the reversible assets return to its estate precisely so that the activity does not stop. A change in who operates the service does not suspend the right to adequate service or the duties of customer care.

For the concessionaire’s creditors, suppliers and employees, the situation worsens in a case of caducidade. Paragraph 6 of Article 38 removes the granting authority’s liability for the company’s commitments, which shifts collection to the company’s own assets and to the disputes typical of insolvency, with all the risks of competing creditors.

For the concessionaire, the difference between the two mechanisms shows up in cash flow and timing. In encampação, it is paid before handing over the service. In caducidade, it hands over the service first and argues about the amount later, already reduced by fines and by the damages assessed. This imbalance explains why the legal classification of the takeover is often the central point in these disputes.

For those who follow the sector, it is worth watching the formal instrument used. A specific enabling statute points to encampação. A decree issued after an administrative proceeding on default points to caducidade. A decree appointing an intervenor and setting a term points to intervention, which by itself does not end the delegation. The label given to the act gives way to the procedure actually followed.

Frequently Asked Questions

Can encampação happen without a specific enabling statute?

No. Article 37 makes a takeover for public interest during the concession term conditional on a specific enabling statute and on prior payment of the compensation calculated under Article 36. The absence of either requirement undermines the validity of the measure and opens the door to a challenge by the concessionaire.

Does a declaration of caducidade require compensating the concessionaire before the takeover?

No prior payment is required. Once default is established in an administrative proceeding with a full defense, forfeiture is declared by decree without prior compensation, with the amount determined in the course of the proceeding. The amount follows the method of Article 36 and the contract, minus contractual fines and damages caused by the company.

How long can an intervention in a concession last?

The term is set in the decree declaring the measure. The administrative proceeding to establish its causes must be opened within 30 days and completed within 180 days, or the intervention is invalid. If the intervention ends without the concession being terminated, the service returns to the concessionaire after the intervenor renders accounts.

As informações deste artigo são de caráter informativo e não substituem consulta jurídica individualizada. Cada caso possui particularidades que exigem análise específica.