Lawyers have welcomed President Dilma Rousseff’s plans to revive the Brazilian economy by selling concessions in infrastructure projects worth US$65 billion, but some fear the programme could be dashed by unpopular railway concession models, a lack of project financing from development bank BNDES, and investor scepticism arising from the sprawling anti-corruption investigation into state-owned oil company Petrobras.
The government will tender concessions for 7,000 kilometres of toll roads, largely located in Brazil’s agricultural heartlands; 29 ports in several states, including Para, Paraná, Rio Grande do Sul and São Paulo; airports in the cities of Florianópolis, Fortaleza, Porto Alegre and Salvador; and 12 major railways, which will be developed across the country.
Partner Frederico Bopp Dieterich at Azevedo Sette Advogados, who is focused on infrastructure, public-private partnerships and project finance, says the announcement is positive news for Brazil as it displays a more conciliatory attitude towards private funding. “The government now seems less interested in micromanaging concession projects than before and seems more open to the concerns of the private sector,” he says. “The presentation indicates that most if not all projects will hinge on private sector investments.”
Bopp Dieterich also draws attention to the government’s recent changes to its bidding criteria. He said the changes are aimed at upping government revenues, rather than lowering costs for those who use the infrastructure once it is built. “Instead of prioritising lower costs for users, the new policy is to obtain higher payments from concessionaires to boost federal revenues,” he says. The move marks a change in direction by the incumbent Worker’s Party, which criticised a similar attitude adopted by the previous administration for being unfair to consumers.
José Virgílio Lopes Enei, a project finance and infrastructure partner at Machado, Meyer, Sendacz e Opice Advogados, believes parts of the concession package will succeed, while other components will fall short. Among the areas likely to draw strong investor interest are toll roads, which are considered by many companies, law firms and banks as a relatively safe investment thanks to a strong development track record.
Lopes Enei notes the Brazilian market is also familiar with airports and marks them out as another area likely to do well. “Airports also benefit from a very successful track record thanks to the first two concession rounds and this new round makes a lot of sense,” he says, adding that the government’s timeframe, envisaging their tender in 2016, is more realistic than the 2015 date set for the toll roads. This also holds true of the ports, most of which are being re-tendered and are therefore not new concessions.
However, the 12 railway concessions up for grabs are less promising. The government hopes to attract investment worth US$27 billion in this area – making it the most costly component of the infrastructure package – but Lopes Enei believes the concession model will prove unattractive. It envisions the concessionaire only developing the railways lines, after which point it will sell them back to state-run railway developer Valec. “That makes a lot of sense, but the problem of having Valec in the middle is that private investors are not confident the government will be able to honour the long-term revenue commitments”, he says. Valec will need to find third party buyers willing to buy the newly developed track to provide freight services, which is by no means guaranteed. Lopes Enei says interest in the concessions is likely to remain lacklustre at best if the government fails to provide a collateral package guaranteeing Valec’s ability to pay in the absence of buyers.
The railway concessions also involves funding sections of the 5,600-kilometre Trans Amazonian railway, which will link Rio de Janeiro with the southern Peruvian port city of Ilo. The US$13 billion line was announced as part of a package of Chinese investment in Brazil during Premier Li Keqiang’s visit last month. However, the plan has only just been announced, and is barely beyond the planning stages. Lopes Enei believes questions over logistics and the environment mean the plan is some way from being implemented: “It has to be studied from scratch; we don’t know where the tracks will go through and we could face serious environmental constraints,” he says. However, Antonio Felix de Araujo Cintra at TozziniFreire Advogados is more positive about China’s potential involvement in this infrastructure package. He says the Chinese have already made several investments in Brazil’s oil, gas and energy infrastructure, and pledged US$50 billion investment in the country during Premier Keqiang’s visit, so to him it seems likely they will invest in this new programme. “It is also worth noting that there are already several Chinese banks that have started operations in Brazil,” he says, such as the Bank of Communications, which bought an 80 per cent stake in Brazil’s Banco BBM last month, “and they will certainly provide support to the Chinese companies that participate in the bidding process.”
More broadly, questions remain over where project finance for the scheme will come from. The Rousseff administration will be eager to avoid a rerun of its last public auction in 2012, when it drew only 20 per cent of the US$68 billion it had hoped to raise. Brazil’s state-owned national development bank BNDES has funded projects in the past, but has recently seen its budget scaled back as the government commits to greater fiscal austerity after running a record US$128 billion deficit last year. However, Araujo Cintra says BNDES will still play an important role in the new package, albeit in a different capacity. The government has come up with an interesting alternative, whereby BNDES will give incentives for project companies to issue project bonds on local capital markets. “The idea is that if the company issues a certain amount of infrastructure debentures then BNDES will increase the portion of its relevant loans subject to reduced interest rates – therefore reducing the overall cost of the project,” he says. This means the projects will most likely be funded by a mix of BNDES and capital markets resources.
The ongoing anti-corruption investigation into state-owned energy company Petrobras’ contractual dealings, which has driven several construction companies to file for bankruptcy, could also have negative consequences for the infrastructure concessions by limiting private involvement. By the time the bidding begins, some construction companies could be barred from participating due to their involvement in the scandal, says Bopp Dieterich. “Assuming some of the biggest players in the market are out, the remaining ones would hardly have the financial strength to win all the bids.” This will give smaller companies the chance to bid, but they would likely have to combine or look for foreign partners to raise the capital needed, and given the state of the Brazilian economy there is no guarantee of foreign bidders.