Toll Roads and Airport Projects As Their Request for Proposal (RFP) Processes Are in a More Advanced Stage

The Brazilian Infrastructure: It’s “Now or Never” From an Economic Growth Constraint to a Plethora of Opportunities

July 29, 2013 It’s “Now or Never.” If Brazil’s infrastructure bottlenecks were concerning before, they have only gotten Research Analysts worse. Over the past ten years, while the Brazilian economy enjoyed prominent growth leveraged by the exhaustion of the model based on credit, consumption, and commodities (the "3 Cs"), transportation Bruno Savaris, CFA infrastructure investments accounted for just ~0.6% of GDP, i.e., less than half of what would be required 55 11 3701.6332 bruno.savaris@credit–suisse.com to sustain annual economic growth of 4.5%. Now that the 3Cs economic model is running out of steam, the Brazilian government has shifted towards addressing concerns about meager economic growth by laying Felipe Vinagre the groundwork to solve one of its biggest problems: the lack of adequate infrastructure. 55 11 3701.6333 felipe.vinagre@credit–suisse.com Mindful Government but Ineffective Alone. While the federal government seems highly committed to delivering on the ~R$240bn investment plan announced in 2H12, the execution challenge cannot be Daniel Magalhaes 55 11 3701.6124 understated, as most projects are still in the analysis stage and execution of public investments has proven daniel.magalhaes@credit–suisse.com inefficient, to say the least. Thus, the private sector has to be involved. Accordingly, the government has implemented several changes to the regulatory framework for ports, railroads, highways, and urban mobility to make the rules sufficiently clear to foster private investments. To put things into perspective, over the past ten years some R$52bn in projects were granted to the private sector. In the next three years, the government wants to auction an investment budget nearly six times larger. As the government targets single–digit headline rates of return, at least a friendly regulatory framework has to be in place. What’s in This Report? In this report, we address the (i) causes and consequences of the lack of reasonable levels of infrastructure investments in the country and (ii) measures being implemented by the government to narrow Brazil's R$1 trillion transportation infrastructure gap to more developed economies. We discuss the idiosyncrasies of each mode of transportation (namely highways, railroads, ports, airports, and urban mobility), evolution of the regulatory framework, and why we think that some of the potential investment opportunities arising in the short–to–medium term have a greater likelihood of coming to fruition.

DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client–Driven Solutions, Insights, and Access 29 July 2013 Executive Summary (1/2) .Shifting Focus from 3C to Infrastructure Investments… Brazil’s past ten years of prominent macroeconomic fundamentals were built not only on its improved economic predictability but also on the favorable global scenario. The latter, characterized by strong economic growth, mainly in China, led to a period of high demand for commodities. This scenario was essential for the liquidity injection seen in Brazil and consequently for the boost in the domestic consumer market. The economic growth model in place for the past ten years became known as the “credit, consumption and commodities” (3Cs) model. Yet, more recently, the 3Cs started to lack stamina as households became more leveraged and credit availability got stricter. Now, the Brazilian economy is experiencing the unpleasant dichotomy of low economic growth and high inflation. To reverse that, implementing the “Chinese recipe”, i.e. shifting the focus away from consumption to infrastructure, seems appropriate to put Brazil on track to deliver greater growth rates.

. Underinvestment? Now, US$1 Trillion Gap. The current diagnosis of low economic growth and high inflation is explained by supply–side inefficiencies rather than insufficient demand. According to Boston Consulting Group (BCG), 74%3 of Brazil’s GDP growth over the past decade was due to an expanded workforce and only 26% due to productivity gains. Along with that, Brazil’s underinvestment in overall infrastructure, amounting to a meager ~2% of GDP, made the long–lasting infrastructure bottleneck even more evident. This is half of the investment level needed to sustain economic growth at 4%. To put things into perspective, other emerging economies such as China and India invested ~13% and ~5% of their GDP, respectively. As a consequence, Brazil holds a fairly ineffective infrastructure, ranking1 107 out of 144 countries, well below its fellow BRIC countries. Putting it differently, Brazil has a 16% asset–to–GDP ratio2, namely infrastructure stock, and is an underperformer outlier on a global scale, holding highly depreciated assets. The average infrastructure stock ratio stands at ~70%. In order to tap this gap, US$1 trillion in infrastructure investments would be required, half of which in transportation alone.

.What Has Been Wrong? Granting Brownfields but Lagging Behind in Greenfields. Before the 1990s investments relied mostly on public execution given the very unstable macro backdrop and poor regulatory framework. In 1993, the Brazilian Government enacted two laws (8666/93 and 8987/95) that established the general terms for concessions in Brazil between public and private entities. Since then, several assets have been granted to the private sector which essentially overhauled depreciated brownfield assets while the public sector remained in charge of developing greenfield ones. In this context, while we observed improvements in the granted brownfields, Brazil lagged behind in greenfield projects given (i) the government’s inefficient planning and execution and (ii) lack of regulatory support for private investments. The result was: all the Brazilian transportation modes got overly constrained, especially airports, ports and railroads. The airport sector has just started to undergo a privatization process (Feb-2012), and its dependence on public administration for a long time might explain its deterioration. The other two modes (ports and railroads) didn’t have a robust regulatory framework, especially for greenfield projects.

.It’s “Now or Never”! Calling for Private Investments. It would be unfair to say that the Brazilian government isn’t mindful of the urgency of further infrastructure investments. After attempting to fix the economy through micro–policies, it has shown a more pro-market stance towards long–term investments, i.e. infrastructure. In our view, an ultimate improvement in Brazil’s infrastructure won’t come through greater public investments in the sector but rather by promoting a friendlier environment to private investments.

(1) World Economic Forum ranking / (2) Mckinsey Study / (3) Productivity gains in China, India and Mexico accounted for 93%, 88% and 60% of GDP growth over the last 10 years / (4) PPP: Public-Private Partnerships 2 29 July 2013 Executive Summary (2/2) . Improving Regulation, and More. In order to attract private players, the government has been laying the groundwork to foster private investments in the country by (i) straightening the regulatory frameworks, (ii) tackling the limited availability of private funding, and (iii) streamlining the licensing process. To mention a few developments, we note the:

– New Ports Law, which eliminates restrictions imposed on the development of greenfield private ports. Now, they can handle 100% of third–party cargo, directly competing against concession holders (within public ports);

– New Railroad Model, the so-called “Open Access”, which should stimulate (i) competition between rolling stock operators and (ii) the development of greenfield stretches;

– Updates on the Law for Public-Private Partnerships, which is key for urban mobility projects. Essentially, it brings more flexibility to government payments which now can happen also during construction phases.

. A Sizeable Pipeline of Identified Projects. Out of the R$1trillion investment gap in the Brazilian transportation infrastructure, we have identified ~R$334bn in potential private investment opportunities. We think that Brazil’s infrastructure gap now has a greater likelihood of being eventually narrowed given the government’s strong focus (ever) on (i) boosting investments in the sector and (ii) improving the regulatory framework for further private participation.

. What about Short–Term Opportunities? While there is a plethora of interesting projects, the execution challenge cannot be understated as (i) some projects are still in the feasibility analysis stage and (ii) the process for obtaining environmental licenses remains cumbersome. As such, our base case is that R$109bn (1/3) has significant chances of being auctioned in the next two years. Within this estimate, we attribute a greater probability to toll roads and airport projects as their request for proposal (RFP) processes are in a more advanced stage. For ports and railroads, although these projects account for 46% of the total identified opportunities, we attribute a lower probability for them to take place in the short term, as feasibility studies are still under early developments and environmental licensing tends to be more complex for these modes.

. At Least, Doubling Private Investment Levels! Even this more conservative scenario would be enough to double private investment levels in transportation to ~0.9% of GDP. If we also consider public expenditures and investments in the sector, it would reach ~1.4% of GDP for the next five years. Besides, we argue that the auctioning of 1/6 of this notable pipeline of R$334bn would already be equivalent to the projects granted to the private sector in the past ten years.

. All Companies to Benefit. Almost all companies under our transportation and capital goods coverage would directly or indirectly benefit from a boost in infrastructure investments in Brazil. Some key names are Mills, CCR, Ecorodovias, Arteris, Localiza, Marcopolo, Randon, Iochpe–Maxion and Mahle Metal Leve.

Main Discussions about the Current Model Government Actions

. The main change proposed relates to stricter capex requirements in . The highway model is certainly the most mature and robust, with limited terms of deadlines and penalties. The bulk of improvements should take Better room for surprises, in our view. place within five years (duplication works). . For the next auctions, the government will try to avoid the capex delays . The government is being more flexible to attract private investors, by seen in past auctions by addressing its causes and applying stricter rules

Toll Roads Toll improving headline return rates (from 5.5% to 7.2%, real, unleveraged) and greater penalties. and easing financing guarantees requested by public banks.

. Developed in 2H11, the recent regulatory framework for the privatization . The government increased technical qualification requirements to 35mn of airports attracted several bidders in a intense competitive bidding pax/year (from 5mn pax/year) so that, at most,13 global operators can process. participate in the auction, possibly implying less bidders in the next auction.

. Yet, it seems that the government wasn’t satisfied with the fact that Airports none of the largest global operators has won any bid. . Another requirement is that the airport operator has to hold a minimum

stake of 25% in the formed consortiums.

. Update of the PPP* Law. Law No. 12766, enacted in 2012, now . Apparently, operational quality rules are not an issue, even though permits government’s reimbursements during construction phases. feasibility usually depends on government reimbursements (PPP model). . Also, this new law increased the threshold for municipal tax revenues . The challenge for PPPs is how to mitigate the government’s payment that can be channeled to PPP payments from 3% to 5%. risk, which in these cases becomes a relevant source of revenues. . Government’s payment risk (main investors’ concern): guarantees and

Regulation of Regulation . Political Exposure is high as it deals with people not cargoes.

UrbanMobility collateral pools are still under discussion/being designed. Private Investments Private . The government’s intention is to stimulate (i) private investments in new . Government is unsatisfied with the current railroad monopoly model, corridors (i.e. capacity increase) and (ii) competition between multimodal which hasn’t stimulated investments in new stretches (greenfields). operators (i.e. tariff decrease). . Besides the measures announced in 2011 (challenging the monopoly of . Yet, (i) projects are still under preliminary studies and (ii) there are still current concessions), the government has launched a plan to grant 10 Railroads uncertainties regarding the new model such as (a) operational feasibility new stretches under a new railroad model (Open Access). and (b) collateral pools to secure Valec’s payment risk.

. In 2013, the government launched the New Ports Law in order to . Capacity additions in public ports has depended on the government’s foster investments other than in public ports. The main innovation was planning and auctioning processes, which have been insufficient to the authorization for private ports to handle third–party cargo. address the country’s port infrastructure needs.

Ports . While we welcome the elimination of that restriction, we think there are . Private investments in greenfield projects outside of public ports have Worse still a few unclear terms such as for: renewals, auction criteria and been constrained by the lack of regulatory support. different conditions for public and private ports.

Source: Credit Suisse Research / (*) PPP: Public-Private Partnerships 4 29 July 2013 Table Of Contents Macro Backdrop 6 … But Limited Capacity Addition 42 In the Last Decade, Economic Stability and Consequent Greater Predictability… 7 Encouraging Private Investments 43 … Improved Credit Availability and Boosted Consumption in Brazil 8 Recent and Upcoming Auctions – Galeão Better than Confins… 44 The Commodities Boom and its Infrastructure-Intensive Profile 9 Global Comparison on Regulatory Frameworks 45 Demand for Transportation Infrastructure Spiked! What About Supply? 10 Details on the Privatization of Some Airports 47 Underinvestment Led to Underperformance. Lagging Behind the BRIC League 11 Concession of Airports to Private Companies/Investors 48 After Golden 1970s, Investing Merely ~2% of GDP on Overall Infrastructure... 12 Urban Mobility 49 … And Barely ~1% of GDP on Transportation Infrastructure 13 Huge Urbanization and Wrong Incentives Behind Rising Mobility Constraints 50 The Result: Mediocre Infrastructure Performance Across The Board … 14 While Middle Class Motorizes, Low Income Class Relies on Public Transport 51 The Result: … On a Deteriorating Trend 15 Global Comparison of Subway Networks: Rio and São Paulo Far Behind 52 The Result: Unbalanced Transportation Matrix And Inefficient Logistics 16 Government’s Plan: Over R$81bn of Investment Opportunities 53 Government Actions 17 The Need for Subsidies through Public Private Partnerships (PPP) 54 A Mindful Government: Federal Investment Programs (PAC I and II) 18 Railroads: A New Model to Boost Private Investments in New Locations 55 But Ineffective Alone: Investing Far Below Brazil’s Transportation Needs 19 Brazilian Railroads: Increasing Demand, Flat Network Size, and … 56 Examples of Poor Government’s Execution: N–S Railroad & BR-163 Highway 20 … a Consequently Over–Constrained System 57 Gradually Boosting Private Investments: R$52bn in the Past 10 Years 21 Brazil Lagging Behind On a Global Scale 58 R$334bn on Identified Investment Opportunities to the Private Sector 22 Impacts on Brazil’s Competitiveness: The Soy Exports Example 59 Laying the Groundwork for Private Investments: Improving Regulation 23 Current Railroad Model Hasn’t Fostered Investments In New Lines 60 Can Financing Be a Constraint? Is BNDES Enough? Searching for Alternatives 24 The New Model (Open Access): Mitigating Risks to Boost Greenfields 61 Toll Roads 25 New vs. Current Framework: What Changes in Each Participant’s Role? 62 From Dedicated to Spare Funding (1945–1988) 26 Comparison to Other Railroad Models: Innovative Solutions Despite Similarities 63 Making Private Investments Viable (1990–2000) 27 Investment Opportunities: Projects still under Study Phases 64 Setting Single Digit Headline Return Standards (2001–2007) 28 Ports: Addressing Regulation Barriers to Private Investments 65 Many São Paulo State Concessions, But Few Federal Ones (2008–2012) 29 Current Conditions: World’s Ninth Worst 66 After Lack of Private Interest Comes a Pro-Market Stance (2013 onwards) 30 Current Conditions: Limited Draft, Limited Efficiency… 67 Private Toll Roads – A Snapshot Of The ~ 20 Years Of Regulatory Framework 31 Current Conditions: Awkward Customs Process 68 Current Road Conditions: Only 14% Paved and Public Lagging Behind Private 32 Regulatory Story: Framework and Constraints 69 R$54bn in Upcoming Auctions. Are They All Attractive? What About Risks? 33 The New Ports Law: What Has Changed? Open Doors for Private Ports 72 Government Showed Flexibility on Headline Returns. Will it Be Enough? 34 The New Ports Law: Asymmetries between Public and Private Ports 74 Upcoming Auction – Location & Potential Bidders 35 Investment Opportunities: R$54bn in Projects 75 Amendments Pipeline (CCR, Arteris, Ecorodovias) 36 Complex Licensing Process – How Long Can It Take? 76 Regulatory Improvement to speed-up Contract Amendments 37 Companies Mentioned 77 Airports 38 Important Global Disclosures 78 Twenty Airports For 90% of Passenger Flow 39 Important Regional Disclosures 80 ANAC, SAC, DAC… Fairly Regulated Sector 40 Disclaimers 81 Strong Demand Growth Fostered by Lower Yields… 41

5 29 July 2013 Macro Backdrop

FOTO

Exhaustion of the 3Cs Model… Now, It’s about Restoring the Great Legacy – Shifting to Infrastructure Brazil’s past ten years of prominent macroeconomic fundamentals were built on observance Unfortunately, Brazil’s noticeable economic development wasn’t followed by adequate of three main pillars, namely (1) inflation targeting, (2) a floating exchange rate, and (3) fiscal infrastructure investments to tap the growing demand. Over the past ten years, the country’s responsibility, which improved Brazil’s economic predictability. At the same time, the transportation system became overloaded, resulting in clogged ports, congested roads and favorable global scenario characterized by strong economic growth, mainly in China and, to airports, obsolete railroads, and inadequate transportation matrix. Brazil’s underinvestment in some extend, in the developed regions, led to a period of high demand for commodities. This overall infrastructure, amounting to a meager ~2% of GDP, made the long–lasting scenario was essential for liquidity in Brazil and consequently for the boost in the domestic infrastructure bottleneck even more evident. This is half of the investment level needed to consumer market. The economic growth model in place for the past ten years is known as sustain economic growth at 4%. the “credit, consumption and commodities” (3Cs) model. To put things into perspective, other emerging economies such as China and India invested Yet, more recently, due to government inaction, the Brazilian economy started to experience ~13% and ~5% of their GDP, respectively. Looking at the World Economic Forum ranking, the unpleasant dichotomy of low economic growth and high inflation. Also, with more Brazil’s overall infrastructure ranked 107 of 144 countries, well below its fellow BRIC leveraged households, with a debt–service ratio of ~22% of disposable income, up from countries, with India ranking 87th and China, 69th, and nearly on par with Russia, which is ~16% in 2005, the 3Cs model is lacking in stamina. Thus, the adoption of the “Chinese 101st. Among the BRIC countries, Brazil has the worst airport, port, and railroad systems. recipe“, i.e. shifting the focus away from consumption to infrastructure, seems appropriate to Now, its about restoring the great legacy. According to McKinsey, Brazil has a 16% asset– put Brazil on track to deliver greater growth rates and keep its emerging market status. to–GDP ratio, namely infrastructure stock, and is seen as an outlier on a global scale, The current diagnosis of low economic growth and high inflation is explained by supply–side holding highly depreciated assets. The average ratio stands at ~70%. To help tapping this inefficiencies rather than insufficient demand. About 74% of Brazil’s GDP growth over the gap, US$1 trillion of infrastructure investments would be required, being half of that in the past decade was due to an expanded workforce and only 26% due to productivity gains. transportation sector. 29 July 2013 In the Last Decade, Economic Stability and Consequent Greater Predictability… . Brazil’s prominent prospects can be credited to the “Real Plan,” instituted back in GDP Growth (%) vs. Inflation (IPCA %) 1994, almost 19 years ago, which led to a rapid reduction in monthly inflation, from 50% to 1%. Then, in 1999, the Brazilian government adopted an economic policy 12.5 Real GDP growth (%) based on three main pillars, namely (1) inflation targeting, (2) floating exchange rate, IPCA inflation (%) and (3) the adoption of a fiscal responsibility law. 9.3 . Observance of these policies for over ten years has improved Brazil’s economic 7.7 7.6 7.5 6.5 predictability and contributed to a significant improvement in Brazil’s macroeconomic 5.9 5.8 5.7 5.7 6.1 6.0 5.8 fundamentals. From 2003 to 2011, the government kept inflation relatively low, 5.2 4.3 5.9 redeemed all sovereign debt originated from the 1990s debt renegotiation, improved 4.0 4.5 2.7 3.2 3.0 the risk profile of its sovereign securities, posted primary surpluses, and substantially 3.1 2.7 2.0 1.3 1.1 increased its level of international reserves. 0.9 –0.3 . Despite the recent macro challenges, consisting of “high” inflation and low GDP 2001 2002 2003 2004 2005 2006 2007 2008 2010 2011 2012 2013e 2014e growth, the current scenario is far better than in the past. 2009 Brazil’s Historical Inflation and Interest Rate Levels, Almost 20 Years of Economic Stability 7,000

160 20 6,000 Real Plan Russian crisis and abolishment 15 Selic basic interest rate 120 of the fixed FX 5,000 rate regime 10 Lowest interest rate in decades 5 4,000 80 IPCA Introduction of the 0 floating FX rate and Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Apr-13 inflation–targeting 3,000 40 regimes SELIC 2,000 0 May-95 Aug-97 Nov-99 Feb-02 May-04 Aug-06 Nov-08 Feb-11 Apr-13 1,000 IPCA 0 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-13

Source: Central Bank; Credit Suisse Research. Source: Central Bank of Brazil, Brazilian Statistics Bureau (IBGE), Credit Suisse Economics Team 7 29 July 2013 … Improved Credit Availability and Boosted Consumption in Brazil

. Brazil’s sound macroeconomic policies helped to stabilize financial inflows and make Household Income and Breakdown of Income Groups in Brazil investors less concerned about the safety of their investments. Accordingly, the Total Household Income from Breakdown of Income Groups in Brazil greater economic predictability was essential to foster a substantial improvement in all Sources of Income (millions of people) (US$/month) credit availability in the country. 2002 2009 2014

. While some people may look at credit availability and disposable income through Class “A” 7.2 9.6 13.4 different lenses, we note that both are closely linked and extremely important factors Class “A” for any credit transaction. Thus, the combination of credit availability improvements Class “B” 7.3 10.4 15.7 and greater disposable income leveraged the domestic consumer market. Through 5.010 2009, the purchasing power of about ~30mn people had improved. By 2014, about Class “B” Class “C” 67.5 95.0 118.0 60% of Brazil’s population, or ~50mn people, will have enjoyed an improvement in 3.843 their purchasing power. Class “D” 46.1 44.5 32.1 . Back in 2008/2009, the fear of increasing delinquency rates led financial institutions Class “C” to implement a stricter credit approach, decelerating the growth pace of their loan portfolios, which once boomed. Going forward, it seems that it will be increasingly Class “E” 46.6 28.9 16.8 hard to see a rise in buyers’ purchasing power, at least not at the same pace 891 Class “D” observed until 2010. 558 Total 175mn 188mn 196mn Class “E” 0 Real Growth in Average Wages and Unemployment Rate Improving Credit Availability (%) 60 9 14.1% Real Increase in Minimum Wage Credit–to–GDP Delinquency Rate Unemployment Rate (%, LHS) 50 (%, RHS) 8 12% 12% 40 7 10% 10% 9% 7.5% 7.0% 8% 8% 30 6 6.0% 7% 7.2% 6% Debt–to–Income 6% 20 5 3.7% 5% (%, LHS) 3.1% 5.3% 4% 10 4 0.7% 2.7% 0.9% 0.1% 0 3 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013e 2014e Jan-05 May-06 Sep-07 Jan-09 May-10 Sep-11 Jan-13

Source: FGV, Central Bank of Brazil, Brazilian Statistics Bureau (IBGE), Credit Suisse Economics Team. 8 29 July 2013 The Commodities Boom and its Infrastructure–Intensive Profile

. The share of commodities in exports rose from 49.7% in 2000 to 70.0% in the 12–month period ended in April 2013. The most significant increases have been in iron ore, oil, soybeans, and sugar attributable mainly to a rise in the international commodity prices. The mining industry alone accounts for ~4% of GDP and ~20% of Brazil’s exports. While the Brazilian government put a lot of effort in trying to reduce its dependence on commodities, minerals and agriculture, they are still very significant to the economy. . The booming commodities cycle also made evident one of the country’s major structural problems: the lack of proper infrastructure. As the most important agricultural and mineral areas are located far from the country’s export gates, it would be reasonable to assume that railroads meet most of the transportation demand. In fact, that isn’t the case. Highways account for ~60% of agricultural commodities transportation. In the case of minerals (mainly iron ore), as railroads are used as cost centers by miners, most of the iron ore flows through railroads. An example of Brazil’s logistics bottlenecks we note the usual ~10–mile line of trucks awaiting at the ports’ gates to unload the crop and the ~200 ships awaiting to load cargo as well.

Brazilian Landscape: Producing Areas Away from the Coast Boom in Commodity Prices Drove Exports Up Volume Exported (tons) Index 2002 =100 AP 800

Ponta da Madeira Port 600 Santarem Port 900 Corn AM PA MA 400 Carajás Soy 1,500 200 RO TO BA Iron Ore Sugar 0 MT 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Capitals Lucas do Rio Verde US$ FOB / tons Exported Index 2002 =100 Railroads GO 2,000 MG 800 Distance (km) MS Ports 700 600 Tubarão Port Iron Ore Producing Zones 1,000 RJ Sugar SP Santos Port 400 Soy/Corn Paranaguá Port 200 Sugar Soy Corn Iron Ore 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: Aliceweb, Credit Suisse Research. (*) FOB value in the Brazilian Ports/Exported tons 2002=100) 9 29 July 2013 Demand for Transportation Infrastructure Spiked! What about Supply?

. Unfortunately, Brazil’s noticeable economic development wasn’t followed by greater infrastructure investments to tap the growing demand. Over the past ten years the country’s transportation system was overloaded, resulting in clogged ports, congested roads and airports, obsolete railroads, and inadequate transportation modes. About 300Mt have been added to foreign trade flows, led by iron ore and agricultural commodities exports. Light vehicle sales are 2.5x higher than ten years ago, increasing highway infrastructure needs and deteriorating urban traffic. Yet, investments in transportation infrastructure have not kept the same pace of economic development. . Reportedly, the inefficiencies created by infrastructure bottlenecks subtract 10%–15% from the country’s GDP. Growing Demand across the Board (Services, Manufacturing Industry and Agriculture): How About Processing Capacity? Infrastructure Distance to Ports Demand Demand Growth in Past Ten Years Delta Demand Drivers (km) in 2002 in 2012 (%, 2002–2012)

Air Passenger Traffic 71.2* 193.1 121.9 171 (mn passenger/year) NA

Light Vehicle Sales 1.6 4.0 2.4 147 (mn units/year) NA

Agricultural** Exports 32 77 45 140 (Mt/year) 500 – 3000

Container Flow at Ports 3.5 8.2 4.7 132 (mn TEUs/year) 70 – 150

Iron Ore Exports 167 327 160 96 (Mt/year) 500 – 1000

Foreign Trade*** 387 688 301 78 (Mt/year) NA

Household Consumption 1,825 2,744 919 50 (R$bn) NA

ABCR Index 111 163 NA 48 (Paved Highway Traffic) NA

Petrobras Offshore 1,257 1,768 511 41 Production (mn bpd) NA

Source: INFRAERO, Anfavea, Aliceweb, Brazilian Water Transportation Agency (Antaq), ABCR, Petrobras, CS Research // (*) 2003 Figures. (**) Soy, corn and sugar. (***) Exports and imports. 10 29 July 2013 Underinvestment Led to Underperformance. Lagging behind the BRIC League

. Brazil has invested, on average, ~17.5% of its GDP, much less than China (42%), BRIC’s Gross Fixed Capital Formation (% of GDP) India (30%), and Singapore (25%). Among the BRIC countries, Brazil stands out for 50 having the lowest level of investments for the past ~ten years. . On average, for the past ten years GDP growth in these countries has been virtually China proportional to the level of investments, with Brazil growing ~4%, China 11%, India 40 8.2%, and Singapore 6.5%. South Korea and Mexico are heading into the right direction to boost growth. Needleless to say, the lower investment levels in Brazil were not able to sustain its growth rates at 4% for longer. 30 India Russia Fixed Capital Formation vs. GDP Growth (Last Ten Years) 20 45 China Brazil 10 40 1963 1969 1975 1981 1987 1993 1999 2005 2011 Breakdown into Public and Private: Brazil’s Fixed Capital 35 Formation (% of GDP) Private Public 19.1 19.5 19.3 India 18.1 18.1 18.2 18.5 17.4 16.8 17.1 30 16.4 16.1 16.0 16.4 4.2 5.2 4.5 15.3 S. Korea 2.6 2.9 3.6 4.8 4.7 4.7 5.0 3.2 3.0 3.1 3.4 2.8 25 Japan Chile Singapore Hong Kong Gross fixed capital formation (annual %) 20 14.2 14.2 13.8 14.9 14.3 14.8 Mexico 13.2 12.5 13.1 12.9 13.0 13.3 13.4 13.5 13.5 Russia US Brazil 15 0 2 4 6 8 10 12 GDP growth (annual %) 2000 2002 2004 2006 2008 2010 2012 2014e Source: Central Bank; World Bank, Credit Suisse Research. 11 29 July 2013 After Golden 1970s, Investing Merely ~2% of GDP in Overall Infrastructure ….

. Looking at Brazil’s historical investments in the infrastructure sector, the highest investment levels occurred during President Juscelino Kubitschek’s administration and in the following decade (1970s). During the 1980s Brazil faced strong fiscal issues and started to significantly reduce its expenditures. Before the 1990s investments relied mostly on public execution in view of the very unstable macro backdrop and poor regulatory framework for private investments. . It would be unfair to say that the Brazilian government wasn’t mindful of the urgency of further infrastructure investments. Looking at the R$250bn of federal investments disbursed in the past 12 years, ~85% has been disbursed over the past five years, during the booming economic cycle. Transportation was the category with the greatest number of investment initiatives (~25% of the total) and the greatest volume of disbursements (~R$76 billion) in the period. . Annual federal investments in transportation have corresponded to ~0.2%–0.3% of GDP since 2010. In our view, an ultimate improvement in Brazil’s infrastructure won’t come through greater public investments in the sector but rather by promoting a friendlier environment to private investments. Brazil’s Investments in Infrastructure* (as a % of GDP)

5.42 Brazil’s Investments in Infrastructure (as a % of GDP) Investments Breakdown (% of total) Waste 0.46 3.1 and Water Federal Transportation Telecom Power & Utilities 11.2 12.9 11.6 14.8 18.7 16.1 Government 0.8 2.5 2.5 2.13 2.4 Power 3.62 Public–Owned 33.3 36.2 0.24 2.2 37.1 Companies 2.1 2.0 2.0 2.0 36.1 0.9 1.0 44.8 1.8 1.9 42.1 1.0 1.47 0.8 0.8 0.8 0.80 2.29 0.8 1.4 0.9 Telecom 0.15 2.16 1.7 0.7 0.8 0.19 0.6 0.8 0.4 0.43 0.76 0.6 0.67 0.5 0.6 0.7 55.0 Private–Sector 0.7 0.5 0.5 50.5 51.5 0.7 47.3 Companies 2.03 0.73 0.64 40.8 39.1 Transportation 0.5 1.48 1.0 1.0 0.8 0.8 0.6 0.7 0.63 0.62 0.5 0.5 0.6 0.6 0.4 0.4

1971–80 1981–89 1990–00 2001–10 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012* 2007 2008 2009 2010 2011 2012* (*) Includes both private and public investments Source: Inter. B Consultoria / Castelar Pinheiro and Giambiagi (2012) and Frischtak (2012) 12 29 July 2013 … And Barely ~1% of GDP in Transportation Infrastructure

Total Investments (R$bn) Breakdown of Investment as % of GDP Total Investments 2002 – 20012 1.2% 0.8% 45 1.2% 0.7% 40 1.0% 1.0% Subway 35 0.6% Airports 0.8% 30 0.8% 8% 0.5% 3% 25 0.6% 0.4% 0.6% Waterways 20 12% 0.3% 15 0.4% 0.4% 0.2% 10 0.2% 0.2% 5 0.1% railroads 58% 0 0.0% 19% 0.0% 0.0% 2002 2004 2006 2008 2010 2012

Highways

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2002 Highways railroads Waterways Subway Airports Public Private % of GDP Public (RHS) Private (RHS)

Airports Investments Highway Investments railroad Investments Waterway/Ports Investments (R$bn) (R$bn) (R$bn) (R$bn) 2.5 90% 18 60% 7 100% 3.5 120% 80% 16 90% 50% 6 3.0 100% 2.0 70% 14 80% 5 2.5 60% 12 40% 70% 80% 1.5 60% 50% 10 4 2.0 30% 50% 60% 40% 8 1.0 3 40% 1.5 30% 6 20% 40% 2 30% 1.0 0.5 20% 4 20% 10% 1 0.5 20% 10% 2 10%

0.0 0% 0 0% 0 0% 0.0 0%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Private Public % Private

Source: Orçamento Fiscal (SIGA BRASIL /SIAFI), ABCR, DEST/Docas, ANTF, Infraero, BNDES, IPEA / (*) Public Investments (based on SIAFI & DEST–MPOG) 13 29 July 2013 The Result: Mediocre Infrastructure Performance across the Board … . Looking at the World Economic Forum ranking, Brazil’s overall infrastructure ranked Investments in Infrastructure, 2011 (as a % of GDP) 107 of 144 countries. Among the BRIC countries, Brazil has the worst airport, port, China 13.4 and railroad systems. The only mode in which Brazil isn’t as bad (relatively to BRICs)

is highway transportation. Perhaps that has to do with the fact that the regulatory Vietnam 11.4 framework seems to be relatively more robust. Chile 6.2 . As mentioned in the previous slides, Brazil’s Achilles’ heel is its infrastructure, which Colombia 5.8 is the clear result of its meager infrastructure expenditures for the last several years. India 4.5 Relative to other developing economies, Brazil invested only ~2% of its GDP in Philippines 3.6 infrastructure, versus ~4.5% in India and an astonishing ~13% in China. Brazil 2.1 Global Ranking of Quality of Infrastructure (1= Best performer, 144= Worst performer)

Airports 1 (Best performer) 144 (Worst performer) 15 68 70 104 134

Brazil S. Africa India China Russia

Ports 1 (Best performer) 144 (Worst performer) 52 59 80 93 135

Brazil S. Africa China India Russia

Railroads 1 (Best performer) 144 (Worst performer) 22 27 30 46 100

Brazil China India Russia S. Africa

Highways 1 (Best performer) 144 (Worst performer) 42 54 86 123 136

Brazil S. Africa China India Russia

Overall 1 (Best performer) 144 (Worst performer) Infrastructure 58 69 87 101 107

Brazil S. Africa China India Russia

Source: World Economic Forum, Credit Suisse Research 14 29 July 2013 The Result: … On a Deteriorating Trend

. For the past five years Brazil has consistently witnessed a deterioration in all of its Total Infrastructure Stock*, 2012 (% of GDP) transportation modes. The deterioration is mostly pronounced in airports, ports and 179 railroads. The airport sector has just started to undergo a privatization process (February 2012), thus the dependence on public investments for a long time might explain its deterioration. The other two modes of transportation just don’t have a Average, excluding outliers, 80 82 87 robust regulatory framework in place, which hinders private investments. Brazil and Japan 71% 71 73 76 64 . According to McKinsey, Brazil has a 16% asset–to–GDP ratio, namely infrastructure 16 57 58 58 stock, and is seen as an outlier on a global scale. The average ratio stands at ~70% which would imply that Brazil needs US$ 1 trillion in infrastructure investments to narrow the gap. Brazil UK Canada India US Germany Spain China Poland Italy S. Africa Japan Global Ranking of Quality of Infrastructure (1= best performer, 144= worst performer)

Airports Ports Railroads Highways Overall Infrastructure

2008 2010 2012 2008 2010 2012 2008 2010 2012 2008 2010 2012 2008 2010 2012 60 0 116 0 75 40 50 India 70 118 China 20 5 80 60 China 120 60 80 122 10 China 40 85 70 90 124 Brazil 80 China 15 (RHS) India 100 60 126 90 80 India India Russia 20 110 128 100 80 India 95 90 130 25 China Brazil 120 Russia Russia Russia 132 120 Brazil 100 100 100 Brazil 30 130 134 Russia (RHS) Brazil 140 120 136 35 105 140 110

Source: World Economic Forum, McKinsey Global Institute Analysis, IHS Global Insight, Credit Suisse Research 15 29 July 2013 The Result: Unbalanced Transportation Matrix and Inefficient Logistics

. When measuring logistics costs, there are essentially a few components that impact the final freight rate, namely (i) distance; (ii) volumes; (iii) storage capacity; and (iv) specific product characteristics, such as its density. By far, the two most important components are distance and volumes, especially when the cargo is mostly of low value added and cost dilution becomes essential. . Taking into account Brazil’s geographical landscape (area) and export profile, it is noticeable that the country has an unbalanced mix of transportation modes, heavily concentrated in highways. Roughly 60% of cargo in Brazil flows through highways, of which only 14% is paved. Considering Brazil’s area, a greater proportion of railroad transportation would make more sense, especially in view of its competitive advantage in the production/extraction of commodities (mineral and agricultural), which are low value–added cargo. Due to their size, the USA, Canada, Australia, China, and Russia rely heavily on railroad transportation. AREA Highways Railroads Paved Roads Railroad Density Transportation Matrix (mn km²) (mn km) (000’ km) (%) (km/000’km²)

Transportation Matrix Transportation Matrix 9.0 16.4 Waterways Waterways 1.0 11 Highways 1.0 Railroads 11 8 58.3 % of 85.3 % of Russia Total Canada 46 Total n.a. RTKs n.a. RTKs 43 81 Highways 6.47 Railroads 5.2

9.1 Transportation Matrix 9.3 Transportation Matrix Waterways Waterways 6.5 Railroads 4.0 Railroads 25 13 USA 37 China 228.5 43 % of 66.2 % of Total Total RTKs RTKs 100% 53.5% 50 32 25.0 Highways 7.1 Highways

8.5 Transportation Matrix 7.6 Transportation Matrix Waterways Waterways 1.7 Railroads 0.8 17 Railroads 4 25 Brazil Australia 29.8 % of 8.65 Total 43 % of RTKs Total 13.5% 43.5% RTKs 53 58 3.5 1.13 Highways Highways

Source: World Bank, Credit Suisse Research 16 29 July 2013 Government Actions

FOTO

Mindful Government but Ineffective Alone It’s “Now or Never”! Calling for Private Investments Before the 1990s, investments relied mostly on public execution given the very unstable In our view, an ultimate improvement in Brazil’s infrastructure won’t come through greater macro backdrop and poor regulatory framework. In 1993, owing to the fast deterioration of public investments in the sector but rather by promoting a friendlier environment to private highways, the Brazilian government enacted two laws (8666/93 and 8987/95) that investments. In this sense, the government has been laying the groundwork for further established the general terms for concessions in Brazil between public and private entities. private investments in the country by (i) straightening the regulatory framework, (ii) tackling Later, several assets were granted to the private sector, which became responsible for the limited availability of private funding, and (iii) easing the environmental licensing process. overhauling depreciated brownfield assets while the public sector remained in charge of We think that Brazil’s infrastructure gap now has a greater likelihood of being eventually developing greenfield ones. Yet, given its inefficient execution, there aren’t good examples narrowed given the government’s strong focus (ever) on (i) boosting private investments and of successful greenfield projects. In fact, there are two emblematic projects that exemplify (ii) improving the regulatory framework. In this sense, of the R$1trillion gap, we have the government’s inefficiency, namely the North–South railroad and the BR-163 highway, identified ~R$334bn in potential private investment opportunities. Yet, the execution which have been under development for over 30 years, with delays and cost overruns. challenge cannot be understated as (i) some projects are still in the analysis stage and (ii) However, it would be unfair to say that the Brazilian government wasn’t mindful of the the process for obtaining environmental licenses remains cumbersome. As such, we believe urgency of further infrastructure investments. Back in 2007, it launched the Growth that R$109bn (1/3) has significant chances of being auctioned in the next two years. Acceleration Program (PAC), a stimulus program to boost investments in the country. Since Even this more conservative scenario would be enough to double private investment levels in then, about R$101bn have been deployed in the transportation sector. While helpful, this transportation to ~0.9% of GDP. Adding public expenditures, investments in the sector amount accounts for only 53% of the planned budget and ~10% of Brazil’s R$1 trillion would reach ~1.4% of GDP for the next five years. Besides, we argue that the auctioning of transportation infrastructure gap. Putting it differently, public investments in transportation 1/6 of this notable pipeline would already be equivalent to the projects granted to the private have corresponded to only ~0.5% of GDP since 2007, which is far from adequate levels. sector in the past ten years. 29 July 2013 A Mindful Government: Federal Investment Programs (PAC I and II)

. Back in 2007, the Brazilian government announced the national Growth Acceleration Federal Government Investments (% of GDP) Program (PAC I), a stimulus package aiming at investing R$646bn in logistics, energy, and social and urban development. By 2010, R$444bn had been deployed (49% of it in 1.4 PAC Execution (RHS) 90 the “Minha Casa, Minha Vida” housing program and only 15% in logistics.) Average since 80 1.2 2007 . In 2010, in an arguably political move, the Brazilian government launched the second 70 phase of this stimulus program, the so-called PAC II. It encompasses R$955bn in 1.0 1.0 investments to be deployed during 2011–2014. So far, ~40% of that has been invested. 60 It is important to note that a great portion of PAC’s transportation infrastructure projects 0.8 50 had their first feasibility studies back in 1980. 0.6 Investments ex PAC (LHS) 40 . During the 2007–2012 period, the PAC stimulus program was able to boost federal Execution (RHS) investments to ~1% of GDP, from ~0.4%. Still, infrastructure expenditures would have to 30 0.4 reach ~4%–5% of GDP to sustain economic growth rates of 4% or so. Thus, private 20 enterprise has to be on board. 0.2 PAC (LHS) 10 . Moreover, not only quantity but also quality of deployed investments is key. Public–sector investments have questionable execution and often experience cost overruns. 0.0 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

PAC 1 PAC 2 955 955 Urban Mobility & Sanitation, 55.90 Public Service Improvement, 22.56 Housing Program, 53.80 278.2 Housing Program Water & Electricity, 27.20 657.4 657.4 Remaining Part to be Invested Public Service 566.4 Energy, 335.30 Transportation, 71.60 23.0 investments 115.6 Post–2010 Improvement 275.7 97.8 Uncompleted 461.6 Energy Urban Mobility & Sanitation, 1.2 Public Service Improvement, 0.4 230.1 Social & Urban Energy, 126.3 300.1 Total 388.6 30.6 Water & Electricity Invested 148.5 Energy 57.1 Urban Mobility & Sanitation Housing Program, 224.4 81.6 65.4 Logistics 104.5 Transportation Transportation, 32.9 2007 Announced (*) 2010 Invested 2011 Announced April 2013 Invested Water & Electricity, 3.4

Source: Brazilian Government, Credit Suisse Equity & Macroeconomics Research / (*) Updated from R$504bn in Jan 2007 to R$657bn in Jan 2009 18 29 July 2013 But Ineffective Alone: Investing Far Below Brazil’s Transportation Needs . Taking a deeper look at the government’s PAC investments, about R$190bn were planned to be channeled to the transportation sector. Roughly 48% of that would be deployed in the highway sector, followed by 36% in the railroads. Looking at the past six years, i.e. since PAC’s inception, only 53% of the planned budget has been disbursed and perhaps less than that has been delivered in terms of physical execution. Even when 100% completed, the planned PAC would address only ~20% of the country’s infrastructure needs.

PAC Planned & Executed Investments vs. Brazil’s Infrastructure Needs (R$ billion)

PAC Investments Infrastructure Investment Need Breakdown of Investments

50.4 91.8 1,110 75.3 Construction of 2nd Construction & Pavement Lane & Recovery 41.4

69.6 803.7 Highways

Landside Access

18.6 Dredging and Demolition

873.3 3.0 9.9 23.9 Ports Infrastructure

Ports Expansion, 14.0 2.5 8.0 Construction & Recovery

22.0 Investment Gap Investment Smaller Improvements 46.0 68.9 0.5 Expansion Recovery 10.5 22.9 129.6 14.2 46.1 Railroads PAC Planned Investments

101 140.7 New (less than 500K pax) Expansion 5.5 of 20 Largest Airports Highways 75.3 2.7 5.7 3.8 New (500K–1mn pax) 20.5 3.0 Waterways 8.0 Railroads 14.2 49.5 8.0

Airports 3.8 PAC Executed* Airports PAC 1 PAC 2 PAC Executed New (Over 1mn pax) Expansion of Other Airports Total (Apr-13) Est. Req. (Apr-13) Investment 12.0 3.5

Source: ILOS, FIPE, McKinsey, Credit Suisse Research / (*) PAC Investments until April 2013 19 29 July 2013 Examples of Poor Government Execution: N–S Railroad & BR-163 Highway

. The 3,700km of the 26-year old North–South railroad project and the improvements in North–South Connections (Railroad & Highway) the BR-163 highway are clear examples of the questionable execution quality of public investments in the country. These projects are taking 2x longer to be completed and are at least 3x more expensive than originally forecasted . Tirios . The infamous North–South railroad has been stuck due to political disputes and bureaucratic imbroglio for decades. The railroad started to be built in 1987 and its fist Santarem Port phase, a 215km stretch from Açailândia (State of Maranhão) to Porto Franco (State of Ponta da Madeira Port Barcarena Maranhão), was inaugurated with a nine-year delay. Santarém . A later attempt to complete the railroad was carried out by former President Lula in 2007. The former president promised to deliver the entire railroad by October 2010 and PA Açailândia deposited R$4.2bn into Valec’s coffers in order to attain its objective. MA . The project, whose original contract was amended more than 17 times, was mismanaged and postponed once again. In October 2007, the 722km stretch between Açailândia Cachimbó TO (State of Maranhão) and Palmas (State of Tocantins) was transferred to the private sector Palmas through a competitive bid won by Vale, which paid a concession fee of R$1.48bn. At that Sinop MT BA Lucas do Rio Verde time, only the 361km stretch between Açailândia (State of Maranhão) and Araguaína Uruaçu (State of Tocantins) had been completed. The proceeds from the auction process would Cuiabá be used to construct the remaining stretch. Ouro Verde Anápolis Cities GO . Going further south, the ~855km stretch between Palmas (State of Tocantins) and Ports MS MG Anápolis (State of Goiás) has only 155km with reasonable quality while the remainder Current railroads Estrela d'Oeste enjoys a questionable quality of rail tracks imported steel from China. About R$5.1bn BR-163 Road have been deployed in this stretch alone which implies a cost of US$3.6mn per km, Dourados Panorama reportedly requiring further ~R$0.5bn to be concluded. Paved SP Rio de Janeiro Port Undergoing paving Santos Port . Another legendary project is the 3,500km BR-163 highway project, launched in 1976 Cascavel Paranaguá Port (37 years ago). About 1,300km are still unpaved. BR-163 is the primary highway to North–South Railroad transport agricultural commodities out of the producing area of Sinop, Sorriso and Lucas Operating Chapecó do Rio Verde to the ports in the South and Southeast regions. The 1,780km stretch Constructed RS between Cuiabá (State of Mato Grosso) and Santarém (State of Pará) needs a sharp Under construction revamp (construction of a second lane and pavement) and could demand another EVTEA concluded Rio Grande ~R$1.5bn at least. Once completed, it will be possible to export commodities through the Future projects ports in the north region (Santarém Port) instead of using the ports in the south/southeast. Source: Valec, Brazilian Department of Transportation Infrastructure (DNIT), Amazonia Org, Credit Suisse Research 20 29 July 2013 Gradually Boosting Private Investments: R$52bn Auctioned in the Past 10 Years

. Below we outline the main transportation investments unveiled over the past nine years in Brazil. About R$52bn in investments were granted to the private sector, averaging close to R$6bn/year. This figure was boosted by planned investments in the three recently auctioned airports (~R$17.8bn). Excluding the airports, investments would total R$3.8bn/year. Going forward, the government wants to auction ~R$170bn in one or two years, taking into account only the federal investment plan for toll roads, railroads, and two airports. About 40% of that seems reasonable to be auctioned within this timeframe, which wouldn’t be bad at all if we take into perspective the historical level of investments. Timeline of Most Recent Toll–Road Projects Auctioned in Brazil and Project Execution

2004 2006 2007 2008 2009 2010 2011 2012 2013

21,315

11,253 9,800 7,900 5,800 975 1,053 2,100 900

MG–050 975 Subway –SP Line 4 1,053 Autopista Planalto Sul 1,559 CART 1,750 ViaBahia 2,100 BA–093 800 ASGA Airport 600 BR-101/ES/BA 1,700 VLT Rio de Janeiro 1,100

Autopista Litoral Sul 1,962 ViaRondon 1,350 Rodoanel South MT 130 / PE–060 300 Guarulhos Airport 5,200 Galeão Airport 5,200 5,000 & East Autopista Régis B. 2,364 Rodovia do Tiete 1,600 Viracopos Airport 9,900 Confins Airport 3,500

Autopista Fernão Dias 2,456 Ecopistas 900 Brasilia Airport 2,715

Autopista Fluminense 1,672 Rota das Bandeiras 1,500 Transolimpica 1,800 Transbrasiliana 716 RodoAnel 800

Rodovia do Aço 524 Auctioned Projects Auctioned

2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033

6000

5000

4000

3000

2000

1000

0 VLT Rio de Janeiro Transolimpica Brasilia Airport Viracopos Airport Guarulhos Airport BR-101/ES/BA MT 130 / PE-060

Capex Execution Capex ASGA Airport Rodoanel South & East BA-093 ViaBahia RodoAnel Rota das Bandeiras Ecopistas Rodovia do Tiete ViaRondon CART Rodovia do Aço Transbrasiliana Autopista Fluminense Autopista Fernão Dias Autopista Régis Bittencourt Autopista Litoral Sul Autopista Planalto Sul Subway -SP Line 4 MG-050

Source: ANTT, ARTESP, ANAC, Credit Suisse Research. 21 29 July 2013 R$334bn in Identified Investment Opportunities to the Private Sector

Highways Program Urban Mobility 9 federal highways, . . Urban Mobility Growth covering over 7,500km Acceleration Program (federal investments) 54 . São Paulo Subway Program 81.5 . Urban mobility in Rio de Janeiro Airports Program* . Galeão Airport 16.2 . Confins Airport High–Speed Train R$334bn . Rio de Janeiro to Campinas Pipeline 30 (through São Paulo)

54.1 Ports Program Railroads Program . Investment in 16 states, . 10 railroads, covering covering public port over 12,000Km concessions, private port authorizations, and the dredging plan

Source: Credit Suisse Research. * Includes both concession fees and expected capex. 22 29 July 2013 Laying the Groundwork for Private Investments: Improving Regulation

Main Discussions about the Current Model Government Actions

Toll Roads Toll improving headline return rates (from 5.5% to 7.2%, real, unleveraged) and greater penalties. and easing financing guarantees requested by public banks.

stake of 25% in the formed consortiums.

Regulation of Regulation . Political Exposure is high as it deals with people not cargoes.

Source: Credit Suisse Research / (*) PPP: Public-Private Partnerships 23 29 July 2013 Can Financing Be a Constraint? Is BNDES Enough? Searching for Alternatives . BNDES, current the major financing source… While in other countries the major source of BNDES Credit Approval (Portfolio of Financed Projects) funding has been commercial banks, in Brazil funding comes mostly from the federal Total Estimated BNDES Installed Capacity / No. of government through the Brazilian Development Bank (BNDES). BNDES has been financing all Segments Investment Credit Line Description Projects infrastructure projects in the country, either directly or indirectly through pass–throughs via (R$bn) (R$bn) 45K MW (generation) & ~24K commercial banks. Utilities 378 216.0 120.0 . …for How Long? Looking at the potential pipeline of investments, Brazil will need not only MW (transmission) foreign capital but also a steep rise in its savings rate (~19%), currently the lowest among Shipping Industry 222 ships 30 3.0 2.5 major emerging markets such as India (35%) and China (55%). Historically, low government Ports, Terminals 105,630,000 tons/year 43 15.5 7.6 savings has been one of the reasons for Brazil’s low savings rate. If Brazil were to deliver its and Warehouses ~25% investment–to–GDP target (Gross Fixed Capital Formation) relying solely on foreign funding, its current–account deficit would reach unbearable levels. Highways 5,006 Km 36 23.1 12.3 . Project Finance: Still Under Early Stages. Although Brazil has evolved considerably 2,237 Km, 15,212 wagons Railroads 26 27.2 11.9 regarding project finance, there is no single project in the country yet for which project finance and 227 locomotives was used in full (non–recourse). Regarding bonds, they still account for less than 20% of total project funding. It was not until 2009, after Brazilian Securities Commission (CVM) Directive Airports 57,300,000 passengers/year 11 8.0 3.6 476, that bond issuances started to gain traction. More recently, Law 12431/11 established TOTAL 525 292.7 161.9 the guidelines for the issuance of tax–exempt infrastructure bonds. Sources of Funding as a % of Investments BNDES Financing Breakdown (R$bn) BNDES Disbursements, Transp. Investments 100% 20 50 60% Utilities Others 90% Railway Airports In 2013–2015, BNDES 80% Highway 50% Ports 40 Ports is expected to disburse 70% 15 Highway twice as much it has Airports done over the past 60% Others 40% Railroad seven years 30 % Transportation 50% 30% 10 40% 20 30% 20% 20% 5 10 10% 10% 0% 2001 2003 2005 2007 2009 2011 2013E 2015E 0 0% 0 2003 2005 2007 2009 2011 2013e 2015e Retained Profits BNDES External Funding Stocks Debentures 2003–2012 2013–2015e Source: BNDES, Credit Suisse Research /(*) CVM Directive 476 allows the placement of bonds to a small group of investors (50 bidders), thus limiting issuance costs. 24 29 July 2013 Toll Roads

FOTO

The Most Important Transportation Mode in Brazil Stimulating Further Investments (New Concessions and Amendments) Highway transportation is currently the main mode for cargo transportation in Brazil, with a Owing to the fast deterioration of the main interstate and intrastate highways, the Brazilian 58% share. This share would be even higher (71%) if we exclude iron ore cargo. The focus government launched in 1993 the Federal Toll Road Concession Program, after the on highway transportation can be attributed to (i) the implementation of the automobile enactment of Laws No. 8666/93 and 8987/95. These laws established the general terms industry in the country and (ii) to an geographical economic shift, from capital cities (east sea for the Government to grant concessions to the private sector in Brazil. coast) to the central west region, accompanied by a vast program of highway construction. The first round of the Federal Toll Road Concession Program started in 1994 and The most prominent period of highway investments took place during the 1960s and 70s. established the lowest toll fee as the decisive factor for granting concessions. Five During this period, the network of federal paved highways increased sharply from 8,700 km concessions were granted by the federal government during 1994–1997. Thereafter, states to 47,500 km (in 1980). Now, it stands at ~64,700 km (from ~56,000km in 2001). launched their own concession programs and currently 55 toll roads operate under a Investments in highways have noticeably lost steam since the 1980s as its budget was concession model (15,500 km under private administration). In ~20 years, about 5,200 km partially directed to other sectors and now depends on the ordinary federal budget set for the of federal highways were auctioned. Now, the government expects to grant ~7,500 km of sector instead of the direct pass–through of taxes on the sale of fuel, lubricants, and federal toll roads still in 2013, split into nine toll roads (R$54bn capex). In our view, looking vehicles. Although highways received about ~47% of the budget available for investments in at these assets, five of them are at least reasonably attractive while the other four present the transportation sector, this amount hasn’t been enough to tap the growing demand for challenging capex requirements and greater traffic risks. transportation. Besides the auctioning of new toll roads, both the federal and state governments have Currently, only 14% of our highways are paved and public highways lag behind privatized straightened the regulatory framework for new investment opportunities within the current assets. Reportedly, the gap in investments amounts to ~R$800bn. concessions granted to the concessionaries, the so-called contract amendments. This could entail investment opportunities of at least R$8bn– R$10bn. 29 July 2013 From Dedicated to Spare Funding (1945–1988)

1945–1988 1990–2000 2001–2007 2008–2012 Since Jan-13

. 1945: From 1945 to 1988, highway investments were guaranteed by law. In 1945, the National Highway Fund Federal Investments in Transportation Infrastructure (% (FRN) was created. The FRN was composed of revenues from taxes on (i) fuel and lubricants (IUCL); (ii) in of GDP) 1967, highway cargo and passenger transportation services (ISTR); and (iii) in 1969, highway services (TRU). 2.0 . 1950–1960: Highways accounted for “only” 38% of cargo transportation in the country. During the “golden 1.8 years” of President Juscelino Kubitschek's mandate (1956–1961), highway investments were prioritized to 1.6 stimulate the development of the national automotive industry. In 1960, highways already accounted for ~60% of cargo transportation in Brazil. 1.4 . 1974–1982: Law 6093 was enacted, creating the National Development Fund (FND). Investments in highways 1.2 started to lose steam, as part of the revenues allocated to the FRN were channeled to the FND. In 1982, 1.0 revenue from taxes on fuel and lubricant sales were fully allocated to the FND. Later on, these taxes were replaced by the value–added tax (ICMS) charged by the states. Thus, the funds in the FRN were severely 0.8 reduced. 0.6 1988: . The Brazilian Constitution was enacted, prohibiting the automatic transfer of tax revenues to institutions or 0.4 funds and the use of tax revenues to pay pre-established expenses. Thus, highway investments began to be directly dependent on ordinary capital injections from the federal government. However, article 175 of the 0.2 Constitution opened up the opportunity for private investments through concessions. 0.0 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011

Source: CNT, ANTT, EPL, Credit Suisse Research 26 29 July 2013 Making Private Investments Viable (1990–2000)

1945–1988 1990–2000 2001–2007 2008–2012 Since Jan-13

. 1990–2000 – After many attempts to establish ways to raise funds for investments in Federal Concessions highways through taxes (such as the maintenance tax of 1990), private investments in First Round of Auction Process the sector became a viable solution after the enactment of Laws 8666/93 (Concession Extension % Winning First Round Stretch Law) and 8987/95. Then, the Brazilian Toll Roads Concession Program was (km) Discount Company established in 1993. Nova Dutra Rio de Janeiro – São Paulo 402 4.4% CCR . The first round of the Federal Highway Concessions Program started in 1994 with the adoption of the greatest discount over the cap toll fee as the criteria for granting the concession. Some of the main highways in the country were auctioned, Ponte Ponte Rio – Niterói 13 61.0% CCR such as Nova Dutra, which connects São Paulo to Rio de Janeiro. Five concessions were granted during 1994–1997 and one was granted by the State of Rio Grande do CONCER Rio de Janeiro – Juiz de Fora 180 4.5% Concer / Triunfo Sul (transferred to the federal government in 2000). Rio de Janeiro – Teresópolis – CRT 143 14.0% CRT / Invepar . During 1994–2000, almost 10,000km were granted to the private sector under 35 Além Paraíba concession contracts at reportedly returns of 18%–20% IRR, real unleveraged. The Concepa Posório – Porto Alegre 121 60.3% Triunfo majority of them are located in the State of São Paulo, such as Ecovias dos Imigrantes, which connects the city of São Paulo to the Port of Santos, Centrovias, Autovias, EcoSul Pólo de Pelotas 624 0.0% Ecorodovias Colinas, Intervias and Autoban. In Autoban alone, about R$6.9bn had been deployed through Jun-2013. In Ecovias, R$3.7bn have been deployed.

Source: ANTT, ARTESP, Credit Suisse Research 27 29 July 2013 Setting Single-Digit Headline Return Standards (2001–2007)

1945–1988 1990–2000 2001–2007 2008–2012 Since Jan-13

. 2001–2007 – No meaningful toll road auction took place during 2000–2006. In 2004, Federal Concessions Law 11079, which regulates Public-Private Partnerships, was enacted. The first toll Second Round of Auction Process road auctioned under a PPP was MG–050 (372km), in May 2007. Extension % Winning 2nd Round Stretch . In Oct-2007, the federal government launched the second round of federal (km) Discount Company concessions, granting 2,600km split into seven lots. Thirty groups disputed the toll Autopista Planalto Sul Curitiba–Border SC/RS 412.7 39.4% OHL Brasil roads located in South and Southeast of Brazil. The concessions term is 25 years. Autopista Litoral Sul Curitiba–Florianópolis 382 62.7% OHL Brasil . OHL Brasil (Now, Arteris) won five of the seven toll road concessions due to a Autopista Régis bidding strategy perceived as aggressive. This auctioning process brought to the São Paulo–Curitiba 402 49.2% OHL Brasil Bittencourt Brazilian toll roads sector a new perspective regarding rates of returns, setting for the first time a new plateau of single-digit returns. The average headline rate of return (IRR, Autopista Fernão Dias Belo Horizonte–São Paulo 562.1 65.4% OHL Brasil real, unleveraged) for these concessions was set at ~9%. Autopista Fluminense Border RJ/ES–Ponte Rio–Niterói 320.1 41.0% OHL Brasil . In total, R$9bn are expected to be invested in highway lane duplication and asphalt restoration. Another R$10bn will be spent to equip the highways with ambulances, tow Transbrasiliana Border MG/SP–Border SP/PR 321.6 40.0% BRVias services, traffic inspection, mobile and fixed weighing stations, and a telephone per Rodovia do Aço Border MG/RJ– BR116/RJ 200.4 27.2% Acciona each kilometer. In all, 36 new toll plazas were installed. ViaBahia Border MG/BA – Salvador 680.6 21.0% ViaBahia

Source: ANTT, Credit Suisse Research 28 29 July 2013 Many Sao Paulo State Concessions, But Few Federal Ones (2008-2012)

1945–1988 1990–2000 2001–2007 2008–2012 Since Jan-13

. In 2008, the State of São Paulo auctioned six toll roads comprising ~1,750km. The State and Federal Concessions state government offered 30-year concessions for five roads, with concession fees São Paulo State Concessions and Third Round of Federal Auction Process totaling R$3.5bn and payment over a period of 18 months. The first five years of capex Extension % Winning Stretch total another R$3.5bn (R$8bn in total). (km) Discount Company . In January 2009, the Brazilian government auctioned a 680km toll road, namely CART Raposo Tavares 444 16.1% Invepar/OAS ViaBahia. In 2010, two other state concessions were auctioned: Rodoanel South and ViaRondon Marechal Rondon Oeste 417 40.6% BrVias East (São Paulo State) and Bahia Norte (Bahia State). . In January 2012, after many delays in the auction process of federal concessions, the Rodovia do Tiete Marechal Rondon Leste 415 13.1% Brasinfra Brazilian government granted BR-101 ES/BA (476km) to Ecorodovias. The contract Ecopistas Ayrton Senna/Carvalho Pinto 142 45.4% Primav/Ecorodovias was signed only about one year later as the second bidder filed a suit. Ecorodovias Rota das Bandeiras Dom Pedro I 297 6.0% Odebrecht believes it can achieve a ~10.5% IRR (real, unleveraged) even after granting a discount of ~46% over the cap toll fee, while CCR and OHL gave discounts of ~15%–17% and RodoAnel Rodoanel Oeste 32 61.1% CCR other players, discounts of ~25%–35%. Rodoanel South & East Rodoanel South & East 105 63.4% Bertin . In August 2012, the government announced the next toll road auctions, which should ViaBahia Border MG/BA – Salvador 681 21% ViaBahia take place during 2H13 (nine toll roads, 7,500km). ECOR101/ES/BA Bahia – Espirito Santo 476 46% Ecorodovias

Source: ANTT, Credit Suisse Research 29 29 July 2013 After Lack of Private Interest, Comes a Pro-Market Stance (2013 onwards)

1945–1988 1990–2000 2001–2007 2008–2012 Since Jan-13

. The Brazilian government had scheduled the auction process of two toll roads, namely Brazilian State and Federal Toll Roads BR-040 and BR-060, for January 2013. However, the headline rate of return (real, About 55 concessionaries and 15,500 km under private administration unleveraged) proposed by the government to calculate the cap toll fee was set at 5.5%. 18,000 60 As the feasibility study of these projects were outdated, the lower-than-expected IRR # Concessionaires (RHS) proposed by the government left the potential bidders with barely no margin for error 16,000 Private Roads (km) LHS 50 during the potential auction. As such, the auction didn’t take place. 14,000 . To offset this failure, the government adopted a more pro-market stance, improving 12,000 40 financing terms and return rates, and reassessed the feasibility studies for the following toll road auctions (nine toll roads, 7,500km) to take place in 2H13, which includes BR- 10,000 040 and BR-116. The Brazilian government increased unleveraged IRRs from 5.5% to 30 8,000 7.2%. These concessions were announced back in August 2012 and are already delayed by ~6 months. The requests for proposal (RFP) should be launched by the end 6,000 20 of July 2013. 4,000 . Currently, Brazil has about 55 toll road concessions, totaling 15,500km, under private 10 2,000 administration. Thus, the next round of auctions should boost the current network of toll roads by 50%. 0 0 1995 1997 1999 2001 2003 2005 2007 2009 2011

Source: ANTT, Credit Suisse Research 30 29 July 2013 Private Toll Roads – A Snapshot of the ~20 Years of Regulatory Framework

Minas Gerais Bahia

CLN (217 km) Nascentes das Bahia Norte Gerais (371 km) Via Bahia (122 km)

Concer Fernão Dias

Paraná Econorte (342 km) Pernambuco Viapar (546 km) RodoNorte (568 km) Ecocataratas Régis Bittencourt Rota dos Coqueiros (7 km) (459 km) Ecovia Caminhos do Paraná (406 km) (175 km) Litoral Sul

Santa Catarina Espírito Santo Litoral Sul Planalto Sul

Rodosol (68 km)

Rio Grande do Sul São Paulo Triângulo do Sol (442 km) Vianorte (237 km) Rio de Janeiro Rodosul (133 km) Transbrasiliana Autovias (316 km) Coviplan (250 km) Via Rondon (331 km) Intervias (376 km) Rota 116 Convias (191 km) Renovias (345 km) CRT (138 km) Sulvias (329 km) Cart (444 km) Concer Brita (142 km) Rota das Bandeiras (290 km) Santa Cruz (209 km) Centrovias (218 km) Rodovia do Aço Lamsa (20 km) Colinas (307 km) Nova Dutra Concepa Metrovias (534 km) Rodovias do Tietê (406 km) Ecopistas (135 km) Tebe (156 km) Ecovias dos Imigrantes Nova Dutra AutoBAn (317 km) (177 km) ViaLagos (57 km) SPVias (506 km) Via Oeste (169 km) Ponte Ecosul Régis Bittencourt Rodo Anel (30km)

Source: ABCR, Credit Suisse Research 31 29 July 2013 Current Road Conditions: Only 14% Paved and Public Lagging Behind Private

. Less than 30% of Brazilian highways have good quality standards. This has clear-cut Brazilian Highways: Only 14% Are Paved negative implications to the cost of highway transportation in the country. The Non Paved: transportation cost is (i) ~41 higher in regular highways; (ii) ~66% higher in poor Brazil: Total 86% 1,364 Km roads; and (iii) ~91% higher in terrible roads, in comparison to highways within good Road Network conditions. (’000 km) Brazilian Highways (General and Pavement Conditions) 1,584 Km 14% North (’000 Km) Northeast (’000 Km) Paved: 220 Km Paved: 20.5 | Non Paved: 126.8 Paved: 58.5 | Non Paved: 385.3 1 4 5 19 8 13 19 11 7 26 204.4 Toll 16 Paved 3 21 Toll Paved Public Highways (’000 km) Private Highways (’000 km) Roads 34 Roads Roads Roads 49 % % % 34 % 38 Two-lane 4.3 Two-land 6.8 50 38 5

200.1 15.6 8.7 Central West (’000 Km) Single-lane Single-lane Paved: 29.2 | Non Paved: 175.4 Public Private 10 3 10 3 27 Brazilian Toll Roads (%) Public Private Toll Paved 22 42.6 Roads Roads 44 8.0 2009 % % 7.1 2010 54.7

38 5.6 2011 48.0 Great 38 5 3.2 2012 44.7 14.4 2009 33.9 25.3 2010 32.6 28.2 2011 38.9

South (’000 Km) Southeast (’000 Km) Good 24.6 2012 42.0

Paved: 40.4 | Non Paved: 344.3 Paved: 70.5 | Non Paved: 462.8 49.4 2009 21.7 37.6 2010 11.3 6 6 1 5 2 13 21 8 34.2 2011 12.0 12 17 Regular 37.6 2012 11.5 Toll 27 Paved Toll Paved 19.8 2009 1.9 Roads 28 Roads Roads Roads 20.5 2010 1.3 % % % % 56 39 60 21.5 2011 1.1 30 28 29 Poor

6 6 23.8 2012 1.7

8.4 2009 0.0 9.5 2010 0.1 10.5 2011 0.0

Great Good Regular Poor Terrible Terrible 10.8 2012 0.1

Source: CNT, Credit Suisse Research 32 29 July 2013 R$54bn in Upcoming Auctions. Are They All Attractive? What about Risks? . Toll Roads Revision: A Step Forward. After a failed attempt to auction two toll roads in January 2013, the government adopted a more pro-market stance, making the projects more attractive to private investors. On May 23, 2013, in response to investors’ requests, the government announced a new set of parameters on which the concessions tariff will be based. Initially, the government had tried to increase projects’ attractiveness through other alternative ways such as: (i) better financing conditions; and (ii) longer contract duration (+5 years). . While better credit conditions, i.e. lower cost of debt (TJLP +1.5%), proved to be unfeasible, even for state-owned banks, the government decided to ease credit guarantee requirements. Also, it addressed two other components: (iii) adjustments in the operational assumptions, such as reasonably lower traffic growth curves and now (iv) greater IRRs. In order to account for the new return levels set by the government and the new set of operational assumptions, toll fees increased by ~1.5x on average. This should provide an extra cushion for the bidders to analyze how efficient they can be in terms of capex and opex execution and still find an adequate level of return. . The only request made by the government was that the bulk of capex execution take place within the initial five years of the concession term. As such, looking at the BR0163/MT and BR- 163/262/267/MS, the capex for these two projects amounts to R$17bn, with about 1,800km of lanes to be duplicated in five years. This seems very challenging.

Attractive* Attractive* Reasonable Reasonable Challenging Challenging Challenging Unattractive Unattractive Upcoming Auctions Units Total BR-262 ES/MG BR-050/GO/MG BR-101 BA BR-040 BR-153 TO/GO BR-060/153/262 BR-116 BR-163/262/267/MS BR-163/MT Toll Plazas # 5 6 9 11 11 11 8 16 9 67 Road Extension km 376.9 425.8 772.3 937.0 814.0 1,176.5 817.0 1,423.3 821.6 7,564 Lane Duplication Extension km 196.4 218.5 542.9 715.0 814.0 647.8 815.0 1,423.3 434.4 5,807 % of highway lane duplication % 52% 51% 70% 76% 100% 55% 100% 100% 53% 77% Previous Capex R$bn 1.7 2.3 3.6 4.7 4.8 6.1 6.0 8.7 4.8 32 New Capex R$bn 2.1 3.2 5.0 n/a 6.7 8.9 n/a 11.2 6.2 43 Change % 24% 43% 40% n/a 40% 45% n/a 29% 29% 36% per km R$/km 5.6 7.6 6.5 n/a 8.2 7.6 n/a 7.9 7.5 5.7 Previous Opex R$bn 1.3 1.5 2.2 n/a 2.5 3.2 n/a 3.8 2.3 17 New Opex R$bn 1.7 1.9 2.9 n/a 3.2 4.1 n/a 4.9 3.1 22 Change % 29% 30% 31% n/a 28% 31% n/a 31% 34% 31% per km R$/km 4.6 4.5 3.8 3.9 3.5 3.5 3.8 2.9 First Year Traffic 000’ EQV/Day 50 107.1 85.9 n/a 179.3 274.1 n/a 210.7 213.2 n/a Traffic CAGR (25 years) % p.a 4.2% 4.2% 4.5% n/a 3.7% 4.2% n/a 4.1% 4.5% Toll Tariff* (Previous) R$/100km 7.85 5.21 7.45 n/a 5.82 3.45 n/a 7.1 3.17 n/a Adjustments 0 0 –0.02 n/a –0.02 0 n/a 0.03 0 New Traffic (GDP Effect) 1.52 1.22 1.8 n/a 1.44 0.7 n/a 0.72 0.7 New Traffic (Railroad Effect) 0.78 0.64 0.13 n/a 0.55 0.26 n/a 0.41 0.08 30yrs New Capex & Opex 0 0.26 0.72 n/a 0.5 0.38 n/a –0.02 0.21 Toll Fee* (New 5.5% IRR) R$/100km 10.15 7.33 10.08 n/a 8.29 4.79 n/a 8.24 4.16 n/a Variation 1.23 0.84 1.43 n/a 1.19 0.64 n/a 1.23 0.5 Toll Fee* (New 7.2% IRR)** R$/100km 11.38 8.17 11.51 n/a 9.48 5.43 n/a 9.47 4.66 n/a

Source: ANTT, Credit Suisse Research / (*) Attractiveness to the private sector from a concessionaire perspective / Taking into account capex, opex, traffic characteristics 33 29 July 2013 Government Showed Flexibility in Headline Returns. Will it Be Enough?

. During 1995–2000, headline rate of returns (real, unleveraged) for the first round of federal concessions were set at ~19%. At that time, project risk premiums were 19.5% and country risk was 9%, yielding a cost of equity of ~33% (real terms). The cost of debt (pre-tax) was established at ~19.5%. . In 2006–2007, during the second round of auctions of federal concessions, project risk was lowered by ~11pp to 8% as Brazil’s economy was enjoying a friendlier macroeconomic scenario, yielding a cost of equity of ~14%. As a matter of fact, in May 2006 ANTT’s proposal embedded a cost of equity of ~24% but in May 2007 the Brazilian Secretariat of Treasury revised it downwards to ~14% before the request for proposal (RFP) documents were published. . In 2013, after failing to attract bidders at a rate of return of 5.5% (real, unleveraged), the Brazilian Secretariat of Treasury revised the rate of return upward to 7.2%. The project risk was set at ~6%. In our view, this should be the floor for government’s headline returns in upcoming auctions, as it assumed a relatively better macroeconomic scenario up until April 2013. Since then, Brazil’s macro scenario has been deteriorating. Going forward, if anything, it seems that the bargaining power is skewed towards the private sector.

Breaking Down the Calculation of Headline Returns Concession IRR vs. Real Interest Rates (%) 2nd Round 2nd Round 1st Round 2nd Round 3rd Round 1st 3rd Round 3rd Round (Proposed By (Actual, Revised 35 Round (Early 2013) (2H13) Ecovia ANTT) by Treasury) Caminho Triângulo do Sol Capital Structure do Mar Ecovias dos Imigrantes Equity 40.00% 33.33% 40.00% 40.00% 40.00% Tebe 30 Caxias Intervias Debt 60.00% 66.67% 60.00% 60.00% 60.00% Via Lagos Centrovias SP Vias Via Oeste CAPM Viapar Autoban Rodovia Rf 7.49% 5.35% 5.30% 4.54% 4.54% Caminhos do Parana Lajeado/ Renovias das Colinas CRT Rodonorte Vacaria Rm 25.00% 11.28% 12.51% 7.72% 9.99% 25 Santa Cruz do Sul Colinas Market Risk Premium 17.51% 5.93% 7.21% 3.18% 5.45% Vianorte Ecosul Nova Dutra Gramado Unleveraged Beta 0.56 0.74 0.56 0.56 0.56 Autovias IR+CSLL 34.00% 34.00% 34.00% 34.00% 34.00% Econorte Leveraged Beta 1.11 1.72 1.11 1.11 1.11 20 Ecocataratas Project Risk Premium 19.51% 10.18% 8.03% 3.52% 6.04% Country Risk 9.00% 11.32% 3.91% 2.33% 2.78% Nominal Ke 36.00% 26.85% 17.24% 10.39% 13.36% Avg. Real Interest US Inflation 2.54% 2.55% 2.54% 2.47% 2.47% 15 Rate 2011:5.1% Real Ke (CAPM) 32.63% 23.70% 14.34% 7.73% 10.63% Avg. Concession IRR: ~8% Cost of Debt Avg. Real Interest Rate 1994–97:76.3% Rf 7.49% 5.35% 5.30% 4.54% 4.54% Régis Bittencourt Ecopistas Country Risk (ex 10 Avg. Concession Rodoanel BR101ES 9.00% 8.3200% 3.91% 2.33% 2.78% IRR: 15%–20% Fernão Dias regulatory risk) Planalto Sul/ Fluminense Credit Risk 3.00% 1.80% 3.00% 3.10% 4.05% Litoral Sul Nominal Cost of Debt 19.49% 15.47% 12.21% 9.97% 11.37% 5 Nominal Cost of Debt Avg. Real Interest 12.86% 10.21% 8.06% 6.58% 7.50% (net of Tax) Rate 2007:7.4% Avg. Concession Real Cost, in R$ 10.07% 7.47% 5.38% 4.01% 4.91% Selic – IPCA Concessions IRR IRR: ~8% WACC 0 WACC 19.09% 12.88% 8.97% 5.50% 7.20% Oct-95 Jul-98 Apr-01 Jan-04 Oct-06 Jul-09 Apr-12 Source: ANTT, Brazilian Secretariat of Treasury, Credit Suisse Research 34 29 July 2013 Upcoming Auctions – Location & Potential Bidders

1 BR-262 ES/MG 9 TO–080 BR-153 GO/TO Granted Stretch Connected to Connected to 562Km BR-101 BR-116 Fernão Dias & Transbrasiliana BR101 ECOR BR-153 (BRVias) João Monlevade BR-101/ES and BR-101/BA BR-060 Granted Stretch Granted Stretch – 476Km 321.6Km Belo Horizonte BR-040 Vitória RFP 31–Jul-13 RFP 26–Sep-13 Auction BR-262 Auction BR-262 BR-381 20–Sep-13 25–Nov-13 TO 2 Granted Stretch BR-324 BR-101 BA 9 8 BR-050 GO/MG 680.6Km 5 MT BA Granted Stretch Parallel with DF BR-153 Parallel with 8 3 2 321.6Km BR-040 BR-116 ViaBahia & GO MG BR-060 Transbrasiliana & Connected to 7 Triangulo do Sol 6 4 BR-262 Granted Stretch BR101 ECOR Granted Stretch 495Km MS 1 ES BR-050 450Km BR-101 SP BR-381 RFP 29–Aug-13 RJ RFP 31–Jul-13 Granted Stretch PR 320Km Auction 25–Oct-13 Auction 20–Sep-13

3 Granted Stretch BR-126 MG 7 BR-060/153/262 DF/GP/MG 680.6Km BR-060 Connected to BR-153 Ecorodovias, CRT & ViaBahia BR-040 Granted Stretch BRVias, Arteris BR-050 321.6Km Single Lane BR-116 Granted Stretch Double Lane BR-262 562m RFP 1–Nov-13 RFP 26–Sep-13 Granted Stretch Second Lane – Public Procurement (under PAC) Granted Stretch 142.5Km Auction 2–Dec-13 Already Granted/ to be Granted BR-381 147m Auction 25–Nov-13

4 BR-040 MG/GO/DF 5 BR-163 MT 6 BR-163/267/262 MS BR-163 BR-040 Connected to BR-163 Competing with railroads There could be limited Fernão Dias and Limited interest interest from private Concer companies Granted Stretch BR-364 BR-364 562Km Granted Stretch 180Km BR-262 BR-262 RFP 1–Nov-13 RFP 25–Oct-13 RFP 25–Oct-13 BR-381 BR-163 BR-267 Auction Auction Auction 2–Dec-13 BR-267 20–Dec-13 BR-163 20–Dec-13

Source: EPL, ANTT, Credit Suisse Research / (*) RFP – Request For Proposal Publication Date 35 29 July 2013 Amendment Pipeline (CCR, Arteris, Ecorodovias)

Investment Company Contract Description Status NPV/Share Impact (R$mn)

Ponte 350 Direct connection between the bridge and Linha Vermelha, with approximately 2.3km Pending 0.05 0.3%

Nova Dutra 2,500 Construction of a new lane in Serra das Araras, construction of additional marginal roads, environmental improvements Pending 0.5 2.9%

RodoNorte 1,000 Expansion of highways BR 277 and BR 376 from dual 1 lane to dual 2 lanes Pending 0.2 1.2%

AutoBAn 360 Anhanguera II Project (connection with Ceagesp) Pending 0.11 0.6%

AutoBAn 179 Improvements in highway SP–324 Pending

ViaOeste 1,600 Improvements in the initial stretch of Raposo Tavares highway Pending 0.33 1.9%

ViaOeste 67 Direct connection between Castello Branco highway and Ceagesp Pending

TOTAL 5,956 1.19 6.9%

EcoVias 1,850 Third lane on Imigrantes highway, access ways to the Port of Santos and improvements in access to Cubatão Pending 1.29 8.5%

EcoVias 200 Access to the port of Pontal Pending

EcoCataratas 300 Expansion from dual 1 to dual 2 lanes Pending 0.19 1.2%

TOTAL 2,350 1.48 9.7%

State 350 n/a Pending 1.49 7.3%

Federal 1,100 n/a

TOTAL 1,450 1.49 7.3%

Total 9,756

Source: Company data, Credit Suisse Research 36 29 July 2013 Regulatory Improvement to Speed up Contract Amendments

. Aside from further greenfield growth opportunities, an alternative route for growth Cost of Equity (CAPM) Stage 1 Stage 2 Stage 3 could be the so-called contract amendments. This is supposedly a more (1) Risk Free Rate (Rf) 13.72% 13.72% 13.72% straightforward source of growth and should lead to more palatable return levels. The level of return to compensate the concessionaire for deploying additional capex is (2) Market Risk Rate (Rm) 16.93% 16.93% 16.93% being discussed by regulatory agencies (ANTT, ARTESP, etc.) and the (3) Market Risk (Rm–Rf) 3.21% 3.21% 3.21% concessionaire currently holding the concession. (4) Beta Leveraged 1.21% 1.02% 0.86% . Rather than participating in competitive bidding processes, focusing on extracting (5) Business Risk Premium = (4)*(3) 3.88% 3.29% 2.77% value from existing concessions could be a good strategy. Up until 2008, incremental (6) Nominal Cost of Equity = (1)+(5) 17.59% 17.01% 16.49% investments in current concessions, when approved by the regulator, yielded the (7) Inflation Rate (IPCA) 5.02% 5.02% 5.02% initial contractual rates of return (of close to 20% real, unleveraged). Thereafter, the (8) Real Cost of Equity (CAPM) = [1+(6)]/[1+(7)]–1 11.97% 11.42% 10.92% Brazilian General Accounting Office (TCU) requested the Brazilian Land Cost of Debt Stage 1 Stage 2 Stage 3 Transportation Agency (ANTT) to adopt a new mechanism to calculate the marginal (9) Long–Term Funding Cost 12.60% 12.60% 12.60% return on additional investments rather than apply the initial returns set forth in the (10) Capital Market – Funding Cost 15.02% 15.02% 15.02% original contract. The TCU suggested a new formula for calculating the updated returns based on the current cost of capital of the concessionaries. (11) Weighted Factor X (LT–Debt) 74.00% 52.00% 7.00% (12) Weighted Factor Y (Capital Markets) 26.00% 48.00% 93.00% . After almost five years, ANTT’s marginal IRR methodology (Resolution 4075) was finally published (on April 3, 2013). Such resolution empowered ANTT to speed up (13) Nominal Debt Cost = (11)*(9)+12*(10) 13.24% 13.77% 14.86% current and future negotiations of amendments, as it had finally set the parameters (14) Tax Effect 4.50% 4.68% 5.05% for the IRR calculation based on the marginal cash flow methodology. For the next (15) Nominal Debt Cost after Taxes = (13)–(14) 8.74% 9.08% 9.81% five years, depending on the maturation of the concession, the IRR can be 6.57% (16) Inflation Rate 5.02% 5.02% 5.02% (early stage), 7.17%, or 8.01% (fully ramped-up). The government still reserves (17) Real Debt Cost Post-Taxes = [1+(15)]/[1+(16)]–1 3.54% 3.87% 4.56% itself the right to review such rates if there are significant changes in the economic Reference Capital Structure Stage 1 Stage 2 Stage 3 scenario before such five-year period. Equity Stake (E) 35.88% 43.73% 54.20% . This is a step forward in speeding up the concession process. Resolution 4075 Debt Stake (D) 64.12% 56.27% 45.80% establishes a set of parameters and rules that weren’t clear in previous concessions WACC Stage 1 Stage 2 Stage 3 and therefore created hindrances to the negation process. The methodology (18) Weighted Cost of Equity = (E)*(8) 4.30% 4.99% 5.92% established could also prove useful in strengthening the concession process on a state and municipal level. The Regulatory Agency of São Paulo (ARTESP) also (19) Weighted Cost of Debt = (D)*(17) 2.27% 2.18% 2.09% established its rules for contract amendments. (20) WACC = (19)+(20) 6.57% 7.17% 8.01%

Source: ANTT, Credit Suisse Research 37 29 July 2013 Airports

FOTO

Strong Demand Not Met by Investments Only Recently a Government Priority The Brazilian airport sector should also see a period of strong investments. Currently, In the meantime, specific events, such as the 2014 World Cup and the 2016 Olympic Brazilian airports receive about 110mn–115mn passengers per year (excluding connecting Games, make further improvements in Brazil’s airport infrastructure even more critical. Since passengers). Assuming an average growth rate of 5% p.a. over the next 20 years, demand the above-mentioned events are approaching fast, the federal government has decided to should reach roughly 300mn passengers. While demand grew 10% p.a. over the past ten give priority to this sector. years, investments have lagged behind, causing deterioration in the quality of service at After auctioning the first Brazilian airport concession (São Gonçalo do Amarante) in August airports. In our view, the main reason for the underinvestment in the sector is related to the 2011, the federal government then completed the auction of three other airports, namely fact that, up until early 2012, airports had been under the inefficient public administration. Guarulhos, Viracopos, and Brasília. Back in February 2012, about ten consortiums, According to McKinsey, Brazil's airports currently have capacity for roughly 125mn comprised of foreign airport operators teaming up with Brazilian contractors, bid for the three passengers. Of Brazil’s 20 main airports, around 13 are currently operating at full capacity. airport concessions. In 2013, the government is expected to auction two airports (Galeão To meet the growing demand, Brazil needs to more than double its capacity, which should and Confins). Total investments in these five airports should amount to R$25bn over 25 ultimately translate into roughly R$30bn in investments in the sector. Of this total, around years and ~R$4bn by 2014. R$6bn should be deployed in 2012–2014. Comparatively, from 2003 to 2011, investments In 2012, the wining criteria was the highest concession fee offered to the granting authority in the sector amounted to ~R$900mn p.a. Hence, relying solely on public investments (ANAC). Despite the significant premium paid by private players, the government didn’t doesn’t seem a viable option, as the execution rate of the public sector remains in the vicinity seem very pleased with the outcome, as large operators left empty-handed. For the of 50%–60%. For example, in 2011 budgeted public investments amounted to R$2.7bn, upcoming auctions, although it will keep the same bidding model, the government should be but only R$1.4bn was deployed. stricter with respect to bidders’ operational credentials. They should now prove experience in managing airports (at least one) which handle more than 35mn pax/year (vs. 5mn before). 29 July 2013 Twenty Airports for 90% of Passenger Flow

. Since 1997, when Brazil started to experience an improving macro backdrop, air Emplanement Evolution (From 2000 to 2010) transportation doubled, increasing from 0.2 to 0.4pax/inhabitant. A sharper boost in 0.6 enplanement rates took place from 2001/2002 onwards, when the liberalization of 2000 2010 0.5 air fares was allowed in Brazil. The airports of Guarulhos, Congonhas, Brasilia and +78% Galeão are the main hubs of Brazil, with more than 15mn pax/year. Chile 0.4 . While Brazil has roughly 130 airports (98 regional), the 20 most important airports World +36% +121% Argentina 0.3 account for ~90% of passenger demand and ~95% of cargo handling in the country. +52% Brazil +2.8% The ones located in São Paulo, Rio de Janeiro and Belo Horizonte account for ~50% Colombia of passenger traffic and ~65% of cargo handling. 0.2

Enplanements Per Capita Per Enplanements +74% +22% Brazilian Airports and Annual Traffic 0.1 Asia Mexico USA 2000 = 2.12 EU 2000 = 0.74 +242% USA 2010 = 2.55 EU 2010 = 1.23 Peru % change = 20% % change = 66% 0.0 4,000 5,000 6,000 7,000 8,000 9,000 10,000 11,000 12,000 13,000 14,000 15,000 16,000 17,000 Boa Vista Macapá GDP per Capita Belém (Val de Cans) Breakdown of Airport Passenger and Cargo by City Manaus Santarém Teresina Tefé Parnaíba Fortaleza Tabatinga Altamira Belém (J. César) Number of Marabá Natal Airports in Brazil Juazeiro São Paulo Carajás Imperatriz João Pessoa Other 30 Cruzeiro do Sul Campina G. Selected 42 Palmas Petrolina Recife 63 Airports Passenger Paulo Afonso São Paulo 3 Rio Branco Maceió (%) Aracajú Rio de Janeiro 2 B. Horizonte 2 14 Cuiabá Brasília Salvador 1 Rio de Janeiro Passengers per year Brasilia 8 6 Goiânia Montes Claros Ilhéus Brasilia 15,000,001 to Belo Horizonte Confins 30,100,000 Pampulha Corumbá Uberlândia Uberaba Vitória 5,000,001 to Campo Grande C. Prates Other 15,000,000 Campinas Campos dos Goytacazes Other Ponta Porã Macaé Selected 55 Selected 1,000,000 to Londrina RJ Santos Dumont 32 SP Campos de Marte RJ Galeão Airports Airports 5,000,000 Curitiba Foz do Iguaçú RJ Jacarepaguá Joinvile S.J. dos Campos Cargo 500,001 to 1,000,000 Navegantes Guarulhos Criciuma SP Congonhas (%) 54 Uruguaiana Florianópolis 4 São Paulo 100,001 to 500,000 Brasilia 1 Bagé Porto Alegre Belo Horizonte 9 Up to 100,000 Pelotas Total Infraero Rio de Janeiro

Source: McKinsey&Company, DECEA, ITA, Credit Suisse Research 39 29 July 2013 ANAC, SAC, DAC… Fairly Regulated Sector

1990 2013 1980 2010 2000

1980s–1990s: Over the last three decades Early 2000s: Following the liberalizations efforts 2005–2010: The Brazilian Air 2011–2013: The Brazilian Secretariat of the regulatory framework of the air seen during the previous two decades, the beginning Transportation Regulatory Agency Civil Aviation (SAC) was created under law transportation sector has gone through of the 2000s saw the first signs of total freedom to (ANAC) was created under Law 12462 of August 2011. SAC has the status several changes aiming to liberalize services in establish ticket prices. Additionally, the process for 11182, of September 27, 2005, of a ministry and is responsible for matters the sector. Up until the end of the 1980s, the the creation of new airlines in the country became marking the beginning of a new related to the administration of civil aviation. sector witnessed a competitive environment more flexible and GOL Linhas Aéreas started its liberalization of ticket prices. In It is subordinated to the Defense Ministry with restrictions. There were only four national operations in 2001. Since then, demand has grown 2006 and 2007, two airline and is responsible for granting certain airlines and five regional airlines that were at the expense of a sharp reduction in yields. Given disasters occurred (GOL 1907 and airports to the private sector. In August subject to military oversight and fixed air ticket the declining yields and the strong BRL depreciation TAM 3054 flights). The first talks 2011, as a test, it auctioned a greenfield prices. In the beginning of 1990s the Federal in 2002, some legacy airlines in Brazil were driven about granting certain airports to the airport project in the Northeast of Brazil (city Deregulation Program (Decree 99179) was out of business. In 2002 and 2004, Transbrasil and private sector under concessions of Natal). In February 2012 ANAC auctioned implemented, creating a few ranges of air VASP filed for bankruptcy, respectively. This led to a started in 2007, as some three airports, namely Guarulhos (SP), ticket prices to stimulate competition. reversal of the liberalization process, and the bottlenecks became visible. Azul Viracopos (SP) and Brasilia (DF). For 2013, Towards the end of said decade, the ranges Department of Civil Aviation (DAC) established limits started its operations at the end of two airports should be auctioned, namely of ticket prices were eliminated. for tariffs in the sector. 2008. Galeão and Confins.

Regulatory Framework for Brazilian Airlines and Main Government Agencies

Subordinated Brazilian Presidency Linked Ministry of Defense

SAC – Secretariat of Civil Aviation

ANAC is the Brazilian agency responsible for civil aviation Infraero, linked to the Ministry of Defense, manages Brazilian It is responsible for coordinating and supervising the agencies regulation and safety oversight. Established in March 2006, airports. These airports represent Brazil’s sovereignty in and other Brazilian civil aviation entities in charge of ANAC incorporated the staff, the structure and the functions distant areas. There are 63 airports, 23 aeronautical managing, regulating, and inspecting airport infrastructure of the Air Force’s Civil Aviation Department (DAC), the telecommunication stations, 38 aeronautics technical units, and infrastructure of air navigation. It is also the executive- former civil aviation authority. and 34 cargo logistics terminals secretariat of the Council of Civil Aviation

Source: McKinsey&Company, SAC, Credit Suisse Research 40 29 July 2013 Strong Demand Growth Fostered by Lower Yields…

. Over the past ~8 years, the airline industry in Brazil, as in other countries, has Brazil – Yield vs. Enplanement per Capita witnessed airlines’ efforts to create new demand while striving to manage the side- 1.05 2 effects of this strategy. The ~15% p.a. boom in demand was tapped by the growing R = 0.873 0.95 presence of low-cost carriers (GOL, Azul-Trip) in a market dominated by full-service 2003 0.85

carriers (TAM). 2004 2005

) 0.75 2002 2006

. In view of the commodity-like characteristics of airline tickets, the ~14% p.a. growth $ 2008 (R in supply came along with an undesirable reduction of ~60% in yields (real terms). 0.65 2009 Data for the past ~15 years clearly show high elasticity between demand and yield. Yield 0.55 For each 1% decline in yield, demand improves by 1.4%. 2007 0.45 . While in 2002 about 60% of the air tickets sold in Brazil cost up to R$500, in 2012 2010 0.35 this share increased to 88%. As explained above, this effect became noticeable with 2011 0.25 the entry of low-cost carriers in the Brazilian market. 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50 0.55 Enplanement per Capita (Dom. PAX/Population) Distribution of Tickets Sold Based on Prices (R$/ticket*) Avg. Ticket Prices (R$/ticket) & Yield [R$/(pax/km)] 35% 2012 700 Yield 1.00 30% (R$/pax km) – 0.90 25% 600 Real Terms 2010 0.80 20% 2002 500 0.70 15% 0.60 10% 400 2006 5% 0.50 300 0% 0.40

200 0.30 0.20

>=1.500,00 Ticket Price 100 (R$/ticket) – 0.10

>0,00 & 100,00 < Real Terms

>=100,00 & <200,00 >=200,00 & <300,00 >=300,00 & <400,00 >=400,00 & <500,00 >=500,00 & <600,00 >=600,00 & <700,00 >=700,00 & <800,00 >=800,00 & <900,00

>=900,00 & <1.000,00 0 0.00

>=1.100,00 & < 1.200,00 >=1.200,00 & < 1.300,00 >=1.300,00 & < 1.400,00 >=1.400,00 & < 1.500,00 >=1.000,00 & < 1.100,00 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: McKinsey&Company, DECEA, ITA, Credit Suisse Research / (*) Ticket Prices in Real terms 41 29 July 2013 … But Limited Capacity Addition

. The combination of strong demand (growth of ~10% p.a. over the last decade) and Supply vs. Demand at Main Brazilian Airports (in million pax) meager public investments in airports infrastructure created bottlenecks in the main Brazilian airports. Brazilian airports currently have a capacity for roughly 125mn 16 16 passengers (excluding connecting passengers). Of Brazil’s 20 main airports, around 6 6 13 are currently operating at full capacity. 10 10 . These 20 airports account for ~90% of passenger demand and ~95% of cargo Brasilia Fortaleza handling in the country. The ones located in São Paulo, Rio de Janeiro and Belo Belo Horizonte Horizonte account for ~50% of passenger traffic and ~65% of cargo handling. Confins 8 6 . Public investments in airport infrastructure accounted for ~0.05% of GDP over the 9 last ~10 years. The problem was not a lack of available resources but poor 7 Recife government execution. These investments were not able to tap the growing demand. Campinas 13 Airside Landside 9 Airport Runway DECEA Apron Terminal 31 32 Guarulhos 2030 Saturated Saturated Salvador São Paulo Congonhas Limited Saturated Saturated Viracopos 2020 Saturated Saturated 9 9 Galeão 2030 Rio de Janeiro Santos Dumont 2030 Saturated 2030 Belo Horizonte Confins 2020 Saturated Rio de Janeiro Pampulha 2030 2014 2014 Santos Dumont Brasilia 2030 Saturated Saturated São Paulo Porto Alegre 2030 2030 Saturated Guarulhos 17 17 17 17 Curitiba 2030 2020 Recife 2030 2030 2020 Salvador 2030 Saturated 2014 Fortaleza 2030 Saturated Other Rio de Janeiro 31 Regions Manaus 2030 2030 São Paulo Galeão Cuiabá 2030 Saturated Saturated Congonhas 8 8 7 Natal Saturated 2014 Florianópolis Saturated Saturated Demand Vitória 2030 Saturated Saturated Porto Alegre Curitiba Capacity Belém 2014 2030 Goiania 2030 Saturated Saturated

Source: ANAC, Infraero, ABEAR, Credit Suisse Research 42 29 July 2013 Encouraging Private Investments . Public investments in the airport infrastructure sector were not sufficient to meet the Potential Investments in Brazilian Airports (R$bn) growing demand for air transportation in the country over the last ten years. Relying on 57 public investments through Infraero (Brazil’s airport operator) has proven to be inefficient 6 9 as even minor investments require a public bidding process. Thus, public execution of 5 Upper Bound investments has been close to ~60% of the approved budget. 14 7 . As a result, in 2008 the government started to prioritize investments in the sector and then President Lula decided to attract private investments through the auctioning of 4 10 24 3 selected Brazilian airports. Lower 42 . In 2009, the Brazilian Civil Aviation Agency (ANAC) commissioned EBP* (Estruturadora Bound Brasileira de Projetos), an infrastructure planning company established by a group of 17 state-owned and private-sector banks, to prepare the feasibility studies required for the

concession (economic, technical and environmental studies). Expansion of Expansion New airports New airports New Total 20 largest of other (+ 1mn pax) (500K, 1mn pax) (up to 500K . At first, the government considered the ten largest and most profitable airports under airports airports pax) Infraero’s administration as candidates for being auctioned. In August 2011, as a test, it auctioned a greenfield airport project in the Northeast of Brazil (city of Natal). In February Infraero’s Investment Budget and Execution (R$bn) 2012, ANAC auctioned three airports, namely Guarulhos (SP), Viracopos (SP) and 10,389 Brasilia (DF). During the bidding process, 11 consortia participated and the winning bids Investment budget Realized investment Execution (%) represented a significant premium to the minimum concession fee. 1,513 98.3 1,1455,399 . Reportedly, despite the significant premium captured by the government, it didn’t see the 2,346 bidding process as successful as a few winners did not have significant credentials in the 84.9 87.2 81.1 1,086 sector. Some might say that the auctioning process did not establish strict requirements 78.6 75.7 1,022 646 72.4 69.5 for airport operators. 65.1 61.5 1,424 439 59.5 . As part of the upcoming R$8.7bn airport concession program, the government has 52.0 47.3 48.5 399 established stricter requirements regarding operators. Among them, we note: (i) the 43.4 42.9 airport operator is required to have a minimum stake of 25% in the consortium; and (ii) it 934 618 needs to have a track record of managing at least 35mn passengers at a single airport for 25.2 734 the past three years (up from the 5mn pax requirement established in the first round). 504 17.0 224 124 74 This narrows down the potential list of bidders to a total of 13 players worldwide. Another 242 60 350 180 162 81 significant requirement is that Infraero will retain a stake of 49% in the concession. 128 211 117 153 187 166 126 120 102 57 30 88 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Total

Source: CCR, EPL, Anac, Infraero, Valor Credit Suisse Research. * EBP was created by eight commercial banks: Itaú, Bradesco, Banco do Brasil, Santander, and other banks. 43 29 July 2013 Recent and Upcoming Auctions – Galeão Better than Confins…

. According to the Airports Council International (ACI), there are 33 airports globally that handle more than 35mn pax/year. Yet, most of them are state-owned, such as the airports of Atlanta, Miami, and Tokyo. . Therefore, there are only 13 airport operators that can participate in the next round of airport auctions in Brazil. Candidates will 3 likely include: 4 – Ferrovial / BAA (UK), Fraport (Germany), Dubai Airport (Emirates), Aena (Spain), AOT (Thailand), Changi (Singapore), ADC&HAS 2 (USA), Munich (Germany), Malaysia Airports (Malaysia), ADR (Italy), Hochtief (Australia), Incheon (South Korea), and a consortium 1 5 formed by Aéroports de Paris (France), Schiphol (Netherland), and TAV (Turkey)

1 Guarulhos (GRU) 2 Viracopos (VCP) 3 Brasilia (BSB) 4 Confins (CNF) 5 Galeão (GIG)

Winning Bid: R$16.2bn Winning Bid: R$3.82bn Winning Bid: R$4.51bn Concession Period: 25 years Concession Period: 30 years Expected Invest.: R$5.2bn Expected Invest.: R$8.7 bn Expected Invest.: R$2.8bn Expected Invest.: R$5.6bn Expected Invest.: R$3.1bn Concession Period: 20 years Concession Period: 30 years Concession Period: 25 years Minimum Bid: R$1.56bn Minimum Bid: R$4.65bn Winning Invepar 90% Winning Egis 10% Winning Infavix 50% Consortium: ACSA 10% Consortium: UTC 45% Consortium: C. America 50% Upcoming Auction Upcoming Auction Triunfo 45% EBITDA: R$111.9 EBITDA: R$59.5 EBITDA: R$66 EBITDA: R$59.5 EBITDA: R$499.8 Cargo Pax. Cargo Pax. Cargo Pax. Cargo Pax. Cargo Pax. Evolution Evolution Evolution Evolution Evolution Evolution Evolution Evolution Evolution Evolution 12.1 474.2 32.8 246.2 8.9 63.7 62.1 15.9 118.8 17.5 10.3 10.4 418.9 169.6 96.3 6.8 11.6 4.6 0.7 0.4 2003 2012 2003 2012 2003 2012 2003 2012 2003 2012 2003 2012 2003 2012 2003 2012 2003 2012 2003 2012 Rev. Breakdown (%) Rev. Breakdown (%) Rev. Breakdown (%) Rev. Breakdown (%) Rev. Breakdown (%) Commercial Airport Commercial Commercial 35 12 27 41 Commercial Operations Commercial 37 37 Airport 60 Airport Airport 45 Airport 38 60 Operations Operations Operations 20 61 Operations 21 Cargo Cargo Cargo 3 Cargo Cargo 3

Source: Infraero, Institute of Applied Economic Research (Ipea), McKinsey, Credit Suisse Research 44 29 July 2013 Global Comparison on Regulatory Frameworks

. Below we outline the privatization process that took place in a few countries. The first privatization occurred in the UK, with the creation of the British Airport Authority (BAA) in 1987. In early 1990s there was no significant privatization activity apart from the privatization of a few airports in the UK, Vienna and Copenhagen. Later, privatizations in Europe, Asia, and South America were seen from 1996 to 2000/2001. In 2002/2003, due to the 9/11 event, the global air transportation industry went through a phase of declining demand. In 2004/2006 privatizations started to pick up again, with two large airports in India being granted to the private sector.

pre-1996 1996–1997 1998–1999 2000–2002 2003–2004 2005–2006 2007

Denmark Greece Mexico Germany India Italy Italy Copenhagen Athens ASUR Fraport Bangalore Venice Pisa

Austria Bolivia Argentina Italy India Belgium China Vienna La Paz + 2 33 airports Florence Hyderabad Brussels Xi’an

UK Australia New Zealand Germany Ecuador Hungary Jordan BAA Brisbane Auckland Hamburg Quito Budapest Amman

UK Germany China Peru UK Cyprus Turkey Cardiff Dusseldorf Beijing Lima Norwich Larnaca/Paphos Antalya

UK Australia Mexico Malta Jamaica India Spain East Midlands Melbourne GAP Malta Montego Bay Delhi Murcia

UK Chile Malaysia Mexico India UK Belfast Santiago Airports OMA Mumbai Leeds

UK Australia South Africa Australia France US Bournemouth Perth South Africa Sydney Paris Chicaco Midway

UK Italy New Zealand Switzerland Germany Macedonia Liverpool Rome Wellington Zurich Luebeck Skopje/Phrid

Source: FIESP, University of Westminster 45 29 July 2013 Global Comparison on Regulatory Frameworks

Germany Australia China United States India United Kingdom (UK)

Up until the beginning of Up until 1996, the Federal Before 2002 all airports in The Federal Aviation Up until the beginning of The Aeronautical Law the 1990s, German Airports Corporation China were controlled and Administration (FAA) the 1990s, private enacted in 1986 created airports were fully (FAC) was the owner of administered by the Civil regulates the system. investments in the airport the British Airport administered by the 22 airports in the country. Aviation Administration of Airports are controlled and infrastructure sector were Authority (BAA), an government (state, city In 1997 and 1998 these China (CAAC). Later, in operated by local and state forbidden, although talks airport operator, with a and county level). The airports were granted to 2008, the CAAC became governments. After on this matter had been capital injection of airport of Dusseldorf was the private sector for 50 responsible for monitoring attempting to launch a carried out since 1996. In US$2.28bn. It was the the first to be privatized, years. After establishing and regulating the airport privatization program in 2003, after a broader first privatization in the in 1997. In June 2001 price caps for aeronautical system and the state 1997, there are only few reform, the Indian airport sector, privatized examples of private the airport of Frankfurt did tariffs, in 2002 these caps governments, for government allowed as a group of seven operations in the USA. its IPO on the stock were removed and tariffs operating the airports. private investments in the airports. In 2006, BAA For instance, BAA has exchange, raising roughly were monitored only to More recently, certain sector. The privatization of merged into a consortium entered into contracts to EUR1bn for a 29% stake. avoid abuses. Since then, private airport operators operate airports in the US two major airports, namely led by Ferrovial, an Currently, five of the a greater focus has been have entered the Chinese and terminal 4 at JFK Delhi and Mumbai, took Spanish airport operator. 18 main airports in placed on boosting market (Fraport @ Xi’an (New York) was built by a place during 2005/2006. Similar to the Australian Germany are partially commercial revenues. airport, Kunming / Changi consortium formed by Currently, five airports are model, the UK privatized, having private Airport Group in Singapore Schiphol, LCOR, and privatized in India, privatization model fosters investors as minority has a stake in the airports Lehman Brothers. The accounting for 60% of the generation of shareholders. The of Shenzhen and Nanjing). business model of US passenger traffic and 70% commercial revenues. regulation and airports is different from of cargo transportation. Reportedly, BAA’s administration of airports that of other developed airports can generate are still under the economies. In the US, twice as much responsibility there is no incentive to commercial revenues as of state governments. generate commercial the global standard. revenues.

Source: McKinsey & Company 46 29 July 2013 Details on the Privatization of Some Airports

Privatization Concession Concession Passengers Ebitda Mg. Airport Country Main Shareholders Airport Fees Comment Year Term Fee (bn) 2011 (mn) 2011 FGP TopCo Consortium: Composed by Ferrovial, British CDPQ (La Caisse de dépôt et Regulator capped landing Efficiency improvements and 87.4 49.6% Airports UK Privatization placement du Québec), GIC US$2.3 and passenger fees at time quality control closely managed Authority 1987 (the Government of of the privatization by regulators (BAA) Singapore) and Alinda Capital Partners Copenhagen Airports Denmark Fees capped for ApS (CAD) 57.7%; The Danish Copenhagen 3-year periods, upon Service quality improved 22.7 53.1% Denmark State 39.2%; Foreign, Private Airport Privatization n.a. negotiation with airlines, while fees remained at low 1994 and Institutional investors 1.8%; (CPH) or if unsuccessful, levels Danish Private and Institutional by regulation investors 1.3%

City of Vienna: 20%; Province Economic regulatory Costs and fees remain high, Vienna 21.1 32.5% Austria of Lower Austria: 20%; regime provides little as the airport did not improve Airport Privatization n.a. 1992 Employee Fund: 10%; Free incentive for operator its efficiency significantly (VIE) Float: 10% to improve efficiency

Airport remains with low Zurich profitability as it has had excess 24.3 53.6% Switzerland Government: 58%; Little regulation to Airport Privatization n.a. capacity since Swissair (main 2000 Private 42% monitor fees (ZRH) customer) terminated its operations

Brussels Price cap to ensure a Rate-of-return metrics provides 18.8 53.3%* Belgium Government 25% Airport Privatization n.a. minimum IRR. Prices little incentive for improvements 2004 Private 75% (BRU) adjusted every 5 years in efficiency

Airport charges are not regulated by an independent organization and the Auckland operator has to consult airline New Airport charges are 13.4 74.8% International Government ~18%; customers every 5 years before Zealand Privatization n.a. unregulated and AIA Airport 1998 Private 82% increasing charges. Government has a natural monopoly (AIA) has the right to regulate airport charges. This has led to excessive airport fees

Source: IATA, Credit Suisse Research 47 29 July 2013 Concession of Airports to Private Companies/Investors Privatization Concession Passengers Ebitda Mg. Airport Country Main Shareholders Concession Airport Fees Comment Year Term Fee (bn) 2011 (mn) 2011 Sydney Charges have not risen much since 35.6 81.2% International Australia 50 years privatization but had increased 97% before 2002 (with 49-year Government retains ownership, Incentive-based CPI–X Airport but operations are privately run AU$5.6 price cap regulation the concession auction in order to make the (SYD) option) concession more attractive to private investors Wholly owned subsidiary of Perth Airport Started with price-cap Development Group Pty Ltd (PADG). The economic regulation but Adoption of price-monitoring Perth shareholders of PADG are Utilities Trust of Australia evolved to price monitoring regime led airport charges to 11.5 63.5% Australia 50 years (UTA), 38.26%; Australia Infrastructure Fund (AIF), regime in 2002, essentially increase by 70% in 2002, Airport 1997 (with 49-year AU$0.639 (PER) 29.74%; Perth Airport Property Fund (PAPF), leaving airport charges without similar improvements option) 17.34%; Hastings Funds Management Ltd ATF TIF, unregulated. Airport also in service quality or significant 4.27%; AustralianSuper Pty Ltd, 5.00%; Officers charges fuel output levy capital investments Superannuation Fund, 3.17%; Sunsuper, 2.23% on jet fuel at the airport Ezeiza Only 10% of investments have been 22.7 Argentina International AA2000: Consotrium of Investors and No independent economic made to date, as the operators have n.a. Airport 1999 30 years Airport Operators n.a. regulation on airport fees been in a legal dispute since they won (EZE) the concession Juan ~40%–45% No independent economic Santamaria Costa of airport regulation on airport fees. No incentive to improve efficiency and 3.4 Consortium of Investors and airport revenues Government recognized reduce tariffs. Due to disputes International Rica 1999 20 years operators, led by UK-based Alterra n.a. Airport Partners should go to its mistakes in the setting regarding airport fees, investments (SJO) the government of airport fees and has have been halted, thus, pressuring as royalties frozen charges service quality Jorge ~46% of airport Due to elevated royalty charges, LIM Chavez airport is increasing fees and creating 11.8 61.1% Consortium of international investors led by revenues No independent economic new charges, as it is a monopoly. International Peru 2001 30 years Lima Airport Partners and UK-based Alterra should go to Airport Partners the government regulation on airport fees. According to IATA, charges for fueling (LIM) and boarding bridges are among the as royalties highest in the region No independent economic Concession related to the construction of a Athens new airport in Athens for the 2004 Olympic 14.4 61.1% International Greece Government 55%; Private 45%. regulation on airport fees. Games. Charges have increased 500% Airport 2001 30 years Operations run by Hochtief-led n.a. Utilizes rate-of-return compared to the old Athens Airport. IRR (AIA) consortium metric, which caps fees metric ensures returns to operators but at 15% IRR reduces incentives for improvements 3 years for São Gonçalo Brazil construction, Consortium led by Argentina R$0.170 Incentive-based CPI–X Greenfield Project – Airport n.a. n.a. do Amarante 2011 25 years for Corporación América and Engevix price cap regulation under construction operation 30.4 57.0%** Guarulhos Brazil Infraero (gov't–owned): 49%; Invepar R$16.213 Incentive-based CPI–X Tariff adjustment: Tariff2 = Tariff1 * (1+ CPI (GRU) 2012 20 years 10% of Gross – X – Q); where X = Efficiency adjustment / ACSA Consortium: 51% Revenues price cap regulation and Q = Level of Service Adjustment 7.8 51.0%** Viracopos Brazil Infraero (gov't–owned): 49%; Consortium R$3.821 Incentive-based CPI–X Tariff adjustment: Tariff2 = Tariff1 * (1+ CPI (VCP) 2012 30 years Composed by Infravix and Corporación + 5% of Gross – X – Q); where X = Efficiency adjustment América: 51% Revenues price cap regulation and Q = Level of Service Adjustment 15.8 53.0%** Brasília Brazil Infraero (gov't-owned) 49%; R$4.500 Incentive-based CPI–X Tariff adjustment: Tariff2 = Tariff1 * (1+ CPI (BSB) 2012 25 years Consortium formed by Triunfo (TPI), UTC + 2% of Gross – X – Q); where X = Efficiency adjustment Participações and Egis: 51% Revenues price cap regulation and Q = Level of Service Adjustment

Source: IATA, Credit Suisse Research 48 29 July 2013 Urban Mobility

FOTO

The Lack of Urban Mobility Infrastructure and Its Economic Impacts. The Public-Private Partnerships behind Project Feasibility: In contrast with the highway emergence of Brazil’s urban population and the absence of investments in efficient model in which toll revenues are usually sufficient to financially sustain the project, in transportation modes overtime, such as subways, led to a highly constrained mobility the case of urban mobility this is not true. Actually, given the fact that urban mobility system and significant time loss in traffic jams, which significantly impacts Brazil’s projects (i) are mostly greenfields; (ii) it is therefore more difficult to forecast demand; productivity. Roughly 7.1mn Brazilians spend more than one hour per day commuting (iii) capex involves innovative and complex technologies; (iv) political sensitivity is high; from home to work (1.1mn spend more than two hours). If we were to conservatively and (v) the low-income population (main users) is strongly sensitive to prices, the assume that these lost hours could become productive working time paid at the feasibility of projects requires additional revenue sources (government reimbursements), minimum wage (~R$3/h), they would add ~R$13bn/year to the economy. Moreover, which characterize a PPP. Nonetheless, since the enactment of the PPP Law (No. the more we spend on mobility (time and money), the less we spend on consumption 11079) in 2004, there hadn’t been many urban mobility PPP projects until 2012, when and extra qualification. Another impact is that real estate prices in commercial and office the law suffered some improvements. areas are driven upward as it is difficult to live far from work. Provisional Decree MP-575 (Law 12766/12): Streamlining the PPP Law. In 2012 A Huge Pipeline of Projects, Catalyzed by Upcoming Sporting Events. We see the government updated the PPP Law through MP-575 to improve the risk-reward there is a strong government focus on addressing urban mobility constraints. We balance for investors. Basically, government reimbursements can now be made during identified R$81.5bn in investment opportunities, including subway, light rail vehicle constructions phases, including the equipment acquisition phase. This helps to (i) (LRV), and bus rapid transit projects. After the auctions of Transolimpica BRT and reduce investor’s balance sheet requirements and (ii) reduce risk to government downtown LRV (both in Rio de Janeiro), the next projects to be auctioned should be two payments, as it reduces the magnitude of reimbursements during operational phases. subway lines: Salvador and São Paulo (Line 6), totaling R$4bn and R$8.1bn, While we welcome this effort to straighten the PPP regulation, we see investors still respectively. skeptical given to the lack of solid guarantees to secure government payment risk. 29 July 2013 Massive Urbanization and Wrong Incentives behind Rising Mobility Constraints . Massive Urbanization Process Not Matched by Mobility Investments. In 1940 The Rio de Janeiro Example (# of Urban Trips – in millions) Brazil’s urban population accounted for 31% of total population. Sixty years later, this share had increased dramatically to 84%, meaning that another ~150mn people had 1950 1,647 moved to urban areas. Yet, despite the huge demand, the country lagged behind in 2005 deploying efficient mobility solutions. . Instead, Government Incentives Have Been in the Wrong Direction. Although we 1,252 acknowledge that the real income growth seen in the past decade played an important role in stimulating car purchases, we believe the government also led consumers into this direction. Credit stimulus and tax incentives (IPI cuts) for car purchases have been the formula to stimulate economic growth, driving mobility incentives to the wrong direction. Rio de Janeiro is a clear-cut example of how urban mobility has prioritized 649 cars and buses to the detriment of subways and regional trains. . Mobility through Private Cars and Public Buses: Unsustainable Traffic Jams. According to the Brazilian Association of Urban Mass Transit Companies (NTU), even 259 though 90% of Brazil’s public transportation is made by bus, demand for this 208 216 transportation mode has been declining (down ~30% since 1996). Public buses have 20 0 been losing share to private vehicles in the past decade, causing traffic jams and significantly lengthening the average commute to work in metropolitan areas. TRAM Train Bus Car Remarkable Growth in Urban Population Average Trip Duration – Home  Office (minutes) 191mn 40 170mn 35 Metropolitan Areas

84% 81% 17% 161mn Urban 30 138mn Brazil 41mn 25 31% Non-metropolitan areas 69% 19% 16% Rural 20 1940 2000 2010 2001 2004 2007 2009

Source: Brazilian Statistics Bureau (IBGE), Institute of Applied Economic Research (Ipea), Brazilian Public Transportation Association (ANTP), Credit Suisse Research. 50 29 July 2013 While Middle Class Motorizes, Low Income Class Relies on Public Transport . The widespread urban mobility constraint among major Brazilian cities is led by Rio de Distribution of Trips among Income Groups (São Paulo) Janeiro and São Paulo, where more than 20% of the population spend more than one hour per trip per day (from home to work). 23.2 26.8 40.4 . The breakdown into different income groups shows a huge gap between the richest 60.3 Private 79.0 and the poorest deciles (see graphs below), as low-income citizens mostly live mostly Vehicles far from their work and depend more on public buses. 76.8 73.2 59.6 . Urban mobility projects primarily serve price-sensitive low-income groups, which 39.7 Public 21.0 Transportation implies low demand visibility and thus an additional risk premium to required returns. Class E Class D Class C Class B Class A Growth in Motorization Rate* Average Commute to Work (minutes) Proportion of Trips that Lasts More Than One Hour (2000–2010) 10 25 40 55 20 30 40 50 0% 10% 20% 30%

Belo Horizonte

Curitiba

Salvador

Belém

Metropolitan areas

Porto Alegre

São Paulo

Recife

Fortaleza

Distrito Federal

Rio de Janeiro

Richest decile of the population City average Poorest decile of the population

Source: Institute of Applied Economic Research (Ipea) (2013), OD Survey (2007) by the State of São Paulo, Credit Suisse Research. * Measured as vehicles per 100 inhabitants. 51 29 July 2013 Global Comparison of Subway Networks: Rio and São Paulo Far Behind

. When we compare Brazil’s metropolises in terms of subway infrastructure with other cities around the world, we note that both Rio de Janeiro and São Paulo are London significantly lagging behind. Although it has 35%–40% more inhabitants than New Berlin York and London, São Paulo has just 65km of subway lines compared to 370km and Barcelona Paris Tokyo 400km, respectively. Los New York Angeles Shanghai . The result is predictable: higher commuting times and larger traffic jams. According to the Brazilian Public Transportation Association (ANTP), the country wastes more than 20bn hours per year in traffic jams, not to mention the resulting inefficient fuel consumption and the loss of productive working hours. Rio de Janeiro

São Paulo Comparison of Subway Systems

Population Pop. Subway Commute Time Cities (million) Density* System Size (Km) Stations (#) Lines (#) Network Density (Km per citizen) (minutes) São Paulo 11.2 7.4 65 58 5 5.8 42.8

Rio de Janeiro 6.3 5.0 46 34 2 7.2 42.6

Los Angeles 3.8 2.9 141 80 6 36.9 28.1

New York 8.2 10.4 370 468 24 45.1 34.6

London 7.8 4.9 402 270 11 51.5 37.0

Paris 6.5 8.5 214 245 16 32.9 33.7

Berlin 3.4 3.8 152 170 9 44.6 31.6

Barcelona 1.5 15.3 103 141 11 68.4 24.2

Shanghai 16.4 7.7 439 287 12 26.8 50.4

Tokyo 8.8 14.1 310 290 13 35.3 34.5

Source: Toronto Board of Trade, Institute of Applied Economic Research (Ipea), US Census, LTA Academy, University of Munich, Credit Suisse Research. * Pop. Density = 1,000 inhabitants/ km² 52 29 July 2013 Government’s Plan: Over R$81bn in Investment Opportunities for Private Players

. The Solution: The government is focused on granting urban mobility projects to the private sector through Public-Private Partnerships. R$12.5 billion Projects by State . What about IRRs? Higher Risks Offset by Lower Competition and 29 Projects Government Support. We believe that the implied risks are higher than those of 7.1 878 km CE standard toll-road projects due to: (i) low demand visibility, (ii) price-sensitive traffic, AM (iii) high construction complexity, and (iv) high political sensitivity. As such, in order DF PE

GO for a project to become feasible, the government normally needs to share the MG demand risk. The positive side is that the competitive environment is healthier than ES BRT MS that for toll roads (much fewer players), which increases our confidence in positive SP RJ PR spreads between IRRs and WACC. 1.5 RS . Upcoming Auctions: Line 6 of São Paulo (R$8.1bn) and the new line of Salvador (R$4bn) are under a public hearing process and are expected to be auctioned in 0.7 Bus Rapid Transit is a 0.6 0.5 high capacity bus that 2H13, catalyzed by recent street protests. 0.3 0.3 0.3 usually runs on dedicated 0.2 0.2 0.1 0.1 . How to Seize this Opportunity? CCR is the only listed company that invests in exclusive lanes. urban mobility. The company already operates a subway concession (Line 4 in São RJ MG ES PE DF GO MS SP AM CE PR RS Paulo) and recently won two auctions (Transolimpica BRT and RJ Downtown LRV).

R$65.2 billion Projects by State R$3.9 billion Projects by State

15 Projects 5 Projects CE 250 km AM 63 km 43.7

160 stations 1.4 70 stations MT

1.3 GO MG BA 10.2 RJ 0.9 SP SP

Subway VLT (LRV) VLT Light Rail Vehicle is an electric 4.0 0.3 rail transport designed for 3.0 3.0 urban areas; it has narrow 1.4 tracks and car body so that it can operate over ground in the urban landscape. SP RJ BA MG PR AM MT GO SP CE

Source: Brazilian Association of Urban Mass Transit Companies (NTU), ANPTrilhos, Revista Ferroviária magazine, Credit Suisse Research 53 29 July 2013 The Need for Subsidies through Public-Private Partnerships (PPP)

. Public-Private Partnerships behind Project Feasibility. Many Risks Involved. Given that urban Annual Cost Revenues Subsidies Subsidies City mobility projects (i) are mostly greenfields; (ii) demand is thus less visible; (iii) capex involves (US$ mn) (US$ mn) (US$ mn) (% of Total Cost) innovative and complex technologies; (iv) political sensitivity is high; and (v) the low-income population Amsterdam 454,3 173,6 280,7 62 (main users) is strongly sensitive to prices, the feasibility of projects for the private sector usually requires further support from the government through PPPs. Barcelona 978,6 546,6 432 44 . Government’s Subsidy is King. In contrast with the toll road model in which toll revenues are Berlin 1772 931 841 47 usually sufficient to financially sustain the project, in the case of urban mobility this is not true. Brussels 566,2 174 392,2 69 Considering the above-mentioned high risk profile, if mobility projects were to be financially sustained Budapest 636 233,5 402,5 63 solely by user payments, the tariff would be prohibitive, especially in view of the price-elastic demand in Brazil (low income users). London 4433 2252 2181 49 . The PPP Law of 2004. In this sense, in an attempt to boost subsidized private concessions, the Madrid 1742 744,5 997,5 57 PPP Law (No. 11079), enacted in 2004, provided legal support for the government to make Paris 7000 2763 4237 61 reimbursements to concessionaires under Public-Private Partnerships as an additional revenue Vienna 62,3 23,7 38,6 62 source, complementing the user payments. Nonetheless, the law established a few restrictions that still prevented PPP investments from ramping up, such as the fact that reimbursements weren’t Government PPP Law (2004) MP–575 (2012) allowed during constructions phases (i.e. just allowed after the start of operations/services). Reimbursements (Law No. 11079) (Law No. 12766/12) . Provisional Decree MP–575: Streamlining the PPP Law. In 2012 the government updated the PPP Law through MP–575 to improve the risk-reward balance for investors. Among other provisions, Allowed solely after the Also allowed during Payment Phases service started to be construction (including the decree established that government’s reimbursements can now be made also during provided to users. equipment acquisition) constructions phases, including in equipment acquisitions. This helps to (i) reduce investor’s balance phase. sheet requirements and (ii) decrease the government’s counterparty risk during operational phases. Considered as operating Not considered as The MP-575 was enacted into the Law # 12,766/12. Tax Regime revenues to which federal operating revenues. Tax taxes were applied. exemptions*. . How to Mitigate Government Payment Risk? While we welcome the government’s effort to straighten the PPP Law, we still see investors skeptical with the lack of guarantees backing Could not be used as Allowed, if the federal government payments, which depend on the government’s budget and thus can be impacted by Federal Collateral guarantee for State and government participates in political and fiscal issues. The solutions under discussion are (i) the structuring of robust collateral Fund Municipal PPPs. the project. funds (backing a potential default by the government, irrespective of political interests) and/or (ii) down payments (~15% anticipated revenues) to create a revenue cushion. Reportedly, just the states Fiscal Limit for Limited to 3% of Limit raised to 5%. of São Paulo and Minas Gerais already have collateral funds. Overall, there is still a lot to do in the Government’s Fiscal Reimbursements federal level and in other states before we see a boost in PPPs throughout Brazil. Revenues

Source: Exame Magazine, European Metropolitan Transport Authorities, Credit Suisse Research /(*) exemption from Income taxes and tax over revenues (PIS & Cofins) 54

29 July 2013 Railroads: A New Model to Boost Private Investments in Greenfields

FOTO

The Lack of Railroads and Its Economic Impact. Logistics costs in Brazil represent New Railroad Model: Open Access. As (i) the current model has not stimulated 10%–11% of GDP compared to 7%–8% in the United States. One of the reasons concessionaires to expand the rail network and (ii) Valec’s execution proved highly behind this underperformance is the limited use of efficient transportation modes such inefficient, the government is now seeking to deploy a new model, namely Open as railroads and waterways. For example, less than 20% of the volume of soybeans is Access, in order to attract private investments into Greenfields and stimulate transported through these modes of transportation compared to ~75% in the US. In competition between train operators. There will be two separate private parties: (i) the this section, we discussed the reasons behind Brazil’s low investments in new railroad infrastructure manager, responsible for building and maintaining the new rail lines and lines and the government’s actions to revert this situation, besides the investment (ii) rolling stock operators, responsible for transporting the cargo. The former will sell opportunities derived from these actions. 100% of its capacity to Valec, a state-owned corporation, which will work as a capacity Current Railroad Model Fails to Encourage Investments in New Lines. The trader and sell it to the latter (train operators), through public tenders. Therefore, Brazilian railroad system was privatized in the mid-1990s when the goal was to recover government will assume demand risk and stimulate different train operators to compete. a deteriorated infrastructure while alleviating the federal budget. In the proposed model, Investment Opportunities and Risks. Following the new model, the government concessionaires were responsible for both investing and maintaining the rail network expects to grant ten slots (12,000km) to the private sector, most of them greenfields, besides operating the trains, enjoying a near-monopoly with limited competition. The totaling R$98bn in investment opportunities. At this point, the focus is to attract industry result was that concessionaires focused investments on the most profitable stretches participants with more of a construction profile, for whom the greatest pushback has instead of increasing the length of the railroad network. While there was no contractual been Valec’s payment risk. Solutions will likely be in the form of (i) collateral funds obligation to invest in new lines, the risk/reward equation was unattractive given the backed by public assets and (ii) down payments to create a revenue cushion. In our high capital requirements, long-term paybacks, and high demand risks. view, it is still unclear whether these will be sufficient to attract bidders. 29 July 2013 Brazilian Railroads: Increasing Demand, Flat Network Size, and … . The Unplanned Railroad Construction Boom. From 1900 to 1930 the Brazilian Railroad Network Size (’000 km) railroad network more than doubled and reached ~34K km, driven by strong 40 government stimulus to private players. However, given the (i) limited integration between different stretches (different gauges), (ii) high sinuosity, and (iii) shift in 35 focus toward highway investments, the railroad system proved to be unsustainable as it was dredging a big chunk of government’s fiscal budget. 30 . The Nationalization of a System Falling Apart. In 1957, when the railroad network size was 37K km, it was nationalized in a government’s attempt to improve it 25 1957: Government nationalized the and halt the fiscal bleeding. The new railroad manager, RFFSA*, discontinued several 20 railroad network. stretches and severely reduced capex disbursements. After three decades under Creation of RFFSA. government’s management, the result was a highly depreciated rail infrastructure, 15 which was still hurting the fiscal budget. 1996–1998: Privatization of . Privatization: Recovery of Brownfields instead of Network Expansion. The 10 25K km among network was privatized between 1996–1998 when ~25K km were granted to the 11 concessions private sector. Nonetheless, despite the noticeable increase in both investments and 5 transported volumes, not much has been done in terms of expansion (new lines). Additionally, a big portion of the investments have been in rolling stock (wagons and 0 locomotives). The result is the current system saturation. 1850 1870 1890 1910 1930 1950 1970 1990 2010

Investments in Railroads Railroad Volumes (bn RTKs) Growth % 6.6 Public 6.3 6.4 Other 6.2 291 298 77 Private Iron Ore and Coal 271 278 1.1 1.7 1.1 258 5.1 244 73 70 232 65 65 0.4 4.4 2.9 221 58 63 4.2 203 58 3.8 182 49 0.7 1.3 168 56 3.2 0.5 47 0.2 43 45 2.1 5.1 4.9 5.3 2.1 4.7 214 226 225 80 0.3 184 200 208 185 0.8 3.3 3.5 3.1 3.4 155 165 3.0 125 136 1.9 1.3

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: CNT, ANTT, Institute of Applied Economic Research (Ipea), Brazilian Statistics Bureau (IBGE), Credit Suisse Research // (*) RFFSA (state-owned corporation) 56 29 July 2013 … a Consequently Over-Constrained System

. Capacity Usage above Adequate Levels. Besides the low density of railroad lines in Brazil, capacity saturation is above adequate levels in the most important stretches, such as in the agricultural commodity corridor, which connects Mato Grosso State (strong producer of soybean and corn) to the Port of Santos (see exhibit 1). . Critical Situation for Access to Port Zones. The situation is even worse for access to the most important port zones, as shown in the exhibits below. A red line indicates that the stretch is operating with capacity above 80%. The exhibits show that rail access to the Port of Santos is highly constrained, with several stretches operating above 90% capacity (exhibit 2). Looking at the immediate access to the Port of Paranaguá, the situation is not different (#3).

Capacity Utilization Rate (%)

Rio Grande da Serra Varginha 1 Embu– 2 Above 80% Guaçu 3 Piaçaguera 50%–80% Pereque Below 50% Evangelista de Souza

1 Uberaba Santos Rail Access Access RailPort Santos to Colombia Paratinga

Votuporanga

3 Francisco

Colina Orlândia Simas Apiai

Araçatuba Mirassol Campinas Belas Evangelina Maracanã Rio Branco CornExports Tupa Pirirquitos (São Paulo (SãoPaulo State) Araraquara do sul São Carlos Mogi– Eng. Antonina Presidente Gutierrez Curitiba Bauru Guaçú Prudente Torrinha Eng. Walter S. Morretes Veloso Most Important Rail Stretch Stretch Most Important and Soy for Rail Paranaguá Paulínia Access Port Paranaguá to Rail Eng. Bley

Source: Network Declaration (ANTT), Credit Suisse Research 57 29 July 2013 Brazil Lagging Behind On a Global Scale

. One-Third of the Rail Network Being Significantly Used: The privatization of the Brazilian railroad network started in 1996, after decades of deterioration and absence of investments under government administration. Since then there have been improvements in high-traffic stretches, on which private concessionaires focused their investments. The remaining stretches remained underused. As a result, of the current ~29K km of total rail network, only ~11K could be considered as being considerably used for transportation. . Lowest Railroad Penetration among Comparable Countries: Compared to other countries with similar size, such as China, Russia and the US, Brazil has both the lowest rail network size and density (see below). Accordingly, it is not a surprise that only 25% of cargo in Brazil flows through railroads versus more than 80% in the US. Productivity is also a problem, as the average speed of Brazilian trains is also the lowest (~28km/h).

Railroad Infrastructure Conditions

Canada Russia

China USA

Extension Density Market Share Velocity Brazil has the smallest area Compared to other countries, served by railroad transportation Railroad still accounts for only Compared to other countries, Brazil has the smallest railroad (in terms of railroad km for each 25% of the total cargo railroads in Brazil operate at a network in good conditions ’000 km2 of land area) transportation in Brazil considerably slower speed (km/h)

0 50 100 USA 194,731 USA 21.3 China 60 Russia 81 Brazil³ 9.3 Russia 50 Russia 87,157 China USA 46

China 65,650 Canada 7.0 Canada 46 USA 42 China 37 Canada 64,994 Russia 5.1 Canada 37 Brazil 25 Brazil 10,930 (3) Brazil 1.3 (3) Brazil 28 Railroad Highway Waterway (3) Considers only private concessions with considerable traffic.

Source: ANTT, ANTF, CNT, Macrologística, COPPEAD ILOS, Exame Magazine 58 29 July 2013 Impacts on Brazil’s Competitiveness: The Soybean Exports Example

. Logistics Inefficiencies. Logistics costs in Brazil account for a high 10.6% of GDP, 38% more Overall Logistics System: Logistics Costs than in the US (7.7%). Although the difference in inventory costs is mostly explained by the (% of GDP) higher cost of capital in Brazil, in the case of transportation the main reason for the cost difference is Brazil’s high dependence on trucks, i.e. the limited use of railroads and waterways. 0.4% 10.6% . Competitive Disadvantage for Soybean Exports. A comparison between the logistics of 0.7% soybeans in Brazil and in the US shows that the lack of adequate railroad infrastructure has a 7.7% 3.2% 0.3% Administrative major impact on competitiveness. In Brazil, 82% of soybean volumes flow through highways 0.8% while railroads account for 16% and waterways, for 2%. In the US, these modes of Warehousing 1.9% transportation account for 25%, 35% and 40%, respectively, which is a much more efficient Inventory

matrix in terms of cost efficiency and CO2 emissions. As a result, ground transportation costs in Brazil account for 44% of soybean price compared to 26% in the US. 6.3% 4.7% Transportation . Illinois vs. Sorriso: Inland Transportation is Key. Exporting soybeans from Sorriso (Brazil) to China is 104% more expensive than from Illinois (US). The main difference comes from inland transportation, which costs USD 25/ton in the latter case and USD145/ton in the former case. BRAZIL USA Soy Logistics System Transportation Matrix Warehousing Capacity Ground Freight Cost Example of Logistics Cost for Soybean Exports to China (% of RTK) (% of Annual Harvest) (% of Soybean Price) (US$ ton)

Highway 120 44 US$45/ton 82 Highway US$145/ton Sorriso 2 16 Rail 80 Water 26 Total Price Brazil Santos Brazil: US$190 US: US$71

Soy Highway

Water 25 Water US$25/ton Illinois 40 35 Rail US$46/ton

USA USA Brazil USA Brazil New Orleans

Source: CNT, ANTT, ANTF, CNT, Macrologística, COPPEAD, ILOS, Exame Magazine, Jornal do Comercio, FIESP, Credit Suisse Research 59 29 July 2013 Current Railroad Model Hasn’t Fostered Investments in New Lines

. Origins of the Current Railroad Model: It was designed in 1996, during the first Current Railroad System: Independent Concessionaires mandate of President Fernando Henrique Cardoso, and its main target was to quickly alleviate the federal budget while recovering a deteriorated infrastructure.

. Independent Concessionaires: In order to mitigate risks and attract private RR players, the railroad network was divided into regional sub-systems (see map), so AP that each one of them could operate independently from the other. The result was Ponta da Madeira Port limited (if not any) competition between concessionaires, which were responsible for both railroad infrastructure (construction, maintenance and control center) and train Santarem Port Pecem Port operations (rolling stock, loading, transportation and unloading of cargo). AM PA MA . Limited Stimulus for New Lines: Concessionaires didn’t have a contractual obligation to build new railroad lines and the argued unattractive risk/reward balance AC Suape (for new lines) drove concessionaires to focus on their most profitable stretches, RO TO Port instead of increasing the rail network. MT BA . Government’s Execution Proved To Not Be a Solution: The government thus Ilheus Port tried to carry out the expansion works through the state-owned corporation Valec Lucas do Rio Verde GO (North–South and West-East stretches, for example). The result was recurring delays and cost overruns, which made the government to change its strategy. MG MS . First Signs of the Search for a New Model: In July 2011 the government Railroad Network Tubarão Port expressed its dissatisfaction with the current model and announced some regulatory RJ updates that challenged the monopolistic position of concessionaires. The idea was ALL Ferroeste SP Rio de Janeiro Port to strengthen the regulation framework in order to foster investments by other parties FCA EFC Santos Port in the rail network managed by concessionaires. Another measure was to clarify the Paranaguá Port MRS FTC Right of Way rule in order to facilitate the connectivity of different concessionaires São Francisco do Sul Port Itajai Port and thus stimulate competition between them. EFVM West–East CFN North–South . The New Model: Further Private Participation: In August 2012 the government announced R$90bn in investment opportunities in railroad projects, mostly Existing Rio Grande Port greenfields, and proposed a new regulatory model to improve the risk/reward Under Construction (PAC) balance for expansion projects, while stimulating competition between train operators. State Relevant Capital Cities/Ports

Source: Infra Partners, ANTT, ANTF, Credit Suisse Research. 60 29 July 2013 The New Model (Open Access): Lower Risks to Boost Greenfields

. The New Model: Two Parties. Together with the announcement of the Investment . Mitigating the Demand Risk: The idea behind Valec’s role is to mitigate this risk package of R$98bn in August 2012, the government proposed a new railroad model. component for infrastructure managers as this was supposedly the main cause of the The main change is the segregation of the system into two separate private parties: low risk/reward balance of investments in new rail lines. Additionally, the government (1) the infrastructure manager and (2) the rolling stock operator. is improving the financing conditions through the BNDES, with longer periods for . Private Roles: The infrastructure manager will be responsible for building and amortization and lower spreads to the TJLP (Brazilian long-term interest rate). maintaining the rail network while the rolling stock operator will provide and . Is It Enough? The concern now shifted to the payment risk of Valec. Investors are commercialize the transportation service, besides operating the trains, its still skeptical with the lack of legal and asset guarantees. In this sense, the locomotives, wagons and all the respective support staff and technical operations. government is now focused on mitigating this risk and the potential solutions under . Valec’s Role: The liaison between the two parties will be made by Valec. The state- discussion are the creation of collateral funds and/or down payments in order to owned corporation will acquire 100% of the capacity offered by the infrastructure create a revenue cushion. The idea is to create legal instruments that would not be manager and sell it to any interested rolling stock operator. affected by political interests and government’s fiscal constraints.

Rail Infrastructure Manager Rail Rolling Stock Operator Cargo Owner . Interest: TJLP + up to 1% . Interest: TJLP + up to 5.17% . Debt/ Equity: up to 80%/ 20% . Debt/ Equity: up to 80%/ 20% . Grace Period: 5 years . Minimum: R$10mn . Amortization: 25 years

Financing Financing

Valec purchases 100% … and sells it to train of the new rail operators through capacity… public tenders

. Construction of the Network . Rolling Stock Operation and . Demands Transportation Maintenance Services (hires Rolling Stock . Expansion . Guarantees the remuneration of the network administration Operators) . Staff . Maintenance . Guarantees fair prices for rolling stock operators . Control Center . Commercialization

Source: Infra Partners, Credit Suisse Research 61 29 July 2013 New vs. Current Framework: What Changes in Each Participant’s Role?

. Among the main changes proposed by the new model we would highlight the possibility of different parties acquiring rail capacity from Valec and operating their own trains. In our view, this should stimulate competition between carriers and boost sector’s efficiency, challenging the current monopoly status of rail concessionaires.

Agent Current Model (Monopoly) New Model (Open Access)

ANTT Less active participation, aligned with the monopoly model and More specific regulatory tools, more thorough inspections, and (land transportation facilitated privatization reinforced mediation powers regulator)

EPL Planning of logistics needs, with a focus on the integration of modes, (state-owned logistics Vacuum left by the restructuring of GEIPOT in the 1990s a systematic view, and efficiency planning company)

Entity through which the government will purchase all transportation Valec Responsible for the construction of new railroads such as the capacity offered by rail infrastructure managers and resell it to the (state-owned corporation) North-South and West-East corridors market

Responsible for the construction/expansion of the network under Current rail Will be able to buy the rail capacity offered by Valec through a public concession, management of the line, and operation and sales of concessionaires tender the transportation services

Rail infrastructure To be engaged by the government through public auctions to build, Responsibility also of current rail concessionaires manager maintain, and manage the railroad infrastructure

Independent In practice, almost non-existent, even though recent updates in the Companies that will purchase capacity from Valec to transport third- operators regulatory framework brought legal support to them party cargo on their own trains (logistics service provider)

Cargo owners Engagement of freight services, occasionally investing in rolling Under this new model, they will be able to buy capacity from Valec (shippers) stock or grid in partnership with concessionaires and transport their own cargo with their own locomotives and wagons

Source: Infra Partners, Credit Suisse Research 62 29 July 2013 Comparison to Other Railroad Models: Innovative Solutions Despite Similarities

. Even though the new railroad model has similarities to other models such as the Australian and the German ones, as both offer any independent logistics operator with open access to the rail network, it has a few innovative aspects. Among them, we highlight Valec's role as a capacity trader, buying all the capacity from infrastructure managers and selling it to any interested independent operator and/or cargo owner. International Comparison of Railroad Models

Developed markets with a high Cargo concentrated Emerging Fragmented cargo with a high share of rail in transportation matrix in exports markets share of passengers

USA Canada South Africa Australia Brazil* Russia China India Germany UK Spain

Number of 5 5 (Class 1) 2 (large) 1 ~10 1 1 1 ~300 5 10 Operators Unlimited

Handled Volume 1,652 370 180 599 380 1,151 2,200 560 330 121 27 2005, Mt

Railroad Penetration (% of total transported 45% 46% 34% 53% 25% 88% 60% 39% 22% 13% 5% volume in RTKs) Railroad Infrastructure Mostly Integrated Segregated and Rolling Stock Integrated Integrated Integrated Integrated Integrated Integrated Segregated Segregated integrated (same holding) Operations Segregated

Open Access? (to Mostly Mostly Depends on Closed Mostly Closed Closed Closed Open Open Open Closed Closed the Railroad Closed independent operators) Open Ownership Mostly Mostly Depends on Private Public Public Public Public Public Public Public Infrastructure Private Private the Railroad (concessions)

Mostly Depends on Mostly 80% 90% Rolling Stock (Locos Private Private Private Public Public Private and Wagons) Public the Railroad Public Public Public Mostly Public New Lines: Investment Public and Public and Public and Public Public Public Public Public Public Public Responsibility Private Private Private Private

Source: ANTF, Credit Suisse Research // (*) Current Model / New Model 63 29 July 2013 Investment Opportunities: Projects still under Study Phases

. R$98bn among 10 Railroad Slots: The government announced its intention to grant 12K km to the private sector in 2013, under the new model. The previous plan was to carry out the public hearings during 1Q13 and the auctions between April and Port of Port of Vila do Conde Santarém June, 2013. Port of Itaquí Port of 3 . However, the Auction Schedule Was Overly Optimistic: Most of the projects are Manaus Port of Pecém Port of Açaílândia greenfields and still lack basic engineering and demand studies. Even those in more Marabá advanced stages seem premature to be auctioned, such as the Ferroanel SP (bypass Port of Port of Suape of São Paulo city), which needs to have its engineering studies updated. Also, the Porto Velho 6

stretches (1) and (3) are still under the management of private concessionaires (their 2 5 Lucas do Port of Salvador return to government is still under negotiation). Rio.Verde Uruaçú Port of Ilhéus 10 . Private Sector’s Appetite still Unclear: Despite the high government’s focus on Corinto Belo Horizonte improving projects’ attractiveness through better financing terms and mitigation of Maracaju 7 demand risks, investors are still requiring further guarantees on Valec’s payment risk Port of Vitória Panorama 4 such as collateral funds. 1 Port of Rio de Janeiro 8 Port of itaguaí Current Network Mafra Port of Santos General Terms Port of Paranaguá To Be Auctioned 9 Concession Contract: 35 Years Port of Rio Grande Investment Capex: R$56bn in the first 5 years Extension (Km) Investment (R$bn) Total Investment R$98bn 1 Ferroanel 245 3.52 Lucas do Rio Verde – Uruaçu – Palmas – Auction Criteria: Lowest tariff 2 1,920 4.1 Anápolis Total Extension 12,000 Km 3 Açailândia – Vila do Conde 480 2.6 4 Rio de Janeiro – Campos – Vitória 634 3.8 Financing Terms 5 Belo Horizonte – Salvador 1,651 6.8 6 Salvador – Recife 1,200 6.5 Interest Rate: TJLP + up to 1% 7 Anápolis – Panorama – Dourados 1,294 3.5 Grace Period Up to 5 years 8 Maracaju – Eng Bley – Paranaguá 1,012 6.8 Amortization Period Up to 30 Years 9 São Paulo – Rio Grande 1,800 6.7 10 Uruaçu – Corinto – Campos 1,730 12 Financial Leverage Between 65% and 80% Total 11,966 98

Source: Brazilian Government, Credit Suisse Research 64 29 July 2013 Ports – Addressing Regulation Barriers to Private Investments

FOTO

Brazilian Ports: World's Ninth Worst. According to a World Bank survey in 2012, New Law to Boost Private Investments outside of Public Ports. To address the Brazil ranked 135 among 144 countries in regards to the quality of its ports investment constraints and the well-known bottlenecks at ports, the government (infrastructure and service). Relatively to highways, railroads, and airports, the port launched Provisional Decree (MP) 595 in December 2012. The core goal of the segment is Brazil’s poorest transportation mode. (pages 13/14). If, on the one hand, proposed new law was to boost investments through the elimination of restrictions in the government’s inefficiency led to insufficient capacity expansion of public ports, on private port authorizations on handling third-party cargo. On June 5, President Rousseff the other hand, private participation has been mostly restricted to concessions for enacted the New Ports Law (No. 12815). Going forward, the private sector will not rely operating public port terminals. Regulatory barriers have hindered private investments on public port expansions / concession auctions in order to invest in ports, which should outside of public ports, unless companies had enough of their own cargo to justify such help to boost investments in the sector, in our view. investments. Brazil recently launched a new ports law to remove these barriers and Investment Opportunities and Other Impacts of the New Law. While positive for boost private participation. the country at first glance, for listed companies the reading should be at best neutral. Previous Ports Law and Constraints on Private Investments. The Ports Some of the main aspects of the new regulatory framework remain uncertain, especially Modernization Act (Law 8630), enacted in 1993, was aimed at (i) increasing private- with regards to the concession renewal mechanism to be used for the existing port sector’s participation and thus (ii) recovering a deteriorated infrastructure while terminals (implemented after 1993). For contracts signed before 1993, the new Ports alleviating the government’s fiscal budget. Nonetheless, the emergence of many private Act establishes that they will be re–auctioned, if already expired. According to the port projects in the past decade resulted in intense regulatory disputes led by private Brazilian Water Transportation Agency (Antaq), the port regulator, there are 94 concessionaires of public ports. In 2008, Decree 6620 restricted the private port terminals in this situation, mostly dedicated to liquid operations. Finally, the government authorizations to companies that could justify the investment for their own cargo. The expects R$54bn in investment opportunities in public ports and has already received 63 result was limited capacity expansion and the current saturation of the ports system. authorization applications (~R$25bn in investments). 29 July 2013 Current Conditions: World’s Ninth Worst

. If we take a closer look at the conditions of Brazilian ports, we will note that access to the most important public container ports (see below) by either land of sea is unsatisfactory, based on the conditions and availability of adequate highways, railroads and maritime channels. Another critical variable that evidences the low productivity of Brazilian ports is the waiting time to dock, which, in the case of agricultural commodities, is dramatic. . As mentioned previously, demand for infrastructure in Brazil spiked in the last decade, especially for ports, as foreign trade growth has consistently outperformed GDP growth. Nonetheless, the supply side lagged big time and hasn’t tracked the capacity needs. The result was that Brazil currently occupies the 9th worst position in the world ranking of quality of port infrastructure and service, according to the World Bank 2012 Survey. . The situation is even worse for containers and agricultural commodities ports, in which capacity expansions have relied mostly on government’s execution, given that the construction of private ports has been restricted by regulatory constraints. In the case of iron ore operations, in which concessionaires mostly operate their own cargo, regulation hasn’t been a constraint for private ports and thus supply could better track demand. Main Brazilian Public Container Ports

Access Average Waiting Time to Dock (Hours) Throughput (k TEUs in FY 2012) Land Channels Container Solid Bulk*

Vitória Unsatisfactory Unsatisfactory 9 45

Vitória Port Rio Satisfactory 270 Unsatisfactory 6 N/D

Santos Port Rio Port Santos Critical Unsatisfactory 13 72 2,961 438 Paranaguá Port 744 Paranaguá Unsatisfactory Critical 11 68

São Francisco do Sul Port 116 S. F. do Sul Unsatisfactory Unsatisfactory 14 64 Itajaí Port 385 Itajaí Unsatisfactory Unsatisfactory 20 N/D 611 Rio Grande Port Rio Grande Excellent Unsatisfactory 7 23

Source: Brazilian Water Transportation Agency (ANTAQ), University of São Paulo (USP), Credit Suisse Research. (*) Agricultural commodities. 66 29 July 2013 Current Conditions: Limited Draft, Limited Efficiency…

. Draft Capacity as a Competitiveness Source: In the assessment of Brazilian ports, it is also important to analyze their draft capacities. The ability of a port to dock large vessels is a relevant source of competitiveness in the world trade market as it means lower unitary transportation costs (scale gains). . Rising Dynamics of Containership Sizes: Currently, ~6% of the world’s containership fleet is larger than 7K TEUs (from ~0% in 2004), which require drafts of 14.5m or above. The world draft comparison does not favor Brazilian container ports as most of them are still not capable to dock ships of this size. . Government’s Dredging Plan: It is important to mention that there have been some advances in access to ports with the start of the Brazilian Port Dredging Program (Law 11610/07). It introduced the concept of output-based dredging contracts and established the competence of the Brazilian Secretariat for Ports to implement it. Draft in Container Ports Containership Generations (A–E) Containership Drafts

6 Vitoria A, B 10.7 137x17x9m 4 Early Containerships (1956–) 9–10 500–800 TEU 8 A, B Itajai 11.5 A 200x20x9m 4 Fully Cellular (1970–) 10 Rio Grande A, B 12.2 1,000–2,500 TEU 5 215x20x10m 4 12.5 Paranagua A, B 12.3 Panamax (1980–) 13 250x32x12.5m 6 3,000–3,400 TEU 5 Santos B, C 13.3 B 13 Panamax (1985–) 290x32x12.5m 8 3,400–4,500 TEU 6 São Francisco B, C 14.0 13–14.5 Post Panamax (1988–) 15 285x40x13m 9 4,000–5,000 TEU Rio de Janeiro C 14.5 C 5 Post Panamax Plus (2000–) 17 300x42x14.5m 9 Shanghai C 14.5 6,000–8,000 TEU 6 15.2 New Panamax (2014–) 20 366x49x15.2m 10 Long Beach (US) D 15.0 D 12,500 TEU 6 Post New Panamax (2006–) 23 Singapore E 18.0 15,000 TEU 10 E 400x59x15.5m 15.5 Triple E (2013–) Rotterdam E 22.5 8 18,000 TEU

Source: Hofstra, Sindamares, Codesa, Tecnologística, Marine Link, Ports’ Websites (Santos, São Francisco do Sul, Itajaí, Rio Grande, Rotterdam, Long Beach), Credit Suisse Research 67 29 July 2013 Current Conditions: Awkward Customs Process

. Another huge constraint in the Brazilian ports operations is the customs process Average Time Spent within Customs Services related to imports, provided by the federal government. This process is highly 5,5 With auditing bureaucratic, with several distinct entities acting without a centralized coordination. Without auditing . The results are both low productivity and competitiveness given that, in Brazil, cargo 3,9 flow wastes more time in this process than in other countries such as India, China 3,4 3,5 and Argentina. In Santos, which is Brazil’s main port by import volumes, the average 2,8 time of the customs process is above 15 days for containers. Additionally, this 2,2 1,9 2,1 1,6 1,7 1,7 inefficiency increases the need for storage areas, pressuring the entire port zone and 1,2 1,0 1,1 negatively impacting its efficiency and capacity. 0,6 0,6 0,7 0,7 0,5 0,3 0,4 0,3 0,4 0,5 . Finally, another productivity distortion resulting from the high customs bureaucracy in

Brazil is that bonded warehousing became a significant revenue source for container

terminals, which does not make any sense if we think about ports’ intrinsic value India

proposition: to be an intermodal transition point, delivering efficiency in terms of lead USA

Brazil

China Spain

times and costs. For instance, in the case of Santos Brasil, its warehousing revenues Korea

Germany

Argentina

Singapore Hong Kong Hong

have increased from 20% to 42% since 2012 (as a % of total revenues). Switzerland Netherlands Santos Brasil (STBP11), Revenues (R$mn) Quality and Efficiency of Government Customs Services 1,138.0 1.00 (worst) a 5.00 (best) Warehousing Operations (Storage) Quay Operations (Handling) 997.5 4,02 4,00 3,98 3,88 3,83 3,83 42.0% 781.6 41.7% 82ª Position 642.0 591.6 33.3% 2,37 514.5 27.1% 444.7 30.7% 375.8 20.8% 20.2% 20.1%

2005 2006 2007 2008 2009 2010 2011 2012 Singapore Germany Netherlands Sweden Hong Kong China … Brazil

Source: World Bank, Santos Brasil, Credit Suisse Research 68 29 July 2013 Regulatory Story: Framework and Constraints Law 12,815/13 “The New Ports Law”: . Allows authorizations for Law 8630/93 Decree 6620 handling third-party cargo “Port . Further . Re-auctioning of concession Modernization restrictions on contracts signed bf 1993 . Renewal conditions for post- Law 6222 Act”: Creation Antaq the handling . Decentralization of third-party 1993 contracts still unclear . Creation of of Antaq Resolution 517 . Concessions & cargo (in . Labor restrictions not for Portobras . Regulator . Conditions for Authorizations authorizations, private ports . Centralization for Ports authorizations to i.e., private . Centralization of sector What . Government handle third-party ports) decisions on the federal level monopoly cargo (Antaq and SEP). Now?

1975 1993 2002 2005 2008 2012/2013 ?

. Until 1975, Brazilian ports were managed by states or private companies under a decentralized model. In 1975 the government created Portobras S.A. (Brazilian Port Company), which was responsible for planning, building, managing and exploiting port activities, centralizing them in the federal government. . In 1993, after almost two decades of infrastructure deterioration, the government enacted Law 8630/93, decentralizing the administration of public ports and creating better conditions for private investments. The idea was to boost the modernization of ports through the private sector while alleviating the federal fiscal budget, in a context of a high inflation in Brazil. . Under the “Port Modernization Act” the Brazilian ports have been locally managed by port authorities (state-owned entities), which were responsible for planning the port areas and carrying out the auctions of terminals, including the draft of tender documents and establishment of auction criteria. . Also, this law created two ways for private exploitation of ports: (i) concessions (for terminals located inside public ports) and (ii) authorizations (for terminals located outside of public port zones, i.e. private ports). – On the one hand, concessions need to be auctioned and must include: expiration date, renewal clauses, leasing fees, port authority fees and the restriction to hire workers from OGMO (Port Labor Management Body). – On the other hand, authorization was defined as the legal instrument whereby the granting authority transfers to a company the right to operate a private port, which does not require a public auction. There were two types of authorizations: exclusive (exclusively for handling owned cargo) and mixed-use (both owned and third party). . At this point. there was no restriction for the holders of mixed-use authorizations to handle third-party cargo, condition which prevailed until 2005.

Source: Credit Suisse Research 69 29 July 2013 Regulatory Story: Framework and Constraints Law 12,815/13 “The New Ports Law”: . Allows authorizations to Law 8.630/93 Decree 6.620 handle third-party cargo; . “Port . Further Re-auctioning of concession Modernization restrictions on contracts signed bf 1993; . Renewal conditions of post- Law 6.222 Act”: Creation Antaq’s the handling . Decentralization of third party 1993 contracts still unclear; . Creation of of Antaq Resolution 517 . Concessions & cargo (for . Labor restrictions not for Portobras . Regulator . Conditions for Authorizations Authorizations, private ports; . Centralization for Ports authorizations to i.e. Private . Centralization of sector What . Government handle third– Ports) decisions on the federal level monopoly party cargo (Antaq and SEP). Now?

1975 1993 2002 2005 2008 2012/2013 ?

Container Handling (000 TEUS) . After 1993, several port terminal concessions and authorizations have been granted to the private sector (such as Tecon Santos, Tecondi, Libra, Tecon Salvador, Tecon Suape, Embraport, etc.), initiating the process of recovery of a deteriorated port infrastructure. 2002 304 421 . Nonetheless, the emergence of container terminals outside of public ports generated several complaints by concession owners (within 2003 public ports) against the Port Modernization Act. 519 . In 2005, as a response, Antaq issued Resolution 517, specifying the terms under which a private terminal could handle third-party 2004 cargo. Basically, the condition was a minimum volume of own cargo sufficient to justify the investments in the terminal’s infrastructure. 2005 558 However, said resolution was somewhat ambiguous and unclear on how to technically determine whether a given volume is sufficient to . 2006 549 justify a certain project. 2007 496 . During 2007/2008, the emergence of many port projects in Brazil gave rise to much legal debate about the regulatory framework for 12 ports. Concessionaires claimed against unfair competitive conditions in favor of authorizations holders such as the inexistence of 359 2008 216 concession fees, labor union restrictions, port authority fees and contract expiration. 197 2009 . In October 2008, President Lula thus enacted Decree 6620 which, in practice, implied further restrictions for private ports 395 384

(Authorizations) to handle third-party cargo. The decree establishes that, occasionally and on a complementary basis, the private port 2010 570 would be allowed to handle third-party cargo, which should be of the same nature of the authorized owned cargo. 385 2011 . All in all, the “soap opera” between concessionaires and authorization holders and its impacts on regulation led to a uncertain legal 540 370 environment which, in practice, reduced stimulus for investments in new private ports. 2012 611 APMT (Old Teconvi | Itajaí) Portonave (Navegantes)

Source: Itajai Port, Infra Partners, Credit Suisse Research 70 29 July 2013 Regulatory Story: Framework and Constraints Law 12,815/13 “The New Ports Law”: . Allows authorizations to Law 8.630/93 Decree 6.620 handle third-party cargo; “Port . Further . Re-auctioning of concession Modernization restrictions on contracts signed bf 1993; Law 6.222 Act”: Creation Antaq’s the handling . Renewal conditions of post- . Decentralization of third party 1993 contracts still unclear; . Creation of of Antaq Resolution 517 . Concessions & cargo (for . Labor restrictions not for Portobras . Regulator . Conditions for Authorizations Authorizations, private ports; . Centralization for Ports authorizations to i.e. Private . Centralization of sector What . Government’s handle third-party Ports) decisions on the federal level Monopoly cargo (Antaq and SEP). Now? 1975 1993 2002 2005 2008 2012/2013 ?

. In December 2012 the government launched the Ports Investment Program unveiling . After intense and lengthy plenary debates, the Chamber of Deputies approved the R$54bn in investment opportunities for the private sector, supported by a new Provisional Decree on May 15, with few additional amendments in favor of concession regulatory framework: Provisional Decree MP 595. holders such as contract renewals for 25 years, without regulator’s discretion. The Senate . The most significant proposed change was the elimination of the restrictions for private approved it on May 16, the day on which the decree would expire if not voted. ports (authorizations) to handle third-party cargo. Such restriction has been the main . On June 5, President Rousseff signed it into the New Ports Law (Law 12815/13) constrain for private investments to take-off in the ports segment . controversially vetoing 13 amendments approved by the Congress. . Other important measures were (i) the maintenance of labor union requirements solely . Is the Congress “soap opera” already over? Not yet. The vetoes are still subject to for concessionaires (not for authorizations) and (ii) centralization of strategic decisions, Congress analysis, which has 30 days to convene a joint session (deputies and senators) such as the holding of auctions, on the federal level (previously carried out by local port and vote on the matter. This means that the clauses related to contract renewals could authorities, which are state-owned corporations). potentially return to the text previously approved by Congress on May 16, which favors . MP 595 wasn’t well received by industry participants, mainly those that operate public public concession holders such as Santos Brasil (Tecon Santos) and Ecorodovias port concessions. As such, there were 645 proposals for amendments to the decree, to (Tecondi). For this to happen, an absolute majority of Congress votes would be required. be debated by the joint congressional committee (composed of 12 deputies and 12 . In the following slides we discuss in more details the main changes resulting from the new senators). ports law and its impacts on investments and competition. . On April 24, the joint committee ended up approving the provisional decree accepting more than 100 amendments.

Source: Credit Suisse Research 71 29 July 2013 The New Ports Law: What Has Changed? Open Doors for Private Ports . The enactment of the New Ports Law implied that the previous framework (Law 8630/93) has been revoked. Accordingly, in this section we aimed at (i) pointing out the main changes resulting from the new law compared to the previous regulation and (ii) discussing the impacts on the industry and on Brazil’s economic competitiveness. . As widely said, the most important innovation brought about by the new regulatory framework is the permission for private ports to handle third-party cargo and thus to directly compete against concession holders (within public ports). As a consequence, we now expect much lower barriers to port capacity additions and therefore a fiercer competitive environment for current players in the medium term. On the other hand, greenfield projects in Brazil have been taking more than ten years to become operational, considering the licensing process and the bureaucracy involved. In this sense, the Government is faced with the challenge of streamlining these processes. . Another source of competitive pressure for concession holders within public ports is the potential cost advantages of up to 25%–35% in favor of private ports, such as the absence of restrictions on labor and concession fees. . Finally, the new law offers nothing new in terms of the conditions for early renewal of concession contracts signed under the previous framework. The process is still subject to the regulator's discretion, and thus we prefer to keep a more cautious stance in this regard.

Previous Regulatory Framework New Law (12815/13) Impacts and Questions

Allowance of Under Decree 6620/2008, private ports The new law eliminated this restriction. We expect much more dynamicity in capacity Authorizations (Private must be focused on owned cargo and were Therefore, authorization holders are now additions, mostly driven by private port Ports) to Handle Third- allowed to handle third-party cargo only allowed to handle any type of cargo and thus investments. Party Cargo occasionally, under certain circumstances. to freely compete against concessionaires of There is already 123 requests for This posed significant restrictions on private public port terminals. authorizations waiting for Antaq’s approval, of investments, especially for containers and which 63 are for private ports. agricultural commodities for which it is harder The question is how the government will to have enough owned cargo to justify the conduct this selection process given the wide investment (pulverized demand base). range of criteria.

Labor Restrictions: Establishes that port workers dedicated to Extends such restriction to other classes of While we welcome the fact that private ports Obligation to Hire loading/unloading (inside the vessels) must workers dedicated to ground handling, cargo won’t be restricted to OGMO’s workers list, we Workers from the List of be hired from the OGMO list (Port Labor verification, and vessel repair, surveillance, highlight that it implies a distortion against the Port Labor Management Body). and cleaning. private concessions within public ports. In fact, Management Body the conditions for the latter have deteriorated At this point, there was no clear distinction Differentiates authorizations from (OGMO) as the restriction now involves further classes between private ports (authorizations) and concessions. Only for work under of workers. All in all, this implies significant public ports (concessions). concessions must OGMO workers be hired. cost advantages for private ports.

Source: Credit Suisse Research 72 29 July 2013 The New Ports Law: What Has Changed? Open Doors for Private Ports

Previous Law New Law (12815/13) Impacts and Questions

Early Renewal of Nothing specific with respect to early renewal. Contracts with an express renewal provision Even though the worst-case scenario (no Concession Contracts Renewal clauses are usually established that has not yet been invoked may be renewal) seems to have been ruled out, the Signed under Law 8630/93 under each concession contract, on a case- renewed early, at the discretion of the outlook remains cloudy as renewals are still by-case basis. The standard is 25 years of granting authority. subject to the regulator’s discretion. How much concession term, renewable for another 25 Concessionaires will need to propose and additional investments? For how long will years, upon a negotiation process between investment plan. No guarantee that it will be contracts be extended? 25 years? Will the concessionaires and granting authorities. renewed and under which conditions. marginal cash flow methodology be applied?

Renewal of Concession Nothing specific with respect to the Government plans to re-auction these R$54bn in investment opportunities. Contracts Signed before adaptation of these contracts to Law terminals under the new ports law. The risk for the government is that contract 1993 8630/93. Local port authorities have been There are 94 terminal in this situation, mostly holders could take the discussion to the court. granting automatic renewals. focused on liquid bulk cargo.

Port Authority and Proposed a decentralized model in which port Proposed a centralized model in which the The rationale behind this measure was to Regulator Roles authorities (mostly state-owned companies) federal regulator is responsible for sector speed up the auction processes given that – Port Sector Planning were responsible for planning the port zones planning, including auctions and all important only 11 terminals have been granted to the they managed, including the auctioning decisions. The Port Authority Board of private sector in the last 12 years. – RFP, Tender, Auction processes. Commissioners (CAP), formerly an executive Some say that the granting process could committee formed by port stakeholders, become even more bureaucratic, arguing that became a consulting group with no decision- Antaq has no structure or expertise to deal making power. with all ports, in view of specific local issues and demands.

Auction Criteria Highest concession fee Lowest tariff and/or highest throughput It is still unclear how, in practice, the new capacity and/or highest handling productivity criteria will work, as there are several tariff types and capacity and productivity measurement is somewhat imprecise.

Expansion into No regulatory provision on the issue, Granting authority can now authorize Good news for concession holders, such as Neighboring Areas (for which in practice became a prohibitive concessionaires to expand their operations Santos Brasil (SBTP3), which gain more Concession Holders) process. into neighboring areas within the public port flexibility for capacity expansion. as long as they prove this is productive.

Source: Credit Suisse Research 73 29 July 2013 The New Ports Law: Asymmetries between Public and Private Ports . New regulation implies fiercer competition between public and private ports Key Differences Between Concession & Authorization going forward. With the new ports law, several private port projects are expected to materialize as the restriction for them to operate third-party cargo has been eliminated. An Concessions Authorizations anecdotal evidence is that there are already 63 requests for authorizations waiting for (within Public Ports) (Private Ports) Antaq’s approval. Pays Government Fees? . Nonetheless, the Distortions between Authorizations and Concessions Haven’t – Concession Fees (Leasing) Been Addressed. There are many differences in the market conditions to which public – Port Authority Fees (TUP) and private ports are subject. Most of them potentially imply higher operating costs for concessionaires within public ports and could thus mean a competitive advantage in favor of private ports. These distortions have been an important source of complaint by Investment Responsibilities concessionaires and haven’t been addressed by the new regulation framework. – Maritime/Ground Access . The Main Complaints of Concession Holders Are: – Labor restrictions: some classes of workers can be hired only if they are on the list Investment Responsibilities of Port Labor Body (OGMO), while authorizations are not subject to this restriction. – Terminal Infra/Equipment – Higher operating costs as they pay: (i) concession fees (leasing) and (ii) Port Authority fees (TUP) related to maritime access (dredging and signaling). Labor Restrictions? Authorizations don’t pay these fees. – OGMO – Authorizations have no expiration (perpetual) while concessions usually expire in 25 years (renewable for another 25) and the assets must return to the government upon expiration of the concession. Expiration Date – Concession Contract Breakdown of Public Port Costs ** (% of Net Revenues) SG&A (3) 10.4% Costs Related to an Concession Assets Return Autonomous to the Government? Labor (Estiva) . Autonomous Labor (stowage) Fixed 10.9% . Regulator Fees COGS (2) Universality 24.5% Regulator . Port Authority Fees (TUP) Principle* Fees, . 11.3% Concession Fees (Leasing) Variable COGS (1) Yes No Favored Party 6.7%

Source: ANTAQ, LLX, Credit Suisse Research. * Public terminals must meet all service requests, while private ports are not bound by universality requirements. ** Based on Santos, Brazil. 74 29 July 2013 Investment Opportunities: R$54bn in Projects . Together with the announcement of the new regulatory framework back in 2012, the . For public port concessions, the auctions should be split into four blocks totaling government also unveiled the ensuing investment opportunities in the ports sector, ~R$27bn in investments among 159 bidding processes: totaling R$54.1bn among public and private ports. – Block #1 (~R$2bn): 26 terminals within the Ports of Santos and 26 in Pará. . For private ports, the government has already received 123 requests for Projects are currently under study phases. Government expects the auction to be authorizations, of which: held in November, which seems optimistic in our view. – 63 for port terminals, amounting to R$23.5bn (15 projects above R$1bn) – Block #2: 45 terminals within the public ports of Salvador, Aratu and Paranaguá. – 44 transshipment terminals, amounting to R$1.6bn – Block #3: Ports of Suape, Itaqui and remaining North and Northeast terminals. – 11 small-size terminals and 5 touristic terminals (cruises) – Block #4: Ports of Vitoria, Rio de Janeiro, Itaguai, Rio Grande and Sao Francisco do Sul; Investment Opportunities at Ports (Values in R$mn)

Total (Pará) Belem/Miramar/Outeiro/ Belem/Miramar/Outeiro/ Itacoatiara / Macapa / Porto Velho

Santarem/ Vila do Conde Macapa Santarem/ Vila do Conde 2014/15 3.1 1.2

Itaqui North 5.7

Itacoatiara Pecem 2016/17 1.5 0.1

Total Aratu/ Salvador/ Recife/Suape / Pecem Itaqui Cabedelo Porto Sul/ Ilheus / Cadebelo / Maceio Recife/ Suape 11.9 2014/15 2.7 1.3 2.8 Maceio

NorthEast 2016/17 1.9 2.8 0.5 Porto Velho Aratu/ Salvador/ Total Itaguai/ Santos/ Porto Sul/ Ilheus Vitoria Rio de Janeiro São Sebastiao Itaguai/ Rio de Janeiro 28.7 2014/15 6.5 7.0 2.9

SouthEast 2016/17 6.9 4.5 0.8 Vitoria Santos/São Sebastiao Total Paranagua – Imbituba/ Itajai/ Porto Alegre/

Antonina São Fransisico do Sul Rio Grande

7.6 2014/15 1.0 1.3 1.0 South 2016/17 3.3 0.8 0.1

Source: Credit Suisse Research 75 29 July 2013 Complex Licensing Process – How Long Can It Take?

. The licensing process is a lengthy process as there are several permits and licenses Private Ports PortoNave Itapoá Embraport Açu BTP required for a project to be implemented. Not to mention the hassle of requesting Start year 1997 1997 1999 2006 2007 permits to a multitude of federal, state and local agencies. This bureaucracy isn’t Environmental authorization 2005 2003 2006 – 2009 necessary, in our view. Authorization from Antaq 2004 2005 2006 – – . In the best-case scenario, the implementation of a greenfield port project can take five years. Yet, based on recent examples, such as Portonave, Itapoá, Embraport, Start of construction 2005 2008 2011 2007 2010 Açu and BTP, some projects can take up to 14 years to be concluded, of which Start of operation 2007 2011 2013 2013 2013 about 5–7 years spent only on the licensing process. Time to completion 10 years 14 years 14 years 7 years 6 years

Tentative Licensing Timetable: At Least 5 Years for Project Completion

150 Environmental Impact Applicant carries out EIA/RIMA studies and files them, together with other days Study EIA/RIMA documentation, with Ibama to request for the Pre-Project License.

120 Pre-Project Ibama analyzes the pre-license documents and, days License if everything is compliant, the license is granted.

360 Executive Engineering Applicant prepares the EEP for the construction phase and days Project (EEP) submits it to Ibama, together with other documents.

90 Construction Ibama analyzes the EEP and other documents and, if everything is compliant, the days License license is granted.

Before the operation starts, Ibama checks whether the Construction 1,080 project has been built according to the plan and only then Phase days issues the Operating License.

Operating Before the operation starts, Supram checks whether the project has been 60 License built according to the plan and only then grants the Operating License. days

(1) Brazilian Environmental Protection Agency (Ibama). (2) Environmental Impact Study/Report (EIA/RIMA). (3) If Ibama questions any of the items, the applicant will have four months to answer. (This period is not included in the 110 to 120 days.) (4) The time required to prepare the final design and other documents is not included. (5) Construction time is not included. Source: Infra Partners, Brazilian Environmental Protection Agency (Ibama), Credit Suisse Research 76 29 July 2013 Companies Mentioned Prices as of July 26, 2013

. Aeroports de Paris (ADP.PA, €77.22) . Airports of Thailand (AOT.BK, Bt190.0) . Autometal (AUTM3.SA, R$18.4) . CCR (CCRO3.SA, R$17.85) . Ecorodovias S.A. (ECOR3.SA, R$16.01) . Iochpe–Maxion (MYPK3.SA, R$25.99) . JSL (JSLG3.SA, R$14.96) . Localiza (RENT3.SA, R$32.3) . Mahle Metal Leve (LEVE3.SA, R$24.85) . Malaysia Airports (MAHB.KL, RM6.8) . Marcopolo (POMO4.SA, R$13.3) . Mills (MILS3.SA, R$28.79) . OHL Brasil (ARTR3.SA, R$21.35) . Randon (RAPT4.SA, R$12.17) . Santos Brasil S.A. (STBP11.SA, R$26.38) . TAV Havalimanlari Holding (TAVHL.IS, TL11.7) . Tegma (TGMA3.SA, R$22.8) . Triunfo (TPIS3.SA, R$10.91) . WEG (WEGE3.SA, R$27.65) . Wilson, Sons (WSON11.SA, R$26.0)

77 29 July 2013 Important Global Disclosures

Bruno Savaris, CFA, Felipe Vinagre, and Daniel Magalhaes each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his personal views on all of the subject companies and securities and (2) no part of his compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012, analysts’ stock ratings are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non–Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; Australia, New Zealand are, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12–month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10–15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10–15% and –10–15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

78 29 July 2013 Important Global Disclosures

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79 29 July 2013 Important Regional Disclosures

Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS––Non–Voting shares; RVS––Restricted Voting Shares; SVS––Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non– affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. Bruno Savaris, CFA & Felipe Vinagre & Daniel Magalhaes each certify that (1) The views expressed in this report solely and exclusively reflect my personal opinions and have been prepared independently, including with respect to Banco de Investimentos Credit Suisse (Brasil) S.A. or its affiliates ("Credit Suisse"). (2) Part of my compensation is based on various factors, including the total revenues of Credit Suisse, but no part of my compensation has been, is, or will be related to the specific recommendations or views expressed in this report. In addition, Credit Suisse declares that: Credit Suisse has provided, and/or may in the future provide investment banking, brokerage, asset management, commercial banking and other financial services to the subject company/companies or its affiliates, for which they have received or may receive customary fees and commissions, and which constituted or may constitute relevant financial or commercial interests in relation to the subject company/companies or the subject securities. Bruno Savaris, CFA is the responsible analyst for this report, according to Brazilian Securities Commission (CVM) Directive 483. To the extent this is a report authored in whole or in part by a non–US analyst and is made available in the US, the following are important disclosures regarding any non–US analyst contributors: The non–US research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non–US research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances, and trading securities held by a research analyst account. Banco de Investments Credit Suisse (Brasil) SA or its affiliates. Bruno Savaris, CFA ; Felipe Vinagre ; Daniel Magalhaes For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at www.credit–suisse.com/researchdisclosures or call +1 (877) 291–2683.

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