Actionable Intelligence for Global Infrastructure & Renewables

Brazil Intelligence Update| Intelligence

Published: Thursday 23 May 2013

Executive Summary

Brazil's score on the inspiratia intelligence index has risen from 63.70% to 65.20% in line with expectations. The government has shown greater political support for PPP with the finance minister undertaking an international tour to promote projects and attract private investors. Projects have also been made more attractive and the government has rolled out new plans in a continued push for better infrastructure. The anticipated port investment programme was released and there is now talk of one for sanitation. Changes to urban planning and other approaching deadlines are expected to increase political activity in order to force projects through. The country's economic performance has been weak but growing investment is expected to accelerate growth. Brazil has a positive outlook of 66.95%.

Brazil Update

Brazil's federal government has boosted its support of PPP as a means of developing the country's infrastructure. It carried out an international road show to showcase projects set to be auctioned this year and announced an investment programme focused on ports. In a bid to entice international investors and developers to the country, Brazil's government has established tax breaks for infrastructure investments, extended the length of concessions and is now allowing higher internal rates of return. However, the procurement process remains uneven with projects being delayed due to permitting issues or legal action.

In December 2012, the federal government announced a US$26 billion investment into port infrastructure between 2014 and 2017. The programme involves leasing existing facilities as well as concessions for new terminals. It follows on from the Logistics Investment Programme announced in August the same year [News Story]. Both are meant to combat Brazil Cost – the extra cost of doing business in Brazil compared with similar markets as calculated by the Brazilian government, which has been a key focus of President Dilma Rousseff's administration.

Part of the reform of logistics was recently approved by Brazil's National Congress [News Story]. The Port Reform Bill allows procurement of port concessions to be based on the lowest tariff rather than highest concession payment and allows private terminals to handle 3rd party cargo. The tenders will be released by state and local authorities.

Sanitation is also set to be expanded with the federal government preparing to bring forward a major investment plan for the sector. The programme will see a roll out of basic sanitation infrastructure across the country, including development of water supplies and treatment, and waste disposal.

The sanitation plans will be built on at the municipal level as urban planning is renewed. Under the Statute of the City (Law 10257, 2001), municipalities were given powers and responsibilities over land use, housing, the environment and social inclusion. It also required preparation of master plans to govern municipalities' urban development policies. Cities such as São Paulo, Brasilia and Rio de Janeiro are now designing master plans which will likely result in a requirement for more/different infrastructure such as housing, public transport, schools, healthcare, water supply and sanitation. For instance, CH2M Hill was recently selected to develop a master plan for the Belo Horizonte Metropolitan Region.

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Road show

In February 2013, Brazil's finance minister Guido Mantega undertook an international campaign to publicise the government's PPP and concession programme and increase investors' interest. The programme includes the construction and operation of 7,500km of roads, 10,000km of railways and 159 ports. Mantega also pointed to good investor returns of over 10% for the deals.

The minister made several presentations on the benefits of different financing mechanisms, the macroeconomic environment as well as the opportunities available in Brazil. This included outlining tax breaks that were originally established through a presidential order in August 2012 but would have lapsed unless legislated by the National Congress. This was done in December 2012 with the passing of Law 12,766. The tax breaks affect the issuance of bonds to finance infrastructure as well as limiting taxes on income from investments made by foreign companies. They come in addition to 3 special tax regimes affecting possible PPP deals, one for infrastructure investment, one for harbour investments and one for defence investments.

On top of the large volume of financing required, an additional incentive for the government to attract more investors to Brazil was Moody's downgrade of BNDES and Caixa Econômica Federal (CEF) over concerns about the institutions' rate of credit expansion and low capital ratios. The banks have been reducing borrowing costs as part of an attempt to revitalise the economy and diminish the Brazil Cost. Both banks retained a positive outlook.

Spanish interest is increasing in Brazil PPP, with development minister Ana Pastor recently visiting the country to encourage Spanish companies to build on their experience in Spanish deals to win projects [News Story].

The full list of PPP deals presented by minister Mantega is as follows:

Highways

The 9 road concessions are all set to be auctioned in July 2013. The concessions will be 30-years long and will be set to have an internal rate of return between 9% and 15%. The deals are:

Table 1: Highway Concessions – Brazil

Highway Investment required over 25 years Description

BR-040 US$3.35bn 937km with 715km to widen Juiz de Fora – Brasillia

BR-116 US$2.5bn 817km with all to widen Além Paraíba – Divisa Alegre

BR-101 US1.8bn 772km with 547km to widen Mucuri – BR-324

BR-262 US$850m 377km with 196km to widen João Monlevade – BR-101

BR-153 & TO-080 US$2.4bn 814km with 786km to widen Anápolis – Palmas

BR-050 US$1.15bn 426km with 219km to widen Cristalina – Minas Gerais Border

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BR-060/153/262 US$3.05bn 1,177km with 648km to widen Brasilia – Betim

BR-163/267/262 US$4.35bn 1,423km with 1,383km to widen

BR-163 US$2.35bn 822km with 435km to widen Sinop – border with Mato Grosso do Sul

Railways

The 10 railway concessions are set to be 35-years in length with an internal rate of return of 9.26% to 12.5%.

Table 2: Railway concessions - Brazil

Railway Line Investment required over Description Auction date 30 years

São Paulo Rail Beltway US$2.4bn 245km extension May 2013

Lucas do Rio Verde – Palmas –Anápolis via US$5.1bn 1,920km extension May 2013 Uruaçu

Açailândia – Vila do Conde US$2.15bn 480km extension May 2013

Anápolis – Dourados US$4bn 1,294km extension May 2013

Belo Horizonte – Salvador US$6.3bn 1,651km extension June 2013

Rio de Janeiro - Campos - Vitória US$3bn 634km extension June 2013

Uruaçu – Corinto – Campos US$9.05bn 1,730km extension June 2013

Maracaju – Engenheiro Bley – Paranaguá US$5.16bn 1,012km extension June 2013

São Paulo – Rio Grande US$6.50b 1,800km extension June 2013

Salvador – Recife US$5.35bn 1,200km extension June 2013

Ports

The port concessions are all for 25 years with the option to be renewed for a further 25. They are being auctioned off in 4 lots between November 2013 and February 2014 with awards to bidders with the largest flow capacity and lowest tariff.

North: a concession for a US$200 million container port in Manuas. There are also leases for 27 existing facilities: 15 bulk liquid terminals, 9 bulk solid terminals and 3 container terminals.

North-east: a concession for the construction and operation of US$50 million Ilhéus Port handling general cargo, passengers and bulk solids. Leases for 48 operational facilities will also be auctioned, consisting of: 19 bulk liquid terminals, 14 bulk solid terminals and 15 container terminals.

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South-east: a concession for the DBFOM of the deep water US$1.45 billion Águas Profundas Port handling containers and bulk solids. Forty-four Leases will be auctioned: 2 offshore support terminals, 12 bulk liquid terminals, 10 bulk solid terminals and 20 container terminals.

South: a concession for the US$50 million Port of Imbituba which will handle general cargo and bulk solids while 39 leases will be up for auction: 5 bulk liquid terminals, 18 bulk solid terminals and 16 container terminals.

Airports

Brazil is auctioning a further 2 airports following the auction of 3 last year [News Story]. The authorities are hoping to attract greater international interest and competition for these 2 airports than has been achieved previously on Brasilia International, São Paulo International and Campinas Airport. This is being done as greater experience in handling passengers is needed and to guarantee international involvement in a consortium. The 2 being auctioned in September 2013 are:

 Galeão – serves Rio De Janeiro, handling 17.5 million passengers in 2012. It has an EBITDA of US$33 million and demand is expected to rise to 69 million passengers by 2042  Confins – serves Belo Horizonte handling 10.4 million passengers in 2012. It has an EBITDA of US$21.5 million with demand expected to rise to 47.5 million in 2042

High Speed Lines

The presentation included the re-launched Rio de Janeiro – São Paulo – Campinas high speed line. The project is set to be auctioned on 19 September 2013 with the contract due to be signed in February 2014 [News Story]. The deal was restarted in December 2012 [News Story] after the original tender was suspended in April 2011 due to court action [News Story].

The project will be 511km long with a US$3.53 billion capex. The financing will be 70% debt and 30% equity with 45% of the equity coming from government.

Project developments

Procurement of the Rio de Janeiro – Campinas HSL is an example of Brazil's tendering process which often suffers delays due to legal and permitting issues. BR-101 was suspended in August 2012 following an injunction against the project enacted by a federal court [News Story]. However, this was overturned by the Superior Court of Justice and the project reached commercial close in April 2013 [News Story].

Maracanã stadium went through a similar ordeal with the O&M deal being suspended following selection of a preferred bidder [News Story]. This was shortly overturned by anther court a few days later [News Story].

There have also been problems at a state and municipal level with São Paulo having to re-issue tender documents for the US$3.9 billion Orange Line 6 after concerns were raised over land acquisition documents [News Story] and with concerns raised over the viability of São Paulo's pathfinder housing PPP [News Story].

There has been some success at the local level with the selection of the preferred bidder on Rio de Janeiro's light rail deal connecting the city to its redeveloped Porto Maravilha district [News Story]. Post-financial close there have also been issues with the federal government renegotiating the first phase of highway concessions. The government is looking to alter the terms of the agreement following higher than predicted demand growth. The

greater increases in traffic volume have resulted in high returns for the private sector and the government is hoping to either benefit from these returns or to see greater investment from the concessionaires.

Conversely, the government has lowered demand forecasts for the latest set of road concessions following concerns raised by bidders. It has also extended the concessions and made a number of other alterations to the terms in order to make the deals more attractive to the private sector.

Chart 1: inspiratia intelligence index: Q1 2012 to present

Brazil has risen on the inspiratia intelligence index [See Chart 1] as the government demonstrates growing political support for PPP and the model is adopted across a larger number of states. The Political Support Indicator has been steadily improving since Brazil was first looked at in Q1 2012 and is forecast to keep rising.The Macroeconomic Indicator has been stable as Brazil's economic performance was weak during 2012 [Intelligence Update] though expected to improve during 2013.

The Legal and Regulatory Indicator is being supported by the large pipeline of deals, though the country's procurement process remains irregular with deals being halted by legal challenges, renegotiated or otherwise subject to delay. The other Indicators have remained stable following an uptick in the previous briefing in Q3 2012. Overall the country's strongest scores are in its debt management, legal and regulatory and financial indicators [See Table 3].

Positive Indicators

Brazil's Political Support Indicator has increased from 65% to 75% as the government has accepted the model as the best means to improve the country's infrastructure and undertaken a series of steps to make the country more attractive to the private sector. The government listened to bidders concerns regarding toll concessions and responded with more attractive terms showing a willingness to change to ensure good quality bids.

PPP is gaining popularity among states with northern state Pará looking at the model and Paraná advancing its first deal. Already active states like São Paulo and Minas Gerias have kept up support with multiple feasibility studies being carried out and with projects advancing. The country's major municipalities such as São Paulo, Rio de Janeiro and Belo Horizonte are also developing master plans which will inform urban development. The plans are expected to lead to greater use of PPP to build required infrastructure. The indicator has a positive outlook of 80%.

Stable Indicators

The Legal and Regulatory Indicator has remained stable at 73% against expectations of a rise to 76%. The country's procurement process has continued to be jolty in nature with legal challenges and regulatory hurdles plentiful. However, delays tend to pause projects rather than resulting in cancellation. Environmental approval is a particularly frequent hurdle although delays are sometimes orchestrated by contractors to put off investments when they are overstretched. The indicator is supported by the existence of a substantial deal pipeline across a variety of sectors. The indicator has a stable outlook.

The Macroeconomic Indicator has remained at 47%, as expected but now has a positive outlook with economic performance expected to improve towards the end of 2013. Brazil's growth rate was 0.9% in 2012 due to a lack of investment. This is now expected to change and an increasing investment should see the country manage 3.6% in 2013. Unemployment has remained low resulting in real wage increases; inflation was high at 5.8% in 2012 and is expected to remain at that level throughout 2013. The Indicator has a positive outlook of 57% due to the pickup in growth.

The Financial Indicator has remained stable (72%) as BNDES retains its dominant position in the market. The country's development bank continues to be active and price aggressively ensuring its widespread presence. However, its recent credit rating downgrade along with CEF may point to a possible rolling back of the banks' capabilities, although this has not been indicated by government. Banco do Brasil is the other main domestic lender and there is also a presence from some regional banks.

The government has taken steps to introduce alternative sources of finance including creating tax breaks for bonds issued for infrastructure deals. The legislation of these tax breaks provides some assuredness of their on-going presence, but their primary effect was felt in the previous update's rescoring. There has also been speculation over whether government may create a US$7.6 billion infrastructure fund to support bank lending to infrastructure. Brazil's continues to use the PPP guarantee fund to provide certainty over public sector payments. The government has also set out to make projects attractive to investors by talking of higher investor returns. The indicator has a stable outlook of 72%.

The Debt Management Indicator has also remained stable at 72%. The government is expected to keep a fiscal surplus despite expansionary measures taken. Debt levels are also forecast to remain on a downward trajectory. The country is set to keep its Baa2 rating from Moody's and its BBB rating from Standard & Poor's. The International Indicator has stayed at 40% with the Institutional Indicator remaining at 54%, all three have stable outlooks.

Conclusion

The Brazilian government has become more supportive of PPP as it aims to use the procurement model to upgrade the country's infrastructure and reduce the Brazil Cost which is seen as the main hindrance business activity and the country's growth.

Urban and rural development is also a key driver behind improving infrastructure with states undertaking a large set of feasibility studies examining using PPP to improve housing, transport, health and sanitation.

Brazil remains a large opportunity for infrastructure players but remains problematic with its procurement process. The government is trying to improve the regulatory structure but is focused more on making projects more attractive to international companies.