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. Inform | influence | inspire © Copyright inspiratia 2013 1 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 Inform | influence | inspire © Copyright inspiratia 2013 2 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. Inform | influence | inspire © Copyright inspiratia 2013 3 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.