Poorly Timed Concession Unlikely To Progress

BMI View: Paraguay's plans to concession its main airport come at a bad time, as the country continues to be embroiled in the political ramifications from the June 2012 ousting of former President, Fernando Lugo. Paraguay has subsequently been excluded from various regional organisations and we anticipate that things are likely to get worse prior to improving. Given that a stable policy environment is crucial in attracting private infrastructure operators, we see little potential for these plans to move forward in the foreseeable future.

Paraguay's finance minister, Manuel Ferreira, has re-visited plans to employ the private sector for the operation of strategic infrastructure in Paraguay, with Asunción's Silvio Pettirossi International Airport top of the project list. However, the government will need to pass a concessions bill in order to move forward with a tender. Former President Fernando Lugo put a concessions bill to congress in late-2011, but this effort stalled. A new bill is being drafted and hoped to be put to congress in October 2012.

Despite this announcement, we hold little optimism that this plan will move forward, at least over the short term, given Paraguay's political climate. In June 2012, Paraguay's congress impeached the then-President, Fernando Lugo, and replaced him with his deputy, Federico Franco. Many observers have questioned the legality of the move, and Paraguay has been isolated from the region, with its memberships to Mercosur and Unasur suspended. It currently remains in the OAS.

Short Term Weakness, Longer Term Potential Improvements?
Paraguay Business Environment Ratings, %

With presidential and congressional elections due to take place in April 2013, we see little scope for this project to move forward before then. Even if the bill is passed through congress, Paraguay will be hard pushed to entice international private investors to commit to operating an airport with little policy security. Indeed, when creating an attractive concessions environment, investor protection, security and certainty of regulations are key elements that Paraguay will be unable to provide over the short term. For this reason, even if the tender moves forward, we expect interest to be muted.

Demand risk is also a threat in Paraguay. The country's economy is doing poorly following bouts of foot-and-mouth disease (FMD) in 2012 and drought, which have damaged the country's soybean and beef export potential. The country's ability to export and import will be further hit by its suspension from Mercosur, and we have therefore downgraded our already weak 2012 real GDP growth forecast to -2.7%. A poor economy is bad for aviation demand, especially on the cargo front given the expected impact to trade, but also passenger demand. Paraguay's weak economy may see the airport, when eventually concessioned, failing to attract anything near the targeted investment.

The present political instability has some upside potential, however: Lugo was ousted in part due to his attempts to take a more hard line with the country's landed elite, and therefore his departure could lead to a more market-friendly administration. However, we will have to wait until after the April 2013 elections to get any sense of policy direction.

This article is tagged to:
Sector: Infrastructure
Geography: Paraguay

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