BMI View : Brazil's ambitious plans to launch US$121bn worth of transport concessions are looking to be far from a successful venture given the current operating and investment conditions. Despite making a number of improvements over the course of 2013 to make concess ions more attractive , we believe further improvement in the rate of return will be necessary, especially as the cost of capital domestically increases, the economy continues to stagnate, inflation continues to be a concern and protests against the cost of public services hit the headlines.
Brazil's new concession package, which is aimed at capturing private sector investment for the infrastructure sector , is planned to progress over the course of 2013 . However, over recent months , we have not only seen a number of alterations on the regulatory and contract side as tender dates approach , but we have also seen a continued deterioration in the economic and political environment. The convergence of these factors has made us weary of the immediate success of this package to attract new and international investors into Brazil's infrastructure sector.
|Source: Ministry of Finance|
|High Speed Rail||35.6|
In this environment, the big winners will likely be the domestic companies, who have the experience in operating in the complex and changeable Brazilian business environment. Therefore, we expect CCR, EcoRodovias, TPI, Odebrecht TransPort, Invepar and their peers to be the most likely victors.
In terms of sectors, we expect that those which are reliant on freight demand will attract the most interest given a limited exposure to government concerns over price tariffs. As such, we hold a more optimistic outlook for the port and freight rail projects to attract international investor interest. Of these two, we would expect ports to receive greater interest due to the lower value of projects (the cost of some railway projects could prove prohibitive in the current financing environment), and the fact that there has been considerable demand from the private sector to operate port terminals to smooth the supply chain.
|Ports To Outperform|
|Brazil Transport Infrastructure Industry Real Growth, By Subsector, % y-o-y|
Highways: Getting Close To A Test Case
Brazil is just about keeping on schedule for its first lot of highway concessions since the new package was announced, with an investor road show already completed. Since the road show in February, there have been multiple changes in the fine print regarding financing and rate of return, to the extent that there remain several grey areas from our perspective. This highlights one of the major difficulties in committing to working with the Brazilian government over a multi-decade horizon.
The unlevered Internal Rate of Return (IRR) has been increased for highway concessions from 5.5% to 7.2%; however further increases are also being considered, which could cause investors to hold off from making a decision. The Leveraged IRR is currently estimated at 9-15% for highway projects (depending on the debt/equity ratio used), but we highlight that this figure could be threatened by any increase in interest rates.
Access to financing and loan conditions have also been improved, with BNDES expanding its credit lines and the TJLP (long term interest rate) decreased to 5.00% in January 2013. However, with the Central Bank now entering a hiking cycle, with 125 basis points of hikes to the selic rate in 2013 thus far, pressure is mounting for the TJLP to be increased as well.
The level of financing allowed from one creditor has been reduced from 80% to 70%, meaning that alternative sources of financing will be needed beyond BNDES.
Recent protests in Brazil were sparked by an increase in bus fares, pushing the cost of transport firmly into the political sphere and making it a key issue ahead of the 2014 elections. The cost of public services has been an area of popular discontent, prompting the government to freeze or reduce tariffs for both publicly and privately operated infrastructure. In June 2013 for example, the state of Sao Paulo froze all highway tolls for a year, some of which are privately operated.
Against this backdrop, Brazil's national ground transportation agency - ANTT - has released the draft tenders for two highway concessions due to be auction on July 31. The BRL2.1bn (US$944mn) BR-262 and BRL3bn BR-050 concessions will be offered on a 30-year term. The winning bidder will be chosen based on the lowest toll rate. We believe that the bidding for this project will provide an insight into the potential for the BRL42.5bn road concession package to be a success.
|Source: EPL, Ministry of Finance|
|BR-262||377||1.8||Draft tender released|
|BR-050||426||2.4||Draft tender released|
|BR-153 and T0-080||814||4.8||na|
Airports: Second Time Round A Different Story
Brazil's airports were the testing ground for the government's latest wave of concessions. Regulatory changes allowed the first concession for airports to take place in 2011, followed by the main auction for three major airports in February 2012.
All three airports were successfully auctioned, with significant interest from international players. However, the final prices for these airports were at a huge premium - on average, 347% on the minimum bid price - raising some concerns over investment returns for their respective concessionaries over the coming years.
The concessions for Guarulhos International Airport in Sao Paulo, Brasilia International Airport and Viracopos International Airport in Campinas took place on February 6 2012 as planned, with 11 consortia, comprising 28 companies placing bids. With Brazil's airport concession regulations new and relatively untested - the auction took place just seven months after the decree to allow private operation of airports in the country - we saw the auction as a litmus test for investor confidence in the market.
The airports are three of the busiest airports in the country, with all of them located in World Cup host cities. The growth in air travel in Brazil has been incredibly strong over the past few years; therefore, we believe that demand is not constrained to the World Cup year and revenues should continue to be strong.
Due to the lack of domestic experience in operating airports, an international ly experienced operator was required by the bidding rules - a stipulation that drew the world's biggest airport operators to register their interest. The auction therefore presented a rare opportunity for international companies to get a foothold in a market dominated by local players. However, despite a number of high-profile companies placing bids (including Fraport , Changi and Asur ), the most well-known players in the sector are absent from the winning consortia. Their absence implies that they were outbid, and perhaps unwilling to pay the high premium necessary to secure the concessions.
|Airport||Minimum Price, BRLmn||Auction Price, BRLmn||Winning Bid||Concession Period||Capacity, mn (by 2014 World Cup)||Total Investment, BRLmn||Annual Contribution to FNAC|
|Sao Goncalo do Amarante International Airport, Natal||51.5||170||Inframerica Consortium (Corporacion America, Engevix)||25 years||3||650||na|
|Guarulhos International Airport, Sao Paulo||3,400||16,213||Invepar ACSA Consortium (ACSA, Invepar)||20 years||7||4,600||10% gross revenue|
|Brasilia International Airport||582||4,510||Inframerica Consortium (Corporacion America, Engevix)||25 years||2||2,800||2% gross revenue|
|Viracopos International Airport, Campinas||1,500||3,821||Brazil Airports Consortium (TPI, Egis)||30 years||5.5||8,700||5% gross revenue|
Under the new concessions package, two more airports are to be released under a concessionary format, with a 51% stake offered. Confins is being offered under a 30-year concession, with a minimum bid of BRL1.56bn, while Galeão is being offered under a 25-year concession, with a minimum bid of BRL4.65bn.
Regulations used in the first batch of airport concessions were tweaked ahead of the auction to address concerns raised the first time round:
This time round, the FNAC annual gross revenue contribution will be set at 5% for both airports to address profitability concerns.
To address charges of inexperience, operators must now have experience with airports of a minimum capacity of 35mn passengers per annum (compared to 5mn previously) and these operators must take at least a 25% stake in the consortium (versus 10% previously).
One interesting change also being considered is exceptions to a ban on companies already involved in airport operations bids. Although they are likely to remain in place for the airport operators, an exception is in the works for the country's pension funds who have been key sources of finance for the infrastructure sector.
We suspect that these measures will substantially reduce the pool of bidders, as well as the value of bids received. As such, it is not surprising that changes to these stipulations are already being considered. However, given that the first invitation for bids has taken place, and the auction is due to take place in September 2013, changing the regulations this late in the day is a worrying, but not unexpected, precedent. Therefore, these developments raise the potential for the auction date to be pushed back as companies will not have enough time to prepare based on new stipulations for who can bid.
Ports Look Most Promising
In December 2012, the government unveiled a US$26bn port investment programme. The investment would come from both public and private sources, with the exact breakdown not known. Although project details are still slim, one important change is the licensing terms for private investment into ports. The majority of investment under the plan will be made between 2014 and 2017 and therefore is an additional investment to that classified under the second PAC.
In December 2012, a new regulatory framework to allow concession and private operation of ports was approved; the most recent alterations to the law were passed by congress in July 2013. In short, the new law allows private companies to handle third party cargo in addition to their own. Concessions will be offered for a 25 year period, with the government required to approve any extension. The concessions will be procured by Antaq, with the first lot to go to tender in Q3 2013 and be awarded in November 2013. Concessions will be awarded based on a flexible set of criteria which will be adjusted depending on the individual project. This will include the fees, volume of cargo, time of execution, but also highest investment, lowest public subsidies and technical proposal.
Concessions will be offered for a number of ports including Ilheus and Imbituba, as well as for the construction and operation of new ports including Aguas Profundas Port and Manaus. Auction details are to be published in late-2013 and will take place in 2014. Financing will be offered at TJLP plus 2.5% with a three year grace period.
In July 2013, the tender was released for the first 50 projects with an estimated investment of BRL11bn. Antaq has already received 123 requests to operate these terminals, with the deadline for bids in early August.
Railways: High Value, Questionable Reward
Under the Logistics Investment Plan, 10 railways have been highlighted for private investment and operation under concessions. Representing a total investment of BRL98bn, the scheme aims to enable construction of over 11,000km of railway. Financing will be offered for the concessions at a rate of TJLP plus 1%. The estimated leverage IRR is between 9.3% and 12.5% depending on the debt/equity ratio used. The concessions will be offered for 35 years. Demand risk has been highlighted as a potential area of concern. According to tender regulations, the railway must remain fully operational and well maintained regardless of demand. Under the first concession, in order to reduce demand risk on the railway, capacity will be purchased by Valec, which will then allocate it. It is not clear if this method will be replicated for all stretches.
The first railway to be tendered under the new railway concessions programme will be the Açailândia - Vila do Conde railway. Public consultation has taken place. Under the original schedule the contract signing was due to take place in August, however bids are due to be submitted during that month, with the contract now expected to be signed in October. The route will service iron ore, bauxite and grains transport primarily.
The next four railway concessions have been opened for initial engineering consultation, with responses due in July. The combined length of the four railways is 5,348km with an estimated investment of BRL49.7bn.
|Railway||Length, km||Value, BRLbn||Status|
|Source: EPL, Ministry of Finance|
|Belo Horizonte - Salvador||1,651||12.6||Initial engineering consultation|
|Rio de Janeiro - Campos - Vitória||634||6.0||Initial engineering consultation|
|Uruaçu - Corinto - Campos||1,730||18.1||Initial engineering consultation|
|São Paulo - Rio Grande||1,800||13||Initial engineering consultation|
|Açailândia - Vila do Conde||480||4.3||Public consultation complete, preparing tender, due October 2013|
|Lucas do Rio Verde - Uruaçu - Palmas - Anápolis||1,920||10.2||na|
|Anápolis - Panorama - Dourados||1,294||8||na|
|Maracaju - Eng Bley - Paranaguá||1,012||10.32||na|
|Salvador - Recife||1,200||10.7||na|
|São Paulo Rail Beltway (Ferroanel)||245||4.8||na|