Infrastructure projects in Brazil: the road to partnerships

May 2019 | EXPERT BRIEFING | FINANCE & INVESTMENT

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Brazil has, historically, had to contend with a huge infrastructure gap. Currently, annual investments from private and public sources are insufficient to even cover depreciation. The Brazilian public budget is unable to fill this gap; thus, the only way to satisfy demand for the infrastructure investment the country urgently needs is to establish partnerships with firms operating in the private sector.

In a recent publication, the World Economic Forum reported that Brazil was ranked 80th out of 137 countries evaluated in its global competitiveness rankings. In the ‘quality of infrastructure’ category, Brazil’s position of 108th is even worse, placing it well below the average of Latin American and Caribbean countries.

The biggest driver to attract private capital is a conducive business environment that inspires credibility. This means not only providing the market with consistent and attractive projects, but also tackling issues such as predictability, legal certainty, regulatory maturity and transparency.

The Investment Partnerships Program (IPP) was created by Brazilian Federal Law in 2016, with the goal of coordinating and successfully delivering concessions and privatisations for the Brazilian federal government. The IPP is directly linked to the presidency of Brazil, which demonstrates the level of commitment the Brazilian government places on the project.

The IPP’s main role is facilitating relationships between government stakeholders, such as sectoral ministries, regulatory agencies and control and audit institutions, among others, with market actors, such as investors, financial institutions, concessionaires, multilateral organisations, infrastructure operators, consulting and law firms, and others, in order to guarantee that all parties will contribute to furthering projects.

As the ultimate goal is to enable the creation of a partnership, it is imperative that a permanent channel of dialogue and interaction is created between all of the actors involved in an infrastructure project.

This was the process which brought 12 airports to a concession auction on 15 March 2019 – the journey to that point began in August 2017. The fifth round of the airport concessions auction introduced an innovative concession model, whereby the airports were offered in three regional clusters, each one combining attractive assets with less attractive ones. The 12 airports account for 9.5 percent of domestic traffic, handling around 20 million passengers per year.

In March 2018, the IPP, along with the National Civil Aviation Secretariat (SAC) and the National Civil Aviation Agency (ANAC), organised an initial round of discussions with the chief executives of the concessionaires of the 10 airports already being managed privately in Brazil – which accounted for around 60 percent of domestic traffic. The goal of the discussions was to receive feedback on the positive and negative aspects of the concession contracts they have signed and to suggest improvements on the next round of airports concession. A total of 219 contributions were received and they provided valuable insights into the bidding process, regulation, investment obligations and business environment, which were prioritised. Their main complaints were also addressed by government teams.

These discussions were followed by public consultation, carried out by the ANAC. At the same time, the IPP promoted a new round of road shows, which were attended by 11 potential investors. The SAC, ANAC and IPP teams initiated a series of interactions with the Federal Court of Accounts (TCU), which resulted in the approval of feasibility studies in October 2018. The TCU’s approval provided the legal certainty needed for the process to move forward.

This systematic approach to the project (strictly technical and free from political influence), the nature of the discussions and the integrated actions of the IPP, the sectoral ministry and the regulatory agency, have undoubtedly had a positive effect on the market’s perception that advances have been made. The result emerged at the fifth round of airport concessions: intense competition, high premiums and a successful auction.

Two major global operators – Spanish group Aena and Swiss group Zürich Airport – as well as a consortium of Brazilian companies led by infrastructure group Socicam, won the bids for the 12 airports, offering a total of US$624m in upfront payments.

On 18 March, the Brazilian government launched the next round of airports concessions that will offer the private sector the operation of 22 airports, in three clusters, which handle around 24 million passengers per year. The auction is expected to take place in the fourth quarter of 2020. Upon completion of the sixth round, 80 percent of the country’s passenger demand will be served by granted airports.

The IPP portfolio has currently 57 projects in progress, comprised of concessions of energy transmission lines, highways, railways, port terminals and cession of mineral rights. Most of these projects are at an advanced maturity level and will be offered to the market shortly.

January 2019 saw a new government assume power in Brazil, and the IPP team also began a new cycle, with a focus on locating projects which may become part of the IPP portfolio. More than 100 potential projects were identified as concrete possibilities for the near future.

It is important to say that for a project to be incorporated into the IPP portfolio, it must be approved by the IPP council, which includes seven ministries and is overseen by the president. By law, all the projects selected to join the IPP’s portfolio must be treated as national priorities by the state actors involved.

The IPP portfolio is dynamic and built according to the project’s maturity level. In the 30 or so months that it has been in existence, the IPP council has held eight meetings to approve new projects for the IPP portfolio. The last meeting was held in July 2018, and the first meeting of the IPP council under president Bolsonaro’s government is expected to have taken place in April 2019.

Another concrete example of how the IPP has been contributing to regulatory innovations in Brazil is the publication of Resolution No. 1 of the IPP council, which sets guidelines for IPP projects, based on the best practices and benchmarks from other countries. It establishes, for example, a mandatory public consultation for all projects, the publication of all the bidding documents in Portuguese and English, and a minimum period between the release of the bid notice and the auction, providing enough time for a foreign investor to be properly prepared to participate.

The reach and scale of the projects can vary. There are large projects, such as the ‘Transfer of Rights’ surplus oil bidding round, and relatively small-scale ones, such as the cession of mining rights of zinc, copper and lead in the town of Palmeiropolis, in the state of Tocantins.

The ‘Transfer of Rights’ contract was signed in 2010 by the Brazilian federal government and Petrobras, assigning Petrobras the right to explore and produce oil, natural gas and other fluid hydrocarbons in certain areas of the pre-salt, limited to a maximum volume of 5 billion barrels of oil equivalent (BOE). The contract divided the exploration areas into six blocks, namely: Franco, Florim, Guará, Tupi, Northeast of Tupi and Surroundings of Iara. A contingent area, called Peroba, was also allocated to ensure the maximum volume established in the contract.

Government studies point to a production potential far above the contract value signed by Petrobras. It is estimated that the surplus volume in some blocks lies somewhere between 9.8 and 15.2 billion barrels of recoverable oil. The government expects to carry out the bidding process until October 2019 and receive signature bonuses that may range from US$22bn to US$26bn.

In contrast, the cession of mineral rights of Palmeiropolis is projected to raise about US$10m in signature bonuses and royalties. It will, however, open up new investment opportunities to a sector that has historically faced many challenges, as well as foster economic development in the state of Tocantins.

The previous rounds of concessions under the IPP flag have attracted 49 foreign companies from 15 different countries. Considering the investments by country, the biggest investors have been the UK, followed by China and the US, and most of these investments have come from the oil & gas sector. It clearly demonstrates the potential impact that reliable regulation, well designed contractual incentives, and the role played by the IPP have in encouraging foreign investment into Brazil.

The IPP has achieved significant results so far. A total of 193 projects have qualified for the programme, of which 136 projects have already concluded, meaning that the project was brought to a successful auction and the concession contract was signed. Those projects will translate into US$68bn in investments over the next few years and upfront payments of US$14bn. They will generate thousands of new jobs, income and boost economic growth. They have a lot to contribute to Brazil´s development. While the road ahead is still very challenging, it is immensely promising.

Pedro Bruno Barros de Souza is secretary of Energy and Airports Coordination, Robson Eneas de Oliveira is director of Oil, Gas and Mining and Claudia Yukari is an advisor at the Investment Partnerships Program (IPP). Mr de Souza can be contacted on + 55 61 3411 6410 or by email: pedro.bruno@presidencia.gov.br. Mr de Oliveira can be contacted on + 55 61 3411 6439 or by email: robson.eneas@presidencia.gov.br. Ms Yukari can be contacted on +55 (61) 3411 6478 or by email: claudia.asazu@presidencia.gov.br.

Pedro Bruno Barros de Souza, Robson Eneas de Oliveira and Claudia Yukari

Investment Partnerships Program (IPP)