This blog is designed to inform investors about business opportunities in Brazilian infrastructure projects. It covers energy, telecomm, mining, transportation, ports and airports greenfield and brownfield projects.
Its content is supported by official information and/or documentation gathered from news agencies, Brazilian regulatory agencies or other governmental entities.
This blog is updated upon new regulations on the areas covered by this blog are issued by Brazilian Agencies.
Brasília reduces minimum price for auction of Confins airport
By Daniel Rittner | Brasília
The federal government has reduced by 36% the minimum license price for the Confins airport auction. The Secretariat of Civil Aviation revised the initial bid down to R$993 million from R$1.56 billion. The auction will be won by the consortium offering the highest bid. There were no changes in the internal rate of return, kept at 6.46% a year. The new minimum price is due to adjustments in the amount of investments demanded during the 30-year concession contract.
New demands included, for example, a higher number of passenger boarding bridges to be built by the future concessionaire. Since investment demands increased, the minimum price fell. Confins is the airport serving Belo Horizonte, capital of Minas Gerais. In the case of Galeão, Rio de Janeiro’s international airport that will also be auctioned, there were adjustments in work demands too, but smaller ones. The initial bid was raised to R$4.73 billion from R$4.65 billion — a 1.8% increase. In Galeão, the exact opposite happaned: there was a slight reduction in investments required over the 25 years of contract, pushing the minimum bid higher.
“The internal rate of return didn’t change. The Treasury understands there is no need. The project’s profitability is assured,” the minister of Civil Aviation, Moreira Franco, told Valor. New versions of the tender notices will be sent this week to the Federal Audit Court (TCU).
The decision to keep the return rate unchanged caused dissatisfaction at consortia that intend to take part in the auction. They claim that the demand studies used by the government are outdated, considering the economy’s stagnation and the scenario of rising airfare prices. The studies point to average annual growth of 4.7% in the volume of passengers for the next three decades for Galeão and Confins. In the first half of this year, though, figures were well below that.
From January to June, according to numbers of Infraero, the state-owned airport operator, domestic and international passenger traffic at Galeão was 8.47 million — slipping 0.2% from the same period in 2012. At Confins, traffic was 4.91 million passengers — 4.5% less than a year earlier. For private-sector investors, this may be reflecting an accommodation of demand, with repercussions for the entire concession period. Demand will continue growing, investors say, but not at the projected pace.
The government disagrees and doesn’t see the first half’s demand fall as a trend. “In the past ten years, civil aviation had a boom and tripled the number of passengers. In 2009, for example, the number fell. Over a long series, there are variations of all natures, but any study today points to a path of strong and consistent growth,” says Guilherme Ramalho, executive secretary of the Secretariat of Civil Aviation.
Current controlling shareholders of privatized airports — Guarulhos, Viracopos and Brasília — were allowed to take part in the next auction. However, the 15% limit for their participation frustrated companies. Invepar, which controls the Guarulhos Airport, in São Paulo metro area, was articulating to join the bidding for Galeão and Confins together with Italian operator Atlantia. UTC, which shares the control of Viracopos with Triunfo, was in advanced talks with Europeans and Americans.
The government’s retreat, after showing intransigence in the defense of such restriction, is attributed behind the scenes to former President Luiz Inácio Lula da Silva and his close aides. They were directly reached out by the companies, which no longer saw chances of altering the rules at the Palácio do Planalto, the president’s office. Minister Moreira Franco said he was unaware of the issue, but stressed that the loosening “of the rule keeps the principle of competition.”
The minister said the participation of 15% of current controlling shareholders in private-sector consortia obeys the Brazilian Corporate Law, which sets this ceiling in order to prevent the shareholders from having vote rights. “There’s a strong competitiveness logic,” he explained. After the contract’s signing, with the alliance of Infraero to the auction winners, the current controlling shareholders of already privatized airports will be able to hold at most 7.5% stakes in Galeão and Confins.
The trend now, Valor has learned, is that companies such as Invepar and UTC seek minority positions in the consortia being formed.
Behind the scenes, there is strong investor concern over the situation of Reidi, the special taxation regime that exempts from social contributions PIS and Cofins all purchases of machinery and equipment for the construction work. A new Secretariat of the Federal Revenue rule, published in December 31 of 2012, froze the inclusion of new infrastructure projects – especially in the electricity industry – in the tax regime. The measure can cut down costs up to 9.25% is being taken in consideration in the investment figures being demanded from future concessionaires.
Brasília eases collateral terms for infrastructure financing
By Leandra Peres | Brasília
Companies that win upcoming highway auctions will be allowed to substitute traditional collateral – real or financial assets and corporate bonds – in the financing they get from public banks with contracts in which they commit to increase their consortium’s capital by up to 20% of the total value of the works demanded to cover any problems that arise during construction, the so-called “equity support agreement” (ESA).
Such design, agreed upon at a meeting of Finance Minister Guido Mantega, industry executives and trade groups, also sets that the Brazilian Agency for Funds and Guarantees Management (ABGF) will offer protection against the so-called “uninsurable risks,” basically unpredictable political events.
If something of that nature occurs, ABGF, which is 100% controlled by the federal government, will anticipate the needed funds to cover possible losses faced by concessionaires. With this, it will prevent construction work from being paralyzed while the issue is evaluated. At the end of the process, if it is proven that the contract had an economic-financial imbalance, compensation will be paid to ABGF as reimbursement of money advanced in the insurance policy.
“This model guarantees construction will be delivered, since shareholders will face the commitment of coming up with more capital. In parallel, it offers a relief for the balance sheet of companies while also keeping banks healthy, since they'll have guarantees that the works will be executed in the deadline and with a much lower risk,” explains Dyogo Oliveira, acting executive secretary of the Finance Ministry.
Under the current model of long-term financing, pre-operational loans are usually collateralized with real assets, like properties, and financial assets such as bank deposits or other accounts; or corporate bonds, which are basically a pledge by controlling shareholders, who even offer their personal assets.
The government's view and the claim from the private sector is that the volume of concessions to be granted and the size of domestic companies would make it impossible to use such tools. Currently, even before the auctions have started, there are important engineering firms in the market with no room in their balance sheets to offer more collateral to large-scale projects.
That is why the government decided to accept the ESAs, which are basically capital commitments in case of problems during construction work. Concessionaires will also have to offer performance insurance, which guarantees work goes along the agreed-upon timetable, and is a common demand in large-scale works.
The advantage for the auction's winners is that the capital-injection agreement does not directly affect company balance sheets. A bond, for instance, affects a company's net worth. ESAs, meanwhile, are booked out of the balance sheet.
A similar structure already was used for the financing of hydroelectric plant project Santo Antônio, in which the Brazilian Development Bank (BNDES) wanted corporate collateral from the concessionaires. At the time, however, the state-owned bank said that the collateral structure was an “exception.”
ABGF's presence has to be complementary to the private insurance market. Created in 2012 to manage all of the Union's collateral funds, ABGF will have the role of mitigating the “non-manageable” risk, a technical term that basically means political risks.
In the contracts prepared by the government, such type of risk gives to concessionaires the right to seek the “economic-financial rebalancing” of contracts, which is nothing more than compensation for any losses. But this discussion usually is long and drags in court.
The Finance Ministry's proposal is having ABGF offer a product that allows it, in case of such a claim, to advance funds to the concessionaires. Thus, work would be guaranteed to go ahead. But the state-owned firm also becomes the creditor of the result of any conflicts for the rebalancing of contract terms.
This model will be used in financing granted by state-owned banks, but officials also hope it could serve as a reference for the private sector. Despite the verbal agreement between government and private sector, the rules haven't been entirely detailed, something officials hope to make by mid-September, when they expect to launch the first highway auction.
Bullet-train auction expected to attract two consortia
By Daniel Rittner | Brasília
Two consortia led by French and Spanish companies are willing to present proposals for the auction that will define the operator of the bullet-train line between Rio de Janeiro, São Paulo and Campinas, set for August 13th, saving the government from another setback in its attempt to tender the project. But the groups are making it clear that they expect the creation of a “bride fund” by the government to deliver their bids. The exact format of that fund, which would have “strategic partners” joining the capital of the future concessionaire responsible for operating the high-speed train (known by the acronym TAV), hasn't been detailed by officials yet.
Domestic groups specialized in infrastructure concessions are being or will be sought by the government to join as partners in the investment after the auction. Odebrecht TransPort, CCR, Invepar and Ecorodovias are being eyed by officials. State-owned pension funds – like Previ, Petros and Funcef – are part of the “plan B” as strategic partners if attracting private groups turns out to be impossible.
Initially there were five consortia interested in the TAV. The Koreans, seen as the leading contenders in the first attempt at tendering the project, are now being dismissed. The Japanese still haven't given their final word, but everything indicates they won't join the auction, despite being interested in the venture. People close to the situation say they are not willing to shoulder any risks with passenger demand and already hinted in talks with Brazilians over the last weeks that they have decided to leave the bid.
In the same talks, the French and Spanish revealed willingness in handing proposals that could save the government from another failure – the auction in July 2011 ended without a single interested party. The French consortium is being led by Alstom and state-owned rail company SNCF. The Spanish consortium is headed by Talgo and state-owned rail firm Renfe but includes more companies, like Cobra, Indra and Abengoa.
It isn't clear if the German consortium is still interested in the project. Siemens, which was heading the consortium, signed an agreement with the Spaniards to supply signaling and telecommunication systems through Dimetronic, a company headquartered in Madrid and controlled by Siemens. Deutsche Bahn, the operator of the German railways, is said to have faced restrictions to join as a partner in an international project. No other group wanted to comment on the process.
The concessionaire responsible for operating the bullet train will have state-owned firm Logistics and Planning Company (EPL) with a 45% stake. The other 55% initially will be handed to the auction's winner. On November 20, the tender's result is expected to be announced, according to the schedule released by the National Ground Transportation Agency (ANTT).
After results are announced, there will be a 90-day period for the entry of strategic partners, such as Correios (ECT), Brazil’s state-owned postal service. ECT has expressed interest in up to 5% in the project, reducing the original stake of the auction's winner. The government is already preparing to create a “bride fund” to take on a more relevant stake – talks revolve around 30% - in the future concessionaire.
But less than 40 days from the date set for delivery of proposals, there are still no details on the “bride fund”. And that's what is concerning the Spaniards and French. None of the consortia is willing to take such a big stake in TAV. The foreign players actually want to sell technology – high-speed trains and systems – to Brazil, but prefer a relatively limited equity stake in the project. The concessionaire will have to spend at least R$30 billion, the minimum amount set in the auction, throughout the contract's 40-year term. For that, it will have to take on the project's demand risks – in other words, the risk of having passenger traffic lower than the estimated by the government.
Behind closed doors, the foreign consortia say they prefer having the state-owned pension funds as strategic partners. Their reasoning is that they usually rubber stamp whatever the government wants, but have no great pretensions at interfering in the operation and are only vying to the business's profitability. But the government is sympathetic to private groups because it believes that despite having a small stake in the future concessionaire, they could demand more efficiency and gain experience operating high-speed trains.
Domestic groups’ receptivity to compose this “bride fund” is not very high. They have already studied to take part in other auctions – especially in roads, ports and airports. Given the project menu, they show no enthusiasm for the bullet train, whose return rate was set at 7% per year. Such compensation is below the 8.5% rate set for the first railway to be auctioned (Açailândia-Vila do Conde) and 7.2% for highways. So there is a great chance that state-owned pension funds take the charge.
Whatever the composition of the “bride fund”, the French and Spaniards keep interested in submitting proposals on August 13th, if the entry of the “strategic partners” is actually known by then. Thus, EPL would have a 45% stake in the future concessionaire, the other partners 30% and, Correios, 5%. The winning bidder would keep a slice not bigger than 20%, reducing demand risks with the project.
The tender’s result is likely to be announced on September 19th. Wins the auction the group that submits the highest award value. The minimum price is R$68.08 per kilometer travelled.
As Valor reported last week, there are two requests to postpone the auction to be reviewed by ANTT. The government, at the moment, is strongly inclined to not change the schedule, since postponing the auction could give the wrong impression that the project could be a waste of public money.
Brasília will reduce investment demands on road concessionaires
By André Borges | São Paulo
The government’s decision of suspending an increase in prices of federal roads’ tolls will have a direct impact in the infrastructure of each of these highways. Valor has learned that the National Agency of Land Transport (ANTT) has already started talks with concessionaires with the goal of assessing their annual investment commitments. Since the government suspended increases that are set in the contracts signed with the concessionaires, it was decided that this loss will be compensated with the reduction of investments that were planned. Less work and intervention in roads means more money in the companies’ cash.
The information was confirmed to Valor by Transport Minister César Borges. He said the government has decided to abandon two other solutions that could be adopted to pay for the no-hike bill. First, it was considered the possibility of increasing the timespans of road concessions. Thus the government would dilute the impact of the increase suspension, giving more time to companies to explore commercially the highway. The second option would be a direct payment from the government to settle the account with concessionaires. But withdrawing Treasury money was entirely ruled out. “We will not do either of those things. The government will not lengthen the contract nor will it pay from its own pocket, there’s no margin for that,” Mr. Borges said.
Mr. Borges said the financial impact of this decision is yet to be calculated. The federal suspension of toll increases was announced at the end of June, soon after the São Paulo state government declared it wouldn’t raise the price of tolls for state roads.
According to ANTT’s timetable, at least three federal concessions would have toll increases next month: Nova Dutra, Rio-Niterói Bridge and Rio de Janeiro-Juiz de Fora. The two first are CCR concessions and the third is managed by Concer, which is controlled by Triunfo. A second block of concessions has toll hikes scheduled for the last quarter.
“We are talking to all concessionaires. What we want to ensure previously is that there will be no breach of contract. Companies will have their financial commitments honored,” said Jorge Bastos, ANTT's general director.
The government is mainly concerned at this moment with avoiding any type of measure that can risk its package of new concessions. In this second half, 7,500km of roads and 11,000km of railways will be auctioned. The macroeconomic environment is not very favorable and investors have been reacting with caution to government announcements. Getting into a collision rout with current concessionaires would only add to the scenario of complications.
There are currently 15 federal road concessions, in a total of 11,200km. Toll increases happen once a year. The fare is the sole source of remuneration of concessionaires.
Infrastructure groups continue interested in federal auctions
By Fábio Pupo | São Paulo
Even with changes in the economic scenario and a clearer perception of risk in the infrastructure concession business, which increased the tension among investors in the industry, big corporations maintain their plans of bidding in the federal government’s auctions planned for this year. Although they mention more wariness and even more difficulty in raising capital, executives say the interest continues.
Odebrecht TransPort CEO Paulo Cesena
Odebrecht TransPort CEO Paulo Cesena rules out strategy changes at the company for the auctions due to slower-than-expected economic growth or exchange-rate swings. “Facing certain events, there is always some type of exaggerated reaction. But it’s normal to have volatility” in the economic scenario, he says.
Street demonstrations are also not expected to bring about change. “I’ve been through moments such as September 11, the wake of Lehman’s collapse. Those were macro-events. What is happening now is compatible with the exposure of long-term businesses. I haven’t seen cooling interest from anyone,” he says.
Mr. Cesena says he also doesn’t see signs of higher cost of capital for the company and for the industry. “I have not had any negative indication. On the contrary, there remains strong investor interest exactly because it’s about long-term projects,” he says.
Odebrecth TransPort is studying all federal highway and airport projects, and plans to make significant bids for “two or three” roads — which start to be auctioned in September. For the concessions of the airports of Galeão, in Rio de Janeiro, and Confins, in Minas Gerais, in October, Mr. Cesena says the company will sign a partnership with Asian operator Changi within the next 60 days. The company also has interest in growing in the port sector and is negotiating the purchase of a grain terminal in the Northeast region.
Carlo Alberto Bottarelli, president of Triunfo Participações e Investimentos (TPI), also says the company is keeping its plans to compete for this year’s contracts. “We have been in Brazil for a long time. The appetite continues the same,” he sums up. Mr. Bottarelli dismisses difficulties with the alleged higher cost of capital needed for these projects, saying that funds — mostly — don’t need to be raised on the market. “Most of the capital is public,” he says. State banks, especially the Brazilian Development Bank (BNDES), will be able to finance up to 70% of the investment.
But Mr. Bottarelli argues that projects should have some improvements to become more attractive. He says that the projects’ debts should not be consolidated into the companies’ balance sheets, staying instead restricted to the project’s liabilities. “It’s the same problem that other companies face. It’s a common agenda,” he says. In a recent event on infrastructure, Ricardo Castanheira, vice president of CCR, made similar comments. He said companies can’t “put their own balance sheet as guarantee” for the developments. He said CCR was talking about the issue with state banks and government authorities.
The CEO of Construcap, Roberto Ribeiro Capobianco, says the company may face a higher cost of money. “Indeed, the latest [political and economic] developments bring an additional cost and risk to concessions,” he says. But he adds that this doesn’t alter the company’s plans. “Our preference is having a good concession contract,” he says. “In highway concessions there have already been several decisions to reduce and eliminate taxes. This is a normal process.” Construcap is the eight-largest construction company in Brazil by sales, according to trade magazine O Empreiteiro.
Among market analysts and observers, the concern with a possible cooling of interest in the auctions gained traction after protests against the increase in public transport’s fares. Because of the protests, São Paulo Governor Geraldo Alckmin decided to freeze highway tolls in the state, causing a drop in the sector’s stock prices.
HSBC argues that even if it doesn’t mean losses to concessionaires, the decision taken by the São Paulo state government to prevent toll price hikes is risky. “One of the main risks of decline continues being regulatory intervention. We believe the possible continuity of government interference creates the potential for future economic unbalances,” says a report by analysts Alexandre Falcão and Ravi Jain. On the other hand, affected companies released statements saying they accept the proposal to rebalance their contracts.
Companies including CCR (which is controlled by groups Andrade Gutierrez, Camargo Corrêa and Soares Penido), EcoRodovias (CR Almeida) and Invepar (OAS and pension funds) preferred not to comment the subject. Behind the scenes, it’s known that the last few weeks’ developments left executives in doubt about the government’s next steps for the sector. Some companies are expecting to be called to Brasília to talk.
But executives themselves interpret that the developments didn’t interfere directly in the plans. What groups are requesting is essentially the same as before the demonstrations. Some companies, for example, still fear the tight timeframes for investments. The government’s Planning and Logistics Company (EPL) and the National Land Transport Agency (ANTT), which coordinate the matter, ruled out altering the schedule and change return rates.
Please follow the link below to access my article published on the latest issue of the Brazilian Journal of Infrastructure, where I discuss an approach to the rule of proportionality provided by Prof. Robert Alexy from the Christian-Albrechts-Universität zu Kiel that helps enhance the predictability of the decisions of the Brazilian Oil & Gas Regulator (ANP) coming out from its penalty policies.
Available only in Portuguese.
The government plans to take responsibility for surveying minerals considered strategic and, from these studies, auction the country's mines. The controversial proposal - which eliminates the current system of authorization for prospecting and mining - is part of the new regulatory framework for the mining sector. The question is whether the Union can handle such bold changes.
The plan is to have mapping of Brazilian deposits carried out by the Companhia de Pesquisa de Recursos Minerais (CPRM), a state-owned agency linked to the Ministry of Mines and Energy (MME), which has the task of organizing the geological knowledge of the country. Today, mineral exploration is done primarily by the private sector, mainly small businesses that conduct research and then sell their projects to major mining companies.
Through the Access to Information Act, Valor has obtained data on CPRM’s structure and its limitations. Over the past five years, the number of CPRM’s employees practically has not changed. Today the agency has 1,474 permanent employees and 456 contractors. The annual budget, which in 2009 was R$307 million, reached R$468 million this year. Despite the growth, some experts consider that the amount is still low to carry out the new project.
CPRM said that it"already has made this diagnosis and noted the need for expansion" of its staff. The agency has been authorized to recruit, through public tender, 355 professionals from different areas. Today, most CPRM’s researchers (184 people) are focused on hydrometeorological issues. Only 130 professionals work in geological surveys.
Asked about the impact of proposed changes, the company said that, once confirmed, "there will be certainly the need to increase the budget. This costs review, however, will depend on the volume of Areas of Relevant Mineral Interest (Arim), which will be under its responsibility. "CPRM has been depleted for a long time. The scenario shows that they are trying to operationalize the state-owned agency, but [the intention] falls far short of what is intended. The company is able to assume the role that today belongs to the private sector”, says Bruno Feigelson, mining expert and partner at Ribeiro Lima Advogados. "There is a clear move to try to nationalize mineral exploration in the country. Is this really the government’s role, focusing on mineral exploration? See that oil prospecting goes in the opposite direction, giving room for companies”, he says.
This is not a simple endeavor. Data from the Brazilian Mining Institute (Ibram) point out that, to date, less than 30% of the country is known by geological surveys according to a scale appropriated to the activity. Last year, investments in mineral research totaled $321 million in Brazil, while Peru, which has a territory seven times smaller, invested $535 million.
The government's decision affects not only the future of small surveying companies (juniors, as they are known). The industry’s concern is that, in some way, the government takes over studies already conducted and sent by companies to the National Department of Mineral Research (DNPM).
In an interview with Valor, Edison Lobão, minister of Mines and Energy, said "CPRM today has the largest collection of geological and mineral resources of Latin America" and keeps "a complete database with geological surveys throughout Brazil.”
Mr. Lobão says CPRM has obtained authorization from the Ministry of Planning to conduct its tender, which should take place in August. Among the new professionals, the government will select 208 new geosciences researchers "to strengthen the technical staff and meet the current institutional functions of CPRM and those arising from the new legislation."
According to the MME, CPRM’s geological mapping activities, which have been included in the Growth Acceleration Program (PAC), are up to date. By the end of 2014, the agency wants to map about 900,000 square kilometers of the national territory, expanding by 25% the areas currently covered by geological maps. Aerial-geophysical surveys, which also generate important data on geology and mineral resources, are expected to be completed next year, covering over 1.4 million square kilometers.
Although betting on CPRM’s ability to take the national research, the government has taken steps to ensure the implementation of the studies. The agency has asked the Ministry of Planning to make "adjustments in its institutional law." Changes will allow CPRM to bid services related to the company’s end activities, i.e., outsource its work. Besides that, CPRM can use a “special regime for contracting specialized technical services.”
Meanwhile, the government has changed the industry’s rules through ministerial orders. This week DNPM reduced the deadline for companies to do their mineral researches. Time dropped to one year from three years. The government says that it has not given up the new regulatory frame and that, by the end of June, the promised project will be sent to Congress.
Government raises tolls of federal highways on auction block
By Leandra Peres | Brasília
Tolls charged from users at federal highways that will be handed over to the private sector are likely to become up to 62.33% more expensive than initially planned by the government. The increase in values set in tender rules, which are in final discussions, was the option found by Brasília to offer a higher return rate and attract investors to the auctions.
This percentage will be applied to those who bid for the concession of BR-153 in Goiás and Tocantins states. The maximum toll was R$5.84 for 100km stretches in the public hearing that released the auction notices. After the latest revision, the government estimates maximum toll at R$9.48 for 100km stretch.
The lowest increase among the seven stretches that will be auctioned is of 33.38% for BR-153 in Mato Grosso do Sul. The initial government estimate was a toll of R$7.10 for 100km stretch, raised to R$9.47, according to a report by the National Land Transport Agency (ANTT).
In the road-concession auction model, the government sets a maximum value for the toll and the winner is the company offering the biggest discount, or the lowest rate for the auctioned stretches.
This means that users may pay a lower toll than those set in the invitation for bids. But the value gives a measure of what the government considers acceptable in each stretch and by how much it accepts to remunerate investors.
ANTT director Natália Marcassa says toll values may still be altered because of fine tuning. “I don’t believe there will be big oscillations,” she says. But the definition will only happen after analysis by the Federal Audit Court.
“The toll value is simply the result of assumptions we’ve adopted. Since we’ve changed some assumptions, this affects the rate,” Ms. Marcassa says.
To have an idea of what the new toll rates mean, it’s possible to compare them to already-privatized roads. Although this doesn’t allow one to conclude if the set rate now is low or high, it’s possible to gauge what will leave the user’s pocket in each of the models.
The toll price is a direct function of required investment, financing conditions and volume of cars that run in each highway. This way, it’s natural that when the government requires big investments in building additional lanes, as is the case of the current model, the toll value is higher.
A car that travels from São Paulo to Rio de Janeiro on Rodovia Dutra pays R$49.80, which means R$12.38 for 100km stretch. The highway was privatized in 1996, during the administration of Fernando Henrique Cardoso, of the Brazilian Social Democracy Party (PSDB). The model, in which the auction winner was the company offering the highest upfront payment to the government, is criticized by the current Workers’ Party (PT) government because of high toll rates.
In 2001, when President Luiz Inácio Lula da Silva privatized Fernão Dias, road that connects Minas Gerais to São Paulo, the idea was to have low toll prices. Today, who travels there pays R$1.99 per 100km stretch.
The rules set by President Dilma Rousseff end up, in some cases, closer to the toll charged by concessions granted in the PSDB model than in the PT model. Among the seven lots that will offered in the next auctions, tolls vary from R$11.51/100km to R$4.66/100km.
“It’s necessary to know what is being offered to the user. In the second-stage concessions [which include Fernão Dias] lane expansions had already been made by the government. Time conditions are also different. In the 1990s, the regulatory risk was much higher than now,” Ms. Marcassa says.
Since the notice was released, in August last year, the government has already revised twice the maximum toll rates. Initially, it kept the internal rate of return at 5.5% a year, but increased the concession timespan and improved project-financing terms, including interest rates of 1.5% above the Long Term Interest Rate (TJLP), now at 5%.
These changes reflected on toll prices, which rose. The maximum toll at BR-262 in Espírito Santo and Minas Gerais states, for example, was raised to R$10.15/100km from R$7.82/100km.
Since this return improvement was not enough to ensure the auctions’ success, the government decided to change again the terms and this time increase the return rate of investors to 7.2% a year from 5.5%.
According to this latest revision, the highest toll may be charged at BR-101 in Bahia — R$11.51 per 100km stretch; and the lowest is of BR-153 in Mato Grosso, estimated at R$4.66.
The government also kept the demand that all lane expansions have to be performed in the first five years of concessions and that toll charges start only after 10% of planned investments are made.
Oil & gas financing portfolio at BNDES reaches R$83bn
By Chico Santos | Rio de Janeiro
Still very focused on Petrobras in volume terms, the oil and gas portfolio of the Brazilian Development Bank (BNDES), including the industry's production chain, has reached R$83 billion including loans signed and still being prospected. The bank has signed contracts for approximately R$41.8 billion, of which 60% belong to Petrobras and its subsidiaries, even after excluding the R$25 billion extended in 2009 to the state-owned company's Growth Acceleration Program (PAC) projects.
BNDES more than doubled the loan volume to the oil and gas industry, reaching R$7.8 billion from R$3.3 billion in 2011. In 2012 the bank started granting loans through the Department of Oil & Gas and Production Chain, created a little over two years ago to stimulate development of supply chains, having the pre-salt finds and a domestic content policy as main goals.
Petrobras rig P-51 at the Keppel-Fels Shipyard in Angra dos Reis
Priscila Branquinho das Dores, head of the Department Oil & Gas and Made-to-order Capital Goods, estimates that last year's loan growth represented a groundbreaking shift in levels. She estimates that from now to the next four years, her department plans to extend another R$8 billion in financing. Similarly to Ricardo Cunha, head of the bank's Department Oil & Gas and Production Sector, she estimates that her area will lend R$500 million to R$800 million this year, stabilizing around R$1 billion a year in the next few years to a total of R$9 billion for the industry and its suppliers, or 5.8% of the R$156 billion financed by BNDES last year.
Ms. Das Dores explains that from the R$40 billion in new loans signed by her department and now being cleared for payment, approximately 35% (R$14 billion) correspond to dispersed contracts, especially for the shipbuilding industry. OSX, the shipyard of Eike Batista's EBX group, is one of the clients of the state-owned bank, as well as Queiroz Galvão Exploração e Produção (QGEP), the latter to the construction of a rig in Bahia's “Manati” gas field.
The remaining 65% of the contracts consist of loans to Petrobras and its subsidiaries. According to the oil company's third-quarter earnings, BNDES owned 25% of Petrobras's total debt of R$196.9 billion, or R$49.2 billion.
Most of that debt involves a contract in 2009 for the PAC workers. The money was split between the Abreu e Lima Refinery (Pernambuco), with R$9.9 billion, the Transportadora Associada de Gás (TAG), with R$5.7 billion. And the Petrobras “holding company,” with R$9.4 billion. A 40% share of the Abreu e Lima loan is still awaiting Venezuelan state-owned oil company PDVSA to finalize its promises to hold a stake in the plant.
Ms. Das Dores, heading the BNDES department directly focused on the oil and gas industry, said that the concentration of new loans in the refining area last year (R$4.4 billion) will tend to decrease in the next few years, creating space for diversifying the portfolio. The strong share of refining investments in the financing portfolio is due to the ongoing modernization program of the Petrobras refining complex.
The BNDES official also said that the long interval between the last auction of exploration and production areas by the National Petroleum Agency (ANP) had no influence in the formation or cash flow of the bank's credit portfolio in the industry. “Petrobras continues to invest in areas under onerous concession (oil fields ceded during the company's capitalization) and in already auctioned pre-salt areas,” she said.
Ms. Das Dores said that financing for offshore support ships, made with capital from the Merchant Marine Fund (FMM), will also be reinforced. That is also unrelated to the lack of ANP auctions since 2008 up to this month, but with tender bids by Petrobras itself to seek services that she says are made in “batches.”
The recently created Department of Oil & Gas and Production Sector has much more modest but still growing numbers. “Because of the pre-salt, BNDES has decided it needed to deal more carefully with the oil and gas production chain,” said Mr. Cunha. The big difference is that in that area around 8% are small and midsized companies, with up to R$100 million in yearly revenue, while most of the companies handled in its sister department are large sized.
Mr. Cunha says supporting that segment of the industry required learning and flexibility from BNDES, including the interaction with business associations to help companies prepare their credit requests and formalize them. BNDES has also started to accept supply contracts as collateral for financing, since financial data of companies are many times incompatible with their requests.
Mr. Cunha's department has already created a portfolio with 27 ongoing loans totaling a balance of R$2.9 billion. Of that total, R$1.8 billion have been signed, 69% of the R$2.56 billion planned to be spent financing 15 projects.
While the government is forced to cede in the concession model of other infrastructure auctions to attract more competition, private sector interest in airports continues to be strong. All eleven groups that competed in the last auction of the segment, in 2012, have representatives among companies interested in the new round of bidding. Altogether, at least 20 companies are reviewing the assets and talking behind the scenes to bid for Galeão, in Rio de Janeiro, and Confins, in the state of Minas Gerais, in the auction scheduled to take place in September.
Valor has learned that ADC&HAS, an American airports operator, has partnered with Brazilian construction company Fidens to bid in the next round, repeating the consortium formed for the last auction – which finished in third place in the auction of Brasília's airport. Both companies want to bid for Confins and are also seeking a third partner with financial links.
Construction company Queiroz Galvão also plans to take part in the new round. Behind the scenes, it’s already known the company will again join Spain’s Ferrovial – which manages airports in the UK and several other global locations, and has decided to take part in this year bidding for Brazilian airports.
Italian toll giant Atlantia, which already has stakes in road concessions in Brazil, also wants to bid for Galeão and Confins, after the merger with local peer Gemina (which controls the Rome airport). The merger was authorized on Wednesday by Italian regulators.
Germany’s Fraport and Brazil's EcoRodovias have also partnered. Another group on the loop, Odebrecht, will likely partner with Singapore’s Changi, although the Asian partner is still awaiting definitive rules to decide on its participation. CCR, which bid in the previous round with Swiss firm Flughafen Zürich, is searching for another partner, which must have experience managing more than 35 million passengers a year. CCR executives have met with National Civil Aviation Agency (Anac) officials to comment their interest in the project.
Carioca Engenharia and GP Investimentos have also formed a partnership with two foreigner operators: Schiphol, which manages the Amsterdam airport and Aéroports de Paris (ADP, which manages assets such as Charles de Gaulle and Orly). Rio de Janeiro’s Libra has also expressed a clear interest in bidding for airports. Asset management firm Advent is believed to be among competitors, but it declined to comment on the issue.
Generally, companies still say they are waiting for the final bidding documents to set their effective participation in the round. Groups, especially the smaller ones, have only one great fear about the rules: the minimum amount for bid awards – what the company pays for concessions rights. For these companies, if the government interferes too much in setting this value, the auction can cool off. Galeão is already widely expected to have a higher bid award than Guarulhos, the most sought after airport – the government asked for a minimum R$3.4 billion but the asset ended up drawing R$16 billion. Confins is expected to feature a similar minimum bid to estimates for Brasília's airport – with a price floor of R$582 million, it ended up being sold for R$4.5 billion.
The government has already announced stricter rules in relation to the last auction. Now, consortiums must be formed by an operator that manages an airport with at least 35 million passengers a year (experience that only foreigners have). In the last auction, this requirement was only of 5 million passengers a year. In addition, the operator must have at least a 25% stake in the partnership (before it was only 10%). These stricter rules have pleased especially larger groups, which were already in contact with major world operators.
The fact that state-owned Infraero will remain as a partner of the airport, with a 49% stake of the concession, is now generally well accepted. The requirement was a cause of serious concerns at one point. Infraero will carry half of the investments made by the private sector, plus half of the bid award. Likewise, it will proportionally receive dividends generated by the winners.
Companies interested in the bidding are worried with the possibility that the government will continue to ban winners of previous auctions from bidding in the next round. During the announcement of concessions for Galeão and Confins, president Dilma Rousseff confirmed the ban. The idea is fostering competition between privatized terminals. But as the veto involves pension funds (that won the control of Guarulhos through the Invepar consortium), the market still sees the possibility of some concession. Besides being typical long-term investors, the funds – Previ, Funcef and Petros - have close ties to the government.
Valor has learned that the three controlling groups of airports auctioned in 2012 – Invepar, Triunfo and Engevix – are eyeing Galeão and Confins, but await the government’s decision. Including the three winners so far, the auction already has 19 interested parties (Fidens, ADC&HAS, Queiroz Galvão, Ferrovial, Atlantia/Gemina, EcoRodovias, Fraport, Odebrecht, Changi, CCR, Carioca, GP, Schiphol, ADP, Libra and Advent, besides Invepar, Triunfo and Engevix). Onnly Atlantia and Gemina didn't take part in the last round.
Studies conducted by the government's Brazilian Project Structuring Company (EBP) were presented at the end of last week. The first invitation for bids is scheduled for May 24th, when public hearings will start to be held. After 30 days of hearings, the studies will be forwarded to the Federal Audit Court (TCU) for a final review. The definitive document is expected to be published in September.
Government raises record R$2.8bn in auction of oil exploration blocks
By Chico Santos, Cláudia Schüffner, Rodrigo Polito and Marta Nogueira | Rio de Janeiro
The 11th round of auctions of areas for oil and gas exploration scheduled by the National Oil Agency (ANP) to end Wednesday was concluded on a single day, Tuesday, and caused intense government celebration. The amount raised, to be deposited by August 6th, is a record R$2.8 billion in upfront bonuses, more than R$700 million above the R$2.1 billion obtained in November 2007, in the 9th round. It was also a new bid record for a single block, with R$345.9 million offered for FZA-M-57, a block at the mouth of the Amazon River that went to a consortium formed by France’s Total, Brazil’s Petrobras and the UK’s BP.
As expected, there was intense dispute for blocks in ultra-deep waters of the equatorial bank, which include the states of Pará, Maranhão, Ceará and Rio Grande do Norte and attracted bids from giants including Chevron, Exxon, Shell (unsuccessful), BP, BHP Billiton and Petrobras. The total premium over the minimum bid for the exploration rights was 797.81%, and the expectation of investments only in exploration of the 142 blocks auctioned, of 289 offered, is R$7 billion.
“This is stunning, really great and grand,” celebrated Magda Chambriard, director of ANP. She demonstrated particular satisfaction with the appetite of companies for promising onshore areas of gas in the states of Maranhão, Piauí, Paraíba and Bahia. In her view, this appetite creates strong prospect of success for the 12th round of auctions, planned for October, whose focus will be natural gas production, including promising shale gas reserves, currently a big attraction on the international hydrocarbon market. For November it’s scheduled the first round of auctions for the pre-salt layer, already under the rule of production sharing and not as concession, which is used for auctions of other sedimentary basins excluding the pre-salt one.
“The Brazilian regime is really a concession. Pre-salt is an exception that generates fields with 5 billion, 8 billion, 10 billion barrels of recoverable volume and this is an exception from any country in the world,” Ms. Chambriard said when commenting a statement by Senator Francisco Dornelles (Progressive Party, Rio de Janeiro) that the success of Tuesday’s auction was due to the concession regime, which should prevail over production sharing. “The exception will be treated as exception,” she said, after stressing that the pre-salt accounts for only 2% of Brazilian sedimentary basins.
The presence of 18 companies from 11 countries among the 30 winners of the auctions was another aspect highlighted by the ANP director as evidence of the round’s success. Not even the absences of companies from China and Japan that were registered — GDF Suez didn’t place bids either — shook the executive’s confidence. She was unable to explain the reasons for their absence, especially the Chinese, bud didn’t admit the hypothesis that they had opted to prepare for the pre-salt auction.
Ms. Chambriard preferred to celebrate the return of Total to Brazilian auctions, the consolidation of BG as a deep-water operator — it won ten blocks, six of them alone and four in partnership with Petrobras and Petrogal — and the strong presence of the controversial OGX of businessman Eike Batista and the emergence of Petra, a national oil company, as an onshore operator, and of BP as offshore operator. Another aspect highlighted was that blocks were sold in all 23 sectors of the 11 sedimentary basins offered.
Ms. Chambriard said upfront bonuses will have to be paid by August 6th, when 13 years sinc the signing of contracts from the round zero will be completed, reason for which it was chosen as the contract signing date for Tuesday’s auction.
João Carlos De Luca, president of the Brazilian Oil Institute (IBP), said the strong presence of OGX in the 11th round was something he already expected. “Every company needs to open exploratory fronts, needs to have portfolio, generate new opportunities,” he said. Mr. Batista’s company won 13 exploration blocks, 3 of which alone.
Two blocks won by OGX were in consortium with Exxon, company which didn’t have exploration and production assets in Brazil. They bought the rights for POT-M-762, in the Potiguar Basin (next to Rio Grande do Norte state), and CE-M-603, in the Ceará Basin. The consortium, Mr. De Luca said, shows Exxon’s respect for OGX. As for the Asian no-show, Mr. De Luca recalled that they have a profile of seeking assets that offer shorter term returns.
Mr. De Luca didn’t considered Petrobras’s participation small. “Petrobras played its role, which was bigger than I expected,” he said. He added that the arrival of new players is important for the Brazilian market and brings more dynamism to the industry as a whole. Petrobras won in consortium or alone more than 30 blocks, but opted in most of the consortia to give up the role of operator.
After being notified by Brazilian authorities due to two leaks detected in the Frade Field of the Campos Basin, in November 2011 and March 2012, Chevron won one block in the Ceará Basin, CE-M-715, as operator in a consortium with Ecopetrol.
Mr. De Luca said the success of the 11th round may be attributed to exploration opportunities, with potential to find reserves, and a stable political situation.
Brasília increases return rate of highway concessions by 31%
By Leandra Peres, Edna Simão, Eduardo Cardoso and Lucas Marchesini | Brasília
In another attempt to guarantee the success of the government’s concession program, officials announced Wednesday a 31% increase in the profitability of highway projects, besides allowing the Brazilian Development Bank (BNDES) to become a partner in companies that win the auctions, something that wasn’t included in the first versions of the program.
Minister Guido Mantega
Finance Minister Guido Mantega said that the Internal Rate of Return (TIR) of the highway concession projects will be increased to 7.2% from 5.5%. That will increase the return on shareholder equity, which should vary from 12% to 15%, to something between 16% and 20%. “We’re making the concessions very attractive so that there won’t only be investments, but also competition. The more profit prospects, the more investors will be attracted,” Mr. Mantega said.
Increasing the return of investors means that the government will raise the maximum toll price. But Mr. Mantega believes that competition during the auctions could lead to lower tolls and return rates than the tender’s rules project.
The improvement in the return rates of the projects was considered “minimally acceptable” by the private sector. The president of the National Union of the Heavy Construction Industry (Sinicon), Rodolpho Tourinho Neto, said that the private sector was defending a TIR of 8%.
The participation of BNDES as partner of the auction winners still hasn’t been decided. Luciano Coutinho, president of BNDES, said there’s a greater chance that BNDESPar, the bank’s investment arm, will have stakes in the special-purpose partnerships (SPEs) that will be created by the consortia to compete for the highway, railway and seaport concessions.
“We do can analyze how to strengthen the capital structure of logistics operators. That’s an agenda that interests Brazil,” Mr. Coutinho explained after a meeting with Senators.
Mr. Coutinho says the investment demand of the concession program is too high and “there are few large enough companies” able to run those projects. He also said that in those cases, BNDES can join the ventures to help make possible partnerships, consortia or to attract foreign partners.
The new return rates announced Wednesday will reduce to 70% from 80% the maximum share of subsidized loans the government can offer, known as the leverage rate. Mr. Mantega said the government will maintain the financing term at 25 years, with a five-year grace period, the interest rate limited to the Long Term Interest Rate (TJLP) and rates of at most 1.5% a year.
The conditions for the tenders involving railroad concessions and the high-speed train program have been postponed. Mr. Mantega said they will be defined in “other occasions.”
The new deadline for the auctions, previously expected for January and not postponed until September, was again confirmed by the government.
This is the third version of the government’s package for 7,500 kilometers in highways. When it was launched, last August, the highways were supposed to be privatized for 25 years, while loans could not go beyond 20 years and the return rate was 5.5%. Investors reacted negatively and the first auctions were postponed to the risk there wouldn’t be any interested.
Since then, the government has been ceding to private-sector demands. The first changes announced in February improved financing conditions, raising the return on equity rate, but not the overall TIR rate. The government then extended the concession to 30 from 25 years, and increase the financing terms to 25 from 20 years, while the leverage rate fell to 65% from 80%.
In the most recent version, the general conditions were maintained, but the maximum toll was raised to guarantee there will be more competition at the auctions.
Officials see new delays in infrastructure concession plans
By Rodrigo Pedroso and Guilherme Soares Dias | São Paulo
The federal government's plans to offer infrastructure work concessions will be delayed, the president of the government's Planning and Logistics Company (EPL), Bernardo Figueiredo, said. The delay for the highways will be smaller than four months, but part of the auctions for the railway sector may only be held in 2014.
Regarding highway projects, Mr. Figueiredo said that the tender's rules for the 7,500 kilometers of federal highways to be privatized will be announced by August. The auctions, he said, will start in September. “The first lot of seven highways will begin to be offered in July; it was initially to be in March. It's four months late, but it's going to happen,” he said Monday during the 8th Logistics and Transport Meeting promoted by the São Paulo State Federation of Industries (Fiesp). A total of 13 federal highways will be offered, divided into nine lots.
Mr. Figueiredo also said that the “timetable exists to be followed,” but admitted there are limitations and a “learning curve” for the auctions. He says the tenders for BRs (as federal highways are known in Brazil) 116 and 040, suspended due to technical errors, are being redone.
In the railway transport industry, Mr. Figueiredo said that part of the 10,000 km of railways expected to be privatized that were included in the integrated logistics package announced by the federal government last year, may be auctioned only in 2014. “We want to publish the rules and hold the auctions this year, but something could be left for next year,” he said.
He recalled that the first 2,600 km of railroads, of which the rules were expected for March, are still awaiting the conclusion of studies. Part of that group involves the north and south stretches of the São Paulo Ferroanel, a set of tracks circling the metropolis, and the access to the Port of Santos (São Paulo), the Lucas do Rio Verde (Mato Grosso) to Uruaçu stretch, as well as the Estrela d’Oeste (São Paulo)-Panorama (São Paulo)-Maracaju (Mato Grosso do Sul), Açailândia (Maranhão)-Vila do Conde (Pará) railroads.
Meanwhile, the second group of concessions, totaling 7,400 km, is still undergoing the public hearing process. “Projects are moving, but we're reviewing the schedules, since the rules for those tenders were supposed to be announced this May,” he says.
The delay apparently cannot be attributed to a lack of funds. People in two financing banks – the Brazilian Development Bank (BNDES) and the Inter-American Development Bank (IDB) – said they have been increasing lending activity to logistics businesses.
Last year, 30% of BNDES loans were destined to projects linked to logistics, according to BNDES director Roberto Machado. In 2008, that amount of credit represented 12%. Mr. Machado notes that financing trend in logistics projects is for the bank to increase available credit in the next few years.
Another event participant, IDB infrastructure and environmental manager Alexandre Rosa, said that 50% of the bank's loans go to infrastructure-linked projects. The share of bank money destined to the sector points to the main drivers of growth in the Brazilian and Latin American economies, he says.
Mr. Rosa also said Latin American investment in infrastructure needs to and will catch up in the next few decades. “We have made studies and found that the region's countries, including Brazil, invest around 3% of GDP in infrastructure. To compete with South Korea, for instance, the rate would have to be 5%. With China, the rate would have to be 7%,” he said.
According to the IDB's evaluation, four main factors led to the incipient investment rate of the region in the last two decades: The lack of an integrated vision for transportation, absence of public planning, scarce private projects and a legislation that inhibited sector investments. Mr. Rosa said infrastructure is going to be the main engine of Brazilian growth in the next few years. “As well as the rise of the class C, social inclusion and growing consumer spending were responsible for the country's growth in the last ten years, infrastructure investment will now take on that role,” he said.
EPL's Mr. Figueiredo also said that São Paulo's Ferroanel is another project that may only be offered to private interests next year. “It's better if you can actually do a study. We started the licensing process and delayed the concession. Ferroanel is one of the projects in which that may happen, but it's not the only one,” he said.
When the logistics package was announced by the federal government in August, then Transportation Minister Paulo Passos had said that the goal was the Ferroanel project to leave the drawing board by July. The new projection is for the tender rules to be announced in July and the auction to take place in October, but the government studies may delay the concession even more.
Mr. Figueiredo noted that the federal government will sign an agreement in the next few days with the São Paulo government, so that the construction in the north stretch of the Ferroanel can take place at the same time as work for the Rodoanel, a ring road for São Paulo, with a parallel lane that would take advantage of some eminent domain and environmental licensing work.
The EPL president also said that the government must negotiate with MRS and ALL, the private-sector companies that managed the railway to the Port of Santos, to invest in links to the seaport and take control of them. Asked if he believes that the companies will let go of those stretches, Mr. Figueiredo said it would depend on the compensation. “If you improve traffic conditions, it could become better for the companies than to operate alone under the current conditions,” he says.