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Infrastructure and privatization market is heating up

Brazil’s infrastructure and privatization market is heating up

Brazil appears poised to enter a new era of foreign investment that would have a powerful impact on the country’s infrastructure development and its economic fortunes following years of economic volatility.

The goal of new President Jair Bolsonaro’s government is to increase total infrastructure investment via partnerships or privatization. The government’s ambitious plan to boost the economy includes doubling investment in infrastructure to approximately US$65 billion per year by 20221. It is hoped that much of this new investment will come from foreign investors – and the government is now making a concerted effort to attract foreign equity in ways that will put the country on a new path to growth2.

While it’s too early to say how things will play out, we believe the new government’s focus on facilitating infrastructure investment and driving economic growth looks promising indeed. And it comes at a critical time for Brazil.
Over the last 10 years, public and private investment in infrastructure peaked at 2.5 percent of GDP in 2015 and fell to just 1.5 percent of GDP (US$22 billion) in 2017. Brazil’s economy contracted throughout 2015 and 2016 before turning around in 2017 but economic growth has struggled to stay near 1 percent over the past two years and has not exceeded 2 percent in about five years.

Initiatives are currently underway to reorganize and streamline the previously scattered infrastructure procurement process for much higher efficiency and participation – including enhanced governance concerning approval and tendering of projects and efforts to minimize or combine the number of authorities and ministries involved.

A new focus on efficiency and governance gains attention

The effort to streamline processes should boost investor confidence in the months ahead. The good news is that we are already seeing new or broadening interest in Brazil’s infrastructure opportunities from foreign investors and funds in countries like Canada, Singapore, Spain, Japan and India.

Brazilian aviation authority ANAC raised about US$628.6 million in March this year in a fiercely competitive auction that saw Spanish operator AENA, Switzerland’s Zürich International Airport and Brazilian consortium Aeroeste pay an average premium of 986 percent for three blocks of airport concessions with a total of 12 airports3. The three airport operators agreed to pay US$581 million (BRL R2.2 billion) above the minimum bid set by ANACfor the 12 airports in the northeast, centre-west and southeast of Brazil.

The new Bolsonaro government’s Infrastructure Minister Tarcísio Gomes announced in his inaugural address this year that the government was starting its first year with a pipeline of 69 infrastructure projects. These projects, inherited from the Partnership and Investment Program (PPI) of the previous government, include concessions, public-private partnerships (PPP) and privatization initiatives among airports, railways, ports, highways, defence, power generation/transmission, and oil-and-gas businesses. An auction scheduled for the end of March this year will include:

  •  Four port terminal concessions; 
  • A north-south railway concession; 
  • PPP for the Management of the Aeronautical Communications Network (COMAER).

Minister Gomes also announced that INFRAERO, the state-owned company responsible for management of the 55 largest state-owned airports, will be privatized in regional block concessions in 2020 and 2022. This follows the success of 10 airport concessions to the private sector between 2012 and 2017 that resulted in investments exceeding US$12.9 billion5.

The maintenance and ongoing enhancement of the PPI, created by the previous government and responsible for governance and tendering of infrastructure priority projects, will be essential to increasing private investment in infrastructure. In addition, the Secretariat for Infrastructure Development was created to establish an integrated long-term investment plan for infrastructure and will prioritize projects possessing the highest potential to increase productivity and returns to the economy6. Brazil’s PPI has successfully completed 124 infrastructure projects from mid-2016 to the end of 2018.

Emerging projects will modernize and expand infrastructure

PPI tendered projects have raised US$12 billion in grants and guaranteed investments of US$65 billion for future infrastructure.

With regard to Foreign Direct Investments (FDI) related to the 124 completed 2016-2018 projects, 47 involved foreign companies or consortiums with Brazilian companies, with US$47 billion in foreign investment, representing 72 percent of the total contracted investments7. According to the PPI Secretariat, Ministry of Economy and National Treasury, companies from 15 countries, including France, Spain, Norway, Qatar, Switzerland, India, Germany and the UK, have contracted investments under PPI-auctioned projects. They have invested mostly in four sectors: airport, highway, oil and gas, and power generation/transmission/distribution.

The current PPI pipeline includes 69 projects approved by the PPI Council, with projected investments of US$29 billion. These projects are a priority and are to be tendered in the near future.

More than US$100 billion to be invested in Sanitation

In the sanitation sector, the previous federal government approved a plan in 2013 to increase coverage of services to more than 90 percent of households, requiring investment of more than US$100 billion over 20 years or more than US$5 billion per year8.

However, total investment has been below US$2.6 billion per year in the last five years. The government is currently poised to approve measures that will significantly increase the volume of private investment in the sector and the Brazilian Development Bank continues to support seven state governments in studies aimed at attracting more private investment to improve sanitation services.

Privatization program sets a US$125-billion target

As for the privatization of federal state-owned companies, Economy Minister Paulo Guedes has made clear his desire to implement an ambitious privatization program in the early years of the new government.

The federal government currently owns 134 companies – most of them unable to cover their operating costs and generating expenses of more than US$ 3.8 billion per year. The current objective is to keep state-owned companies that provide public social services, privatize those that attract investors and close the remaining ones.

Also, a significant portion of real estate assets owned by the federal government will be put on sale.

The Secretariat of Privatization and Disinvestment was created at the Ministry of Economy to conduct the privatization program and enhance management of remaining public assets and its objective is to raise more than US$125 billion with the sale of state-owned companies, such as Brazil’s postal service and telecoms company Telebras, and real estate assets9.

The government also intends to sell the subsidiaries and non-core investments of Petrobras and of the largest state-owned banks such as Banco do Brasil, Caixa Econômica Federal and BNDES.

Finally, at the state government level, most of Brazil’s largest states have elected liberal governments that together account for more than 60 percent of the national GDP. The newly elected Governors are also announcing intentions to privatize their state-owned companies and to widely use concession and PPP contracts to increase private investment into infrastructure.

It remains to be seen how successful Brazil’s efforts will be. But its ambitious initiatives and increased focus on infrastructure investment could indeed prove remarkably successful and put the country on a new growth trajectory as foreign investors take note and gain new confidence in Brazil’s opportunities.

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