Brazil’s largest state, São Paulo, is refining the details of a new concession programme specifically tailored to international investors, as political and economic headwinds severely hit the local players that have been the main force behind the infrastructure development of the past few decades.
The new public-private partnership (PPP) plans includes projects spanning airport and road infrastructure, urban mobility and housing. Total investment in road infrastructure alone (comprising four toll highways) amounts to 10bn reais ($3.1bn), while the concession for the operation and maintenance of recently build Metro Line 15 will require investment for another 3.5bn reais.
The government aims to get the programme under way in October with a first tender for a toll road between Florínea and Igarapava, with the other three toll roads expected to follow by the end of the year, and all the contracts assigned by the end of 2017.
The end of the commodity super-cycle and a mounting number of corruption scandals exposed the fragile nature of Brazil’s development model engineered by former president Luiz Inácio Lula da Silva and continued by his successor, Dilma Rousseff, where local contractors pegged their success to the rise of their Workers’ Party (PT) and high prices for oil, mining and agriculture products.
With Lula out of the picture, and Ms Rousseff facing an impeachment trial, and commodity prices far from their peaks, some of the country’s largest contractors – such as Odebrecht and OAS, which had largely been on the recipient end of the public investment programmes of the last decade – went bust. Their demise left a void that authorities in São Paulo are now keen to fill through foreign investment.
“The local construction companies that used to be the main players in the PPP sector are not as strong as they used to be and cannot deal with all the market demand by themselves,” Saulo de Castro, chief of staff of São Paulo’s governor Geraldo Alckmin tells fDi Magazine. “It’s a good moment for investors that are interested in going to Brazil, because right now they can find good assets and good opportunities.”
In fact, the uncertainties faced by the Brazilian economy today make the country as a whole, including São Paulo, a hot play for any construction company or concessionaire looking for opportunities in Latin America.
The Brazilian real depreciated by over 40% against the US dollar in the last couple of years, turning revenue projections for any possible PPP project into a risky business. Besides, the corruption scandals of the past months have exposed the widespread system of redistribution and clientelism typical of the Lula and Dilma administrations, which did not spare local procurement processes.
“There is a need for transparency [in these procurement processes] as corruption is a well recognised issue in the country,” says Dominika Nowosinska, senior consultant at Mott MacDonald, which is advising the local government on the development of the new PPP programme. “We’ve suggested ways of trying to make improvements – among other things, giving feedback to the concessioners, doing roadshows to let the market know early so that everyone has equal access to opportunities.
“Barriers also concern financing and exchange rate risks, and we discussed with local authorities ways in which payment mechanism and guarantees can be structured to alleviate that risk to attract more foreign investment.”
Authorities in São Paulo, which can handle their own PPP legislation independently from the federal government, are trying to address such issues in the new concession contracts under assessment and thus “create a new paradigm for attracting international players to infrastructure projects”, according to a presentation by local transport agency Artest.
To better cater to the needs of foreign investors, bidding documents will now be translated into English and investors will be given 92 days (from a previous 45) to come up with proposals. Local authorities are also considering the introduction of so-called direct agreements between the government and investors to give the latter additional rights and guarantees, says Karla Bertocco, São Paulo’s subsecretary for PPPs and innovation.
Change of heart
Direct agreements have never been used in Brazil, mostly because in the past, state development bank BNDES was the main lender in the most of the country’s infrastructure development. However, BNDES was also hit by the recent storms and is rethinking its role when it comes to such projects.
“In concrete terms, BNDES role is the main barrier to entry in Brazil because companies have to be located in Brazil to access its funding, which is so cheap that international investors cannot compete with it,” says Bernardo Tavared de Almeida, senior investment officer at the World Bank’s IFC, which is also advising local authorities on the new PPP programme.
He adds that BNDES is currently responsible for 95% of the country’s long-term investment. “Now they are trying to phase out this participation, and developing instruments to attract international funding. In the past they had much money. Today, it’s a different situation – they need to find partners.”