Road Concessions: Brasilia increases return rate of highway concessions by 31%.

10 hours and 42 minutes ago

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.

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