Infrastructure: Brasília reduces minimum price for auction of Confins airport

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.
Luis Ushirobira/Valor
Moreira Franco
“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 They claim that the demand studies used by the government are outdated, considering the economy’s stagnation and the scenario of rising airfare prices.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.

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Infrastructure Financing: Brasilia eases collateral terms for infrastructure finance

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).
Dyogo Oliveira
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.

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High-Speed Train: Bullet-train auction expected to attract two consortia.

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.

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Roads: Brasilia will reduce investment demands on road concessionaires

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.

© 2000 – 2012. All rights reserved to Valor Econômico S. A. . Read our terms and conditions on http://www.valor.com.br/international/about-legals/terms-conditions. This material cannot be published, rewritten, redistributed or broadcasted without authorization from Valor Econômico.

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Infrastructure: Demonstrations in Brazil do not affect infrastructure group's investment plans.

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.

© 2000 – 2012. All rights reserved to Valor Econômico S. A. . Read our terms and conditions on http://www.valor.com.br/international/about-legals/terms-conditions. This material cannot be published, rewritten, redistributed or broadcasted without authorization from Valor Econômico.

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