RIO DE JANEIRO, BRAZIL – On July 8, the flow of people at the B3 headquarters, Latin America’s largest stock exchange, was a positive sign for Brazil’s infrastructure sector. Entrepreneurs and investors flocked there, in downtown São Paulo, with more than one mission.
In addition to taking part in the auction of the BR-163 highway toll concession, which connects Mato Grosso state to the ports in Pará state – won by the Via Brasil consortium for almost R$2 billion (US$196 million) – many wanted to talk to Infrastructure Minister Tarcísio de Freitas and specialists about upcoming opportunities in the sector.
A similar flow occurred in the same place in late April at the auction of Cedae, the Rio de Janeiro state sanitation company, whose three-block concession will raise R$22.6 billion in awards and require some R$30 billion in investments by 2033, a historic milestone.
Also on July 8, the National Electrical Energy Agency held its first renewable energy auction since the beginning of the pandemic. Fifty-one projects were contracted in hydroelectric plants, biomass thermal plants, and wind and solar plants, which will require R$4 billion in investments in energy delivery in 2023 and 2024.
The infrastructure sector is one of the drivers to emerge from the crisis triggered by the pandemic. This year, Brazilian investments in the area should reach R$135.6 billion, the highest value of the past four years, according to an original study by the Inter.B consultancy. Almost 68% of this amount will come from the private sector. The public sector’s R$44 billion will mainly come from state governments.
Electricity, transportation and telecommunications are the sectors to be allocated the most funds. Sanitation, which should benefit from R$17.6 billion in investments by the end of this year, is the sector that offers the most varied range of opportunities. The new regulatory framework for sanitation, passed in July last year, caused an unprecedented wave of capital attraction in a sector still far from being universal in Brazil.
The new legislation encourages private initiative to participate by terminating contracts between municipalities and state-owned sanitation companies that were signed without going through a bidding process. “The regulatory framework was a brilliant initiative, first class legislation that is changing the sector,” says Claudio Frischtak, Inter.B. consultancy’s founder.
Other important changes affecting infrastructure seem to be underway. The Chamber of Deputies passed a bill that expands the possibilities of issuing debentures for the sector – in 2020, only R$18.6 billion were raised in this modality. The bill now needs to be passed in the Senate.
The government is also considering the possibility of issuing a Provisional Measure to unlock the railroad sector and to create a plan for river transport concessions – currently, rivers account for only 16% of all cargo handled in Brazil. “This modal is underused and Brazil has the world’s largest hydrographic basin,” said Infrastructure Minister Tarcísio de Freitas after the BR-163 auction in São Paulo.
All these changes are essential to remove Brazil’s historical lag in the infrastructure sector. Only 12% of the country’s highways are paved, according to the National Transport Confederation (CNT). In the past 10 years, the length of federal highways has increased by only 3.7%. The railroad network situation is even worse.
Of the country’s paltry 30,000 kilometers of track – negligible compared with almost 293,500 kilometers in the United States and 100,000 in China – a third is abandoned or underused. The drama continues in basic sanitation: half of the Brazilian population has no access to sewage collection and treatment, a scenario that should change with private investment in the sector.
The continuous years of low investments explain the current stage of Brazilian infrastructure. In the past two decades, the country allocated an average of less than 2% of GDP per year to the sector, when the required amount would be at least 4% of GDP. In segments such as transportation, the volume invested in the 2001-2021 period was one third of what was required, according to an Inter.B. study.
In other words, for the country to double the volume of investment in infrastructure, more private capital is needed, as well as public resources for certain projects. Not surprisingly, Brazil is placed 78th in the ranking of the most competitive countries in infrastructure, prepared by Pezco Economics based on data from the World Economic Forum.
Today, Brazil is behind countries like Mexico and the United Arab Emirates. The good news is that the country has moved up 4 positions in relation to the 2018 ranking and this year it is expected to rank 70th. “Public-private partnerships, initiated under ex-president Michel Temer’s government, have provided a major boost to Brazilian infrastructure,” says Frederico Turolla, partner at Pezco. “Recent concessions are also helping leverage the sector.”
The new cycle in infrastructure will impact the Brazilian economy in the long term. According to the Ministry of Infrastructure, 1 million jobs should be created with the concession of 70 assets that passed to the private sector between 2019 and the first half of this year, which add up to 34 airports, 6 railroads, 26 port terminals and 4 highways. The contracts generated R$71 billion in investments. This money comes at a good time.
“We are resuming a bidding cycle interrupted by the pandemic,” says Lucas Marquiori, BTG Pactual’s executive director of equity research. “If on the one hand we have fiscal tightening in the public sector, there is availability of capital and agility in the private sector to carry out these projects.”
Consequently, states, municipalities and the federal government are rushing to launch projects that will attract the interest of investors. Sanitation auctions are scheduled for the second half of 2021 and 2022 in states such as Alagoas, Rio de Janeiro, Rio Grande do Sul, Ceará, Amapá, and Acre. “We will continue looking at opportunities for new projects, particularly in Brazil’s North and Northeast regions,” says Radamés Casseb, president of Aegea, which became the largest in the sector by winning four concessions within a year, including two Cedae lots.
With the new undertakings, the company will have to meet an investment and concession payment plan totaling R$53 billion over the next 30 years. BRK Ambiental, which invested R$790 million in 2020 in the sector, has been approached by foreign investors interested in better understanding the new market rules – and also in signing potential partnerships. “In the post-pandemic, sanitation will be one of the key sectors in economic recovery,” says Daniela Sandoval, BRK Ambiental’s vice president of corporate affairs and regulation.
By the end of the year, investors’ focus should also turn to the Via Dutra auctions – a new round of highway concessions is expected to test the proportional charging model per kilometer traveled on toll roads for the first time – and Ferrogrão, a railroad network of almost 1,000 kilometers between Sinop, in Mato Grosso, and Miritituba, in Pará, which should transport a good part of the Mato Grosso grain harvest to the Northern Region ports.
The deal, which still needs to be approved by the Federal Audit Court (TCU), has interested parties such as VLI operator and investment funds. The Northern Region and the state of Mato Grosso, which make up the so-called Arco Norte, currently account for over 30% of soy and corn shipments, one of Brazil’s GDP drivers. “The Arco Norte has become a priority for our growth, which is why we are studying the railroad projects in the region very carefully,” says Ernesto Pousada, VLI’s CEO, whose shareholders include Vale, Mitsui and Brookfield.
Another front gaining even greater visibility at the moment is renewable energy. The worst hydroelectric crisis in the past 100 years has brought back the risk of electric power rationing in Brazil. Since hydroelectric plants produce 68% of the energy consumed in the country, the specialists’ concern is justified.
It is true, however, that the situation has improved.
In 2001, the year of the blackout that brought Brazil to a halt, dependence on hydroelectric plants was much higher – 90%. Investments in renewable sources have advanced. In 2020 alone, R$20 billion were invested in wind energy and another R$13 billion in solar generation, respectively 70% and 52% more than in the previous year.
“In the coming years, Brazilians will be able to choose to consume energy with the freedom they have today in cellular telephony,” says Rodolfo Pinto, partner of Araxá Solar. At a cost of R$750 million, the company plans to build 45 solar plants over the next two years in the states of São Paulo, Minas Gerais, Paraná and Mato Grosso.
The objective is to offer shares of these projects to small commercial establishments and individual consumers.
Global obsession
In discussions about which path to follow in the post-Covid era, infrastructure has become the topic of the moment not only in Brazil but also in countries where, in theory, the needs are less pressing. The line is mainly driven by the United States, where the Joe Biden administration pledged in its campaign an ambitious, trillion-dollar infrastructure package.
The US$2.3 trillion targeted by the Democrat is unlikely to be fully passed by Congress, which is now discussing an agreement on a smaller plan. Nevertheless, investments of around US$1 trillion are expected. In his speeches, Biden states that this is a “once in a generation investment” and does not conceal that one of his main goals is to compete with China – whose government is also making massive investments in infrastructure in all sectors, year after year.
It’s a different strategy than the one used in the aftermath of the 2008 crisis, when the Barack Obama administration’s efforts focused on bailing out jobs in specific sectors, such as banks and automakers, but without more abrupt structural changes. “Many of us have advocated greater infrastructure spending after 2008,” says Kenneth Rogoff, professor of public policy and economics at Harvard University.
“But because plans like these take longer to design and approve, many governments become impatient, although many projects might have provided much-needed long-term stimulus and productivity gains today,” he says.
The primer for betting on infrastructure in a crisis is old. It dates back to the 1930s, when Franklin Delano Roosevelt’s government implemented the so-called New Deal to generate jobs quickly and boost the economy after the 1929 stock market crash. In addition, it built some of the infrastructure that America enjoys to this day – from transportation in cities to highways, bridges, railroads, and communications.
Biden’s package, not by chance, was named the American Jobs Plan, that is, a plan “for jobs” and not only for infrastructure, the president vows. The name is marketable, but there is some truth to it: the reason infrastructure investments are always so popular is that they kill several birds with one stone, says Joseph Kane of the Metropolitan Policy Program at the Brookings Institution. “It’s something that Congress and the public tend to agree on, no matter what their political position,” he says.
In the debate about the global “new infrastructure,” key fronts will be transforming the economy into a more sustainable model, combined with the generation of more qualified jobs and increased equity, such as in education and health. Unequal access to the internet, for instance, is another of the points most cited by specialists. “The world has changed since the 1930s.”
“Now, much of the infrastructure in a country like the United States is in place and it only needs to be improved. But this does not always mean repeating what was done in the past, because it generated bottlenecks and inequality. That’s more complicated, because then there’s resistance,” Kane says.
John Maynard Keynes, perhaps the thinker who most supported public investment as a driver of demand, said that “the difficulty lies, not in the new ideas, but in escaping the old ones.” Governments will be challenged not only to build bridges and roads, but to build and modernize integrated systems that will leverage the entire economy in the long run.
Beyond the United States, other advanced and largely industrialized economies, such as European Union members and Japan, are also expected to pour new hundreds of billions of dollars into infrastructure projects, mostly with a focus on projects like clean energy or connectivity. The main focus, apart from economic recovery in the short post-coronavirus period, will be not to miss the train of global modernization.
“We are talking about a broad investment, a competitive reorganization of these economies that will impact the entire global chain,” says Professor Marco Antônio Rocha from Unicamp’s Economics Institute, a specialist in industry and technology development.
It was a debate that was only in its infancy even in developed countries before the coronavirus hit. The World Economic Forum pointed out in 2019, before the crisis, that the last few years had been “a lost decade,” with stagnant global productivity, despite US$10 trillion issued by central banks.
China was one of the few that went against the grain. Due to the same investments in infrastructure made post-2008 crisis, the country jumped from 66th in 2009 to 36th in 2019 in the institution’s competitiveness ranking. The number of cities with subways tripled, while the rapid train system, built for the Beijing Olympics in 2008, now accounts for two-thirds of all the capacity built worldwide.
The Chinese strategy highlighted investments in technology, such as internet networks and 5G development, and commendable advances in education, training skilled labor – which economists call “soft infrastructure,” crucial to continue moving forward. “This has increased the country’s debt, but also built the foundation for transforming the economy into a productivity-based growth model,” Qu Hongbin, Santander Bank’s chief economist in China, wrote in a report on the Chinese progress.
Developments in the world’s leading economies shed light on the infrastructure debate globally. But for the remaining emerging countries, the challenge is not having such deep pockets as wealthier nations. “During the 21st century, emerging markets tended to grow more than advanced economies, narrowing the gap between them.”
“But the pandemic has reversed this process, and there is a risk that things will worsen,” says Harvard’s Rogoff. This is one of the reasons that led the G7, the group of the world’s 7 wealthiest democracies, to announce the Build Back Better World plan at their last meeting. The goal is to help developing countries reach the US$40 trillion in investments, including private partnerships, that the World Bank estimates they will need by 2035 to ensure they don’t fall behind in the 21st century race.
China has had a so-called New Silk Road since 2012, with investments reaching US$3.7 trillion in committed projects in allied countries, particularly in infrastructure and logistics. In a world that has redoubled its bets on infrastructure, Brazil must step up a gear to eliminate the deficit of the past and to keep up with the demands of the future.
Infrastructure Minister Tarcísio Gomes de Freitas’ agenda has been busy, with constant trips to São Paulo and other cities to take part in auctions on the B3 and to inaugurate works. This year alone, 22 airports and 5 port terminals were privatized and awarded. According to companies and investors, however, the country still needs to take further steps to achieve greater maturity in the financing of infrastructure projects.
On Thursday June 8, the Minister hosted EXAME’s team for an exclusive interview at B3, right after the BR-163 highway auction. Read below the main excerpts of the interview.
How do you assess the infrastructure financing mechanisms in Brazil, in particular the approval of the incentivized debentures bill?
The approval of this bill was a milestone. The bill is very good, with the transfer of the debenture’s tax benefit to the issuer and the possibility of issuing debentures in foreign currency. All this should attract institutional investors. Infrastructure funds will become similar to real estate funds.
Is there a trend for infrastructure funds to expand?
Yes. The curve for debenture issuance has been rising and BNDES funding has been dropping. In 2019, a year before the pandemic, we had R$35 billion in infrastructure debentures issued, compared to R$24 billion in credit granted by the BNDES. The capital market is now taking this space. This also shows that projects are much more suitable for the capital market. We are migrating from a corporate financing to a project financing situation.
Shouldn’t the insurance market for infrastructure projects grow in this context?
This market will greatly grow in Brazil. There was an important change in the way insurance will be part of the project structure after the law for tenders and contracts was passed in April this year. The former law provided that the winner of the bidding process would choose the type of guarantee it would provide, limited to 5% of the value of the contract.
Now the bidder can choose between insurance-guarantee, variable up to a limit of 30%. In concessions we will see two trends. One is the increasing use of certifiers for projects and stages of construction, and the other is growth in the insurance market.
Specialists say that ideally the financial structure of projects should be based on cash flow forecasts. How close or far are we from this premise?
This is now very present in the energy market, in the transmission sector. It is practically an investment in fixed income. Highway concessions are increasingly closer to this reality you mentioned. That is why the migration from corporate financing to project financing is occurring. It is easier to finance infrastructure.
If Brazilian infrastructure projects were born with a focus on environmental and social sustainability, wouldn’t it be easier to raise funds abroad?
Undoubtedly, and this is a concern. That is why we went looking for respected organizations abroad. Today we have German GIZ and the Project Bond Initiative from the European Investment Bank working with us in the structuring of projects. The railway program is being designed to be granted the green seal.
We want to mitigate the image risk for investors and access other pockets. Financial flows will be increasingly linked to environmental issues. Private companies in the transportation sector are also beginning to issue green bonds.
Source: Exame