Strategic and financial investors from Brazil and abroad started the year mobilized around the agenda of infrastructure privatizations in the country. It is hard not to think that this may be the repetition of the same story heard in the recent past about a long investment cycle to eliminate bottlenecks in the segment, but that ended up frustrating expectations. However, investors want to believe that this time may be different. Now, they say, the last government has left a list of projects ready to be executed. On top of that, the Jair Bolsonaro government has brought a new boost, since the president and his team have promised to extend the privatization of services like airports, highways and railways. Macroeconomic conditions are also more favorable than in the past, and Operation Car Wash has eliminated tricks that favored builders in the bids.
“Since the election’s second round, and especially in the government’s first weeks, we have received many calls from customers interested in infrastructure auctions,” says Daniel O’Czerny, Citi’s projects and infrastructure director. Facing the demand, the bank plans to carry out roadshows to European investors and explain the projects to be tendered.
The same interest is confirmed by Gustavo Lopes, partner for infrastructure at consultancy Roland Berger. He says foreign investors have started to make a move shortly before the presidential election, when the outlook became clear.
“I am very confident that we have a good moment for infrastructure investments in the country,” says Otavio Castello Branco, a partner at Pátria Investimentos, an asset manager with a big focus on the segment. “From the macroeconomic point of view, we rarely had such low interest rates and inflation, and a solid foreign exchange. In addition, the capital market is willing to finance the projects,” he says, citing the government cabinet as something positive. Recently, Entrevias, a highway concessionaire controlled by Pátria, financed the company’s entire capital requirement through infrastructure bonds.
Mr. Castello Branco confirms the asset manager’s interest in highways, power transmission lines and generation, all segments in which it already has invested. Sources say Pátria would be in talks with a strategic partner to join the next round of airport auctions, scheduled for March, and one of the names cited is that of German airport operator Avialliance. Mr. Castello Branco declined to comment.
Pátria now has 14 infrastructure companies in its portfolios and 60 people working in the segment. Currently, its investments are made through its third infrastructure fund, which has $1.7 billion raised mainly with foreign investors, and has already invested in eight projects. Mr. Castello Branco says that for now there is no need to set up a new fund.
Vinci Partners is another local asset manager already dedicated to infrastructure projects, and will now double its bet on the sector. “We will grow our team as opportunities materialize. We have already identified potential teams to work within companies,” says Alessandro Horta, a partner at Vinci.
To gain agility for the various opportunities that will appear, the asset manager has decided to create specific vehicles according to projects instead of setting up a multisectoral fund. One of them is being structured to bid in the next round of airport auctions. Vinci Partners would be in talks to form a consortium with France’s Aéroports de Paris, or ADP. Mr. Horta does not confirm the information. In the case of power transmission auctions, the asset manager has set up a vehicle in which investors pledged to inject R$300 million to R$400 million with a mandate to participate in several rounds.
Mr. Horta says that, in addition to airports and transmission lines, Vinci Partners is also interested in power generation and sanitation companies. “These are the segments in which we put a bigger focus,” he says, without ruling out other sectors, such as highways.
Mr. O’Czerny, of Citi, estimates that at least seven to ten groups are eyeing the auction of 12 airports, divided into three blocks. The bank advises one of them. “It will be a mix of financial and strategic investors.”
Hans Lin, investment bank chief at Bank of America, says it will be a game more between airport operators rather than financial investors. “In the latest round, operators had already taken the lots alone, and did not need third-party capital,” he says.
Other names of airport operators interested in the bid, in addition to ADP and Avialliance, would be Switzerland’s Zurich, which operates with CCR Confins airport (Minas Gerais); France’s Vinci, which operates Salvador’s airport, Germany’s Fraport (Fortaleza and Porto Alegre airports); France’s Egis, a minority shareholder in the group that runs Viracopos (Campinas); and Argentina’s Corporación América, which is already operating the Natal and Brasília airports. Spain’s Aena, which is not yet in Brazil, is also among the potential bidders. Singapore’s Changi, who runs the Galeão airport, in Rio de Janeiro, says it is considering its participation in the round. Among Brazilian groups, other investors would be CCR and Socicam, which already runs regional airports such as Caldas Novas (Goiás).
The most attractive block is that of Northeast, whose main asset is the Recife airport (Pernambuco). The most uncertain is that of the Central-West, which has a low passenger flow and will require higher investments.
For Bruno Aurélio, infrastructure and regulatory partner at law firm Tauil & Chequer Advogados, the existence of several airports in the same block will demand from interested parties higher investments to know the problems of each terminal.
“As there is obligation to pay the grant in cash, premiums should not be so relevant,” he says. The icing on the cake will be the bidding of blocks including Santos Dumont, in Rio, and Congonhas, in São Paulo, which the Bolsonaro government has already signaled interest in carrying out, but no date has been set yet. “Many operators will already try to position themselves in the local market with smaller assets waiting for these two airports,” Mr. O’Czerny says.
March promises to be busy, with two other auctions besides that of airports. Together, the three auctions should bring in investments of more than R$6 billion over the concession periods. The season begins with an auction of airports on March 15. Then, on March 22, the government will offer four fuel-port terminals (on April 5 there will be another six terminals). Then, on March 28, there is the bid of 1,537 kilometers from the North-South Railway.
Port terminals will be auctioned at a time when the country is increasingly dependent on imported fuels. As a result, David Goldberg, partner at consultancy Terrafirma, sees fuel distributors as potential bidders, such as Ultracargo, Raízen, Oiltanking, BR Distribuidora, Ageo and Cattalini, as well as Argentine and Chinese investors.
In the case of the North-South Railway, VLI Logística and Rumo Logística are the most likely bidders since the stretch to be auctioned is in the middle of their networks under concession. The railroad’s northern section ends in VLI’s network and the southern section, in Rumo’s.
Despite being a huge investment, both are considered fully able to raise funds. VLI has among its shareholders Canadian investment company Brookfield, which invests in infrastructure, as well as Vale, Mitsui and FI-FGTS, the investment arm of the Workers’ Severance Fund (FGTS). It is not ruled out that the two could join forces to buy the asset. VLI has a competitive advantage, since the stretch’s North wing is ready, and therefore would generate instant synergy with the company’s network. As for the section to be finished, it is in the area that ends in Rumo’s network.
Mr. Goldberg, with Terrafirma, estimates that the investment required in the North-South is below what is needed, and the volumes of general cargo are, in turn, overestimated. “If the figures translated the reality, the minimum grant would have to fall by a few hundred million. It remains to be seen if the groups’ strategic interest in buying the railroad will overcome these difficulties,” he says.
Bankers, lawyers and consultants are also working for large institutional investors interested in the various assets to be tendered, especially airports, highways and energy. Among them are Canadian pension funds and sovereign funds from Asia and the Middle East. Chinese builders would be eyeing highways.
Mr. O’Czerny, of Citi, estimates that while the projects mapped by the government are good and timely, they are not enough to secure a long infrastructure-investment cycle. “The program left by the [Michel] Temer government, the PPI [Investment Partnerships Program], is good, but it’s short. It goes until 2022, but most projects run out in 2019 and 2020,” he says. “The challenge now is for the government to create a new pipeline.”
In his opinion, the new government got off to a good start in creating the Ministry of Infrastructure. “It will be important to consolidate areas that were scattered throughout municipalities and ministries, which made everything slower. The single ministry can become an assembly line of projects,” he says.
Mr. Castello Branco, with Pátria, agrees with the need to renew the list of projects to feed future auctions, but says there already has been a lot of progress. “The highway pipeline is already very large, in railways there are three to four large projects identified,” he says.
Mr. Castello Branco, as well as other industry players, welcomed the appointment of Tarcísio Gomes de Freitas as Infrastructure minister. “It meant the continuity of something that was working,” he says, referring to the fact that Mr. Freitas was in charge of auctions and concessions under the Temer government.
There is also expectation that the Bolsonaro government will strengthen regulatory agencies, which would increase predictability of investor rules, reducing project risks.
Mr. Castello Branco says that if it were to mention a single measure that would further leverage foreign investment in infrastructure, it would be the country joining the Organisation for Economic Cooperation and Development (OECD). “Many foreign pension funds don’t invest in Brazil because the country is not a an OECD member.”
Mr. Horta, with Vinci Partners, estimates that one of the most important measures would be for the government to create a mechanism to mitigate the currency risk of foreign investors, something that the new president has already said he wants to do. “If this happens, the sky will be the limit for the inflow of foreign funds,” he says.
Source: Valor International