Toll-Road Builders Accept Lower Returns as Rousseff Cuts
Brazil’s biggest infrastructure companies from Santos Brasil Participacoes SA to EcoRodovias Infraestrutura & Logistica SA are settling for lower returns from government contracts, betting that a rebounding economy will make new projects viable.
EcoRodovias, Brazil’s largest toll-road operator, expects returns of about 9 percent, Chief Executive Officer Marcelino Rafart de Seras said yesterday at the Bloomberg Forum: Brazil event in Sao Paulo. That’s down from at least 15 percent for toll roads auctioned to private investors in the 1990s, said Banco Itau BBA SA. TPI Triunfo Participacoes & Investimentos SA CEO Carlo Alberto Bottarelli sees lower rates “near double digits,” while port operator Santos Brasil CEO Antonio Sepulveda expects returns “slightly above” 10 percent.
“The trend is for the rate of return to fall, but there’s going to be more competition among infrastructure assets -- there’s going to be a ports package, a road package, a rail package,” Bottarelli said at the event. “For us, what’s important is the contract. And if the contract is stable, then we’ll take a look.”
President Dilma Rousseff is pushing companies from utilities to wireless carriers to accept lower profits after her administration cut the benchmark interest rate by 5.25 percentage points since August 2011 to a record 7.25 percent. Brazil is providing funding at below-market rates for many infrastructure projects ahead of the 2014 World Cup and 2016 Olympics.
Rousseff, seeking to stimulate the economy and solve infrastructure challenges that stem from a decade without investment, in August announced a $66 billion package that includes licenses to run 7,500 kilometers (4,660 miles) of roads and 10,000 kilometers of railways. The economy in Brazil, the world’s second-largest emerging market, is estimated to grow 1.03 percent this year, according to a central bank survey released this week, the lowest of so-called BRIC countries.
Carlos Hamilton, the Brazilian central bank’s head of economic policy, said at the Bloomberg Forum that economic growth in coming years may top market forecasts averaging 3.7 percent should Rousseff’s reform efforts succeed.
Treasury Secretary Arno Augustin said government funding for roads and other projects will ensure that investors are rewarded.
“The return for shareholders is not the same as the rate of return on the project, especially for projects with financing at low or even negative interest rates,” Augustin said at the same event yesterday. “And, for me, the rate of return is a reflection of risk.”
Brazilian infrastructure operators have provided some of the industry’s best returns on equity. Sao Paulo-based CCR SA (CCRO3), which manages highways, has posted an average return on equity of 29 percent in the past five years, the most among 61 transportation infrastructure companies worldwide with a market value above $1 billion, data compiled by Bloomberg show. Toll- road operator Obrascon Huarte Lain Brasil SA (OHLB3) comes in third with 28 percent, while Sao Paulo-based EcoRodovias ranks ninth with a return of 20 percent.
It’s natural for returns to fall as interest rates decline, said Roberto Altenhofen, an analyst at Empiricus Research. Infrastructure operators also aren’t at risk of the government intervening to change contracts, he said.
“The market is already used to this new reality,” Altenhofen said in a telephone interview from Sao Paulo. “The risk profile for these projects is improving. It doesn’t make sense for them to continue giving returns of about 15 percent with lower risk.”
Investimentos & Participacoes em Infra-Estrutura SA, which has the lease to run Guarulhos, the nation’s largest airport, expects to boost income by offering more services, such as parking and restaurants, CEO Gustavo Rocha said. Invepar, as the company is known, seeks to increase revenue from sources other than airport fees to about 65 percent by 2015, from between 35 and 40 percent in 2009, he said.
Triunfo, part of the group that won the February contract to expand and operate the Campinas airport in Sao Paulo state, is taking on a mix of port, road and airport projects in a bid to protect returns, Bottarelli said. Tolls account for about 70 percent of revenue, according to data compiled by Bloomberg.
Brazil started auctioning its first contracts for airports last year. Triunfo’s stock has rallied 38 percent since it was awarded the Campinas contract, compared with an 8.6 percent drop for the benchmark Bovespa index. EcoRodovias has gained 26 percent, and Santos Brasil is down 0.5 percent.
Triunfo rose 0.3 percent to 11.79 reais at 1:57 p.m. in Sao Paulo trading, while EcoRodovias was unchanged at 16.88 reais. Santos Brasil declined 1.7 percent to 29.18 reais.
The nation also seeks to attract private investment for ports to reduce transport costs and bolster economic growth. The government will offer ports for private licensing, Ports Secretary Leonidas Cristino said Dec. 6. Part of the spending will be financed with long-term loans, he said.
Santos Brasil sees opportunities to expand in the North and Northeast in Brazil, CEO Sepulveda said at the Bloomberg Forum.
“Every project has its allure, its risks, its strategy,” Invepar’s Rocha said at the event. Infrastructure companies are all seeking returns around 10 or 11 percent, he said. “In the end, the important thing is to have a stable regulatory framework.”