Rousseff’s Brazil Works Plan Hits Bump With Road Bidding
Brazil is considering offering higher returns to persuade investors to build $93 billion of infrastructure after one of its top road projects failed to attract any bidders, an official involved in the talks said.
No companies submitted proposals for an auction tomorrow on a contract for the BR-262 highway in the states of Espirito Santo and Minas Gerais. A second road, BR-050 in Goias and Minas Gerais, drew bids from eight companies, including Arteris SA (ARTR3) and TPI-Triunfo (TPIS3) Participacoes e Investimentos SA.
The government needs “to speed things up, and for that they will need to pay a premium to attract investors,” said Daniela da Costa, a country specialist at Robeco Groep NV in Rotterdam, which manages 189 billion euros ($252 billion) in assets. Returns aren’t enough to offset political risks after violent protests against tolls and bus fares paralyzed the nation in June.
The contracts are the first test of President Dilma Rousseff’s 212-billion-real ($93 billion) infrastructure plan after she retained profit caps on such projects even as local interest rates rise and economic growth falters. Return rates were raised already for road projects, to 7.2 percent from 5.5 percent, and the government offered more financing at below-market rates to woo bidders for its planned highways, ports and airports.
The government may review the maximum toll and operating-cost estimates for the BR-262 project, said the official, who asked not to be identified because the talks aren’t public. An auction of airport work in Belo Horizonte and Rio de Janeiro, set for Oct. 31, may be delayed a week, the official said yesterday. Brazil’s Finance Ministry and Presidential Palace declined to comment.
“Returns in the current model are not economically viable given the higher risk environment,” Felipe Silveira, an analyst at Coinvalores, said in a telephone interview from Sao Paulo. “The fact that no one submitted a bid is a very negative signal that puts the other infrastructure auctions at risk.”
Auctions for railroads, ports, airports and more roads are slated to follow tomorrow’s event in the next several months.
The lack of bidders to improve and operate BR-262 “doesn’t affect the government’s expectations regarding growth and doesn’t affect, by any means, the government’s auction schedule,” Finance Minister Guido Mantega said in a statement sent to Bloomberg on Sept. 14.
BR-262 probably will be be rebid later this year with other highway work, according to Silveira and Jefferson Finch, a political risk consultant at Eurasia Group.
Rousseff’s administration is counting on the road projects, and port and rail works to come, to jump-start growth after decades of neglect created transportation bottlenecks blamed for strangling expansion. Brazil’s economy is expected to grow 2.4 percent this year, according to a weekly central bank survey of about 100 economists. The growth rate in 2012 was 0.9 percent.
The lack of bids for the BR-262 contract is “an unfortunate bad start to the government’s infrastructure agenda,” Finch said in a telephone interview from New York. “The political risk in highways continues to be high in the post-protest environment in Brazil.”
After states such as Sao Paulo canceled increases in tolls and bus fares following countrywide protest marches that left at least six people dead, “politicians are going to be very wary of passing on costs to people,” he said.
The failure to attract interest in BR-262 comes eight months after companies from CCR SA to Sao Paulo-based Arteris refused to join in a first round of bidding. That spurred the boost in returns to 7.2 percent, as well as creation of an 11 billion-real fund to cover political risk and natural disasters, and the offer of government pension funds as partners.
Increasing private funding through infrastructure is imperative for Brazil’s economic growth and avoiding a sovereign credit rating downgrade, according to Standard & Poor’s. Brazil’s investment of 21 percent of gross domestic product is the least among the largest developing nations and less than half of China’s rate, S&P said.
Companies such as Ecorodovias (ECOR3) Infraestrutura e Logistica SA, Brazil’s largest toll-road operator, “are very discounted today,” said Silveira, the Coinvalores analyst, after the government intervened in the electricity industry and cut tariffs last year, and after the state of Sao Paulo failed to attract any interested parties to its subway line auction on July 30.
Ecorodovias fell 10 percent this year through yesterday, as CCR, another toll-road operator, dropped 7.5 percent, Arteris rose 2.4 percent, Triunfo declined 16 percent and the Ibovespa benchmark index slid 12 percent. Ecorodovias is trading at 18 times estimated 2013 earnings, while Sao Paulo-based CCR is at 22 times, Triunfo is at 61 times and Arteris, an operator of state and federal highways, is at 16 times, according to data compiled by Bloomberg.
“Risks in the new auction are better balanced, returns are attractive for investors and operators can associate with pension funds,” Arteris said in an e-mailed statement on Sept. 11. “The other advantage is that the Brazilian development bank, BNDES, may finance up to 70 percent of the investment for 25 years at attractive interest rates.”
A spokesman for CCR from outside agency Entrelinhas said the company is “always looking at potential business opportunities” and declined to comment specifically on the road concessions. A spokeswoman for Ecorodovias said the Sao Paulo-based company wouldn’t comment before results were announced.
Triunfo, a Sao Paulo-based operator of highways and harbors, also declined to comment.
For rail projects, the government is making changes to the size of lots and estimated costs as it attempts to mitigate higher risks associated with the untested program.
“When the government is faced with setbacks, the response is going to be to maneuver to make the terms more attractive,” Eurasia Group’s Finch said. “The government’s not going to respond to difficulties with concessions by giving up or saying, fine, we’ll build public lines. They don’t have the revenue and fiscal resources to do that anymore.”
Airports have proved to be an easier sell because they are less prone to attracting government intervention. Ports also don’t involve limiting returns or as heavy regulation as railways, Finch said.
Future highway projects were designed at a time when growth expectations for the economy were higher and traffic was expected to be heavier, Silveira said. Bigger initial capital investments will be needed and the government has shown no signs it’s reviewing those projects, Finch said.
The Planning & Logistics Co., a government transportation agency known as EPL, declined to comment.
After watching state governments trim increases following the toll and bus fare protests, investors are concerned there will be the same treatment on federal projects, Robeco Groep’s da Costa said.
“They offer low returns and then they compensate that with subsidized loans from BNDES -- there is a limit to subsidies and the government is very close to this limit,” da Costa said. “They have to try to make an environment where at least they have healthy competition and interested agents.”
The number of companies interested in bidding in the road auctions is “satisfactory,” said Luciano Coutinho, president of BNDES. The government is listening to company concerns, he told reporters yesterday in Rio de Janeiro, without commenting specifically about the BR-262 work.
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