Protests to Spur Better Returns on Roads, Rail: Corporate Brazil

Brazil is boosting returns on contracts to operate roads and railways to lure more private investments as the biggest street protests in two decades put pressure on the government to improve public services.

The government last week increased the rate of return on a planned $15 billion bullet train from Rio de Janeiro to Sao Paulo to 7 percent from 6.32 percent in an auction to be completed by September. It follows a similar move in May, before the protests, to sweeten contracts to operate interstate highways to be sold by the end of the year.

Investors who shied away from contracts with low returns and high risks will probably benefit after protestors brought Brazil’s problems “into the mainstream,” said Ruchir Sharma, managing director and head of emerging markets at Morgan Stanley in New York. The return for investors can be as high as 20 percent net of taxes because the government is offering to finance the projects at subsidized interest rates, Treasury Secretary Arno Augustin said in an interview.

“The government is more committed than ever to try and turn to the private sector,” Chris Garman, Latin America director for Eurasia Group, said in a telephone interview from Washington, adding that he expects the government to grant higher rates of return to boost competition for the contracts. “They need for these concessions to work.”

‘Better Off’

The contracts valued at 187 billion reais ($83 billion), which are attracting companies from TPI Triunfo Participacoes & Investimentos SA to EcoRodovias Infraestrutura & Logistica SA, are a part of President Dilma Rousseff’s plan to solve infrastructure bottlenecks hindering growth in Brazil.

The difference in quality between publicly operated roads and private ones is evident, said Triunfo Chief Executive Officer Carlo Alberto Bottarelli.

“The government sees this clearly and has understood that these things are better off in the hands of the private sector,” he said in a telephone interview from Sao Paulo.

Protests last month swelled to more than 1 million people and spread from Rio de Janeiro, Sao Paulo and the capital Brasilia to cities across the country. The demonstrations were sparked by an increase in bus fares and quickly morphed into a catch-all for discontent over poor public services, corruption and inflation.

“Typically, it’s only when a government has its back to the wall does it end up doing the right thing,” said Sharma, whose 2012 book “Breakout Nations” was critical of Brazil for neglecting government assets.

Winners and Losers

Not all industries are set to benefit as the government responds to protestors demands. Utility Cia. Paranaense de Energia, or Copel, has plunged 13 percent since June 20 after giving in to demands from the Parana state governor that it suspend an electricity rate increase of as much as 15 percent. Toll-road operator CCR SA also declined after Sao Paulo Governor Geraldo Alckmin canceled a toll increase on state roads. The shares have partially rebounded after the state said it will offset the lost revenue by lowering fees on operators, boosting tolls on trucks and fining construction companies behind schedule. CCR didn’t return an e-mail request for comment. A Copel press official declined to comment on its decision.

Copel rose 1.6 percent to 28.53 reais in Sao Paulo trading at 1:05 p.m., while CCR advanced less than 1 percent to 17.16 reais.

“From a purchasing power point of view, bus fares are higher in Brazil than elsewhere, and the same goes for utilities and telecom,” Eurasia’s Garman said. “These are types of services where politicians may be a little more hesitant to pass on to consumers.”

Companies may avoid auctions until returns are more attractive, said Gabriel Gaetano, an analyst at Fator Corretora. He cited a January auction for road concessions at 5.5 percent returns that attracted no interest. Returns rose to 7.2 percent in May.

“It makes sense to not support the concession,” he said in a telephone interview in Sao Paulo. The government “ceded to pressure from the companies.”

Before it's here, it's on the Bloomberg Terminal.