Arteris Sees Rousseff Brazil Road Plan as Lacking ProfitChristiana Sciaudone, Denyse Godoy and David Biller
Arteris SA Chief Executive Officer David Diaz said Brazil’s road auction plans, part of President Dilma Rousseff’s $98 billion effort to spur growth, are flawed because traffic estimates are too high and cost projections low.
Brazil’s failure to attract bids for the BR-262 highway shows companies are hesitant about potentially unprofitable projects, said Diaz, who became CEO after the nation’s third-largest toll-road operator was bought last year by Brookfield Infrastructure Partners LP and Abertis Infraestructura SA. The government may have to offer more attractive terms, he said.
“For BR-262, we have a different vision of the costs of investment and a different vision of traffic,” Diaz said in an interview on Oct. 17 at Bloomberg’s Sao Paulo office. “We want simple investments, without a lot of complexities, in areas where we are already operating and with a low level of investment and a high amount of traffic.”
BR-262 has become a symbol of Brazil’s challenges in finding operators to invest 46 billion reais ($21.2 billion) in the tollway licenses. The government had to dangle a 7.2 percent return to lure bidders after a 5.5 percent offer got no interest in January. The lone successful auction, for the BR-050 highway, was won last month by Consorcio Planalto, a group of nine small-and medium-sized companies.
The roads are the first piece of Brazil’s 212 billion-real infrastructure program, including rails and ports, to go to auction to eliminate bottlenecks blamed for stalling economic growth.
While the administration has sought to get work under way before next year’s World Cup soccer tournament and the 2016 Rio de Janeiro Olympic games, the International Olympic Committee’s inspection team said after an August visit to Rio that it was concerned that there may be delays in getting the city ready.
Arteris operates nine road concessions in Brazil and wants to “invest, invest, invest,” Diaz said. Revenue at the company rose 15 percent last year and 23 percent in 2011.
All companies bidding in highway auctions say the government is overestimating traffic and underestimating investment needs, according to Felipe Silveira, an analyst at brokerage Coinvalores who rates Sao Paulo-based Arteris as buy.
“If road managers don’t see the return level they’re seeking, they’re not going to be very aggressive in their proposals and the auctions won’t work, as happened with BR-262,” Silveira said. Arteris’s efforts to damp risk make sense “because its controlling shareholders changed recently and they are still trying to better understand infrastructure projects in Brazil.”
Four road licenses, of a total of nine, are to be auctioned by year’s end. This comes as the number of new vehicles more than doubled from 2009 to 2012, to an annual average of 3.5 million, according to Luciano Coutinho, president of state development bank BNDES. Vehicle output will rise to 5.7 million in 2017 from an estimated 4.3 million this year, automaker trade group Anfavea predicts.
“There are huge needs and the question is how much private capital is going to those needs, not one of lack of private capital,” Gabriel Goldschmidt, senior manager of infrastructure and natural resources for Latin America and the Caribbean at International Finance Corp., said in a telephone interview “It’s not that there is no interest.”
BNDES will finance as much as 70 percent of the road investments and is guaranteeing 87.5 billion reais for infrastructure financing from 2012 to 2014, according to an Agencia Estado report on Oct. 18.
“BNDES financing is very attractive,” Arteris’s Diaz said. “It’s hard for private banks to offer better terms.”
Even without winning any of the new concessions, Arteris has outperformed the Ibovespa index this year, rising 3.7 percent through Oct. 18, while the benchmark gauge of Brazilian equities fell 9.1 percent. CCR SA, a rival, fell 8.6 percent and EcoRodovias Infraestrutura e Logistica SA slid 8.1 percent. Today, Arteris rose 0.7 percent to 19.78 reais at 11:08 a.m. in Sao Paulo, while CCR was up 0.3 percent top 17.84 reais and EcoRodovias fell 1.4 percent to 15.68 reais.
The government’s return rate and traffic studies are just two components of the road projects, the press office of Rousseff’s chief of staff wrote in an e-mailed statement.
“If the winner is more efficient than what the study accounts for, the company can appropriate all of the gains from that efficiency,” according to the statement, which said that the leveraged rate of return for roads is 16 percent.
Brazil’s transportation regulatory agency, known as ANTT, didn’t respond to a phone call and e-mail seeking comment.
Rousseff’s administration has shown new willingness to compromise on a concession framework, according to Glaucia Calp, head of Fitch Ratings’ infrastructure and project finance group for Latin America.
“The government has been adopting a more pragmatic approach compared to the beginning of the year,” Calp said by telephone from Sao Paulo.
Diaz said that while Arteris had synergies with its existing operations and BR-050, the company offered the most conservative bid, 5.1 percent less than the maximum toll price of 0.0787 real per kilometer. Consorcio Planalto, the winning consortium, had offered 0.04534 real per kilometer, a 42.4 percent discount. The winner will invest 3 billion reais in the 437-kilometer concession over 30 years.
If small companies can participate, they must have “the technical and financial capacities to carry it through,” International Finance’s Goldschmidt said. “Some infrastructure projects are extremely complex and challenging; some are simpler. Just because a company is small doesn’t make it inexperienced; it may have a certain know-how for that specific challenge.”
Consorcio Planalto’s companies have as much as 60 years of experience and have already worked on highway construction, said Carlos Prado, the group’s director.
Tollway operators are talking to the government about improving profit and margins, and providing more flexible timelines, Diaz said. There are differences of opinion on expected traffic flow, Diaz said, because some estimates are based on economic growth projections that are now out of date.
Brazil’s economy may grow at a 2.48 percent rate in 2013, according to an Oct. 11 central bank survey of economists, about a third of the 2010 level of 7.5 percent.
“Everything is about profitability. The government establishes a ceiling price, so we do our studies and with this ceiling price we’ll see if it gives expected profitability,” Diaz said. “The government has one vision of the GDP, of traffic, of costs, and we have another.”