How an abundance of projects dilutes investor interest

By
Friday, September 15, 2017

The combination of a high number of infrastructure projects and the lack of in-depth technical studies before tenders are called affects the progress of projects in the long term and reduces the appetite of investors due to higher risks.

Keen to provide a market friendly approach for investors, governments in the region are promising a huge pipeline of projects, but the quality remains uncertain.

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"There is a problem with the prioritization of projects. Governments need to know where to prioritize and should include the whole society in discussions," Norman Anderson, president and CEO of infrastructure consultancy firm CG/LA, told BNamericas.

"With regard to prioritizing projects, I like to cite an example that happened to me years ago when I did some work with the Mexican government and asked them how many infrastructure projects were considered priorities for a particular year. The answer was 450. I said that it wasn't feasible, no country can have 450 priority projects. A country, even a big country, must concentrate on 10 or 12 main projects per year," added Anderson.

In Brazil, federal and local governments are embarked on an aggressive plan of privatizations, concessions and PPPs as they seek to raise cash due to the challenging fiscal scenario, after two years of deep economic recession, and to embrace the private sector and reduce corruption among politicians.

In August, the federal government announced the inclusion of 57 new projects in its investment partnerships program (PPI). Of these, 32 infrastructure assets will be privatized, concessioned or evaluated for privatization, including airports, highways, ports and state-owned companies. The government expects to raise 44bn reais (US14.10bn) with the new contracts.

Airport auctions are due to take place in the second half of 2018, with a total of 14 terminals up for grabs, accounting for 19% of Brazil's passenger traffic in 2016.

Among the projects to be offered to the private sector are Congonhas airport in São Paulo state, and the government stakes in Cuiabá, Santos Dumont and Recife airports. The São Paulo terminal accounts for 10% of all Brazil's air traffic.

"There are too many projects and this caused confusion for investors. Instead of offering a series of projects all at the same time, if the government decided to offer one airport at a time, this would attract much more interest," André Castro Carvalho, a partner at law firm Braga Nascimento e Zilio Advogados Associados who specializes in PPPs, said in an interview with BNamericas.

"I have no doubt that the auction regarding Congonhas airport will be a success, but if you have just Congonhas on offer, you could reach many more investors, and as a result the government could obtain a much better price. When you opt to prioritize everything, in the end you don't have any priorities," he added.

SÃO PAULO SELL-OFFS

São Paulo mayor João Doria, meanwhile, is expected to hold a road show with foreign investors to present the Brazilian city's privatization and public-private partnership (PPP) program.

"Our idea is to leave the city's accounts alleviated and we're carrying out a plan based on three pillars: privatization, concessions and PPPs, depending on the characteristics of each project," Wilson Poit, São Paulo city PPP secretary, told BNamericas.

The mayor of Brazil's largest city is planning to privatize the Interlagos motor racing track and the Anhembi events complex, along with launching tenders for a concession for Pacaembu sports arena, parks and even cemeteries.

Poit also highlighted that Doria's administration plans to award concessions for 27 bus terminals. "Certain terminals have enough room and demand to build a shopping center, schools and even residences," he said.

PLEDGE TO LISTEN

While analysts point to the high number of projects, government officials see things differently.

"We have projects from the federal government and from local governments. Those projects are different and tend to attract different kinds of investors," said Poit.

Meanwhile, the federal government said it is working to offer projects with better feasibilities studies to avoid concessions being returned, as has happened in certain cases when projected revenues have not materialized.

"We're working to listen to investors, participating in a number of different forums to detect all demands to adjust our models to provide the best projects," Tarcisio Gomes de Freitas, projects secretary of the PPI program, told BNamericas.

Invepar this month decided to return its concession for operating highway BR-040 after it failed to carry out planned investments. The 937km toll road connects capital Brasília with Juiz de Fora in Minas Gerais state, passing through Goiás state. The original contract required 702km to be widened.

And in July, a consortium headed by Triunfo Participações e Investimento (TPI) and engineering firm UTC Engenharia decided to return their concession for operating Viracopos airport, in São Paulo state city Campinas, as both are facing financial troubles and revenue and passenger traffic projections have not been met.

"In my view, the return of those two concessions are isolated cases. I don't expect other cases in the near future," said Freitas.

The infrastructure supervisor of the federal audit court (TCU), Luiz Fernando de Souza, criticized past concession processes, highlighting that projects were poorly designed, and investments were made late, and now there are constant requests to modify contractual conditions.

"The concessions need to have more robust studies and projects with a better definition of risk sharing. This avoids surprises along the way before the end of the concession," Souza said during a hearing in the lower house.