Brazil
Feature

Legal uncertainties hurting Brazil's infrastructure investment outlook

Bnamericas Published: Friday, May 31, 2019

Along with challenges in obtaining financing and achieving profitability, investors interested in participating in Brazilian infrastructure projects face a complex legal system, which increases uncertainty.

Concessions, public-private partnerships and privatizations face huge legal risks, according to those involved. The most recent example involves state oil company Petrobras, putting at risk the company’s divestment program.

Earlier this year, Petrobras agreed to sell a 90% stake in its gas transport unit TAGfor US$8.6bn to French energy company Engie and Canada's Caisse de Dépôt et Placement du Québec.

While the superior court approved the deal, the supreme court suspended the sale following a request from an oil workers’ union.

Now, the sale of TAG and other privatizations authorized by the federal government and state governors is being evaluated by 11 supreme court judges in order to set a precedent in such cases.

Under current rules, congress must approve any privatization and the sale must involve a bidding process. State-run firms argue that this rule does not apply to the sale of their subsidiaries and is only applicable to parent or holding companies.

A definitive ruling was initially expected for Thursday, but the supreme court delayed the vote until June 5, according to court documents.

“This kind of controversy is really bad in investors’ eyes, for all the infrastructure area, as it reduces security for investors, mainly those looking for long-term projects,” Luis Antonio Semeghini de Souza, a partner at Souza, Mello e Torres law firm, which specializes in project finance and infrastructure projects, told BNamericas.

Another example of the highly complex scenario for private sector players can be seen in Rio de Janeiro.

The mayor, Marcelo Crivella, is constantly criticizing VLT Carioca, a concessionaire that operates a light rail system connecting Rio de Janeiro's port region with the city center.

VLT Carioca – which belongs to CCR (25%), Odebrecht Mobilidade (25%), Invepar (25%) and Riopar Participações (25%) – is in a dispute with the Crivella administration demanding reimbursements from the city hall as passenger projections for the system failed to materialize.

The city government, meanwhile, criticized the project, which was drawn up during the past administration, and challenges the consortium’s demand.

“This entire situation is absurd and shows for investors that a contract signed during a past administration can be changed, at any time, by the next administration, especially if it’s from a different political party,” Joubert Flores, president of rail passenger carrier association ANPTrilhos.

“The legal uncertainty is particularly serious for the railway sector because projects in this area involve huge investments for a prolonged period, with no solid legal framework for the private sector to avoid this risk,” added Flores.

FEDERAL GOVERNMENT EFFORTS

The legal obstacles threaten the Brazilian government’s plans to increase the interest of private sector investors in infrastructure projects.

Years of poor or negative economic growth hurt tax collection, reducing the government’s ability to invest in those projects.

“The privatizations and concessions agenda could fuel economic growth, but the impact is delayed as all processes must be passed by congress and they face various obstacles. An announcement made today will only impact the real economy in the next few years,” said José Carlos de Faria, chief Latin America economist at BNP Paribas.

Infrastructure minister Tarcísio de Freitas is working with other authorities to cut legal red tape.

The government is in talks with the federal audit court TCU and supreme court to accelerate approvals for new and unfinished infrastructure projects, along with reducing bureaucracy in granting licenses for projects.

“I consider Freitas the best minister of the current cabinet. He is highly efficient and knows exactly the main program of the infrastructure area. However, the problem is that he is not able to advance with the agenda alone, this must count with goodwill from congress,” said Souza.

President Jair Bolsonaro (pictured) promised during last year’s election campaign to privatize state-run firms to deal with the country's tight fiscal situation.

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