Why Brazil’s streetlighting segment is heading towards consolidation

The number of public-private partnerships in the Brazilian streetlighting segment has seen strong growth in the past few years. 

Many small municipalities are currently considering PPPs in this area and this could become a key growth driver in the coming years.

The positive outlook is currently clouded by the country’s high inflation and interest rates as these factors could make some investors more cautious.

Pedro Vicente Iacovino, president of Brazil’s association for private streetlighting concessionaires (Abcip), spoke with BNamericas about the segment’s challenges and opportunities.

BNamericas: What is the outlook for the PPP streetlighting segment in Brazil?

Iacovino: We still have a very positive outlook for the segment as there are around 400 municipalities evaluating the structuring of PPPs for public streetlighting.

It is worth mentioning that perhaps not all these contracts will be offered. Today we already have 69 contracts signed in Brazil and by the end of this year, a few more contracts should be signed, with the most important being the contract for the city of Curitiba [Paraná state capital].

EY recently carried out a survey among stakeholders where most respondents said they believe that by the end of 2024 we will have between 100 and 150 new contracts signed. I think this expectation is reasonable.

BNamericas: What are the main issues today for the continued growth of the segment?

Iacovino: First, we need to see the continued engagement of public [sector] banks BNDES and Caixa Econômica Federal in structuring the projects for municipalities. The support of these banks is fundamental.

Another point of attention is related to the high level of the base interest rate in Brazil, the Selic rate.

When base interest rates are high, as they are now, investors are hold back because it is difficult for a project to compete with the high return that government bonds offer. This has an impact mainly from the point of view of foreign investors.

BNamericas: There are several segments today that are suffering major impacts from the pressure of input costs. How does this pressure affect your segment?

Iacovino: Cost pressure is also high in this segment because what most impact public lighting, in addition to labor costs, is the price of electronic components.

The inputs connected to the LED luminaires are all imported so there is foreign exchange pressure [from the depreciation of the Brazilian real versus the US dollar].

In addition, there are also supply problems with semiconductors that affect the segment directly.

BNamericas: Can the current cost pressure result in requests for contract reviews?

Iacovino: There are two points that we have to consider regarding this topic.

Existing contracts have readjustment mechanisms that take into account variations in the official inflation rate, the so called IPCA. Because of this, inflation, despite having an impact on companies, does not pose a high risk of contract review.

However, there is another problem. In the PPP contracts signed in the recent past, we saw that many companies offered very aggressive discounts for assuming the contracts. 

It is not clear whether these contracts that saw very aggressive offers are economically viable. Only time will tell if we will have a wave of requests for contract reviews.

By law, contracts can undergo revisions, with rebalancing every five years, but as some contracts have had very aggressive bids in the auctions, it is possible that we will see some revisions being requested before that.

BNamericas: In the coming years, given the opportunities and challenges you mentioned, what will the segment’s makeup be in terms of market participants?

Iacovino: In the next two or three years, with new contracts being offered, I think we will have new players entering the market. After this period of new contracts, revised or not, we should start to see a move towards market consolidation.

But we are still in the process of new participants entering and in recent auctions we have seen the entry of energy trading companies, among others. Consolidation will only take place in two or three years from now.

BNamericas: What is the size of investments involved in the contracts signed?

Iacovino: Today, the 69 contracts that we have signed and that are already in progress represent investments of around 22bn reais [US$4.23bn].

However, many are contracts that involve the largest [state] capitals in the country, such as São Paulo, Rio de Janeiro and Belo Horizonte. Looking at the potential of the 400 municipalities that currently have a PPP evaluation underway, all the contracts combined of these smaller municipalities could amount to 30bn reais.

It is also important to remember that investment estimates will vary, as input prices will tend to fall over time as this PPP model keeps making progress.

BNamericas: You mentioned concerns with high interest rates today, what is the funding model most widely used by companies?

Iacovino: Today we have a funding mix that is made up by the companies' own capital and financing from multilateral banks.

In addition, we have seen the development of the infrastructure debenture market, which is also an increasingly common way of financing.

As the streetlighting segment has a strong ESG appeal, because of its social and environmental impacts, the participation of multilateral banks tends to be quite important.