After around a month and a half of preparation and announcements, this Tuesday (June 9) the Brazilian Federal Government finally launched the next stage in the 'Programa de Investimento em Logística' ('Logistics Investment Program' / 'PIL'). The program plans investments of up to R$ 198.4 billion (US$ 64.6 billion) in the form of concessions to the private sectors involved in the construction and operation of railroads, highways, ports and airports. Of this total, R$ 69.2 billion is planned to be invested by 2018.
The plan was presented by the Planning Minister, Nelson Barbosa. During the presentation, he stressed the need for new investments for the country's economy to take hold once again, and noted that, for it to do so, there was a need to ensure macroeconomic stability, regulatory predictability, participation by the private sector and coordination between the public and private sectors. When discussing the set of directives for the concessions, he highlighted the improvement of regulatory frameworks, remuneration in line with the costs and risks of construction, and the availability of long-term financing with greater participation by private institutions and those involved in the capitals market.
The main focus, in terms of volume of investments, is the country's railroad network, with investments of R$ 86.4 billion, of which R$ 40 billion are planned for the cross-continental 'Bioceânica' railroad, the object of a memorandum signed between Brazil, Peru and China. Highways are the second most important area, with R$ 66.1 billion planned for investments, whilst ports and airports make up the figures, with planned investments of R$ 37.4 billion and R$ 8.5 billion, respectively.
It would seem that expectations have been confirmed, and the railroads concession model now no longer includes the 'open access' framework which, in the form it had been proposed by the Government, had been widely criticized by the market and by control authorities (most recently by the Federal Audit Court – 'TCU'). The Government's declared objective now is to improve competition in the current model, of a vertically-integrated operator, including ensuring third party access rights to the railway infrastructure by other operators. Definition of the criteria to be used for the decisions will be based on the particular characteristics of each project, and is expected to involve the highest payment to the Government, lowest tariff and/or investment sharing.
The investments planned for highways in this new stage, including the doubling of lanes, third lanes, etc., encompasses five bidding sessions in 2015 (comprising a total of 2,603km and R$19.6 billion), eleven bidding processes in 2016 (comprising a total of 4,371km and R$31.2 billion) and investments in existing concessions (R$15.3 billion). These concessions will be granted to those bidders offering to charge the lowest tariffs – a model already adopted in the most recent bidding rounds staged by the Federal Government.
In relation to the country's ports, the Government is planning the concession of 50 new public terminals (R$ 11.9 billion), starting this year with the 29 in Santos and Pará that have already been approved by the TCU, the authorization of 63 new Private Use Terminals, the licensing processes of which are currently under analysis (R$ 14.7 billion), and the early extension of the lease agreements on 24 public terminals (R$ 10.8 billion). For the bidding rounds, the Government will be analyzing criteria such as the greatest capacity for the movement of cargo, lowest tariffs, highest levels of investment, fastest movement of cargo, best technical proposal and the highest sum offered for the concession.
The big news in the airports sector, despite the modest level of the targeted investments (R$78 million), concerns the offer of the concessions on regional airports – six in the State of São Paulo and one in Goiás. The concession model was not formally presented in the first stage of the 'PIL', nor in the Regional Aviation Development Program. Expectations were confirmed, however, in relation to the concession of the airports serving Salvador, Fortaleza, Porto Alegre and Florianópolis, the bidding rounds for which should take place in the first quarter of 2016.
The financing for all these projects will be reliant on the traditional participation of the 'Banco Nacional de Desenvolvimento Econômico e Social' ('National Economic and Social Development Bank' – 'BNDES'). However, due to the economic climate, the Government, in relation to the previous stage of the PIL, has reduced the portion of resources tied to the TJLP (Long-Term Interest Rate) – currently 6% – and has bound the availability of part of these resources to the issue of infrastructure debentures, to the raising of funds from other private sources and to the greater contribution of private capital. With this as a basis, the Government hopes to expand the participation of commercial banks, investors in the capital markets (including institutional investors) in the Brazilian infrastructure market. BNDES may finance up to 70% of the estimated project CAPEX for airports, ports and highways (with up to 45% linked to the TJLP) and up to 90% in railroads (with up to 70% linked to the TJLP).
In our view, the Government deserves a round of applause for this initiative, even though a great deal of administrative and regulatory effort still needs to be made to overcome the challenges that usually affect the implementation of projects in Brazil. Furthermore, the PIL may require that conditions are established to allow for foreign and smaller Brazilian engineering, equipment supply, construction companies and operators to participate. This could be the case if certain difficulties initially expected for some of the large players from the Brazilian infrastructure sector prove to be a reality. In such scenario, the Government may, within the limits of its authority and together with the other authorities involved, need to revisit, for instance, certain aspects of the Brazilian legislation that affect the ability of foreigners to enter into this market. This list would include, among others, the regulations concerning the participation of foreigners in bidding procedures, preferences for the acquisition of national products and services, local content requirements, operational requirements set forth by professional councils and work permits for qualified foreign professionals (especially engineers).
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