Yesterday, September 13, Brazil′s President Michel Temer announced the main guidelines and projects of the Investment Partnership Plan (the "Plan"). The Plan aims at attracting local and international investors to acquire state-owned companies and to develop major infrastructure projects in Brazil.
The Government announced 34 projects and privatizations, including airports, power generation and distribution companies and railways, one lottery company, mining, oil and gas bid rounds, ports and water treatment companies. The requests for proposals will be launched as of the last quarter of 2016 (see complete time schedule attached).
Today, September 14, the Board of the Plan announced its first 6 resolutions (details ahead). This E-Alert analyzes the main guidelines and regulations announced to date, with focus on investors′ standpoint.
Guidelines
Public hearing; prior submission to the Federal Auditing Court: the request for proposals will only be launched after a public hearing process and the approval from the Federal Public Auditing Court ("Auditing Court"). These measures may mitigate risks of legal challenges and should bring legal certainty to the public tender process.
The public hearing (which should last at least 45 days) wil give to interested investors an opportunity to discuss technical and legal aspects of the projects, and to suggest improvements before the tender documentation is published
Tender documentation published in English, which is meant to attract international investors. For more details click to see the overview of the Plan and the Plan′s map published in English language by the government.
Antitrust: Brazilian watchdog CADE will be involved to ensure free competition and to curb illegal practices such as cartels in the public bids.
Extended time to deliver bids: timeline to deliver the bids was extended to a minimum of 100 days after publication of the request for proposals (current timelines vary from 45-60 days only). The extension is meant to help investors (particularly international players) to better prepare for the public tenders.
Although the extension is a positive measure, 100 days may not be enough depending on the time required or the investors to secure long-term financing (see topic on "Financing" below).
Environmental licensing: before offering any project to investors, the Government must procure the respective prior environmental license, or, at least, the licensing guidelines, in either case, issued by the relevant environmental agency.
One expects the Government to further clarify how it will allocate the licensing costs and risks. In the current model, several projects have their construction schedule severely impacted by licensing issues.
Long-term financing: in the current model, the winning bidder is unable to secure long-term financing before commencing the construction work. As a result, the investor has to take expensive short-term bridge loans.
The government banks participating in the Plan (BNDES, which has voting right at the Board, as well as Caixa Econômica Federal and Banco do Brasil) have stated their intention to make it possible for investors to obtain long-term financing prior to commencement of construction. They also announced their intention to develop models based on bank guarantees as collateral for the financing during the construction phase (instead of corporate guarantees and other collaterals that are currently required).
Moreover, the government banks stated their intention to phase out the TJLP (low interest rate) financing, which would be gradually replaced by long-term notes called debentures. While the 20%/80% equity/debt ratio would still be sought, TJLP-financing portion would not exceed 40% to 50% of the project. The remaining debt would be raised with the issuance of debentures. The banks could initially acquire the notes and then sell them in the secondary market.
The measures show that the Government wishes to transition the current model, based on government financing, to private financing (private lenders and/or capital markets). If implemented, the measures may indeed help projects to fly. Conversely, considering the extremely high basic rates (14.25% per year, nominal) and the lack of further details on this matter, investors should stay cautious.
Regulations Published Today (Sep 14)
The Board of the Plan published 6 resolutions today (Resolutions Nos. 3 and 5 should be published tomorrow):
Resolution No. 1/2016: set out general guidelines and strategies to be adopted for the tender of projects, such as:
- designation of a single public agent to be in charge of the relevant tender process;
- requirement of prior environmental licensing or licensing guidelines, when applicable;
- project contracts must contain a risk allocation matrix to mitigate future amendments and revisions;
- project contracts must contain rules on governance, transparency and monitoring of related-party contracts;
- the projects must be backed by technical and environmental feasibility studies, which will be submitted for public hearings and analysis of the Auditing Court; and
- the regulatory agencies will most likely not be in charge of preparing the tender documentation. They will remain responsible for regulating, monitoring, inspecting and following up the construction of the projects.
Resolution No. 6/2016: recommends the inclusion of the following port terminal projects in the Plan: Terminal de Fertilizantes do Porto de Paranaguá - FOSPAR S.A., and TECON Salvador. This resolution was based on an opinion from the Ministry of Transports, Ports and Civil Aviation, which has recommended that the existing terminal leases be extended (rather than tender offered). For this reason, we have not included these projects in the list below. In any event, Resolution No. 6 has led one to speculate whether the Plan may include, in the future, other operating, ongoing projects that may not have their concessions extended.
Resolution No. 7/2016: resolves that the privatization of power distribution company Celg should be resumed, and sets a new minimum price for the auction. A few weeks ago, Celg shares were offered for sale, but no bids were submitted. This resolution also determines that a new public hearing takes place before the auction.
Resolution No. 8/2016: resolves that the privatization of lottery company Loteria Instantânea Exclusiva - Lotex e da Caixa Instantânea S.A. be resumed.
Conclusion
If the Government implements the announced guidelines, we anticipate tender processes of better quality, which should offer concrete opportunities to investors.
To succeed, however, the Plan must address at least two critical matters:
- develop a clear, feasible, and accessible long-term financing model to replace the current, exhausted government-financing model. It is not clear how the Government will carry out such transition plan; and
- reconcile the intention of improving the quality of the public tenders (better feasibility studies, public hearings, risk matrix, prior environmental license etc.) with a tight time schedule (all tenders must be concluded by the first half of 2018). President Temer′s mandate ends in December 2018.
Recommendation to our Clients
Investors should closely follow up on the rules and regulations to be announced in the following weeks. They should not wait for the publication of the tender documentation; rather, they should start working earlier, as soon as the project public hearings are announced.
Attachment
Airports
Project |
RFP estimate |
Auction estimate |
Porto Alegre Airport |
4th quarter/2016 |
1st quarter/2017 |
Salvador Airport |
4th quarter/2016 |
1st quarter/2017 |
Florianópolis Airport |
4th quarter/2016 |
1st quarter/2017 |
Fortaleza Airport |
4th quarter/2016 |
1st quarter/2017 |
Ports
Project |
RFP estimate |
Auction estimate |
Santarém Combustibles Terminal (STM 04 e 05) |
4th quarter/2016 |
2nd quarter/2017 |
Rio de Janeiro Wheat Terminal |
4th quarter/2016 |
2nd quarter/2017 |
Toll roads
Project |
RFP estimate |
Auction estimate |
BR-364/365/GO/MG |
1st half /2017 |
2nd half /2017 |
BR-101/116/290/386/RS |
1st half /2017 |
2nd half /2017 |
Railways
Project |
RFP estimate |
Auction estimate |
EF-151 SP/MG/GO/TO – Norte-Sul |
2nd half /2017 |
2nd half /2017 |
EF-170 MT/PA – Ferrogrão |
2nd half /2017 |
2nd half /2017 |
EF-334/BA – FIOL |
2nd half /2017 |
2nd half /2017 |
Mining/ Energy
Project |
RFP estimate |
Auction estimate |
Companhia Energética de Goiás - CELG |
2nd half /2016 |
2nd half /2016 |
Fourth bidding round for marginal oil and natural |
2nd half /2016 |
1st half /2017 |
Fourteenth bidding round for oil and natural |
1st half /2017 |
2nd half /2017 |
Second bidding round under production |
1st half /2017 |
2nd half /2017 |
Phosphate mineral rights in Miriri (PB/PE) |
1st half /2017 |
2nd half /2017 |
Copper, lead and zinc mineral rights |
1st half /2017 |
2nd half /2017 |
Coal mineral rights in Candiota (RS) |
1st half /2017 |
2nd half /2017 |
Copper mineral rights in Bom Jardim (GO) |
1st half /2017 |
2nd half /2017 |
Amazonas Distribuidora de Energia S.A. |
2nd half /2017 |
2nd half /2017 |
Boa Vista Energia S.A. |
2nd half /2017 |
2nd half /2017 |
Companhia de Eletricidade do Acre |
2nd half /2017 |
2nd half /2017 |
Companhia Energética de Alagoas |
2nd half /2017 |
2nd half /2017 |
Companhia de Energia do Piauí |
2nd half /2017 |
2nd half /2017 |
São Simão (GO) Hydroelectric Plant |
2nd half /2017 |
2nd half /2017 |
Miranda (MG) Hydroelectric Plant |
2nd half /2017 |
2nd half /2017 |
Volta Grande (MG) Hydroelectric Plant |
2nd half /2017 |
2nd half /2017 |
Pery (SC) Hydroelectric Plant |
2nd half /2017 |
2nd half /2017 |
Agro Trafo (SC) Hydroelectric Plant |
2nd half /2017 |
2nd half /2017 |
Centrais Elétricas de Rondônia S.A. |
2nd half /2017 |
1st half /2018 |
Water Treatment
Project |
RFP estimate |
Auction estimate |
Water distribution, sewage collection and |
2nd half /2017 |
1st half /2018 |
Water distribution, sewage collection and |
2nd half /2017 |
1st half /2018 |
Water distribution, sewage collection and |
2nd half /2017 |
1st half /2018 |
Lottery
Project |
RFP estimate |
Auction estimate |
LOTEX |
Not disclosed |
Not disclosed |
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.