Brazil’s Big Contractors Looking for a Bigger Slice of Belo Monte’s Action

Brazilian contractor group Odebrecht A sweetheart deal? Maybe. After all, the Brazilian Development Bank (BNDES) will ante up 13.5 billion reais (US$ 7.71 billion) to be paid back in 30 years – instead of the normal 25 and there will be a tax exemption of over 70% for ten years.

And the consortium itself accepted a narrow profit margin of 8.5% while 11% or more would be normal.

Then there was the formation of the winning consortium, Norte Energia. Basically, the government reacted to pressure from big contractors who wanted to raise the price of Belo Monte electricity so they could make more money.

Brasília put a new consortium together at the last moment, consisting of smaller companies with less experience in big projects. And the dark horse won. The experienced bidders and builders made a conservative bid with a razor thin difference between it and the ceiling price.

The winners, expecting this, and aware of the rule that there must be a 5% difference in bids if a further round of bidding is to be avoided, tendered a price 6.02% below the ceiling and won – the whole auction, consisting of only two bids, was over in less than seven minutes.

The ceiling price established by the government was 83 reais (US$ 47.4) MW/h; Belo Monte Energia bid 82.90 reais (US$ 47.34) MW/h; Norte Energia bid 77.97 reais (US$ 44.53) MW/h.

Nivalde Castro, coordinator of the Gesel-UFRJ, explains that the contract model at Belo Monte will be the same used at Jirau on the Madeira River in Rondônia: there is no fixed price per contractor, but a division of the work among various companies which spreads risk and reduces costs.

“Norte Energia, led by CHESF, was aggressive at the auction because it will use a contract model that will allow it to be competitive,” said Castro.

A good contract model will be needed, for example, to remove an estimated 200 million cubic meters of earth and rock to build the two canals that will channel water from one reservoir to the other. Each canal will be over 30 kilometers long.

And a lot of changes could occur. Castro admits that two of Brazil’s biggest construction companies, Odebrecht and Camargo Corrêa, who dropped out of the bidding because of discontent with the price offered, may be back in the future.

And the entrance of Eletronorte is almost certain. “Eletronorte is a company that has the greatest familiarity with Belo Monte. It is what we call a strategic partner that remained on the sidelines during the auction because it is an important reserve player for any winning consortium.”

Less than a week after the auction, invitations are going out to companies like Vale, Votorantim, Gerdau and National Steel (“Siderúrgica Nacional”) to join Norte Energia in the Belo Monte hydroelectric power plant and dam project.

These are not construction companies, they are big electricity users (in mining, steel and cement, for example) and as such are known as self producers. Self producers have an incentive to joint the enterprise as they can buy electricity below market prices (at cost, in fact).

Castro says this is logical and natural. “They will probably accept the invitation,” he says.

“It’s a two-way street. They get electricity at reduced rates and contribute to the project with their skills and experience, which reduces costs. This is a very big project, the third biggest dam and power plant in the world, so there is lots of room for new solutions and innovations that cut costs and increase profits,” declared Castro.

As for the entrance of Petrobras, Castro was not so sure. “Could be another self producer partner. Petrobras has many natural gas-fueled thermoelectric power plants. Sometimes they have to import gas (LNG) to run them, which is very expensive. Belo Monte is a source of cheap electricity for them. Maybe they will be interested, but at the moment this is speculation,” said Castro.

Finally, Castro commented on the threat by Queiroz Galvão, right after the auction closed, to leave Norte Energia. Queiroz Galvão is the biggest construction firm in the winning consortium and as such “tried to pressure the other partners to give it a bigger slice of the action. That’s all that was,” said Castro.

ABr

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