In Dire Need of Repairs Brazilian Roads Become Attractive to Foreign Capital

Brazil road in need of repairs Brazil is living a new phase of investment in highways, which may bring new foreign capital to the country. The movement is the result of a new reality that shows, on one side, highways needing improvement to move at the pace of the growth of the economy, on the other side, public funding in the area, and also foreigners thirsty for investment in a country that is in vogue, like Brazil.

Among the Federal highways, three are in the list of concessions: BR-116, in the state of Minas Gerais, BR-040, also in Minas Gerais, and BR-101, in Espírito Santo, according to the National Agency for Overland Transport (ANTT).

The organization informs, however, that there is no schedule defined for the auction and the call to tender should be published as soon as the Federal Audits Court (TCU) approves the studies in the area.

In São Paulo, the government promises to issue concession documentation for duplication of the SP-099, Tamoios, and for the access route to São Sebastião Port and Caraguatatuba, works to be developed as Public Private Partnerships (PPPs).

In Rio Grande do Sul, the first concessions are coming to the end of their contracts and the state government is giving signs that new tenders should take place. The same should happen in other states in the near future.

“A third round is expected, with more investment from Brazil and abroad. Brazil offers many perspectives to investors. It depends on the government to move and attract the private sector,” said Luiz Afonso dos Santos Senna, a professor at the School of Engineering of the Federal University of Rio Grande do Sul (UFRGS), who has already been a board member at the ANTT.

He recalled that not just highways, but the entire infrastructure sector has bottlenecks in the country and offers great opportunities for investors.

According to Senna, foreigners should target infrastructure in Brazil more and more. “There is no more foreign participation as there are no projects,” he said.

Today, among the 54 groups that have concessions of Brazilian highways and are part of the Brazilian Association of Highway Concessionaires (ABCR), a significant share is foreign.

The organization’s president, Moacyr Duarte, believes that at least 16 have foreign capital. Most is from Europe. This presence may be explained, according to him, by the fact that the Europeans have a tradition of highway concessions and have easy access to Brazil.

And is the sector profitable for investors? The highway sector, as is the case with other infrastructure projects, is appropriate for investors seeking long-term return, said the Transport area professor in the Transport Area at the Civil Engineering, Architecture and Urbanism College of the State University of Campinas (Unicamp), Carlos Alberto Guimarães.

“Large pension funds, for example. It is a safe investment, but not that profitable. It is for those who want firm revenues for many years, not for speculative capital,” he explained.

The ANTT shows that there are no restrictions for foreign capital in highway concessions. Concessions may be disputed by Brazilian or foreign companies, complementary pension organizations and investment funds, both alone and in consortia.

Currently, among the foreign companies that operate in highways in Brazil, both federal and state, are the Spanish OHL, Acciona and Isolux, and the Italian Autostrate and Impregilo.

One of the factors that have been attracting investors to the highway sector in the country is the respect to contracts, according to specialists. “In general, contracts are respected, the changes made were negotiated,” said Dutra, from ABCR.

The same is stated by the Rio Grande do Sul State Attorney, Paulo Valério Dalpai Moraes. “There is legal safety in the country. The tendency, in the Judiciary, is to confirm contracts,” said the attorney.

The government of the state of São Paulo informed, in June, that it aims to review the highway concession contracts, but did not provide greater details or deadlines. Late last month, the government informed that it will unify the index for toll increase in 2012.

What Is Ahead

One of the current discussions in the highway sector in Brazil is the model for concession from now on. The government of the state of São Paulo, for example, guaranteed that investment in Tamoios and in the area surrounding Caraguatatuba and São Sebastião will be through PPPs.

There is not a single formula for PPPs, but the government normally invests together with the concession holder which, according to specialists and heads in the sector, makes the format more attractive to investment.

“If the government wants to attract private capital, it must implement PPPs,” said Duarte, from the ABCR. Guimarães, from Unicamp, also believes that the PPP format makes investment more interesting.

And it may be an alternative, for example, for highways in which the volume of traffic does not sustain a concession, when the value of tolls received by the concession holder does not compensate the disbursement made for improvement of the highway. In this case, joint investment with the government would compensate the low income with tolls.

Senna, from UFRGS, believes, however, that for the time being the conventional concession models should prevail and in three or four years, PPPs should be more used in the area. He, in fact, believes that investors prefer to operate on highways that are sustainable through tolls, if the alternative is depending on government funds, with the government making just an initial investment in partnership for preparation of the road, and not granting regular funds to the concession holder.

“The government has a fame of not honoring its payments,” said the professor. But, he recalls, the legislation forecasts a guarantee fund, which would reduce this lack of safety.

He believes that all models can solve the question of quality of Brazilian highways. In Rio Grande do Sul, in fact, the system under consideration is the DBFO (Design-Build-Finance-Operate), in which the concession holder also participates in the construction of the highway.

“It would be connecting the Metropolitan region of state capital Porto Alegre to Novo Hamburgo and Sapiranga. There is currently a great bottleneck in the BR-116 (on which most of the traffic between both region is focused), which is very congested. It would be an important alternative,” said Senna.

We Want Tarmac

No matter how it is done, nobody disagrees that Brazil needs more and better highways. And those involved in the sector believe that the most useful route for this, in Brazil, is private investment, through concessions.

This has been shown by history. A research by the National Confederation of Transport (CNT) shows that of the ten best highways in Brazil, all are in the hands of concession holders. Among the 10 worst highways, none are under concessions.

In the 2009 CNT research, 42.5% of those interviewed classified the highways under concession as “excellent”. In last year’s research, the total was 54.7%. Among the highways under public operation, in turn, the “excellent” classification was only granted by 8% of interviewees in 2009 and 7.1% in 2010.

According to Senna, there are currently 1.7 million kilometers of highways in Brazil, of which just 11% are tarmacked. “There are many opportunities for investment, but governments must be open to using these funds,” said the UFRGS professor. He said that the governments have shown themselves shy in expansion of private participation in highways.

Long Route

Despite not yet having reached an ideal result in the “highway, private investment, toll, public fund and contract” bill, Brazil has been working on the matter since the 1990s, when a significant share of highway concessions in the country were signed.

Before that, back in the 1960s, the state of São Paulo tried out a similar model, creating the Dersa (Desenvolvimento Rodoviário), with mixed capital, to operate Anchieta Highway through toll charging.

The first concessions directly to private companies were the so-called onerous ones, in which the concession holder paid to the government a certain volume of money that was invested in other highways, with no concession, as well as a share of gross revenues.

The federal government, explained Guimarães, started using another format, without the regular payments and with cheaper tolls, which was then used by the state governments. After that, came the PPPs.

The Third

The third wave of concessions should bring new modifications. Expectations are for more PPPs and also for changes in rules that have not proved themselves efficient up to now. The next ANTT auction will, for example, introduce compulsory investment in the specific period and possible anticipation in case the level of service on the stretch is below the minimum stipulated.

There are also, however, talks about matters that may enter the new concessions or may only be included in future concessions. This is the case of automatic tolls, in which the car drives through and is electronically billed. Today, in most cases, the service is paid and it is up to the user to decide to purchase the system, which has different rates from the manual tolls. But the tendency, according to specialists, is for this to be the only form of billing in the future and therefore must be included in the contracts.

The length of contracts, also criticized by some for being too long – from 20 to 25 years – should be restudied in the future. Some say that as the contracts are so long, they cannot include technological changes, like the introduction of electronic tolls.

“Twenty five years is too long. Many things take place in this time,” said attorney Moraes. Senna, in turn, finds the contract length adequate. “In Spain, they are 90 years. There must be a significant maturity to cover the cost of works,” he said.



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