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MODERNIZATION OF BRAZILIAN INFRASTRUCTURE -
Challenges for the coming years
Brazil is being pointed out by economists and experts as a major emerging market for attracting foreign investment in recent years. The political and economic stability experienced in recent decades, along with the strong domestic demand for new products and services is increasingly attracting foreign companies to the Brazilian market. In the first seven months of 2011, cumulative foreign direct investment in Brazil totaled $38.5 billion, the highest amount for this period in the history of the country, and the Central Bank expects this figure to reach $55 billion by the end of the year.
According to data from the World Investment Report 2011, a study by the United Nations Conference on Trade and Development, Brazil is among the top five countries receiving foreign investments in 2010, with a total of $48.8 billion, and could rise further on the list in 2011.
Major events such as the 2014 World Cup and the 2016 Summer Olympics bring not only the glamour of sporting events. For the country hosting them, there will be an opportunity to attract investments to modernize its infrastructure and society’s quality of life.
Modernization of infrastructure for such events is not just about the construction and renovation of the venues of the sports events (stadiums/arenas), but also the entire state apparatus in the field of urban mobility (highway and railway networks), as well as airports and ports.
After a number of preliminary studies, we noted that the 2014 World Cup and the 2016 Summer Olympics would only take place if we adopted emergency measures to modernize and expand the country. To this end, a federative protocol of cooperation between the Federal Government, States, Municipalities and the Federal District, called the Responsibility Matrix, was signed, setting the allocation of each state agency in relation to funding sources and project implementation.
In January 2010, the Responsibility Matrix for the 2014 World Cup aimed at urban mobility and stadiums was signed, followed by the one targeted at ports and airports, in July the same year.
Initially, we defined projects involving approximately 12 stadiums, 50 urban mobility projects, 25 projects at 13 airports and 7 ports. Estimates indicated an investment of approximately $23.8 billion, divided[1] as follows:
Investment Area |
Urban Mobility |
Stadiums and Surroundings |
Airports |
Ports |
TOTAL |
Total |
11,896 |
5,631 |
5,561 |
741 |
23,829 |
*amounts expressed in reais
FUNDING SOURCES
Funding sources for each infrastructure area have been defined as follows:
Funding Source |
Urban Mobility |
Stadiums and Surroundings |
Airports |
Ports |
Local Funds |
4.1 |
2.6 |
0.4 |
|
Federal Funding |
|
3.0 |
|
|
Federal Budget |
7.8 |
|
5.2 |
0.7 |
* in billion reais
a) Urban Mobility:
The change in Urban Mobility infrastructure is being made ??possible through the Transportation and Urban Mobility Infrastructure Program – Pro-Transporte.
The program includes funding lines established as follows: 20 years to amortize the debt balance (30 years specifically for the rail transportation); 48-month grace period; nominal interest rate of 6% per annum (and 5.5% per annum for railway transportation).
Tenders were held in this modality to select service providers.
b) Stadiums:
After identifying the stadiums where the World Cup matches would be held, a financing line was created by BNDES – Brazilian Development Bank.
The funding limit was set at R$400 million (i.e. 75% of the project), with TJLP (Long-Term Interest) rate plus 1.9%.
The funding has a grace period of 3 years and 12 years for payment.
c) Airports:
Infraero – Empresa Brasileira de Infraestrutura Aeroportuária was responsible for preparing airport modernization projects to collect R$5.6 billion in investments, most of which will come from the federal budget.
d) Ports:
The project for ports was the responsibility of SEP – Ports Secretariat, alongside drill-down projects already contracted by the National Dredging Program (PND). The Ports exclusively count on federal income for the renovations for adaptation to the World Cup.
PRIVATE SECTOR PARTICIPATION
The World Cup will involve the strategic work of state entities, public agencies, private partners, and the 2014 FIFA World Cup Local Management Committee named of the – COL.
For the private sector, the mode of participation involves various forms of action allowed by Brazilian legal system.
One of the modalities heading the private sector’s line of contracting is the so-called Public-Private Partnership – PPP.
The Public-Private Partnership, established by Act 11,079/2004, is one of the forms of Concession agreement (as governed by Act 8,987/95), in which there are two (2) modalities: sponsored and administrative.
Pursuant to §§ 1 and 2 of Article 2 of Act 11,079/2004:
§ 1 Sponsored concession is the concession of public services or public works as addressed in Act 8,987, of February 13, 1995, when involving, in addition to the fee charged to users, pecuniary compensation of the public partner to the private partner.
§ 2 Administrative concession is the service provision agreement in which the Public Administration is the direct or indirect user, even if it involves the implementation of works or supply and installation of goods.
In PPPs designed to modernize the Brazilian infrastructure for the World Cup, we established the modality in which the Government provides a consideration to the private partner through payment of budgetary funds.
The participation of companies in Consortiums in tenders requires private entities to form what is known as a Special Purpose Entity – SPE, in accordance with the related legislation. Administrative agreements governed by the PPP law have terms compatible with the amortization of investments made by the private sector and should not be less than 5 years, nor more than 35 years, including any extensions. Signing of these agreements require the creation of a Special Purpose Entity, for the sole purpose of implementing and managing PPP projects.
The greatest innovation introduced by this legislation was the creation of a Guarantee Fund, with up to R$6 billion in assets (shares of state companies, real estate, money, etc.). This fund will ensure fulfillment of financial obligations assumed by Public Administration when contracting the private sector and its assets will serve to ensure any enforcement actions filed by the Public Partner contracted. Another point worth mentioning is the expected utilization of Arbitration methods as an alternative form of settlement for any disputes arising under the PPP. This is the first time that a law allows the Brazilian Public Administration to participate in arbitration proceedings.
In addition to the PPPs, other studies signaled another path to be taken for certain projects. That is the case of privatization in a few sectors, through the transfer of the shareholding control to the private partner at a 51% share.
For the airports of Cumbica, in Guarulhos, Viracopos, in Campinas, and Juscelino Kubitschek, in Brasília, for example, we opted for privatization, where the private sector owns 51% of the capital stock, and INFRAERO – Empresa Brasileira de Infraestrutura Aeroportuária maintains the remaining 49%. The private sector will work through Special Purpose Entities (SPE), according to a notification issued by the Secretariat of Civil Aviation (SAC). The public notices are expected to be issued in December 2011.
The model allowed for the airport of the State of Rio Grande do Norte opened a new airport management standard, based on Public-Private Partnerships. A consortium will be selected to build and manage the passenger terminal, exploring airport fees, and commercial establishments to be installed (cinemas, restaurants, car rentals, etc.). An initial disbursement amount for private partners was set at R$51.7 million to participate in the auction, awarding the bidder that pays more for the right to commercial exploitation.
In the same State, the renovation of Estádio das Dunas – Novo Machadão will be implemented through a Public-Private Partnership, the concession of which will have a term of 30 years. In the case of participation by the consortium, the private partner should establish a Special Purpose Entity – SPE (created under the provisions of the Public-Private Partnership Law, the Corporation Law, the provisions of the Securities and Exchange Commission of Brazil – CVM, and the standards of the Federal Accounting Council – CFC).
The stadium in Salvador, BA, follows a similar model. However, the concession period reached 35 years. Costs were budgeted at R$591 million and the public partner’s consideration was budgeted at R$107 million to be paid annually over a 15-year period.
In Minas Gerais, Estádio do Mineirão, in Belo Horizonte, also will be subject to a Public-Private Partnership – PPP. Of the estimated R$684 million, R$400 million are related to financing by the BNDES, made available to the company winning the tender, and the remaining funds will be provided by the private sector and the State Government. At the Confins Airport, expansion will be implemented through public funds provided by Infraero.
As we see, priority was given to the Public-Private Partnership model, where concession agreements are signed with 30/35-year terms.
Major works (due to the magnitude of renovations and constructions in relation to the extremely short deadlines), however, received appropriate modernization models, as in the cases of privatizations of some of the busiest airports in Brazil.
BULLET TRAIN
The decision to build the first High-Speed ??Rail – HSR in Brazil opens another business opportunity for foreign investors.
Studies have estimated the total cost of the project at R$33.1 billion. [2]
The form of implementation of the HSR was changed after disagreements between the Government and private groups. The Government decided to split the tender in two stages: the first tender will select the company responsible for operation (company owning the technology); in a second stage, the partner responsible for building the infrastructure will be chosen.
In the previous model, the winning company would be responsible for both technology transfer and for carrying out the implementation works.
As soon as they are defined, the new parameters of the tender will be announced on the website www.tavbrasil.gov.br.
HYDROPOWER PLANTS
Another sector that follows a similar model for private sector participation is the Hydropower Plant sector.
On August 26, 2010, President Luiz Inácio Lula da Silva signed the concession of the Belo Monte Plant, in the Xingu River in the State of Pará.
The tender was won by the company Norte Energia S.A., which will be allowed to explore the project for a period of 35 years. The company comprises 18 state and private companies, contractors, pension funds, investment funds, and free consumers.
The company will pay the Federal Government for the Use of Public Goods at the amount of R$16.6 million annually, in addition to R$200 million to the Federal Government, the State of Pará, and the affected municipalities, to offset the use of water resources.
CONCLUSION
As we see, doors are being opened for attracting foreign investments as Brazil increases its importance in the international scenario.
That occurs not only because only a few foreign companies have the necessary technology for specific projects (as is the case with the bullet train), but also to find the best partner at the global level for the signing of administrative agreements, as this is one of the reasons for the existence of so-called tenders.
Each type of development is given a form of private sector participation: both concession agreements per se and the concession modality qualified as a Public-Private Partnership are in the Brazilian agenda.
However, if required by the very type of project to be implemented, we admit the transfer of shareholding control of a given entity to private entities (privatization).
Dr. Francisco Victor Bouissou
[1] Source: www.esporte.gov.br
[2] Source: http://www.antt.gov.br/noticias/mostra_noticia.asp?id=3556
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