The Brazilian Infrastructure: It's "Now or Never" - Credit Suisse | PLUS
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The Brazilian Infrastructure: It’s “Now or Never”
From an Economic Growth Constraint to a Plethora of Opportunities
July 29, 2013 It’s “Now or Never.” If Brazil’s infrastructure bottlenecks were concerning before, they have only gotten
Research Analysts worse. Over the past ten years, while the Brazilian economy enjoyed prominent growth leveraged by the
exhaustion of the model based on credit, consumption, and commodities (the "3 Cs"), transportation
Bruno Savaris, CFA infrastructure investments accounted for just ~0.6% of GDP, i.e., less than half of what would be required
55 11 3701.6332
bruno.savaris@credit–suisse.com
to sustain annual economic growth of 4.5%. Now that the 3Cs economic model is running out of steam,
the Brazilian government has shifted towards addressing concerns about meager economic growth by laying
Felipe Vinagre the groundwork to solve one of its biggest problems: the lack of adequate infrastructure.
55 11 3701.6333
felipe.vinagre@credit–suisse.com Mindful Government but Ineffective Alone. While the federal government seems highly committed to
delivering on the ~R$240bn investment plan announced in 2H12, the execution challenge cannot be
Daniel Magalhaes
55 11 3701.6124
understated, as most projects are still in the analysis stage and execution of public investments has proven
daniel.magalhaes@credit–suisse.com inefficient, to say the least. Thus, the private sector has to be involved. Accordingly, the government has
implemented several changes to the regulatory framework for ports, railroads, highways, and urban mobility
to make the rules sufficiently clear to foster private investments. To put things into perspective, over the
past ten years some R$52bn in projects were granted to the private sector. In the next three years, the
government wants to auction an investment budget nearly six times larger. As the government targets
single–digit headline rates of return, at least a friendly regulatory framework has to be in place.
What’s in This Report? In this report, we address the (i) causes and consequences of the lack of
reasonable levels of infrastructure investments in the country and (ii) measures being implemented by the
government to narrow Brazil's R$1 trillion transportation infrastructure gap to more developed economies.
We discuss the idiosyncrasies of each mode of transportation (namely highways, railroads, ports, airports,
and urban mobility), evolution of the regulatory framework, and why we think that some of the potential
investment opportunities arising in the short–to–medium term have a greater likelihood of coming to fruition.
DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do
business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this
report. Investors should consider this report as only a single factor in making their investment decision.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®
Client–Driven Solutions, Insights, and Access
29 July 2013 Executive Summary (1/2) Shifting Focus from 3C to Infrastructure Investments… Brazil’s past ten years of prominent macroeconomic fundamentals were built not only on its improved economic predictability but also on the favorable global scenario. The latter, characterized by strong economic growth, mainly in China, led to a period of high demand for commodities. This scenario was essential for the liquidity injection seen in Brazil and consequently for the boost in the domestic consumer market. The economic growth model in place for the past ten years became known as the “credit, consumption and commodities” (3Cs) model. Yet, more recently, the 3Cs started to lack stamina as households became more leveraged and credit availability got stricter. Now, the Brazilian economy is experiencing the unpleasant dichotomy of low economic growth and high inflation. To reverse that, implementing the “Chinese recipe”, i.e. shifting the focus away from consumption to infrastructure, seems appropriate to put Brazil on track to deliver greater growth rates. Underinvestment? Now, US$1 Trillion Gap. The current diagnosis of low economic growth and high inflation is explained by supply–side inefficiencies rather than insufficient demand. According to Boston Consulting Group (BCG), 74%3 of Brazil’s GDP growth over the past decade was due to an expanded workforce and only 26% due to productivity gains. Along with that, Brazil’s underinvestment in overall infrastructure, amounting to a meager ~2% of GDP, made the long–lasting infrastructure bottleneck even more evident. This is half of the investment level needed to sustain economic growth at 4%. To put things into perspective, other emerging economies such as China and India invested ~13% and ~5% of their GDP, respectively. As a consequence, Brazil holds a fairly ineffective infrastructure, ranking1 107 out of 144 countries, well below its fellow BRIC countries. Putting it differently, Brazil has a 16% asset–to–GDP ratio2, namely infrastructure stock, and is an underperformer outlier on a global scale, holding highly depreciated assets. The average infrastructure stock ratio stands at ~70%. In order to tap this gap, US$1 trillion in infrastructure investments would be required, half of which in transportation alone. What Has Been Wrong? Granting Brownfields but Lagging Behind in Greenfields. Before the 1990s investments relied mostly on public execution given the very unstable macro backdrop and poor regulatory framework. In 1993, the Brazilian Government enacted two laws (8666/93 and 8987/95) that established the general terms for concessions in Brazil between public and private entities. Since then, several assets have been granted to the private sector which essentially overhauled depreciated brownfield assets while the public sector remained in charge of developing greenfield ones. In this context, while we observed improvements in the granted brownfields, Brazil lagged behind in greenfield projects given (i) the government’s inefficient planning and execution and (ii) lack of regulatory support for private investments. The result was: all the Brazilian transportation modes got overly constrained, especially airports, ports and railroads. The airport sector has just started to undergo a privatization process (Feb-2012), and its dependence on public administration for a long time might explain its deterioration. The other two modes (ports and railroads) didn’t have a robust regulatory framework, especially for greenfield projects. It’s “Now or Never”! Calling for Private Investments. It would be unfair to say that the Brazilian government isn’t mindful of the urgency of further infrastructure investments. After attempting to fix the economy through micro–policies, it has shown a more pro-market stance towards long–term investments, i.e. infrastructure. In our view, an ultimate improvement in Brazil’s infrastructure won’t come through greater public investments in the sector but rather by promoting a friendlier environment to private investments. (1) World Economic Forum ranking / (2) Mckinsey Study / (3) Productivity gains in China, India and Mexico accounted for 93%, 88% and 60% of GDP growth over the last 10 years / (4) PPP: Public-Private Partnerships 2
29 July 2013
Executive Summary (2/2)
Improving Regulation, and More. In order to attract private players, the government has been laying the groundwork to foster private investments in the country
by (i) straightening the regulatory frameworks, (ii) tackling the limited availability of private funding, and (iii) streamlining the licensing process. To mention a few
developments, we note the:
– New Ports Law, which eliminates restrictions imposed on the development of greenfield private ports. Now, they can handle 100% of third–party cargo,
directly competing against concession holders (within public ports);
– New Railroad Model, the so-called “Open Access”, which should stimulate (i) competition between rolling stock operators and (ii) the development of
greenfield stretches;
– Updates on the Law for Public-Private Partnerships, which is key for urban mobility projects. Essentially, it brings more flexibility to government payments
which now can happen also during construction phases.
A Sizeable Pipeline of Identified Projects. Out of the R$1trillion investment gap in the Brazilian transportation infrastructure, we have identified ~R$334bn in
potential private investment opportunities. We think that Brazil’s infrastructure gap now has a greater likelihood of being eventually narrowed given the
government’s strong focus (ever) on (i) boosting investments in the sector and (ii) improving the regulatory framework for further private participation.
What about Short–Term Opportunities? While there is a plethora of interesting projects, the execution challenge cannot be understated as (i) some projects
are still in the feasibility analysis stage and (ii) the process for obtaining environmental licenses remains cumbersome. As such, our base case is that R$109bn
(1/3) has significant chances of being auctioned in the next two years. Within this estimate, we attribute a greater probability to toll roads and airport projects as
their request for proposal (RFP) processes are in a more advanced stage. For ports and railroads, although these projects account for 46% of the total identified
opportunities, we attribute a lower probability for them to take place in the short term, as feasibility studies are still under early developments and environmental
licensing tends to be more complex for these modes.
At Least, Doubling Private Investment Levels! Even this more conservative scenario would be enough to double private investment levels in transportation to
~0.9% of GDP. If we also consider public expenditures and investments in the sector, it would reach ~1.4% of GDP for the next five years. Besides, we argue
that the auctioning of 1/6 of this notable pipeline of R$334bn would already be equivalent to the projects granted to the private sector in the past ten years.
All Companies to Benefit. Almost all companies under our transportation and capital goods coverage would directly or indirectly benefit from a boost in
infrastructure investments in Brazil. Some key names are Mills, CCR, Ecorodovias, Arteris, Localiza, Marcopolo, Randon, Iochpe–Maxion and Mahle Metal Leve.
(1) World Economic Forum ranking / (2) Mckinsey Study / (3) Productivity gains in China, India and Mexico accounted for 93%, 88% and 60% of GDP growth over the last 10 years / (4) PPP: Public-Private Partnerships 3
29 July 2013
Laying the Groundwork for Private Investments: Improving Regulation
Main Discussions about the Current Model Government Actions
The main change proposed relates to stricter capex requirements in
The highway model is certainly the most mature and robust, with limited
terms of deadlines and penalties. The bulk of improvements should take
Toll Roads
Better room for surprises, in our view.
place within five years (duplication works).
For the next auctions, the government will try to avoid the capex delays The government is being more flexible to attract private investors, by
seen in past auctions by addressing its causes and applying stricter rules
improving headline return rates (from 5.5% to 7.2%, real, unleveraged)
and greater penalties.
and easing financing guarantees requested by public banks.
Developed in 2H11, the recent regulatory framework for the privatization The government increased technical qualification requirements to 35mn
of airports attracted several bidders in a intense competitive bidding pax/year (from 5mn pax/year) so that, at most,13 global operators can
Airports
process. participate in the auction, possibly implying less bidders in the next
auction.
Yet, it seems that the government wasn’t satisfied with the fact that
none of the largest global operators has won any bid. Another requirement is that the airport operator has to hold a minimum
stake of 25% in the formed consortiums.
Private Investments
Apparently, operational quality rules are not an issue, even though Update of the PPP* Law. Law No. 12766, enacted in 2012, now
Urban Mobility
Regulation of
permits government’s reimbursements during construction phases.
feasibility usually depends on government reimbursements (PPP model).
The challenge for PPPs is how to mitigate the government’s payment Also, this new law increased the threshold for municipal tax revenues
that can be channeled to PPP payments from 3% to 5%.
risk, which in these cases becomes a relevant source of revenues.
Political Exposure is high as it deals with people not cargoes. Government’s payment risk (main investors’ concern): guarantees and
collateral pools are still under discussion/being designed.
The government’s intention is to stimulate (i) private investments in new
Government is unsatisfied with the current railroad monopoly model, corridors (i.e. capacity increase) and (ii) competition between multimodal
Railroads
which hasn’t stimulated investments in new stretches (greenfields). operators (i.e. tariff decrease).
Besides the measures announced in 2011 (challenging the monopoly of Yet, (i) projects are still under preliminary studies and (ii) there are still
current concessions), the government has launched a plan to grant 10 uncertainties regarding the new model such as (a) operational feasibility
new stretches under a new railroad model (Open Access). and (b) collateral pools to secure Valec’s payment risk.
In 2013, the government launched the New Ports Law in order to
Capacity additions in public ports has depended on the government’s foster investments other than in public ports. The main innovation was
planning and auctioning processes, which have been insufficient to
the authorization for private ports to handle third–party cargo.
Ports
address the country’s port infrastructure needs.
While we welcome the elimination of that restriction, we think there are
Worse Private investments in greenfield projects outside of public ports have still a few unclear terms such as for: renewals, auction criteria and
been constrained by the lack of regulatory support.
different conditions for public and private ports.
Source: Credit Suisse Research / (*) PPP: Public-Private Partnerships 4
29 July 2013
Table Of Contents
Macro Backdrop 6 … But Limited Capacity Addition 42
In the Last Decade, Economic Stability and Consequent Greater Predictability… 7 Encouraging Private Investments 43
… Improved Credit Availability and Boosted Consumption in Brazil 8 Recent and Upcoming Auctions – Galeão Better than Confins… 44
The Commodities Boom and its Infrastructure-Intensive Profile 9 Global Comparison on Regulatory Frameworks 45
Demand for Transportation Infrastructure Spiked! What About Supply? 10 Details on the Privatization of Some Airports 47
Underinvestment Led to Underperformance. Lagging Behind the BRIC League 11 Concession of Airports to Private Companies/Investors 48
After Golden 1970s, Investing Merely ~2% of GDP on Overall Infrastructure... 12 Urban Mobility 49
… And Barely ~1% of GDP on Transportation Infrastructure 13 Huge Urbanization and Wrong Incentives Behind Rising Mobility Constraints 50
The Result: Mediocre Infrastructure Performance Across The Board … 14 While Middle Class Motorizes, Low Income Class Relies on Public Transport 51
The Result: … On a Deteriorating Trend 15 Global Comparison of Subway Networks: Rio and São Paulo Far Behind 52
The Result: Unbalanced Transportation Matrix And Inefficient Logistics 16 Government’s Plan: Over R$81bn of Investment Opportunities 53
Governm ent Actions 17 The Need for Subsidies through Public Private Partnerships (PPP) 54
A Mindful Government: Federal Investment Programs (PAC I and II) 18 Railroads: A New Model to Boost Private Investm ents in New Locations 55
But Ineffective Alone: Investing Far Below Brazil’s Transportation Needs 19 Brazilian Railroads: Increasing Demand, Flat Network Size, and … 56
Examples of Poor Government’s Execution: N–S Railroad & BR-163 Highway 20 … a Consequently Over–Constrained System 57
Gradually Boosting Private Investments: R$52bn in the Past 10 Years 21 Brazil Lagging Behind On a Global Scale 58
R$334bn on Identified Investment Opportunities to the Private Sector 22 Impacts on Brazil’s Competitiveness: The Soy Exports Example 59
Laying the Groundwork for Private Investments: Improving Regulation 23 Current Railroad Model Hasn’t Fostered Investments In New Lines 60
Can Financing Be a Constraint? Is BNDES Enough? Searching for Alternatives 24 The New Model (Open Access): Mitigating Risks to Boost Greenfields 61
Toll Roads 25 New vs. Current Framework: What Changes in Each Participant’s Role? 62
From Dedicated to Spare Funding (1945–1988) 26 Comparison to Other Railroad Models: Innovative Solutions Despite Similarities 63
Making Private Investments Viable (1990–2000) 27 Investment Opportunities: Projects still under Study Phases 64
Setting Single Digit Headline Return Standards (2001–2007) 28 Ports: Addressing Regulation Barriers to Private Investm ents 65
Many São Paulo State Concessions, But Few Federal Ones (2008–2012) 29 Current Conditions: World’s Ninth Worst 66
After Lack of Private Interest Comes a Pro-Market Stance (2013 onwards) 30 Current Conditions: Limited Draft, Limited Efficiency… 67
Private Toll Roads – A Snapshot Of The ~ 20 Years Of Regulatory Framework 31 Current Conditions: Awkward Customs Process 68
Current Road Conditions: Only 14% Paved and Public Lagging Behind Private 32 Regulatory Story: Framework and Constraints 69
R$54bn in Upcoming Auctions. Are They All Attractive? What About Risks? 33 The New Ports Law: What Has Changed? Open Doors for Private Ports 72
Government Showed Flexibility on Headline Returns. Will it Be Enough? 34 The New Ports Law: Asymmetries between Public and Private Ports 74
Upcoming Auction – Location & Potential Bidders 35 Investment Opportunities: R$54bn in Projects 75
Amendments Pipeline (CCR, Arteris, Ecorodovias) 36 Complex Licensing Process – How Long Can It Take? 76
Regulatory Improvement to speed-up Contract Amendments 37 Com panies Mentioned 77
Airports 38 Im portant Global Disclosures 78
Twenty Airports For 90% of Passenger Flow 39 Im portant Regional Disclosures 80
ANAC, SAC, DAC… Fairly Regulated Sector 40 Disclaim ers 81
Strong Demand Growth Fostered by Lower Yields… 41
5
29 July 2013
Macro Backdrop
FOTO
Exhaustion of the 3Cs Model… Now, It’s about Restoring the Great Legacy – Shifting to Infrastructure
Brazil’s past ten years of prominent macroeconomic fundamentals were built on observance Unfortunately, Brazil’s noticeable economic development wasn’t followed by adequate
of three main pillars, namely (1) inflation targeting, (2) a floating exchange rate, and (3) fiscal infrastructure investments to tap the growing demand. Over the past ten years, the country’s
responsibility, which improved Brazil’s economic predictability. At the same time, the transportation system became overloaded, resulting in clogged ports, congested roads and
favorable global scenario characterized by strong economic growth, mainly in China and, to airports, obsolete railroads, and inadequate transportation matrix. Brazil’s underinvestment in
some extend, in the developed regions, led to a period of high demand for commodities. This overall infrastructure, amounting to a meager ~2% of GDP, made the long–lasting
scenario was essential for liquidity in Brazil and consequently for the boost in the domestic infrastructure bottleneck even more evident. This is half of the investment level needed to
consumer market. The economic growth model in place for the past ten years is known as sustain economic growth at 4%.
the “credit, consumption and commodities” (3Cs) model. To put things into perspective, other emerging economies such as China and India invested
Yet, more recently, due to government inaction, the Brazilian economy started to experience ~13% and ~5% of their GDP, respectively. Looking at the World Economic Forum ranking,
the unpleasant dichotomy of low economic growth and high inflation. Also, with more Brazil’s overall infrastructure ranked 107 of 144 countries, well below its fellow BRIC
leveraged households, with a debt–service ratio of ~22% of disposable income, up from countries, with India ranking 87th and China, 69th, and nearly on par with Russia, which is
~16% in 2005, the 3Cs model is lacking in stamina. Thus, the adoption of the “Chinese 101st. Among the BRIC countries, Brazil has the worst airport, port, and railroad systems.
recipe“, i.e. shifting the focus away from consumption to infrastructure, seems appropriate to Now, its about restoring the great legacy. According to McKinsey, Brazil has a 16% asset–
put Brazil on track to deliver greater growth rates and keep its emerging market status. to–GDP ratio, namely infrastructure stock, and is seen as an outlier on a global scale,
The current diagnosis of low economic growth and high inflation is explained by supply–side holding highly depreciated assets. The average ratio stands at ~70%. To help tapping this
inefficiencies rather than insufficient demand. About 74% of Brazil’s GDP growth over the gap, US$1 trillion of infrastructure investments would be required, being half of that in the
past decade was due to an expanded workforce and only 26% due to productivity gains. transportation sector.
29 July 2013
In the Last Decade, Economic Stability and Consequent Greater Predictability…
Brazil’s prominent prospects can be credited to the “Real Plan,” instituted back in GDP Growth (%) vs. Inflation (IPCA %)
1994, almost 19 years ago, which led to a rapid reduction in monthly inflation, from
50% to 1%. Then, in 1999, the Brazilian government adopted an economic policy 12.5 Real GDP growth (%)
based on three main pillars, namely (1) inflation targeting, (2) floating exchange rate, IPCA inflation (%)
and (3) the adoption of a fiscal responsibility law. 9.3
Observance of these policies for over ten years has improved Brazil’s economic 7.7 7.6
7.5 6.5
predictability and contributed to a significant improvement in Brazil’s macroeconomic 5.7 5.9 5.8 6.0 5.8
5.7 6.1
fundamentals. From 2003 to 2011, the government kept inflation relatively low, 5.2 4.3 5.9
redeemed all sovereign debt originated from the 1990s debt renegotiation, improved 4.0 4.5
2.7 3.2 3.0
the risk profile of its sovereign securities, posted primary surpluses, and substantially 3.1 2.7 2.0
increased its level of international reserves. 1.3 1.1
0.9
–0.3
Despite the recent macro challenges, consisting of “high” inflation and low GDP 2001 2002 2003 2004 2005 2006 2007 2008 2010 2011 2012 2013e 2014e
growth, the current scenario is far better than in the past. 2009
Brazil’s Historical Inflation and Interest Rate Levels, Almost 20 Years of Economic Stability
7,000
160 20
6,000 Real Plan Russian
crisis and 15
abolishment Selic basic interest rate
5,000 120 of the fixed FX
10
rate regime Lowest interest
rate in decades
5
4,000 80 IPCA
Introduction of the 0
floating FX rate and Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Apr-13
inflation–targeting
3,000 regimes
40
SELIC
2,000
0
May-95 Aug-97 Nov-99 Feb-02 May-04 Aug-06 Nov-08 Feb-11 Apr-13
1,000
IPCA
0
Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-13
Source: Central Bank; Credit Suisse Research. Source: Central Bank of Brazil, Brazilian Statistics Bureau (IBGE), Credit Suisse Economics Team 7
29 July 2013
… Improved Credit Availability and Boosted Consumption in Brazil
Brazil’s sound macroeconomic policies helped to stabilize financial inflows and make Household Income and Breakdown of Income Groups in Brazil
investors less concerned about the safety of their investments. Accordingly, the Total Household Income from Breakdown of Income Groups in Brazil
greater economic predictability was essential to foster a substantial improvement in all Sources of Income (millions of people)
(US$/month)
credit availability in the country. 2002 2009 2014
While some people may look at credit availability and disposable income through Class “A” 7.2 9.6 13.4
different lenses, we note that both are closely linked and extremely important factors Class “A”
for any credit transaction. Thus, the combination of credit availability improvements
Class “B” 7.3 10.4 15.7
and greater disposable income leveraged the domestic consumer market. Through 5.010
2009, the purchasing power of about ~30mn people had improved. By 2014, about Class “B”
60% of Brazil’s population, or ~50mn people, will have enjoyed an improvement in Class “C” 67.5 95.0 118.0
3.843
their purchasing power.
Class “D” 46.1 44.5 32.1
Back in 2008/2009, the fear of increasing delinquency rates led financial institutions
Class “C”
to implement a stricter credit approach, decelerating the growth pace of their loan
portfolios, which once boomed. Going forward, it seems that it will be increasingly Class “E” 46.6 28.9 16.8
hard to see a rise in buyers’ purchasing power, at least not at the same pace 891
Class “D” 558
observed until 2010. Total 175mn 188mn 196mn
Class “E”
0
Real Growth in Average Wages and Unemployment Rate Improving Credit Availability (%)
60 9
14.1% Real Increase in Minimum Wage Credit–to–GDP
Unemployment Rate Delinquency Rate (%, LHS)
50 (%, RHS) 8
12%
12%
40 7
10% 10%
9%
7.0% 8%
7.5% 30 6
8%
6.0% 7%
7.2% 6% Debt–to–Income
6% 20 (%, LHS) 5
3.7% 5.3% 5%
3.1% 4%
10 4
0.7% 2.7% 0.9%
0.1%
0 3
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013e 2014e Jan-05 May-06 Sep-07 Jan-09 May-10 Sep-11 Jan-13
Source: FGV, Central Bank of Brazil, Brazilian Statistics Bureau (IBGE), Credit Suisse Economics Team. 8
29 July 2013
The Commodities Boom and its Infrastructure–Intensive Profile
The share of commodities in exports rose from 49.7% in 2000 to 70.0% in the 12–month period ended in April 2013. The most significant increases have been in iron ore, oil,
soybeans, and sugar attributable mainly to a rise in the international commodity prices. The mining industry alone accounts for ~4% of GDP and ~20% of Brazil’s exports. While
the Brazilian government put a lot of effort in trying to reduce its dependence on commodities, minerals and agriculture, they are still very significant to the economy.
The booming commodities cycle also made evident one of the country’s major structural problems: the lack of proper infrastructure. As the most important agricultural and mineral
areas are located far from the country’s export gates, it would be reasonable to assume that railroads meet most of the transportation demand. In fact, that isn’t the case.
Highways account for ~60% of agricultural commodities transportation. In the case of minerals (mainly iron ore), as railroads are used as cost centers by miners, most of the iron
ore flows through railroads. An example of Brazil’s logistics bottlenecks we note the usual ~10–mile line of trucks awaiting at the ports’ gates to unload the crop and the ~200
ships awaiting to load cargo as well.
Brazilian Landscape: Producing Areas Away from the Coast Boom in Commodity Prices Drove Exports Up
Volume Exported (tons) Index 2002 =100
AP
800
Ponta da Madeira Port 600
Santarem Port 900
Corn
AM PA 400
MA
Carajás Soy
1,500
200
RO TO BA Iron Ore Sugar
0
MT 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Lucas do Rio Verde
Capitals US$ FOB / tons Exported Index 2002 =100
GO
Railroads
2,000 MG 800
Distance (km) MS
Ports 700
600
Tubarão Port Iron Ore
Producing Zones 1,000 RJ Sugar
SP Santos Port 400
Soy/Corn Paranaguá Port
200
Sugar
Soy Corn
Iron Ore 0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Aliceweb, Credit Suisse Research. (*) FOB value in the Brazilian Ports/Exported tons 2002=100) 9
29 July 2013
Demand for Transportation Infrastructure Spiked! What about Supply?
Unfortunately, Brazil’s noticeable economic development wasn’t followed by greater infrastructure investments to tap the growing demand. Over the past ten years the country’s
transportation system was overloaded, resulting in clogged ports, congested roads and airports, obsolete railroads, and inadequate transportation modes. About 300Mt have been
added to foreign trade flows, led by iron ore and agricultural commodities exports. Light vehicle sales are 2.5x higher than ten years ago, increasing highway infrastructure needs
and deteriorating urban traffic. Yet, investments in transportation infrastructure have not kept the same pace of economic development.
Reportedly, the inefficiencies created by infrastructure bottlenecks subtract 10%–15% from the country’s GDP.
Growing Demand across the Board (Services, Manufacturing Industry and Agriculture): How About Processing Capacity?
Infrastructure Distance to Ports Demand Demand Growth in Past Ten Years
Demand Drivers (km) in 2002 in 2012 Delta (%, 2002–2012)
Air Passenger Traffic
(mn passenger/year) NA 71.2* 193.1 121.9 171
Light Vehicle Sales
(mn units/year) NA 1.6 4.0 2.4 147
Agricultural** Exports
(Mt/year) 500 – 3000 32 77 45 140
Container Flow at Ports
(mn TEUs/year) 70 – 150 3.5 8.2 4.7 132
Iron Ore Exports
(Mt/year) 500 – 1000 167 327 160 96
Foreign Trade***
(Mt/year) NA 387 688 301 78
Household Consumption
(R$bn) NA 1,825 2,744 919 50
ABCR Index
(Paved Highway Traffic) NA 111 163 NA 48
Petrobras Offshore
Production (mn bpd) NA 1,257 1,768 511 41
Source: INFRAERO, Anfavea, Aliceweb, Brazilian Water Transportation Agency (Antaq), ABCR, Petrobras, CS Research // (*) 2003 Figures. (**) Soy, corn and sugar. (***) Exports and imports. 1029 July 2013
Underinvestment Led to Underperformance. Lagging behind the BRIC League
Brazil has invested, on average, ~17.5% of its GDP, much less than China (42%), BRIC’s Gross Fixed Capital Formation (% of GDP)
India (30%), and Singapore (25%). Among the BRIC countries, Brazil stands out for
50
having the lowest level of investments for the past ~ten years.
On average, for the past ten years GDP growth in these countries has been virtually China
proportional to the level of investments, with Brazil growing ~4%, China 11%, India 40
8.2%, and Singapore 6.5%. South Korea and Mexico are heading into the right
direction to boost growth. Needleless to say, the lower investment levels in Brazil
were not able to sustain its growth rates at 4% for longer. 30
India
Russia
Fixed Capital Formation vs. GDP Growth (Last Ten Years)
20
45
China
Brazil
10
40 1963 1969 1975 1981 1987 1993 1999 2005 2011
Gross fixed capital formation (annual %)
Breakdown into Public and Private: Brazil’s Fixed Capital
35 Formation (% of GDP)
Private Public 19.1 19.5 19.3
India 18.1 18.1 18.2 18.5
17.4
30 16.8 17.1 16.4
16.1 16.0 16.4 4.2 5.2 4.5
S. Korea 2.6 2.9
15.3 3.6 4.8 4.7 4.7 5.0
3.2 3.0 3.1 3.4
2.8
25
Japan Chile Singapore
Hong Kong
20 14.2 14.2 13.2 13.8 14.9 13.3 14.3 14.8 13.4 13.5 13.5
Mexico 12.5 13.1 12.9 13.0
Russia
US Brazil
15
0 2 4 6 8 10 12
GDP growth (annual %) 2000 2002 2004 2006 2008 2010 2012 2014e
Source: Central Bank; World Bank, Credit Suisse Research. 1129 July 2013
After Golden 1970s, Investing Merely ~2% of GDP in Overall Infrastructure ….
Looking at Brazil’s historical investments in the infrastructure sector, the highest investment levels occurred during President Juscelino Kubitschek’s administration and in the
following decade (1970s). During the 1980s Brazil faced strong fiscal issues and started to significantly reduce its expenditures. Before the 1990s investments relied mostly on
public execution in view of the very unstable macro backdrop and poor regulatory framework for private investments.
It would be unfair to say that the Brazilian government wasn’t mindful of the urgency of further infrastructure investments. Looking at the R$250bn of federal investments
disbursed in the past 12 years, ~85% has been disbursed over the past five years, during the booming economic cycle. Transportation was the category with the greatest number
of investment initiatives (~25% of the total) and the greatest volume of disbursements (~R$76 billion) in the period.
Annual federal investments in transportation have corresponded to ~0.2%–0.3% of GDP since 2010. In our view, an ultimate improvement in Brazil’s infrastructure won’t come
through greater public investments in the sector but rather by promoting a friendlier environment to private investments.
Brazil’s Investments in Infrastructure* (as a % of GDP)
5.42 Brazil’s Investments in Infrastructure (as a % of GDP) Investments Breakdown (% of total)
Waste 0.46 3.1
and Water Transportation Telecom Power & Utilities Federal
12.9 11.6 14.8 11.2
18.7 16.1 Government
0.8
2.5 2.5
2.13 2.4
Power 3.62 Public–Owned
2.2 33.3 36.2
0.24 37.1 Companies
2.0 2.0 2.1 36.1
2.0 0.9 44.8
1.9 1.0 42.1
1.8
1.0
1.47 0.8
0.8 0.8
0.80 2.29 0.8 1.4 0.9
Telecom 0.15 2.16 1.7 0.7 0.8
0.19 0.6
0.76 0.8 0.4
0.43 0.6
0.67 0.5 0.6
0.7 55.0 Private–Sector
0.7 0.5 0.5 50.5 51.5
0.7 47.3 Companies
2.03 0.73 0.64 40.8 39.1
Transportation 0.5
1.48 1.0 1.0
0.8 0.8 0.7
0.63 0.62 0.6 0.5 0.5 0.6 0.6
0.4 0.4
1971–80 1981–89 1990–00 2001–10 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012* 2007 2008 2009 2010 2011 2012*
(*) Includes both private and public investments
Source: Inter. B Consultoria / Castelar Pinheiro and Giambiagi (2012) and Frischtak (2012) 1229 July 2013
… And Barely ~1% of GDP in Transportation Infrastructure
Total Investments (R$bn) Breakdown of Investment as % of GDP
45 1.2%
Total Investments 2002 – 20012 1.2% 0.8%
0.7%
40 1.0%
1.0% Subway
35 0.6%
Airports 0.8%
30 0.8% 8% 0.5%
25 3%
0.6% 0.6% 0.4%
20 Waterways
12% 0.3%
15 0.4% 0.4%
0.2%
10
0.2% 0.2%
5 0.1%
railroads 19% 58%
0 0.0% 0.0% 0.0%
2002 2004 2006 2008 2010 2012
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Highways Subway
Highways railroads Waterways Airports
Public Private % of GDP Public (RHS) Private (RHS)
Airports Investments Highway Investments railroad Investments Waterway/Ports Investments
(R$bn) (R$bn) (R$bn) (R$bn)
2.5 90% 18 60% 7 100% 3.5 120%
80% 16 90%
50% 6 3.0 100%
2.0 70% 14 80%
5 70% 2.5
60% 12 40% 80%
1.5 4 60% 2.0
50% 10
30% 50% 60%
40% 8 3 1.5
1.0 40%
30% 6 20% 30% 40%
2 1.0
0.5 20% 4 20%
10% 1 0.5 20%
10% 2 10%
0.0 0% 0 0% 0 0% 0.0 0%
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Private Public % Private
Source: Orçamento Fiscal (SIGA BRASIL /SIAFI), ABCR, DEST/Docas, ANTF, Infraero, BNDES, IPEA / (*) Public Investments (based on SIAFI & DEST–MPOG) 1329 July 2013
The Result: Mediocre Infrastructure Performance across the Board …
Looking at the World Economic Forum ranking, Brazil’s overall infrastructure ranked Investments in Infrastructure, 2011 (as a % of GDP)
107 of 144 countries. Among the BRIC countries, Brazil has the worst airport, port,
China 13.4
and railroad systems. The only mode in which Brazil isn’t as bad (relatively to BRICs)
is highway transportation. Perhaps that has to do with the fact that the regulatory Vietnam 11.4
framework seems to be relatively more robust. Chile 6.2
As mentioned in the previous slides, Brazil’s Achilles’ heel is its infrastructure, which Colombia 5.8
is the clear result of its meager infrastructure expenditures for the last several years. India 4.5
Relative to other developing economies, Brazil invested only ~2% of its GDP in Philippines 3.6
infrastructure, versus ~4.5% in India and an astonishing ~13% in China. Brazil 2.1
Global Ranking of Quality of Infrastructure (1= Best performer, 144= Worst performer)
Airports 1 (Best performer) 144 (Worst performer)
15 68 70 104 134
Brazil
S. Africa India China Russia
Ports 1 (Best performer) 144 (Worst performer)
52 59 80 93 135
Brazil
S. Africa China India Russia
Railroads 1 (Best performer) 144 (Worst performer)
22 27 30 46 100
Brazil
China India Russia S. Africa
1 (Best performer) 144 (Worst performer)
Highways
42 54 86 123 136
Brazil
S. Africa China India Russia
Overall 1 (Best performer) 144 (Worst performer)
Infrastructure 58 69 87 101 107
Brazil
S. Africa China India Russia
Source: World Economic Forum, Credit Suisse Research 1429 July 2013
The Result: … On a Deteriorating Trend
For the past five years Brazil has consistently witnessed a deterioration in all of its Total Infrastructure Stock*, 2012 (% of GDP)
transportation modes. The deterioration is mostly pronounced in airports, ports and
179
railroads. The airport sector has just started to undergo a privatization process
(February 2012), thus the dependence on public investments for a long time might
explain its deterioration. The other two modes of transportation just don’t have a Average, excluding outliers,
Brazil and Japan 71% 76 80 82 87
robust regulatory framework in place, which hinders private investments. 71 73
According to McKinsey, Brazil has a 16% asset–to–GDP ratio, namely infrastructure 57 58 58 64
16
stock, and is seen as an outlier on a global scale. The average ratio stands at ~70%
which would imply that Brazil needs US$ 1 trillion in infrastructure investments to
narrow the gap. Brazil UK Canada India US Germany Spain China Poland Italy S. Africa Japan
Global Ranking of Quality of Infrastructure (1= best performer, 144= worst performer)
Airports Ports Railroads Highways Overall Infrastructure
2008 2010 2012 2008 2010 2012 2008 2010 2012 2008 2010 2012 2008 2010 2012
60 0 116 0 75 40 50
India 118 China
70 5
20 80 60
China 120 60
80
122 10 China
40 85 70
90 124 Brazil 80
China 15 (RHS) India
100 60 126 90 80
India
20 India
110
Russia 128 100
80 India 95 90
130 25 China
120 Russia Brazil
Russia
Russia 132 100 120
Brazil 100 30 100
130 Brazil Russia
134
(RHS) Brazil
140 120 136 35 105 140 110
Source: World Economic Forum, McKinsey Global Institute Analysis, IHS Global Insight, Credit Suisse Research 1529 July 2013
The Result: Unbalanced Transportation Matrix and Inefficient Logistics
When measuring logistics costs, there are essentially a few components that impact the final freight rate, namely (i) distance; (ii) volumes; (iii) storage capacity; and (iv) specific product
characteristics, such as its density. By far, the two most important components are distance and volumes, especially when the cargo is mostly of low value added and cost dilution becomes
essential.
Taking into account Brazil’s geographical landscape (area) and export profile, it is noticeable that the country has an unbalanced mix of transportation modes, heavily concentrated in
highways. Roughly 60% of cargo in Brazil flows through highways, of which only 14% is paved. Considering Brazil’s area, a greater proportion of railroad transportation would make more
sense, especially in view of its competitive advantage in the production/extraction of commodities (mineral and agricultural), which are low value–added cargo. Due to their size, the USA,
Canada, Australia, China, and Russia rely heavily on railroad transportation.
AREA Highways Railroads Paved Roads Railroad Density
Transportation Matrix (mn km²) (mn km) (000’ km) (%) (km/000’km²)
Transportation Matrix Transportation Matrix
9.0 16.4
Waterways Waterways
1.0 1.0 Railroads
11 Highways 11
8
58.3 % of 85.3 % of Russia
Total Canada 46 Total
RTKs RTKs
n.a. n.a. 43
81
6.47 5.2 Highways
Railroads
9.1 Transportation Matrix 9.3 Transportation Matrix
Waterways Waterways
6.5 Railroads 4.0 Railroads
25 13
% of
USA 37 % of China
228.5 43 66.2
Total Total
RTKs RTKs
100% 53.5% 50
32
25.0 Highways 7.1 Highways
Transportation Matrix Transportation Matrix
8.5 7.6
Waterways Waterways
1.7 Railroads 0.8 Railroads
25 17 4
% of Brazil Australia
29.8 8.65 % of
Total 43
RTKs Total
13.5% 43.5% RTKs 53
58
3.5 1.13 Highways
Highways
Source: World Bank, Credit Suisse Research 1629 July 2013
Government Actions
FOTO
Mindful Government but Ineffective Alone It’s “Now or Never”! Calling for Private Investments
Before the 1990s, investments relied mostly on public execution given the very unstable In our view, an ultimate improvement in Brazil’s infrastructure won’t come through greater
macro backdrop and poor regulatory framework. In 1993, owing to the fast deterioration of public investments in the sector but rather by promoting a friendlier environment to private
highways, the Brazilian government enacted two laws (8666/93 and 8987/95) that investments. In this sense, the government has been laying the groundwork for further
established the general terms for concessions in Brazil between public and private entities. private investments in the country by (i) straightening the regulatory framework, (ii) tackling
Later, several assets were granted to the private sector, which became responsible for the limited availability of private funding, and (iii) easing the environmental licensing process.
overhauling depreciated brownfield assets while the public sector remained in charge of We think that Brazil’s infrastructure gap now has a greater likelihood of being eventually
developing greenfield ones. Yet, given its inefficient execution, there aren’t good examples narrowed given the government’s strong focus (ever) on (i) boosting private investments and
of successful greenfield projects. In fact, there are two emblematic projects that exemplify (ii) improving the regulatory framework. In this sense, of the R$1trillion gap, we have
the government’s inefficiency, namely the North–South railroad and the BR-163 highway, identified ~R$334bn in potential private investment opportunities. Yet, the execution
which have been under development for over 30 years, with delays and cost overruns. challenge cannot be understated as (i) some projects are still in the analysis stage and (ii)
However, it would be unfair to say that the Brazilian government wasn’t mindful of the the process for obtaining environmental licenses remains cumbersome. As such, we believe
urgency of further infrastructure investments. Back in 2007, it launched the Growth that R$109bn (1/3) has significant chances of being auctioned in the next two years.
Acceleration Program (PAC), a stimulus program to boost investments in the country. Since Even this more conservative scenario would be enough to double private investment levels in
then, about R$101bn have been deployed in the transportation sector. While helpful, this transportation to ~0.9% of GDP. Adding public expenditures, investments in the sector
amount accounts for only 53% of the planned budget and ~10% of Brazil’s R$1 trillion would reach ~1.4% of GDP for the next five years. Besides, we argue that the auctioning of
transportation infrastructure gap. Putting it differently, public investments in transportation 1/6 of this notable pipeline would already be equivalent to the projects granted to the private
have corresponded to only ~0.5% of GDP since 2007, which is far from adequate levels. sector in the past ten years.29 July 2013
A Mindful Government: Federal Investment Programs (PAC I and II)
Back in 2007, the Brazilian government announced the national Growth Acceleration Federal Government Investments (% of GDP)
Program (PAC I), a stimulus package aiming at investing R$646bn in logistics, energy,
and social and urban development. By 2010, R$444bn had been deployed (49% of it in 1.4 PAC Execution (RHS) 90
the “Minha Casa, Minha Vida” housing program and only 15% in logistics.) Average since 80
1.2 2007
In 2010, in an arguably political move, the Brazilian government launched the second 70
phase of this stimulus program, the so-called PAC II. It encompasses R$955bn in 1.0 1.0
investments to be deployed during 2011–2014. So far, ~40% of that has been invested. 60
It is important to note that a great portion of PAC’s transportation infrastructure projects 0.8 50
had their first feasibility studies back in 1980.
0.6 Investments ex PAC (LHS) 40
During the 2007–2012 period, the PAC stimulus program was able to boost federal Execution (RHS)
investments to ~1% of GDP, from ~0.4%. Still, infrastructure expenditures would have to 30
0.4
reach ~4%–5% of GDP to sustain economic growth rates of 4% or so. Thus, private 20
enterprise has to be on board. 0.2
PAC (LHS) 10
Moreover, not only quantity but also quality of deployed investments is key. Public–sector
investments have questionable execution and often experience cost overruns. 0.0 0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
PAC 1 PAC 2
955 955 Urban Mobility & Sanitation, 55.90 Public Service Improvement,
22.56
Housing Program, 53.80
278.2 Housing Program Water & Electricity,
27.20
657.4 657.4 Public Service Remaining
Part to be Invested 23.0 566.4 Energy, 335.30 Transportation, 71.60
Improvement investments
115.6 Post–2010
275.7 Uncompleted
97.8
461.6 Energy Urban Mobility & Sanitation, 1.2 Public Service Improvement, 0.4
230.1 Social & Urban
Energy, 126.3
300.1 Total
30.6 Water & Electricity 388.6
148.5 Energy Invested
57.1 Urban Mobility &
Sanitation Housing Program, 224.4
81.6 65.4 Logistics 104.5 Transportation Transportation, 32.9
2007 Announced (*) 2010 Invested 2011 Announced April 2013 Invested Water & Electricity, 3.4
Source: Brazilian Government, Credit Suisse Equity & Macroeconomics Research / (*) Updated from R$504bn in Jan 2007 to R$657bn in Jan 2009 1829 July 2013
But Ineffective Alone: Investing Far Below Brazil’s Transportation Needs
Taking a deeper look at the government’s PAC investments, about R$190bn were planned to be channeled to the transportation sector. Roughly 48% of that would be deployed in the
highway sector, followed by 36% in the railroads. Looking at the past six years, i.e. since PAC’s inception, only 53% of the planned budget has been disbursed and perhaps less than that
has been delivered in terms of physical execution. Even when 100% completed, the planned PAC would address only ~20% of the country’s infrastructure needs.
PAC Planned & Executed Investments vs. Brazil’s Infrastructure Needs (R$ billion)
PAC Investments Infrastructure Investment Need Breakdown of Investments
50.4 91.8 1,110
75.3
Highways
Construction of 2nd
Construction & Pavement Lane & Recovery
41.4 69.6 803.7
Landside Access
Dredging and Demolition
18.6
873.3 3.0
Investment Gap
Ports
9.9 23.9 Ports Infrastructure
14.0 Expansion,
8.0 2.5
Construction & Recovery
22.0
Smaller Improvements
46.0 68.9 0.5
Railroads
Expansion Recovery
129.6 10.5
22.9 46.1
14.2
PAC Planned
Investments
101 140.7 New (less than 500K pax) Expansion
5.5 of 20 Largest Airports
Airports
Highways 75.3
2.7 5.7 3.8 New (500K–1mn pax) 20.5
3.0 Waterways 8.0
Railroads 14.2 3.8 49.5 8.0
PAC 1 PAC 2 PAC Executed* Airports
PAC Executed Est. Req. New (Over 1mn pax) Expansion of Other Airports
Total (Apr-13)
(Apr-13) Investment 12.0 3.5
Source: ILOS, FIPE, McKinsey, Credit Suisse Research / (*) PAC Investments until April 2013 1929 July 2013
Examples of Poor Government Execution: N–S Railroad & BR-163 Highway
The 3,700km of the 26-year old North–South railroad project and the improvements in North–South Connections (Railroad & Highway)
the BR-163 highway are clear examples of the questionable execution quality of public
investments in the country. These projects are taking 2x longer to be completed and are
at least 3x more expensive than originally forecasted .
Tirios
The infamous North–South railroad has been stuck due to political disputes and
bureaucratic imbroglio for decades. The railroad started to be built in 1987 and its fist
Santarem Port
phase, a 215km stretch from Açailândia (State of Maranhão) to Porto Franco (State of
Ponta da Madeira Port
Maranhão), was inaugurated with a nine-year delay. Barcarena
Santarém
A later attempt to complete the railroad was carried out by former President Lula in 2007.
The former president promised to deliver the entire railroad by October 2010 and Açailândia
PA
deposited R$4.2bn into Valec’s coffers in order to attain its objective. MA
The project, whose original contract was amended more than 17 times, was mismanaged
and postponed once again. In October 2007, the 722km stretch between Açailândia Cachimbó
TO
(State of Maranhão) and Palmas (State of Tocantins) was transferred to the private sector Palmas
through a competitive bid won by Vale, which paid a concession fee of R$1.48bn. At that Sinop MT BA
time, only the 361km stretch between Açailândia (State of Maranhão) and Araguaína Lucas do Rio Verde
Uruaçu
(State of Tocantins) had been completed. The proceeds from the auction process would Cuiabá
Ouro Verde
be used to construct the remaining stretch.
Cities Anápolis
GO
Going further south, the ~855km stretch between Palmas (State of Tocantins) and Ports MS MG
Anápolis (State of Goiás) has only 155km with reasonable quality while the remainder Estrela d'Oeste
Current railroads
enjoys a questionable quality of rail tracks imported steel from China. About R$5.1bn
have been deployed in this stretch alone which implies a cost of US$3.6mn per km, BR-163 Road Dourados
reportedly requiring further ~R$0.5bn to be concluded. Paved Panorama SP Rio de Janeiro Port
Undergoing paving Santos Port
Another legendary project is the 3,500km BR-163 highway project, launched in 1976 Cascavel
North–South Railroad Paranaguá Port
(37 years ago). About 1,300km are still unpaved. BR-163 is the primary highway to
transport agricultural commodities out of the producing area of Sinop, Sorriso and Lucas Operating Chapecó
do Rio Verde to the ports in the South and Southeast regions. The 1,780km stretch Constructed RS
between Cuiabá (State of Mato Grosso) and Santarém (State of Pará) needs a sharp Under construction
revamp (construction of a second lane and pavement) and could demand another Rio Grande
EVTEA concluded
~R$1.5bn at least. Once completed, it will be possible to export commodities through the
Future projects
ports in the north region (Santarém Port) instead of using the ports in the
south/southeast.
Source: Valec, Brazilian Department of Transportation Infrastructure (DNIT), Amazonia Org, Credit Suisse Research 2029 July 2013
Gradually Boosting Private Investments: R$52bn Auctioned in the Past 10 Years
Below we outline the main transportation investments unveiled over the past nine years in Brazil. About R$52bn in investments were granted to the private sector, averaging close to
R$6bn/year. This figure was boosted by planned investments in the three recently auctioned airports (~R$17.8bn). Excluding the airports, investments would total R$3.8bn/year. Going
forward, the government wants to auction ~R$170bn in one or two years, taking into account only the federal investment plan for toll roads, railroads, and two airports. About 40% of that
seems reasonable to be auctioned within this timeframe, which wouldn’t be bad at all if we take into perspective the historical level of investments.
Timeline of Most Recent Toll–Road Projects Auctioned in Brazil and Project Execution
2004 2006 2007 2008 2009 2010 2011 2012 2013
21,315
11,253 9,800
7,900 5,800
975 1,053 2,100 900
Auctioned Projects
MG–050 975 Subway –SP Line 4 1,053 Autopista Planalto Sul 1,559 CART 1,750 ViaBahia 2,100 BA–093 800 ASGA Airport 600 BR-101/ES/BA 1,700 VLT Rio de Janeiro 1,100
Autopista Litoral Sul 1,962 ViaRondon 1,350 Rodoanel South MT 130 / PE–060 300 Guarulhos Airport 5,200 Galeão Airport 5,200
5,000
& East
Autopista Régis B. 2,364 Rodovia do Tiete 1,600 Viracopos Airport 9,900 Confins Airport 3,500
Autopista Fernão Dias 2,456 Ecopistas 900 Brasilia Airport 2,715
Autopista Fluminense 1,672 Rota das Bandeiras 1,500 Transolimpica 1,800
Transbrasiliana 716 RodoAnel 800
Rodovia do Aço 524
2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033
6000
5000
4000
Capex Execution
3000
2000
1000
0
VLT Rio de Janeiro Transolimpica Brasilia Airport Viracopos Airport Guarulhos Airport BR-101/ES/BA MT 130 / PE-060
ASGA Airport Rodoanel South & East BA-093 ViaBahia RodoAnel Rota das Bandeiras Ecopistas
Rodovia do Tiete ViaRondon CART Rodovia do Aço Transbrasiliana Autopista Fluminense Autopista Fernão Dias
Autopista Régis Bittencourt Autopista Litoral Sul Autopista Planalto Sul Subway -SP Line 4 MG-050
Source: ANTT, ARTESP, ANAC, Credit Suisse Research. 2129 July 2013
R$334bn in Identified Investment Opportunities to the Private Sector
Highways Program
Urban Mobility
9 federal highways, Urban Mobility Growth
covering over 7,500km
Acceleration Program (federal
investments)
54 São Paulo Subway Program
81.5 Urban mobility in Rio de Janeiro
Airports Program*
Galeão Airport
16.2
Confins Airport
R$334bn High–Speed Train
Rio de Janeiro
Pipeline 30
to Campinas
(through São Paulo)
98
54.1
Ports Program
Railroads Program
10 railroads, covering Investment in 16 states,
covering public port
over 12,000Km
concessions, private port
authorizations, and the
dredging plan
Source: Credit Suisse Research. * Includes both concession fees and expected capex. 2229 July 2013
Laying the Groundwork for Private Investments: Improving Regulation
Main Discussions about the Current Model Government Actions
The main change proposed relates to stricter capex requirements in
The highway model is certainly the most mature and robust, with limited
terms of deadlines and penalties. The bulk of improvements should take
Toll Roads
Better room for surprises, in our view.
place within five years (duplication works).
For the next auctions, the government will try to avoid the capex delays The government is being more flexible to attract private investors, by
seen in past auctions by addressing its causes and applying stricter rules
improving headline return rates (from 5.5% to 7.2%, real, unleveraged)
and greater penalties.
and easing financing guarantees requested by public banks.
Developed in 2H11, the recent regulatory framework for the privatization The government increased technical qualification requirements to 35mn
of airports attracted several bidders in a intense competitive bidding pax/year (from 5mn pax/year) so that, at most,13 global operators can
Airports
process. participate in the auction, possibly implying less bidders in the next
auction.
Yet, it seems that the government wasn’t satisfied with the fact that
none of the largest global operators has won any bid. Another requirement is that the airport operator has to hold a minimum
stake of 25% in the formed consortiums.
Private Investments
Apparently, operational quality rules are not an issue, even though Update of the PPP* Law. Law No. 12766, enacted in 2012, now
Urban Mobility
Regulation of
permits government’s reimbursements during construction phases.
feasibility usually depends on government reimbursements (PPP model).
The challenge for PPPs is how to mitigate the government’s payment Also, this new law increased the threshold for municipal tax revenues
that can be channeled to PPP payments from 3% to 5%.
risk, which in these cases becomes a relevant source of revenues.
Political Exposure is high as it deals with people not cargoes. Government’s payment risk (main investors’ concern): guarantees and
collateral pools are still under discussion/being designed.
The government’s intention is to stimulate (i) private investments in new
Government is unsatisfied with the current railroad monopoly model, corridors (i.e. capacity increase) and (ii) competition between multimodal
Railroads
which hasn’t stimulated investments in new stretches (greenfields). operators (i.e. tariff decrease).
Besides the measures announced in 2011 (challenging the monopoly of Yet, (i) projects are still under preliminary studies and (ii) there are still
current concessions), the government has launched a plan to grant 10 uncertainties regarding the new model such as (a) operational feasibility
new stretches under a new railroad model (Open Access). and (b) collateral pools to secure Valec’s payment risk.
In 2013, the government launched the New Ports Law in order to
Capacity additions in public ports has depended on the government’s foster investments other than in public ports. The main innovation was
planning and auctioning processes, which have been insufficient to
the authorization for private ports to handle third–party cargo.
Ports
address the country’s port infrastructure needs.
While we welcome the elimination of that restriction, we think there are
Worse Private investments in greenfield projects outside of public ports have still a few unclear terms such as for: renewals, auction criteria and
been constrained by the lack of regulatory support.
different conditions for public and private ports.
Source: Credit Suisse Research / (*) PPP: Public-Private Partnerships 23You can also read
