There's no shortage of investors keen to pile into Brazil's infrastructure projects
Deals to finance large infrastructure projects have become harder to structure as the result of volatility in international capital markets, but vast pent-up demand in Brazil has seen no shortage of investors.
Last year, the government unveiled its flagship programme to boost growth, the aptly-dubbed Growth Acceleration Programme (PAC). “The PAC has pointed to priority programmes that the country needs and that are good for the private sector,” says Maria Estela Ferraz, head of project finance at Itau BBA in Sao Paulo.
In the meantime, the state-owned development bank BNDES has boosted its infrastructure portfolio by 62% in local currency terms (25.6 billion reais, or some $15 billion).
Geoffrey Cleaver, who manages a R940 million (around $550 million) InfraBrasil fund for ABN Amro to be invested over four years, points out that the PAC’s great advantage is that it can access BNDES funding at more favourable rates. “The cheaper the funding, the higher the returns so we can make these schemes viable,” says Cleaver. Two of InfraBrasil’s projects are included in the PAC.
Rocky road
But the financial crisis has made its presence felt for regional deals. “It has become a bit more complicated to structure projects,” he says.
Before the credit crunch struck, project backers were enthusiastically gearing up for refinancing and looking to extract equity while increasing leverage. But at least in the near term, things will have to change amid growing evidence that the global financial turmoil is constraining funding options for Brazilian projects.
Still, while Cleaver admits there may be delays of one year or more in getting deals done, he is betting on the bigger picture: “Generally speaking, the long-term attractiveness is still here,” he says. “There are going to be good returns.”
InfraBrasil is investing in more than half a dozen small hydroelectric plants (between 15MW and 28MW each) to feed the growing demand for energy, against a background of sustained economic growth. “There is a huge demand for investment in energy. Financing schemes are easier to put together and we can expect greater returns [than in other sectors], of 15% on average,” adds Cleaver.
Meanwhile, a local state-owned company, Furnas, won the bid to build the 3,000MW Santo Antonio plant on the Madeira River, in partnership with other local groups, such as the engineering group Odebrecht. Furnas accepted a lower rate of return than its competitors during late last year’s auction, and defeated foreign groups such as Suez. The PAC still includes some large hydroelectric plants, like Jirau, to be auctioned next month (May).
“There is a very strong demand for this kind of business, such as Rodoanel [Sao Paulo’s ring road]. It may eventually turn out to be marginally more expensive, but there will not be a lack of resources,” says Luiz Fernando Figueiredo, director of Maua, a Sao Paulo-based hedge fund. [A strategic stretch of the Rodoanel was auctioned on March 10th....] Moreover, the federal government is preparing to transfer 4,000 kilometres of roads to private-sector management, following a successful round of auctions last October.
“There is an attractive menu for infrastructure this year,” says Itau BBA’s Ferraz, “but foreign investment declined by a third last year compared to 2006, and funding is now more attractive on the domestic market.” On other hand, investment prospects in water and sanitation, which are also huge, have yet to materialize.
Some state governments, such as in Minas Gerais, have been experimenting with a few public-private partnerships in roads and are considering other schemes including prisons, but these have remained isolated cases.
On such partnerships, ABN Amro’s Cleaver remains cautious. “We have been eyeing PPPs. A lot of people thought PPPs would be the solution to [Brazil’s] infrastructure problems, but they are not,” he says. —T.O.“There are going to be good returns”
—Geoffrey Cleaver