Why are there so few interested parties?

In recent months, two infrastructure auctions prepared by the government of Luiz Inácio Lula da Silva (PT) had to be canceled at the last minute due to the lack of interested parties. In August, it was a port terminal in Porto Alegre and, in November, the duplication of BR-381, also known as the “highway of death”, between Belo Horizonte and Governador Valadares (MG).

Other auctions, such as two lots of highways in Paraná covering a total of 1,077 km, had few interested parties: the first concession, in August, had two competitors; the second, just one. Last Wednesday (13), only one group participated in the auction for a terminal at the Port of Paranaguá – in three previous attempts, no one had been interested.

Depending on the auction model, low competition leads to lower fundraising by the State or higher fees charged to users of the services granted. Or, in extreme cases, neither one thing nor the other: the work simply doesn’t come out.

Why did the investor disappear? Experts consulted by People’s Gazette list several reasons:

• lag in projects and budget tables;
• legal uncertainty, with frequent changes in rules and interpretations by the Judiciary;
• interest rate that discourages investment;
• rising interest rates abroad and the scarcity of resources from foreign investors; It is
• the difficulties faced by the country’s main construction companies after the corruption scandal revealed by Lava Jato.

The reality is very different from what was seen more than ten years ago, when infrastructure asset concession auctions attracted more interested parties. In January 2012, eight groups competed for the Espírito Santo section of BR-101. In November 2013, seven competed on the Mato Grosso stretch of BR-163. The following month, there were six competitors in the bidding for BR-163, in Mato Grosso do Sul, and eight in the dispute for BR-040, between the Federal District and Minas Gerais.

At the time, Brazil was enjoying strong economic growth, recalls the managing partner of KPMG’s infrastructure area, Tatiana Gruenbaum. Between 2003 and 2012, GDP accumulated growth of 45.6%. Then, from 2013 to 2022, the increase was just 5.3%, according to IBGE. During this period, the country went through a strong recession, from the end of 2014 to 2016, and also the impact of the Covid-19 pandemic.

Investment in infrastructure fell abruptly, according to figures from the Brazilian Association of Infrastructure and Basic Industry (Abdib). The peak, recorded in 2014, was R$227.2 billion in updated values, in the sum of the public sector and private initiative. In 2020, the value plummeted to R$149.7 billion in 2020. Since then, there has been a recovery, with the prospect of disbursements of R$213.4 billion now in 2023.

Despite the recovery in recent years, investment is below what is necessary. For the World Bank, economies in emerging and fast-growing countries tend to spend between 5% and 7% on infrastructure. Brazil has invested between 1.5% and 2% of GDP.

Brazilian projects are outdated

The KPMG partner points out that there is a difficulty in attracting players to invest in infrastructure in Brazil. One of the reasons is the way infrastructure projects were structured.

“Most of the projects up for auction were structured with 2018/2019 budget tables. We had a hiatus of almost three, four years without auctions, after the Dilma period [Rousseff]. When the auctions resumed, they came with the cost of capital and inputs with outdated values”, she says.

With the pandemic, there was a sharp increase in the value of construction inputs and services. According to Fundação Getulio Vargas (FGV), the accumulated increase since December 2019 was 51.8%. In the same period, official inflation, measured by IPCA, was 26.6%.

According to Gruenbaum, when analyzing recent auctions, it is observed that they were modeled on another reality, which makes the business unattractive, whether for a national or foreign investor.

The government foresees, in the New Growth Acceleration Program (New PAC), around R$1.4 trillion in investments in infrastructure until 2026.

But the KPMG partner foresees difficulties for the country to fulfill its pipeline (set) of projects if they are not revisited, or even reduced. “Local players could be more interested in a pipeline with small and medium-sized projects that would end up reducing the risk of the project and investment. That could be more attractive,” she says.

Legal uncertainty is a major bottleneck for infrastructure

Another complication for those who want to invest in infrastructure in Brazil is legal uncertainty, point out the experts interviewed by People’s Gazette.

“Foreign investors typically seek a stable economic and political environment. He seeks predictability. Currently, we are experiencing frequent regulatory changes and political uncertainties that end up discouraging long-term investment”, highlights the KPMG partner.

According to Alexandre Aroeira Salles, partner and lawyer specializing in infrastructure at the Aroeira Salles firm, there has been a series of mistakes made by the State in recent years. “The country is unable to make political and legal choices that provide security to the private sector.”

These are, for example, changes in rules, jurisprudence and politicization of regulatory agencies, which were created precisely to remove concessions and possible privatizations from political-party influences.

One of these problems occurred during the Dilma Rousseff (PT) government. On the one hand, in road concessions, a strategy was chosen to limit the price of tolls. On the other hand, the internal rate of return (IRR) was also limited, that is, the profitability of the project for the investor. “It was a huge disservice, as it affected the economic-financial aspect and created huge litigation”, says the Aroeira Salles specialist.

The possibility of going back on already established rules can also scare away interested parties. “This leaves potential investors even more wary,” says Rafael Souza, researcher at the Center for Studies in Regulation and Infrastructure at Fundação Getulio Vargas (FGV Ceri).

A common question is when there is a need for contractual rebalancing. Infrastructure experts point out that it is difficult to reach a consensus in initial conversations and the issue ends up unfolding into pleas, arbitrations and legal proceedings that often take time and are very expensive.

“Companies are afraid of entering into a project in which they have to ask for contract rebalancing or have to renegotiate something, because it is very difficult nowadays to renegotiate a concession contract”, says Virgínia Mesquita, a lawyer specializing in infrastructure at Demarest .

She remembers that investment projects are capital intensive. A delay in ensuring economic-financial rebalancing could mean the “death” of the project, with works stopped.

Macroeconomic issues, such as interest rates, are important

Macroeconomic issues also affect the lives of national and foreign investors. One of the main problems is the high Brazilian interest rate. “In a scenario with greater risk potential, this ends up being another source of disincentive for investments”, highlights Salles.

The investor pays particular attention to the long-term interest rate. “It’s a very complicated issue in Brazil, where there is a lot of instability.” Another aggravating factor is that historically the rates are high.

“Fees affect investor entry. He will prefer to invest in a public bond rather than invest his resources in infrastructure, which offer an internal rate of return that varies between 8% and 10% per year”, says Mesquita.

Global chess also weighs on infrastructure investments

The scenario is more restrictive for investments due to high global inflation, which caused some of the largest economies to increase their interest rates. “By itself, Brazilian investors do not have the capacity to make the necessary investments. There is no money left and we need to look at external resources”, says Salles.

The availability of external capital for Brazil is decreasing. According to the Central Bank (BC), from January to October, US$44.9 billion in foreign resources entered the productive sector, 40% less than in the same period last year.

In this scenario of scarcer resources, there is competition with Middle Eastern countries, such as Saudi Arabia, which are investing heavily in infrastructure. “Foreign companies end up looking where there is a safer environment with less bureaucracy”, highlights the Aroeira Salles specialist.

Lava Jato affected the heavy engineering sector

Another difficulty came with Lava Jato, the corruption scandal that involved Petrobras, large construction companies and the PT. The consequence for the heavy engineering segment was that many companies had their liquidity compromised, were diluted or disappeared from the market.

“It involved companies much more than businesspeople involved in illicit activities. It compromised the heavy engineering sector in a very frightening way”, says Mesquita, from Demarest.

Experts consulted by People’s Gazette point out that smaller and intermediary companies remained in the market, which, by themselves, are unable to take on highly complex projects. They need to act through consortia or operate together to meet needs.

The lawyer remembers that companies in the sector do not have an appetite for very large projects, so the government needs to be sensitive to often cutting up some projects. “It is difficult to implement brutal extension projects.”