Consorcio Planalto, a mid-tier group of builders, on Wednesday won the right to operate 436 kilometers (273 miles) of the BR-050 highway linking Goias in Brazil’s central farm belt to mineral-rich Minas Gerais in the southeast. Planalto, which beat seven rivals in the auction, offered a 42.38 percent discount over the government’s proposed toll for the auction.
With analysts estimating that a discount above 35 percent could make the project unprofitable, Planalto’s aggressive bid may mean that returns will take longer to materialize. UBS Securities estimated that Planalto’s discount implies an internal rate of return of about 3.3 percent for the project, below the 6 percent vastly expected by analysts.
Officials promoted the auction as a key step in its push to create an attractive environment for infrastructure spending in the country, whose economy has struggled over the past three years. The government expects $90 billion in annual investments through 2017 to help Brazil overcome soaring logistics costs and overheads for farmers and exporters.
“It was an outright success,” Transport Minister Cesar Borges said in São Paulo, where the auction took place.
This year, President Dilma Rousseff began a 43 billion real program that allows private companies to bid for roads - a move likened to privatization efforts undertaken in the late 1990s. A prior auction was scrapped in January, signaling the extent to which confidence in Brazil has fallen.
“We have argued for some time that the agenda was likely to have mixed success, but the government’s commitment to courting private investment in infrastructure remains firm,” said Jefferson Finch, a political risk analyst with Eurasia Group.
Wednesday’s auction, in which large toll road groups such as CCR SA, Arteris SA and Ecorodovias SA were defeated, may have helped assuage investors’ doubts about pouring long-term money into Brazil. Shares of the firms rose 4.3 percent, 1.3 percent and 2.6 percent, respectively, a sign that markets lauded the companies’ caution.
“Discipline is the name of the game,” UBS analyst Victor Mizusaki said in a client note.
Rousseff, whose approval ratings suffered in the wake of massive street protests in June demanding better public services, has worked to sweeten conditions for the road auctions to lure skeptical investors. Her government vowed to speed up approval of environmental permits for the projects.
Another proposal may help state-run banks team up with private-sector peers to offer syndicated loans to bidders. The government may create an 11 billion real National Infrastructure Fund in hopes of mitigating financing risks for the projects.
Current terms offer below-market interest rates, with projects being able to secure about 70 percent of funding from state development bank BNDES.
“Successful auctions could show the market that private capital and the government are finally finding a way to make the huge investment pipeline work,” said Goldman Sachs analyst Gabriel Cotellessa.
At Least One More Bid
Planalto may place at least one more bid in coming rounds. The group, which was formed by local builders Senpar SA, Construtora Estrutural SA, Construtora Kamilos SA, Ellenco Construções SA, Engenharia e Comercio Bandeirantes and Greca Distribuidora de Asfaltos - all of which may be less sensitive to low returns, UBS’s Mizusaki said.
Planalto will have to invest 3 billion reais ($1.33 billion) to upgrade and widen the BR-050. Analysts had said smaller companies would bid more aggressively for BR-050, while the larger ones are likely to win most of the upcoming auctions.
The government had also hoped on Wednesday to auction the BR-262, a highway stretching 375 kilometers from Minas Gerais to the port city of Vitoria in neighboring Espirito Santo. But investors, worried about the role of state-run road construction agency DNIT in the project, did not tender any bids by Friday’s deadline.
Borges said the government might improve terms for BR-262 and announce the resumption of the auction next week. The BR-101 concession, slated for Oct. 23, was also postponed until the end of the year after bidders balked at DNIT’s involvement.
Under rules for the BR-262 concession, DNIT would widen about half of the 375 kilometers in roads under concession, a clause the government added to cut costs for the winner. But the latter may be fined if the expansion is not finished in five years, even if DNIT was responsible for the delay.
“Given DNIT’s poor track record executing investments, companies probably considered the risk too high,” said Eurasia’s Finch, but Borges said that “there is no DNIT-related risk.” (Reuters)