Infrastructure PPPs as an investment opportunity in Brazil’s economy

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Infrastructure PPPs as an investment opportunity in Brazil’s economy by Zachary A. Kaplan, Development Specialist, DAI. Presentation featured at

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Infrastructure PPPs as an investment opportunity in Brazil’s economy

  1. 1. Infrastructure PPPs as an investment opportunity in Brazil’s economyEmerging Markets Institute, Cornell Johnson School of ManagementZachary KaplanDAISeptember 20, 2012New York City
  2. 2. Public-Private Partnerships (PPP/P3)- What are they? PPPs are contractual arrangements between the publicsector and a private sector party for the private delivery of publicinfrastructure services or other basic services.Why are they important to Brazil? PPPs arrangements open up infrastructure and servicedelivery to the private sector as a form of investment, carryingnew sources of capital and bringing along efficiency, transparency,and better service provision.Why are they important to investors interested in the Brazilianmarket? New sectors of the market ready for investment
  3. 3. The Case for Brazil’s Infrastructure“Brazil’s Infrastructure Needs Infrastructure as an investment sector• 104/142 (WEF quality of infrastructure rank, China is 69th, India 86th and Russia • Consumer demand: almost 200 million 100th) people, with an increasing middle class demanding infrastructure• 2011-2014, $80 bn spent on infrastructure “growth acceleration” • Strong macro financials: US$2.5 trillion program, averages to around 1% p.a (2011) GDP (8th in world); 2011 2.7% growth in GDP• Need about 6-8% of GDP to catch up with South Korea in 20 years • New market opportunities: 2014 World Cup and 2016 Olympic games• Around $125bn annual infrastructure funding deficit • Deep sources for local finance matching (BNDES) • Strong political will • Returns on investments ranging from 8- 20%
  4. 4. “ Brazil is offering an extraordinary investmentopportunity in an environment of economic and institutional stability” - President Dilma Rousseff, August 15, 2012, Address on infrastructure stimulus plan
  5. 5. History of P3s to-date in Brazil• Since 1990, a total of 550 PPI 350 Number of Projects Reaching transactions have reached 300 250 closure 200 Closure 150• Leveraged $326 bn in 100 infrastructure financing 50 0 • $134bn in energy Energy Telecom Transport Water and Sewage • $138bn in telecom Infrastructure Sector• Fairly even split in value between each model Concession • Uneven dispersion between types of PPP, with more on Divestiture O&M Greenfield • Opportunity to leverage more Management and financing through new lease models
  6. 6. The underpinnings behind the dealsLegal Framework• National PPP Law: 2004 PPP Law opened-up Brazil for private investment in public infrastructure; improved dispute resolution by arbitration, established government financial support and backstop facility, expanded types of PPPs that can be used• State-level: Minas Gerais, Sao Paolo, Espirito,• Municipal-level: City of Rio de Janeiro and Sao Paolo, developing PPP manuals, standard bidding documents, investment guidesKey Institutional Partners• BNDES- Brasil’s Development Bank not only funds deals but helps package and sell the transactions to other private investors• IFC/World Bank- providing technical assistance and funding for many PPP deals; supporting PPP units at national and state-level’s with capacity building• Sector ministries, departments and agencies- championing the PPP development of each project
  7. 7. custo Brasil: cost of Brazil, the risks• Licenses and regulatory environment can stifle projects- getting construction permits (ranks 127 in Doing Business’s construction permit index) and environmental licenses(Belo Monto, controversial hydroelectric scheme is the Amazon) can be burdensome and time-consuming• High taxes (28 different taxes on electricity)• BNDES crowd-out (local financial markets are deep and, although sometimes costly, can crowd-out investment from abroad)• Exchange risk, collection risks and payment risks• Local partnerships are critical: foreign investors cannot own more than 40% share in local company (such as an operating company). Finding the right local partner is key
  8. 8. New opportunitiesfor investment• Auction: Tolling 4700 miles of road and 10,000km of railway- around $66bn) • 3 BRT in Rio • Ring-road • LRT btw Rio and Sao Paolo• Airports: 3 concessioned this year- Sao Paulo ($9.4bn), Viracopas ($2.23bn), and Brasilia ($2.16bn) • Rio Airport• Ports: success of Maravilha• Irrigation initiatives in NE such as Pontal• Stadium and World Cup/Olympic assets• Hospitals and clinics• Solid waste
  9. 9. How to move forward• Select sector and generate pipeline of project• Identify local investment partners and operating groups• Work with BNDES, IFC and government to identify risks (draw on risk mitigation tools when necessary such as MIGA, PRGs, PCGs)

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