Latin Finance - March 2008 - 30

Brazil infrastructure finance sell off a 53.8% stake in the Companhia Brasiliana de Energia, a conglomerate that distributes electricity in São Paulo state and generates more than 3,200 megawatts. US firm AES has the right to match the winning bid within 30 days and purchase the shares, which are currently valued at about 11 billion reais. “These are enormous assets and we have the highest possible expectations for these auctions,” says Dupui. He also expects later this year a multibillion dollar sale of contracts to build transmission lines to get the electricity from the two Rio Madeira plants into Brazil’s heartland. Gabriel Goldschmidt, manager of infrastructure for Latin America at the IFC, also anticipates auctions for transmission lines, not only for Rio Madeira, but to further integrate the national electricity grid and boost its stability. “Past auctions of transmission lines have been successful,” he says. “It’s a very interesting area for the private sector.” In addition, Brazil’s tangled legal system may no longer be the obstacle that it once was. “Brazil represents very little risk in this area,” Dupui says. “There have been many attempts to question and block concession contracts, but the fact is, those attempts have not succeeded.” Instead, Dupui says, the main risks with such investments are those inherent to such projects: whether they can be constructed on time and at budget, and how the financing is structured. Given Brazil’s looming energy shortages, says Dupui, there is little if any demand risk. “After the success of Santo Antonio, the government has a track record in the energy sector,” says Maria Angelica Wiegand, head of structured and corporate finance at WestLB Brazil. “The regulatory environment is clear.” But Carlos Eduardo Schahin, executive director of Banco Schahin, points out another risk. “These big investments are frequently highly disputed by many big investors,” he tells LatinFinance. “Given that level of competition, the returns offered may not be that high.” He cites last year’s auction of the Santo Antonio plant as an example. The promised electricity rate was so low that it delighted the government, but may not leave room for investors to make a enough profit. “There are still many good opportunities in the energy sector here, but it’s smaller projects and alternative energies, ethanol, biofuel, that are most promising,” says Schahin. Roads, Roads, Roads Toll roads is the other area with major transactions on the block. Although the government had not set a firm date as of early February, São Paulo state should auction off two lots of toll roads this year, perhaps as early as July. First, it will sell a 30-year concession to maintain and manage 1,600 km of highways through the state’s interior. The concessionaire will have to pay 2.1 billion reais, and make repairs and maintenance estimated at $9 billion. The bid will go to the consortium promising to meet those requirements while charging the lowest toll. Using a similar process, the government will then auction off the western segment of the Rodoanel ring road around São Paulo city. As of early February, details had not been set, but the concessionaire will probably also have to pay about two billion reais and perform maintenance in return for tolls. “These are all top of the line highways, in terms of traffic and demand, located in areas where there are almost no other transportation alternatives,” Dupui says. WestLB estimates the operating costs for the Rodoanel to be a modest 800 million reais for the first seven years. “São Paulo state has very solid laws governing concessions,” Dupui adds. Here too Wiegand agrees, saying that the main risk for investors lies in traffic studies. “We know how much traffic there is now, when these roads don’t have tolls on them. How much will remain when there are tolls?” she says. Traffic projections also depend on predicting economic growth and gas prices, which are notoriously hard to guess, especially over a 30-year concession. Meanwhile, the federal government is planning three more auctions of highway concessions: in July 637 kilometers of roads in the northeastern state of Bahia, in November 2,000 kilometers in Brazil’s center, and then in April, 2009 another 2,000 kilometers scattered about the country. Different from the São Paulo state concessions, the federal concessions require no upfront payment, but will go to the bidder offering to charge the lowest toll in return for making the required investment. For the Bullet to Rio? In January, Presidential Chief of Staff Dilma Rousseff announced plans to build what transport bureaucrats here have dreamed of for years: a high speed train connecting São Paulo and Rio. The train would also extend to the city of Campinas, 100 kilometers from São Paulo, permitting that city’s airport to handle some of the traffic currently overwhelming Guarulhos and Congonhas. The project is supposed to go to auction in the first half of 2009. The winner will be whoever promises to charge the lowest passenger fare. According to Rousseff, companies from France, South Korea, Italy, Germany, and Japan have announced their intention to compete to build the 518 kilometer line. Construction is expected to take seven years and cost $11 billion. It could reduce travel time between the two cities to two hours. However, preliminary studies on the project’s viability are just beginning, with the BNDES, IDB and World Bank working together to examine engineering issues, potential demand, and how the deal might be financed. These studies are supposed to be completed in August. Rousseff has expressed hope that private capital would pay for it, but she has also admitted that some kind of federal subsidy might be required. If so, the federal government would have to do what it has often promised, but never succeeded in delivering: put together a private public partnership. Yet here the government may have a powerful motivation, especially as municipal elections approach later this year. According to polling agency IBOPE, 86% of São Paulo and Rio residents say that they would prefer a train to any other form of transport between the two cities. — Dan Horch 30 LATINFINANCE March 2008

Latin Finance - March 2008

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