Costly Band-Aid For Business Environment Ignores Fundamental Concerns
BMI View : Brazil's failure to launch highway concessions illustrates one of our principal concerns with the government's new plans to entice private investors into infrastructure investment. At the core of the issue is that the rewards are not high enough to warrant the growing array of risks facing international investors in Brazil infrastructure sector. In order to address the problem the government should tackle the underlying risk factors; however, it is instead upping the reward s , illustrating a continued policy of throwing money at the country's infrastructure problems whilst ignoring the root causes.
The failure of two highway concessions in Brazil highlights our concerns for the country's wider concession programme. Two major concessions fell through in January 2012 when three companies pulled out, citing government projections for traffic growth as too optimistic, according to Reuters.
In an effort to overcome these difficulties the Finance Minister Guido Mantega announced a number of changes to concessions to sweeten the deal. The concession period is to be extended from 25 years to 30 years, better financing terms will be offered, with state-owned banks to provide bridge loans at a lower interest rate, the financing period will be extended from 20 to 25 years and crucially, a rate of return in excess of 10% will be promised, versus the 6% estimated return currently.
|Sweetening The Deal Neglects The Real Problems|
|Brazil Project Finance Ratings|
The road projects are part of a sustained effort to expand private investment and operation of Brazilian infrastructure. The government announced a wide-sweeping concessions plan covering the railways, ports, airports and roads sector in mid 2012, in the hope of attracting greater capital into Brazil's deficient infrastructure and taking some of the burden off the public sector. However, at the time we highlighted four concerns: sophistication of regulations, institutions, costs and financing. These four issues make the costs of doing business in Brazil much higher, and therefore by extension require higher returns to motivate investors.
These measures should go some way to sweetening the deal for private investors. The country's business environment has been deteriorating, especially given President Rousseff's handling of the electricity tariff debacle, leaving investors with little confidence in investor protection and market orientation of the government. In order to overcome these risks, generally investors demand higher returns; however, Brazil's road sector does not currently offer this. Whilst upping the returns and providing access to cheap financing will solve the immediate problem, it does not address the underlying difficulties in the business environment and is more of an expensive band-aid to get investment flowing to address immediate infrastructure needs.