New Metro Line To Test Brazil's PPP Potential

BMI View: Brazil has been increasingly looking at concessions and PPPs to develop new infrastructure. The next significant test for the country ' s attractiveness is the Linha 6 - Laranja metro line in São Paulo. The BRL19.9bn (US$9.8bn) project is due to go to tender in December and we anticipate strong interest from both domestic and international players.

The Linha 6 - Laranja (Line 6 - Orange) metro line in São Paulo is being developed as a public-private partnership ( PPP ) , with the contract for a 25- year concession to build, operate and maintain the line. The contract includes a six - year construction period , with construction expected to cost BRL7.8bn (US$3.8bn), and a 19 - year operational licence. Line 6 will have 15 stations and also includes construction of the Morro Grande metro yard.

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The project has been repeatedly delayed, with the tender now expected to be released in December 2012, while construction is expected to start in 2013. This is an ambitious timeframe, given that significant land expropriation will need to take place ahead of construction and therefore further delays are likely and the 2019 completion date uncertain.

The project is currently in the consultancy phase, with a deadline of November 21 for interested companies and consortia to submit suggestions, according to BNamericas. At present, some of the bidding rules have already been announced. They include a minimum capital requirement of BRL776mn (US$382mn) for companies and BRL1.01bn (US$496mn) for consortia. The tender will be judged on the bid which requires the least government financial support, up to a maximum of BRL580mn (US$285mn).

It is unclear as yet if BNDES will be offering financing for the project. In our opinion, this is very likely to take place. The Brazilian development bank has been present in most of the major financing arrangements for infrastructure projects in Brazil. The bank was the most significant lender for the airport concessions which took place earlier this year and has already offered to support the proposed bullet train/high speed rail project which is to be privately operated; having offered to fund 60% of the cost under previous guidelines (it is unclear how it will financially support the project under the new bidding guidelines). We therefore expect BNDES to provide a sizeable portion of funding for the metro line project.

Assuming financial support from BNDES, we expect this project to be popular. The model and demand projections are much more viable than other rail concessions in Brazil - the bullet train by comparison is a significantly more risky prospect. We assume international companies with expertise, such as Malaysia's Scomi - which is building Line 17 of the Sao Paulo metro - to enter into consortia with local companies, including Odebrecht and Andrade Gutierrez.

This article is tagged to:
Sector: Infrastructure
Geography: Brazil