Brazil launches road show to shop infrastructure projects

Tue Feb 5, 2013 4:54pm EST

* Show headed to New York, London, maybe Tokyo, Singapore

* Brazil wants investors to accept tighter margins

* Failed auction is sign government still feeling its way

By Reese Ewing

SAO PAULO, Feb 5 (Reuters) - Brazil will showcase its biggest investment opportunities on a global road show to try to drum up investment in direly needed infrastructure projects while urging the private sector to accept lower returns than it had in the past.

Finance Minister Guido Mantega and the CEO of investment bank BTGPactual, Andre Esteves, pitched Brazil's potential to hundreds of bankers and business leaders at the road show's launch in Sao Paulo on Tuesday. In just over a year, the country will host the 2014 World Cup Soccer tournament and in 2016, the Olympic Games.

Credit ratings agencies ranked Brazil as investment grade years ago, the central bank has kept inflation on target since 2005, and the country's debt has shrunk to 35 percent of gross domestic product, but investors still demand a hefty return for doing business in Latin America's largest economy.

Such tolls contribute to what is called the "Brazil Cost."

Mantega, Esteves and a team of the government's technocrats in logistics, generation and transmission, and in oil and gas are taking the sales pitch to London, New York and potentially Tokyo and Singapore in the coming weeks in search of $460 billion in infrastructure investments through 2015.

The current government lead by the left-leaning Workers' Party has never been comfortable with the idea of privatization but realizes that Brazil has become a big enough economy that the public sector and state companies can not go it alone.

Brazil will sell 30-year concessions, or leases, to investors that bid the lowest rates of return on projects, with a maximum rate of return to assure no potentially lucrative assets are sold at a steal if there is insufficient competition.

"Returns will be compatible with risks on investments," said Gleisi Hoffman, President Dilma Rousseff's chief of staff. "With lower interest rates, the returns must be lower."

In highway concession projects auctioned before Brazil's economic growth started to take off almost a decade ago, studies grossly underestimated traffic flow rates and investors made double-digit returns.

Brazil has come a long way since then but enticing investors under new, tougher terms that the government has placed into the contracts is not a given.

Last week, the transport ministry had to postpone the auction of two major highway projects after three big construction companies pulled out, rejecting government projections for growth in traffic flow over the 30-year life of the concession as too optimistic.

Mantega sweetened the pot on Tuesday, saying the government would reduce its projections to 4 percent from 5 percent annual demand growth and also offering to improve financing terms, which would likely widen investors' margins.

"The government is going to make sure these investments have returns," Mantega said, outlining what he called a new three-part macroeconomic approach that he hoped would create an amenable environment for investment.

He said the government will contain inflation and keep interest rates low; maintain competitiveness of local industry by limiting volatility of the exchange rate; and lighten taxes and lower the cost of doing business.

The government hopes these efforts will lead to long-term growth by attracting private investment, which is one of the weakest pillars of Brazil's economy.

But in the short term, the government's recent actions on Brazil's energy, currency and fuel markets will likely keep investors guessing whether it will defend their capital or its own macroeconomic goals.

Rousseff recently slashed electric energy rates by 20 percent to help the country's struggling heavy industry and consumers but shattered billions of dollars of value in publicly traded energy companies that were a favorite of big pension funds and institutional investors.

For the past seven years the government has held gasoline and diesel prices at the pump artificially low to contain inflation and stimulate vehicle sales but has heaped billions of dollars of losses on the publicly traded state-run oil company Petrobras by doing so.

Conflicting statements by Mantega and Central Bank Chief Alexandre Tombini over the dollar-real exchange rate have also left markets wondering whether the government thinks the currency is over or under valued.

"The government wants it all right now," said an asset manager, who declined to be named, at a local fund with 4.5 billion reais under management. "Trust takes time to build."