Brazil offers better terms for infrastructure investors

BRASILIA Tue May 21, 2013 4:44pm EDT

BRASILIA (Reuters) - Brazil is sweetening terms for major infrastructure contracts to whet investor appetite and draw private capital and expertise needed to upgrade its deficient roads, railways and ports, the man in charge of planning the projects said on Tuesday.

Bernardo Figueiredo said Brazil needs to double its current level of investment in infrastructure to at least 80 billion reais ($39.2 billion) a year if it wants to resolve a transport crunch that has stymied the economy in recent years.

About half of that sum needs to come from private investors, Figueiredo, the head of government infrastructure agency EPL, told the Reuters Latin America Investment Summit.

Figueiredo said there was heavy interest from institutional investors in Europe and the United States during "road show" presentations that he gave earlier this year.

However, President Dilma Rousseff's government has recently had to improve the targeted profitability of the projects. Many investors balked at the leftist leader's effort to engineer a relatively low rate of return, part of her plan to reduce Brazil's comparatively high profit margins in many industries.

Brazil recently raised the internal rate of return - a measure of profitability - for highway concessions from 5.5 to 7.2 percent previously.

Railway projects, including a planned Rio de Janeiro-Sao Paulo bullet train, will offer rates of return of between 7 and 7.5 percent compared to about 6.3 percent previously, Figueiredo said.

The higher returns may help ease investors' concerns about doing business in a country with a promising economy, but a recent history of delays on big-ticket projects.

"The only risk that investors like to take is the risk of earning money; they dislike any other risks on principle," said Figueiredo, an economist with 40 years experience in the transport industry.

"We recognize that the state has limits in its ability to finance and manage these projects so we need to turn to the private sector for capital and expertise," Figueiredo said.

He said Brazil is also studying the creation of a new investment vehicle so that foreign pension funds can more easily participate in the projects.

The idea is to pool pension fund investment in a neutral fund that can bid for a stake in a project and become a partner with the winning consortium that executes it, while also investing in other projects to spread risk, Figueiredo said.

BULLET TRAIN

The world's seventh largest economy is striving to overcome serious transport bottlenecks that have pushed up its production costs and reduced its competitive edge as a top global commodities exporter. Ships wait for weeks off-shore to dock at clogged ports to load soy that has doubled in price since leaving farms by truck.

Diagrams scribbled on the wall of Figueiredo's meeting room show the railway lines that Brazil is planning to build, crisscrossing the huge country to connect its farming and mining hinterland to coastal and river ports for export.

Last August, Rousseff announced a 133 billion reais drive to build new highways and about 10,000 km of railroads in public-private partnerships.

Auctions of road contracts will begin in July and railways in September with concessions to be decided by December, he said.

Figueiredo said public financing will be raised from 70 to 80 percent for the high speed train project, a planned 350 kph (217 mph) train between Brazil's two largest cities, and minimum bids for the 40-year concession will be lowered by 5 to 10 percent.

The decision to raise the government's stake seeks to spread the risk after no bidders emerged for the high-speed project during an auction in 2011. Figueiredo said companies from a dozen countries, including Spain, are interested in the next auction, to be held in September.

Spanish Public Works Minister Ana Pastor, visiting Brasilia to lobby for her country's businesses, said on Tuesday that a Spanish consortium of state-run and private companies was very interested in the Brazilian project.

"The Spaniards are very excited about the high speed train project. They won a similar project in Saudi Arabia," Figueiredo said. "She said the Brazilian project is an absolute priority for Spain, because this is a good opportunity and they have invested a lot in high speed know-how."

Companies from Chile, Argentina and Mexico are interested in the building of roads and trains in Brazil, and port reform legislation approved by Congress last week will allow more investment in private ports and the reorganization of state ports to improve efficiency, he said.

The government expects the drive to overhaul Brazil's infrastructure will have a multiplier effect on its sluggish economy, creating demands for steel for rails and other goods and services. Figueiredo noted as an example that over the next 15 years Brazil will need 15,000 new locomotives and 100,000 train cars.

Brazil's agricultural research institute Embrapa estimates that the planned railway lines will open up more than 60,000 hectares of new farm land that can grow some 200 million tonnes of grains.

(Reporting by Anthony Boadle; Editing by Brian Winter, Kieran Murray and Diane Craft)

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