* Turmoil in markets has increased financing costs
* Gov't could raise return rates to lure investors
* Investors want higher returns on risk perception
By Alonso Soto
BRASILIA, July 5 As Brazil looks for private
bids for major public infrastructure projects, it may have to
raise the rates of return being offered to keep investors
interested at a time of market turmoil and higher risk.
Investors have grown wary of Brazil, as a decade-long
commodities boom has come to a screeching halt. On Thursday,
billionaire Eike Batista's Grupo EBX, once a high-flying
industrial conglomerate, began breaking up, the latest victim of
the market turmoil.
President Dilma Rousseff has already sweetened the terms of
concessions for airports, seaports, roads and railways as the
government seeks more than $100 billion in private capital to
fix dilapidated infrastructure that has become a hurdle to
growth of the world's sixth largest economy.
But a liquidity crunch has fanned worries about the
long-term investment outlook after an exodus of foreign
investors spooked by weak growth and rising inflation, and a
plunge in local stocks exacerbated by the woes facing EBX's six
listed companies, known locally as the "X" companies.
"The case of the 'X' companies has added to the pessimism
that we see in Brazilian capital markets and that is a concern,"
said a source who is directly involved in the planning of
concession auctions that are expected to start in September.
"As of now there are no changes to the rate of return" on
road, airport and railroad projects, the official told Reuters,
"but that doesn't mean we are not monitoring the situation."
The official, who requested anonymity, said the government
is evaluating whether deterioration of financing conditions
merits an increase in the minimum rates of return guaranteed for
infrastructure projects. In May, the government raised the rate
of return for toll road concession projects to 7.2 percent from
The government is placing its hopes on the next round of
concessions to revive activity and bolster anemic investment.
Road operators and massive construction firms like Ecorodovias
SA, CCR SA, Odebrecht TransPort SA,
Invepar SA and Andrade Gutierrez SA are expected to participate
in the coming auctions for roads, ports and railways.
HIGHER RETURNS, BIGGER RISKS
Some major investors have renewed calls for better return
rates to make up for the sharp increase in risk.
As Brazil's growth stalled, the country's stock exchange has
fallen 27.3 percent this year, the weakest performance among
major world indexes. Its currency has plunged to four-year lows
on worries that foreign investment could slow drastically if the
U.S. Federal Reserve ends its domestic stimulus measures.
"The era of abundant credit is over," Paulo Godoy, the head
of Brazil's Association of Infrastructure Companies, told
Reuters. "Investors and international funds are being much more
selective on where they place their money. The profitability of
these projects should be adapted to that new reality. "
Financing has taken a turn for the worse in recent weeks.
The extra interest that investment grade-rated Brazilian
companies pay in global markets, relative to U.S. Treasury debt
notes, jumped to an average 1.8 percentage points at the end of
June from about 1 point at the start of the year, according to
Credit Suisse Group estimates.
Long-term syndicated bank lending to emerging economies
plummeted 41 percent in 2009 and has yet to recover, affecting
particularly infrastructure financing, according a World Bank
paper published last month.
The breakup of Batista's EBX has increased investor jitters
about Brazil. He was Brazil's richest man until the value of his
conglomerate of companies plunged, failing to realize promises
of immense profits on oil wells, ports, power plants and ships.
A decade of political and economic stability has attracted
investors hoping to tap into Brazil's domestic market of nearly
200 million consumers, but growth in Latin America's largest
economy is expected to slow to just 2.4 percent this year.
Brazil remains a leading destination for international
capital, but two years of sub-par growth and a recent wave of
nationwide demonstrations have eroded its appeal.
Weeks of street protests against poor public services and
political corruption has prompted some local authorities to
freeze toll road and energy fares.
"Although contracts were not broken this sets a bad
precedent and makes investors more cautious." Moacyr Duarte,
head of Brazil's road operators association, told Reuters.
"Given the added risk, that rate of return offered in May is not
Last month, Standard and Poor's said there was a
one-in-three chance the country could lose its "BBB" rating over
the next two years. This week, the ratings agency warned that
protests could force Brazil to lift government spending.