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Brazil mulls boosting allowable returns on big projects
July 5, 2013 / 6:10 PM / in 4 years

Brazil mulls boosting allowable returns on big projects

* 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 (Reuters) - 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 5.5 percent.

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.

STREET TURMOIL

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 adequate anymore.”

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.

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