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Investment Partnerships Program - PPI

Crescer: one year with reforms, results and recover

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28 de agosto de 2017

Crescer: one year with reforms, results and recover

Balanço

A little more than a year after the creation of the Investment Partnerships Program (PPI), many things have changed. The investor confidence is back thanks to the regulatory changes introduced. The simplification of bureaucratic process and legal security generated by PPI Board decisions have been essential to the success of concessions. 

In May 2016, when PPI was created, the country was going through an economic recession, one of the longest and deepest in history. Since the 2nd quarter 2014, the GDP per capita decreased 9.7%, the worse result since the great depression of 1929-1930; and the domestic demand presented a still sharper fall:  12.4%. Thus, by the end of the 2nd quarter 2016, the real GDP was at the same level as that of the 3rd quarter 2010.

Courage and firmness were required to make the adjustments in the economy and to present bold and deep reform measures to overcome this scenario.

The confidence of entrepreneurs and investors and assets prices will certainly have gains with important measures led by the Government:  (1) quick approval in the National Congress of constitutional amendment that limits the growth of primary expenses to the inflation rate of the previous year; (2) approval of labor reform; (3) necessary reform of social security; and, at last, but not less important, (4) decisive steps to contain or reduce current expenses.

The Federal Government effort has generated expressive results. Brazil left the recessive scenario, grew in the first quarter 2017 and the second quarter data show gradual recovery.  Jobs were created in the formal market, which in July reached, for four months in a row, positive result. Both industrial production and commerce data show reaction. Liquidity and capitalization conditions of the financial system have contributed to minimize the crisis effects.   The economy real interest rate shows the lowest level of the last years, while expectations of inflation have supported relevant fall of interest rate. 

However, the economy keeps on operating with high level of inaction of production factors, which reflect on unemployment rate. For this reason, the Investments PPI has a fundamental role in the economic policy. The availability of assets for concession will provide efficiency gains that will be perceived by users of public services, will reflect on industry occupation indexes, and will drive new investments, which, in a controlled inflation scenario, will generate rise of income and employment.

The Program has served as driving force to the economic activities and will make of the free enterprise an important partnership of large public infrastructure projects. It is necessary to capture the external potential, since the global economic recovery creates a favorable scenario to keep the appetite for risk in assets.

Two meeting of PPI Board were held where 89 undertakings were qualified, of which 49 had auctions held or contracts signed. From then on, every effort is being made to rescue credibility, predictability and transparence, so essential to the improvement of the business environment and to attract new investments. This endeavor involves, among other things, the long lasting follow-up of projects, so as to assure timely deliveries. 

3rd Meeting of the PPI Council 

Crescer Project’s premises are the conduction of concession with maximum technical strictness, where projects announced count on technical, economic and environmental feasibility, with focus on services and the establishment of clear performance indicators.   

In this 3rd Meeting, in addition to the Program monitoring, the Board will deliberate on the inclusion of new projects.










After a meticulous diagnosis of Eletrobrás financial conditions and the cost of detected inefficiencies, the Ministry of Mines and Energy (MME) will submit to the Board the reduction of the Union share in the State-owned Company. Another important step towards solving past mistakes, where the technical backing was dominated by ideological issues.  There will be issue of the company’s bonds without subscription by the Union, which will be diluted and will lose stock control. However, the Union will keep veto power to assure the preservation of decisions that are strategic to the Country. This model has been used, with success, in countries like Portugal, France and Italy. The sale will inject expressive funds in Treasury, but, most of all, it will provide modernization of processes, increase in efficiency and improvement in governance, without affecting tariffs.

MME will also present the inclusion of 11 lots of power transmission facilities (transmission lines and substations) in PPI.  

The concession lots will be distributed in nine Brazilian states: Bahia, Ceará, Piauí, Pará, Paraíba, Pernambuco, Rio Grande do Norte, Minas Gerais and Tocantins. The remuneration model and discounts rates make investors see transmission lines as fixed income investments.

The Annual Income Allowed (RAP) is the remuneration that transmitters receive to make the system available to the National Electric System Operator (ONS) and provide transmission public service to users. Its value, for transmitters from bidding, is the one obtained from the transmission auction and is paid to transmitters as of the start of commercial operation of their facilities, with review at each five years (under the terms of their concession contracts).

In the last auction, there was change in the calculation of weighted average cost of capital, considering that, with regard to third parties’ capital cost, all funds raised in the market, which has raised the RAP. As a result, we had the largest auction in history, with seven competitors, in average, per lot, which generated 36% discount in average in RAP and an economy of R$ 24 billion to consumers throughout the concession period. Besides, the auction will generate R$ 12.7 billion of investment. The eleven lots to be qualified in the 3rd Meeting, and bidden in December, will respond for over R$ 10 billion in investments.

MME will also submit to the Board the inclusion of the 3rd Round of Biddings under Sharing Regime (with auction scheduled to October 27); the 4th Round of Biddings under Sharing Regime; the 15th Round of Block Biddings for exploration and production of petroleum and natural gas in concession modality and the 5th Round of biddings of areas with marginal accumulations.

Regulatory improvements have also reached the oil & gas sector. The end of compulsory participation of Petrobras in pre-salt sharing regime and the changes in local content policy will strengthen competitiveness in auctions and will provide to the national industry higher predictability with regard to future demand.  In addition to that, there will prorogation of Repetro – special customs regime for importation and exportation of goods destined to exploration and production of petroleum and natural gas.

MME proposal also includes the qualification of Hydropower Plant Jaguara, located in Rio Grande/MG, capable of delivering 341 MW of physical warranty. The Plant auction is scheduled for September 27.

The Ministry of Transports, Ports and Civil Aviation will qualify 15 port terminals:

• Miramar LPG Terminals in  Belém/PA Port (MIR 01, BEL 05, BEL 06);
• Liquid Bulk Terminals in Belém/PA Port – BEL 02A, BEL 02B, BEL 04, BEL 08, BEL 09;
• Liquid Bulk Terminals in Vila do Conde/PA – VDC 12;
• Grains terminals in Paranaguá – PAR 07, PAR 08 and PAR XX;
• Liquid Bulk Terminals in Vitória/ES;
• Anticipated prorogation of Fertilizers Terminal in Itaqui Port; and
• Authorization for expansion of capacity with new investments in Agrovia do Nordeste Terminal in Suape/PE Port.

The investments exceed R$ 2 billion and are added to other initiatives to retake investments in the port sector. An important step to improve the Country’s business environment, which solved choke points in port infrastructure, was decree nº 9.048, signed in May by the President. The document provides for the optimization of authorization processes for private investments in public ports and private terminals through the establishment of simplified process flows and flexibility of sureties. The measure, claimed by the sector for a long time, expands contractual terms and provides freedom to prorogate contracts, thus providing legal security and predictability for private partners to invest in the sector.  The Decree also offers the possibility of investments – including in terminals’ expansion areas and areas outside the leased area.  The change also simplifies authorization processes and the expansion of private use terminals, and consolidates a series of existing innovations in Government and Regulatory Agency norms.  All this will probably generate R$ 20 billion in investments.

Still in the port sector, the highlight is the proposal for inclusion of Companhia Docas do Espírito Santo in the National Privatization Program (PND). It is certainly the boldest step since the edition of the New Law of Ports. The administration of the organized port is the government responsibility through port authorities. However, efficiency losses are clear in the port operation before the public management, reason why it will be attempted to bring the free enterprise to ports’ administration. BNDES will make studies that will define whether there will be concession of the whole port operation, with transfer of liabilities to the private sector, or whether there will be only concession of Barra do Riacho terminal operation.

In the road sector, BR 364/RO/MT, important route for Mato Grosso agribusiness, will be qualified. In this highway over four million tons of grains travel to Porto Velho, which will go, through Madeira waterway, to Itacoatiara. Also important to agribusiness, BR-153/GO/TO, which was recently declared obsolete, will be included in the list of priority projects.

The Ministry of Transports also proposed the qualification of 13 airports that can, for the first time, be grouped in blocks for bidding. One first block comprises Northeast airports (Maceió/AL, Aracaju/SE, João Pessoa/PB, Campina Grande/PB, Juazeiro do Norte/CE and Recife/PE) which have touristic appeals. Another block will comprise Mato Grosso airports (Cuiabá, Sinop, Alta Floresta, Barra do Garças and Rondonópolis) due to the relevance of grain production in the state. It also proposed Vitória Airport, which currently counts on expansion works in progress.

The Ministry of Planning, Development and Management proposed the qualification of Macaé airport (important post for the oil & gas industry) and Congonhas airport (second larger in Brazil, with around 21 million passengers per year).

These 14 airports represent the greatest offer of the sector in history, consistent with the government policy to improve efficiency to the airport sector and with opportunity generated by foreign investors’ appetite.

Still in the airport sector, the alienation of equity ownership of Infraero (49%) will occur in airports already granted: Guarulhos/SP, Confins/MG, Brasília/DF and Galeão/RJ. The core objective intended by the Federal Government with Infraero participation in this concession during the last five years is considered achieved, which was the learning with private models of airport management.

The Ministry of Defense will propose to PPI Board a Public-Private Partnership (PPP) in the modality administrative concession, whose objective will the service of transport of telecommunications signs to DECEA and military organization in the whole national territory. The objective is the control of the airspace, which will benefit airport concessionaire companies, air transport companies, aviation in general, owners of airplanes and users of civil and military air navigation services.   Investments of R$ 1.1 billion are expected throughout the 25-year concession.

The Treasury Department will present the model of concession of Loteria Instantânea Exclusiva (Lotex), resulting from studies recently concluded by BNDES. The lottery modality popularly known as “Raspadinha” (scratch-card) was authorized by Law 13.155, of August 4, 2015, in its article 28. According to the Legislation, Lotex could be directly explored by Caixa Econômica Federal, or indirectly upon concession. Based on BNDES studies results, the alternative of concession of the right to explore Lotex was defined, which presents more attraction to the investor and more financial return to the Government.   This modality of lottery has a significant potential for commercialization in the Country.  The main global markets of this product are Italy, France, England and some North-American states, which served as reference for BNDES studies.

In Brazil, with the regulatory structure proposed in Law 13.155, it is estimated that the Instant Lottery will reach much higher levels of commercialization than it did until 2014, when it was commercialized exclusively by Caixa Econômica Federal. Besides, the concession will generate funds to the National Treasury and to States and Municipalities by means of taxes to be gained in the concession of the right of exploration, the concession value and taxes destined to the legal beneficiaries.
The Treasury Department also proposes to PPI Board the inclusion of Mint in the PND. The Mint presents, like other state-owned companies, financial difficulties.  From the economic-financial point of view, in the short term, considering the cash flow projection for 2017, it is estimated a deficit in the end of the fiscal year. Preliminarily, two possible solutions were identified:

• Need to contract Long Term Credit Operation (superior to five years), which would yield expressive growth of the company indebtedness;
• Allocation of funds from the National Treasury to support the company’s activities, which would make the company dependent and would increase the Union expenses, in a scenario of fiscal restrictions.

The two alternatives do not adjust to the fiscal endeavor, reason for the proposal of inclusion of Mint in the PND.

The Ministry of Agriculture and Food Supplies brought the proposal of retaining the privatization process of Companhia de Armazéns e Silos do Estado de Minas Gerais (CASEMG) and CEASAMINAS. With this retake, the studies will indicate the best privatization model for both cases.

Retake of economic activity and investment partnerships

The boldness to conduct reforms starts to be rewarded. The consolidation of fiscal adjustment is providing ground to the economy advance. Inflation retreated and is below the goal core, which has allowed more expressive cuts in interest rates, which, after a long time, left the two-digit place. With lower interest rate, cash generation in companies grow and investments are being retaken.   

It is clear the reason for holding more than one meeting of the Board in this moment: to keep on advancing towards the increase of economic productivity, increase in the rates of use of the industrial capacity, job and income generation.

In this scenario, investment partnerships will play a fundamental role. In addition to the entry of incomes, concession will generate investments in sectors like oil & gas, energy, roads, airports and ports, which will strongly drive the economic activity. Oil wells under development, for example, generate jobs, taxes and royalties, and are also important to States that saw their accounts deteriorate with the sector retraction. 

We will count on almost thirty projects delivered in the second semester 2017, which will make PPI reach almost 80 contracts signed by the end of the year. The confidence of investors, including foreign investors, is very high; a fact that has been noticed in auctions already held and due to the increase in direct foreign investment stock. 
The improvement of the infrastructure will contribute to the increase in productivity. 

 We will have the largest cycle of port and railway investments in recent history, considering, for example, crossed investments from anticipated railway concessions.  BNDES’s effort, on the other hand, towards the universalization of sanitation will change the sector profile in Brazil and will contribute to save resources and relieve the pressure on the health system.

With determination, Crescer Project adds to the reform efforts to assist in the retake of economic activity and generation of jobs in Brazil.

Source: PPI

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