Five years ago the International Finance Corporation (IFC) was helping structure three transactions in Brazil. Today, the organization is structuring 23 transactions and expects to sign 10 new mandates in the next two years.
This rapid acceleration of projects through P3 is emblematic of Brazil’s trajectory, and the rationale is a familiar one around the world.
“The main drivers are the fiscal crisis, the government does not have the resources to invest in rail, water and sanitation at the same time, and also if you compare the outcomes of the private sector provision of infrastructure in Brazil, they are usually quite superior,” says Bernardo Tavares, the IFC’s head of P3s for Brazil.
The combination of a proven track record and a clear need cannot be overstated. Tavares points to the transportation sector to prove his point, which in the last national survey noted that the best 20 roads in the country are operated by private concessionaires.
This well-trodden path is set to continue, with over half the next phase of projects to comprise transportation projects. However, alongside that the IFC has expanded into delivering street lighting, sanitation and social infrastructure. With such an impressive and diverse pipeline, delivering it will also be difficult.
“IFC has a very positive background in Brazil,” says Tavares. “Compared to other advisors, we are doing well.”
While keen to advertise the potential, Tavares is also pragmatic about the challenges facing the country. “There are issues in structuring PPPs in Brazil but we are managing them well. Currently the environment is becoming more complex; there are issues with inflation and also the upcoming elections.”
The federal elections loom large over the country, with the pro-concession Jair Bolsonaro, a divisive figure, set to battle it out to retain federal power. Alongside this there are also state elections, which are just as significant given that municipalities are often the signatories on P3 deals.
But Tavares is relaxed about any potential political change. “The outcome of the elections, depending on who gets in, we might get a different approach but for the traditional sectors I don’t think there will be much change because the fiscal space does not allow for much public investment in the short term. The traditional sectors would stay the same but there might be some ideological discussion for the new sectors like water and sanitation; the mindset may change on new sectors but not the traditional ones.”
However, while the rationale for P3s and concessions is likely to persist, the timelines for projects could still be knocked by election anxiety. “This year there will likely not be a lot of projects going to market but considering our portfolio, and others such as [Brazilian development bank] BNDES’s, for the next year and year after I believe the market will keep growing fast.”
Taking a long term view, attracting international capital will be critical in delivering the country’s ambitious pipeline of projects. Authorities across Brazil, the IFC included, are going to great lengths to court investors through efforts such as taking projects on roadshows and carrying out regular market soundings.
“There is a demand for international capital, especially international sponsors. This is one of our objectives: to attract new investors to the projects,” he adds.
But it is no small feat to get foreign players to be meaningfully involved. The Brazilian construction industry has had a torrid time for decades, with financial crashes, corruption scandals (which engulfed two sitting presidents) and repeated late-stage procurement cancellations due to political reasons.
All these have burnt foreign hands in the past, as Tavares admits: “It has not been easy to convince international players to come to Brazil.” Nonetheless, he remains optimistic: “It’s a work in progress but we are having victories.”
Tavares points to changes that have been made to transparency laws in states such as Sao Paulo, although he adds that bankability provisions in contracts and early termination provisions have room for improvement to reassure investors.
“The way we can influence the market is to create a new benchmark for the sector,” he says, highlighting work being done by the IFC on these topics.
Acknowledging and overcoming challenges and creating new standards for project delivery are certainly steps in the right direction, and recent wins have been coming, particularly with Singapore's sovereign wealth fund backing the Lote Piracicaba-Panorama highway concession, one of Sao Paulo’s flagship concessions.
The competition for international investors is fierce and Brazil’s continental neighbors are also taking impressive steps to bolster their pipelines and attractiveness to international investors. In some cases, relative newcomers to P3s in Latin America are evolving into independent, reliable partners without the need for multilateral assistance. As a prime example, earlier this year Colombia’s Norte Accesos 2 highway project became the first project to be structured entirely in-house by the Colombian infrastructure agency, ANI.
Brazil is not far behind in reaching these self-sustaining goals, which could help reassure financial investors.
“Brazil should be competitive,” Tavares says. “It depends on the sector but in the road sectors the country is closing the gap; the same in street lighting.”
The IFC is working with other advisors to create standardized project documentation to allow lighting projects to proliferate and give autonomous authorities the confidence to go it alone. Furthermore, Tavares says the water, sanitation, health and education sectors are also taking “the first steps in that direction”.
With more and more sectors utilizing P3s, advisors such as the IFC are diligently working to convert grand announcements into sustainable pipelines and attractive projects.
“I don’t think there will be 100 projects per year, but I think we are on the right path to consolidate the market in Brazil,” Tavares concludes. “I am optimistic.”