Under the radar of international capital
The agents’ movement around the infrastructure chain shows a detachment with the economic and political scenario; the projects integration in the three spheres of government and new regulation and financing models signal progress perspectivesJuly-September | 2017
On one hand, an economy that is only at the beginning of a long recovery process. On the other hand, private investors (local and foreign). In the middle, large and well known infrastructure gaps, which could otherwise generate good business opportunities. The private sector and the public authorities should side by side perform this crossing in Brazil, but, to do so, it is necessary to think in more effective and attractive relationship models.
Deloitte and ABDIB talk about the perspectives for infrastructure in Brazil
It is a consensus that changes in development projects and in investment stimulus should include more intelligence in the formatting of projects offered, more assertiveness in managing contracts and regulations, more legal stability and economic and financial security for potential investors.
The infrastructure segment, like virtually all others, has been suffering with the crisis. If, in 2014, the total invested in the sector amounted to 2.4% of GDP, in 2016 this percentage fell to 1.7%. The executive president of the Brazilian Association of Infrastructure and Base Industries (ABDIB), Venilton Tadini, put it in context: “There are already contracts signed that are facing economic, financial and environmental obstacles. On the other hand, there are still few well-structured projects ready to be offered in auctions.”
The situation, Tadini believes, should be reversed with the changes brought by the Investment Partnerships Program (MIP) from the Federal Government and by the formatting of new long-term financing models offered by public banks, with expanded participation of the private financial sector. “We see improvements in mechanisms and rules that will make full use of the available financing sources. But still it is necessary to increase the quality of studies and projects and also adequately distribute the risks between the parties involved in the concessions.”
The establishment of a regulatory framework on concessions and contracts is important and still needs to be completed. However, there are other more pressing issues, according to Elias de Souza, Deloitte’s director for the Infrastructure and Public Sector. “From the investor’s point of view, especially the foreign investor, there is a need to demonstrate legal security and guarantees for the agreed rules” he opines, noting that countries in Asia, Europe and the Middle East have shown interest in investing in Brazil. “Another issue is the exchange rate. The investor doesn’t want to cope with market fluctuations, which can be quite large. These possible economic imbalances should be set out in contracts, so that no one will feel damaged – neither the Government nor the companies.”
To ensure contributions in infrastructure, there is a need to demonstrate transparency of actions, legal security and guarantees in relation to market fluctuations., Elias de Souza, Deloitte's director for the Infrastructure and Public Sector.
The Deloitte’s director points to the diversity and quantity of infrastructure projects in development in the three spheres of government. “It is good to see that the Government has summoned specialists and external consultants, as well as representatives from several sectors of the economy, to support it in designing and structuring new projects”, says Souza. “Regulatory agencies, ministries and BNDES have also participated. It is a structural change. It is the Government allowing the society’s participation.”
Other experts confirm the need to review, broadly, the approach to promote private investment. “We still fail in the project structuring. It is an area that requires discipline. We can learn a lot from the experiences of European Union countries, Canada and Australia” says Armando Castelar Pinheiro, coordinator of Applied Economics from the Brazilian Institute of Economics of Fundação Getúlio Vargas (FGV).
This opinion is shared by Rosane Menezes Lohbauer, an attorney with extensive experience in formatting concession projects and PPPs. “We already have a good set of legal norms, which address old bottlenecks such as rebidding and concession extensions. What needs improvement is project shaping” says Rosane. “The old model, with all the investment under the public authorities, has run out. There is a lack of training in the public sector to account for the projects’ complexity, which include construction, operation and maintenance, all that with an increasing participation of private investors.”
“The important thing is to bring more governance to the whole process, towards the development of clear and objective State’s public policies, about each one of the infrastructure segments”, says Eduardo Bernini, founder of the Tempo Giusto consultancy and former president of AES Eletropaulo, in addition to being a member of the board in several electric energy concessionaires. “There’s a lack of commitment in the definition of these topics, which brings instability and wards off the investor and also damages the public authorities. The public policies on private investment in infrastructure need to incorporate quantitative and qualitative assessments about the projects and the management of potential risks.”
In addition to the previous establishment of legal guarantees and deadlines, the new investment opportunities must clearly define the financial mechanisms involved. In this sense, says Castelar, from FGV, the Federal Government’s PPI and the creation, by BNDES, of the Fund to Support the Structuring of Partnerships (FAEP) are encouraging news. “Financing for infrastructure projects will always reflect the risk involved in the venture. With the extension of deadlines, it will be easier to securitize the receivables and reduce the risks for both the BNDES and investors.”
“The greater alignment between the private sector and the government will bring productivity gains and more investment” believes Hugo Ferreira Braga Tadeu, a professor and researcher from Fundação Dom Cabral in the area of innovation management and entrepreneurship. “So far, the public and private agendas have been on opposite sides. A new promotion model must overcome enormous challenges of governance and investment prioritization.” The infrastructure sector’s attractiveness will only increase, according to Tadeu, with the consolidation of five basic factors: “Political stability, public transparency, long-term strategy, strict control of public spending and, of course, demonstrations of increased productivity.”
New development models
Examples of the new paradigm are underway in capitals like Belo Horizonte, where, in 2011, a corporation (PBH Ativos S.A.) was created to support the investment projects and municipal PPPs. The Minas Gerais capital’s Finance Secretariat provides regular accountability of the partnerships’ results and progress. The service order for the public lighting PPP was signed last May and includes specifications on deadlines, network modernization goals and detailed projections of costs and returns. “It’s a more innovative format” says Elias de Souza.
The State of São Paulo presented another innovative case when preparing, in an unprecedented initiative in the country, a dataroom with information in English regarding the state highways concession. Published on the internet, the data compilation attracted the attention of more than 140 potential foreign investors, including interested parties from Spain, Portugal, Italy, France, China, South Korea and Middle Eastern countries. The notices offered also bring more favorable financing conditions, geared to different investor profiles, and the forecast of tripartite contracts, with responsibilities shared by concessionaires, financiers and the granting authority.
Another innovation included in the model applied to São Paulo highways – and also adopted within PPI, in the recent concessions in airports – is the provision of currency protection mechanisms. A structural obstacle to the entry of foreign investors, the instability of real against the dollar, could be balanced with funds from the payment of variable grants, according to predefined rules. “This project format divides the currency risk between the investor and the public administration. If real suffers a devaluation above a predetermined threshold, the grant amount to be paid by the investor drops at the same rate” says Rosane Lohbauer.
Social infrastructure in health
Campo Limpo is one of the regions of São Paulo that most suffer from the lack of urban infrastructure. However, since 2014, residents rely on a Ready Service Unit (UPA), which, equipped with 11 offices and 38 beds, can perform more than 100,000 clinical consultations and other 50,000 pediatric assistances per year.
The UPA Campo Limpo’s (the first unit of this type in São Paulo) operation is made possible by an agreement between the Albert Einstein Brazilian Israeli Charity Society and the City Government. This partnership is just one of the ventures carried out jointly by Einstein and the Municipal Health Secretariat, and includes other health equipment in the capital’s South area.
It is a successful example of private investment in the so-called social infrastructure, with direct impact on the quality of life of the population. Implemented by City and State governments (either directly or in partnership with private entities), the UPAs are part of the National Urgency and Emergency Policy, launched by the Ministry of Health in 2003.
“Public-Private Partnership projects can provide good results to the community and ensure improvement in the service to the population with basic health and prevention, offers of secondary health and different specialties, including those of high complexity” says Dr. Israel Szajnbok, medical manager of the Assistance Units of the Albert Einstein Israeli Social Responsibility Institute.
“We are able to offer new technologies transfer projects, management experience and professional training to the SUS network” says Denise Santos, CEO of Portuguese Beneficence of São Paulo (BP), another institution that participates in the Program to Support the Institutional Development of the Unified Health System (Proadi-SUS), created in 2009 by the Ministry of Health to incorporate (human and material) resources from private entities to the SUS units.
In the 2018-2020 triennium, BP intends to mobilize its clinical staff in the preparation of projects to be evaluated and adopted by the Ministry of Health, with a focus on oncology, cardiology and neurology specialties. In addition, the institution maintains an exclusive unit for direct assistance to the population (the Penha District Philanthropic Hospital, in São Paulo), that – through a contract with the City Government – receives patients referred by the SUS. “We can bring some of our excellence to the public system, either through knowledge transfer or providing innovation in the management of public units’ management” believes Denise.
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