$100bn forecast in new investment following privatization of infrastructure assets for highways, railways, ports and airports

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1 Everywhere you do business $100bn forecast in new investment following privatization of infrastructure assets for highways, railways, ports and airports For information on doing business in Brazil, please contact: Brazil s new boost for infrastructure development Brazil is set to receive an unprecedented supply of new and upgraded infrastructure assets over the next decade as a result of an ambitious pipeline of privatization and public-private partnership projects announced by both federal and provincial governments across Brazil. In 2012, the Brazilian federal government announced new investment and regulatory reform expected to generate $250 billion in new investment from construction and operating contracts for federal highways, ports, railways, airports, energy generation and transmission and urban mobility projects. At the same time the Brazilian government is also developing Brazil s capital markets by cutting taxes to incentivize alternative private financing for infrastructure projects. While doing business in Brazil is notoriously complex due to a high tax burden compared to other emerging markets, the presence of competitive local players, high tariffs for imported goods, national content requirements and other non-tariff barriers, there are nevertheless compelling opportunities for well-prepared Canadian companies and investors in Brazil s infrastructure sector. Investment in Logistics Program On August 15, 2012, Brazil s President Dilma Rousseff unveiled her administration s policy to upgrade Brazil s transportation and logistics infrastructure, called the Investment in Logistics Program (or PIL according to its acronym in Portuguese). The quality of Brazilian transportation infrastructure has suffered from limited public or private investment since the 1970s. The World Economic Forum s Global Competitiveness Index for (table below) ranks

2 Brazil well behind its emerging market peers and far behind Chile, Latin America s regional benchmark for quality of transportation infrastructure. As Brazil recovered from a series of sovereign debt crises in the 1980s, successive governments since 1995 have focused Brazil s growth model on bringing large swathes of the population out of poverty into an emerging middle class, ensuring a consumer-driven economic model, but improvements in infrastructure and transportation logistics in particular have not kept pace with such growth. President Rousseff's new investment in transportation and logistics is a timely and much-needed effort to rebalance Brazil s growth model to ensure greater efficiency for merchandise trade and domestic commerce. The Brazilian federal government is already investing in infrastructure upgrades through its flagship Accelerated Growth Program (PAC), created in 2007, totalling $67.2bn in public funds over the period The aim of the new PIL program is to incentivize private investment in transportation and logistics infrastructure by offering concessions and other means of private sector involvement (such as public-private partnerships PPPs) for the development of Brazil s infrastructure nexus. Opportunities in intermodal logistics: rail and highways The first phase of the new program focuses on federal highways and railway infrastructure. Privatization of assets in these two sectors is expected to generate R$133 billion (approximately $66bn) in new investment over a 25- year horizon, with the majority of funds to be disbursed in the first 5 years ( ). Approximately half of the projects that will benefit from privatization involve upgrades to the existing brownfield network. Investment will be accompanied by regulatory overhaul to ensure joined-up planning and integration of infrastructure networks to ensure greater efficiency in transporting goods and cargo from commodity sources (such as soy fields in Western Brazil and iron ore mines in the North) via port and rail corridors to the ports for export to foreign markets. Of the R$133bn in new infrastructure, R$80bn (approximately $37.1bn) will be deployed between 2013 and Total funds will be divided between 7,500km of highway (R$42bn R$23.5bn in the next five years) and 10,000km of rail track (R$91bn R$56bn in the next five years). Brazil s transport matrix is unbalanced considering the size of Brazil (fifth-

3 largest country in the world by area and population). At present, approximately 60% of freight in Brazil is transported by road and only 25% by rail compared to 46% rail use in Canada. The goal for the Brazilian government under the new investment program is to increase the share of freight transported by rail, including by incentivizing new logistics operations such as intermodal connectivity and inland customs warehouses, as well as upgrading and expanding existing rail assets. Since being privatized in the mid-nineties, Brazil s rail network has suffered from a lack of investment, so the new investment program represents a major shift for the sector. As of 2011, 95% of Brazilian railways were under concession to the private sector, with most of the operations controlled by commodities and industrial companies (5 private groups and 2 state-owned companies). Rail There is a rough 50/50 split between greenfield and brownfield projects in the rail concessions package. The highlight in the rail package is a transition to an Open Access model, where construction and operation of the railways will be kept separate from users via the intermediation of VALEC (a stateowned corporation, currently involved in construction of new rail tracks). The new model will see construction companies tender for the right to construct and operate stretches of rail track, with VALEC purchasing transportation capacity from the winner of the tender (greatly minimizing risk of return on investment for the constructor) and then selling user rights to rail transportation companies on the open market. Brazil s overland transport regulator (ANTT) in early September 2012 also introduced new rate ceilings for companies charging access to the tracks, with further rate reductions possible in the near future. Such moves are designed to incentivize greater competition in rail transportation, including new entrants to the sector. Within the rail package are new bypass tracks around Brazil and Latin America s largest metropolis, Sao Paulo (Ferroanel), as well as improved access to the ports of Santos, the busiest container port in Brazil, and other major port complexes including Vitoria, Suape, Rio de Janeiro and Rio Grande.

4 Highways The Brazilian federal government will auction nine road concessions (consisting mainly of brownfield projects) in Among the initial concession tenders are the BR101 in the Northeastern province of Bahia, the BR116 highway in Minas Gerais and the BR040 from Minas Gerais to Brasilia. Ports On December 6, 2012, President Dilma Rousseff announced that Brazil s maritime and inland waterway ports will receive $26.1bn in new investment as a result of a new regulatory framework for the sector and the decision to licence out operations to the private sector. Incentivizing participation by the private sector is the key component to the ports package, with the government due to begin awarding operating licences based on a concessions model in During the first half of 2013, the federal government hopes to licence 10 port areas to private ownership in the Port of Santos (Brazil and Latin America s biggest by container traffic), situated on the coast of Sao Paulo State; and the Port of Belem, which sits at the mouth of the Amazon River in the north of the country and is a major port for minerals exports and manufactured goods from the inland Amazonian industrial cluster in Manaus. The ports package targets a total investment figure of R$54.2bn (approx. $26.1bn) in new investment for ports, to be divided into two tranches: R$31bn (approx. $15bn) will be spent by 2014/15 and the remaining R$23bn (approx. $11bn) in 2016/17. An additional top-up of R$6.4bn (approx. $3bn) from the public coffers of the federal government s Accelerated Growth Program budget will supplement private investment, with the latter funds targeting port access infrastructure (including dredging operations). The focus of the ports package is to increase the volume of cargo that passes through Brazil s ports. To achieve this objective, the ports

5 package aims to (1) centralize planning in the Ports Ministry in Brasilia and (2) remove barriers to access both physical and in terms of investment. Regarding physical access, the ports package saw the launch of the Second National Dredging Plan, which will use studies developed by the National Institute for Oceans and Waterways Research (INPOH) to guide the dredging plan. The government s objective is to carry out dredging only once every 10 years. On the investment side, the government has removed obstacles to greater container traffic flow through ports, including allowing concession-holders in private terminals to handle third-party cargo. Airports The Brazilian government has already privatized three of Brazil s largest airports, including the country s largest international airport in Sao Paulo (Guarulhos), a major cargo airport in Campinas, an important industrial centre near Sao Paulo (Viracopos) and the country s third-largest airport in Brasilia, the national capital. The government intends to auction two more major airport hubs, including the international airport in Rio de Janeiro (Galeão) and Belo Horizonte (Confins) towards the end of A regional aviation plan has also been agreed, which includes investments amounting to R$7.3bn to develop 270 regional airports in Phase One of the plan. Ultimately 700 regional airports are earmarked for development.

6 Financing Attractive financing conditions have been made available from Brazil s National Development Bank (BNDES), which will offer 65%-80% potential leverage at the BNDES Long-Term Interest Rate (TJLP) currently 5.5% - plus up to a 1.5% spread with a 3-year grace period up to a 20-year financing horizon. Brazil s Finance Ministry has also been working with the BNDES to develop Brazilian longer-term capital markets, mainly through tax incentives to stimulate investment by local institutional investors (such as Brazilian pension funds) in infrastructure bonds. Furthermore, the federal government has exempted infrastructure bonds from Brazil s financial transaction tax (IOF) and income tax (IR) to incentivize private financing in infrastructure projects considered as a priority by the government. Opportunities for Canadian business The new infrastructure investment will include public funds disbursed by the National Development Bank (BNDES), but construction and operation of the assets will be granted on a concession model and some PPPs. On the supplier side, there will be demand for equipment, machinery, professional labour, planning and execution know-how, logistics services and companies to carry out the construction operations. Brazilian companies are likely to be strong competitors in the construction tenders and funds granted by the BNDES often come attached with local content clauses in equipment and machinery procurement, there will nonetheless be opportunities for wellprepared Canadian suppliers for goods and services, especially through integrating with Brazilian supply chains and partnering with Brazilian companies active in the transportation & logistics sector. On the private equity and debt investment side, there are opportunities for institutional investors and companies interested in mergers and acquisitions. In 2012, out of the top ten publicly announced M&A deals, six were in infrastructure.

7 Everywhere you do business The Canadian Trade Commissioner Service (TCS) can play a pivotal role by facilitating Canadian clients investments in foreign markets. The TCS will help you access your options in the local market and provide an honest and informed opinion so that you can evaluate prospects before committing more resources. This may include advice to investing abroad, insights into emerging trends, indications of major barriers to investment, an overview of the regulatory landscape, lists of qualified contacts who have local knowledge to help you refine and implement your investment strategy, and suggested next steps. Whether you have a small or large company, or are new or experienced in foreign markets, the Trade Commissioner Service can help you prepare for the challenges of investing abroad. Disclaimer: The purpose of this market intelligence report is designed to assist Canadian businesses and investors in assessing opportunities in Brazil. The report is compiled based on primary and secondary sources. The Trade Commissioner Service (TCS) or the Department of Foreign Affairs and International Trade (DFAIT) recommends that Canadian businesses and investors secure local legal and market advice before making investment decisions. No liability is accepted by the TCS of DFAIT for any loss or damage which may arise out of in or connection with this Report. TCS and DFAIT do not necessarily endorse the organizations listed herein. commerce.br@international.gc.ca