Brazil’s privatization drive should attract investors | KPMG | GLOBAL

Brazil’s latest privatization drive should prove attractive to investors

Brazil’s privatization drive should attract investors

Brazil’s government has announced a sweeping privatization drive that includes the country’s largest power generation utility and potential investors will no doubt be turning their attention to this.

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Brazil’s government has announced a sweeping 57-project privatization program that includes everything from the country’s mint to its state lottery and largest power utility. Potential investors will no doubt be turning their attention to this comprehensive package of assets being tendered in the fourth quarter of 2017 and in 2018.

Brazilian President Michel Temer’s goal is to raise critically needed revenue and boost infrastructure investment at a time when Latin America’s largest economy is struggling to escape a deep recession. As a result, Brazil has announced to put on the auction block an array of 57 federal projects through the government’s Investment Partnership Program (PPI). The goal is to raise a total of R$40 billion or about $US12.6 billion in fees and R$44 billion or about $US13.9 billion in future infrastructure investments.

The package of major Brazilian assets, which should provide interesting opportunities for the right investors, includes:

  • Divestment of six state owned assets:
    • Eletrobras – the national power generation, transmission and distribution company;
    • Casa da Moeda – national mint company;
    • Lotex – national electronic lottery;
    • CODESA – Espirito Santo State’s port area;
    • CEASAMINAS – Minas Gerais State’s agricultural products distribution center;
    • CASEMG – Minas Gerais State silo and warehouse.
  • Concession of two highways;
  • Concession of 14 airports;
  • Concession of 15 port terminals;
  • Concession of one brownfield hydro power plant;
  • Concession of 11 greenfield power transmission lines;
  • public-private partnership of the air force’s Integrated Communications Network;
  • Four rounds of auction for offshore and onshore oil exploration areas.

Eletrobras and Lotex among assets on block

Key assets among the privatization initiative include the Brazilian mint Casa da Moeda, the state-owned electronic lottery Lotex, São Paulo’s domestic airport Congonhas – the second-largest airport in Brazil – and a controlling stake in Eletrobras, the largest power generator in Latin America.

The proposed move to privatize Eletrobras involves divesting the government’s controlling stake to modernize the state-owned utility and increase its efficiency and competitiveness. The privatization of the utility is also expected to benefit the industry overall by attracting long-term investment and enhancing transparency. The government currently is the majority shareholder in Eletrobras with a stake of 51 percent. Brazil expects to raise R$20 billion or US$6.3 billion by offloading its holding and hopes that the privatization will be completed by the end of the first half of 2018.

The entire package of assets being offered comes just at a time when the country’s troubled economy has been slowly recovering, with improved GDP numbers this year and an outlook for slow but continued economic progress. Brazil’s economy contracted by 7.4 percent in the past two years and the government is struggling to manage soaring budget deficits. Strapped for revenues, Brazil’s government recently announced it was increasing the nation’s budget deficit target in 2017 from R$139 billion to R$159 billion while continuing to slash its costs.

Package should attract investors

This latest initiative contains a significant new group of assets up for sale and beyond the huge potential benefits to the government, it could generate considerable interest among investors in both the domestic and international markets.

That said, the success of this ambitious program will present challenges for Brazil’s government, which has failed to attract significant international investment interest in recent years. Brazil’s PPI has been a positive recent initiative by the new government to lead privatization opportunities and enhance the confidence of the marketplace and it will no doubt continue to play a key role in generating valuable new opportunities and attracting domestic and international investors.

But this program’s success will depend on the government’s ability to continue adjusting project structuring to attract international investors. While we have seen some progress thanks to PPI, additional changes are required to make deals more attractive in a market that has been dominated by domestic players. This includes: project structuring, project financing, and clarity on variations and termination.

With a more strategic approach, this latest ambitious offering from Brazil’s government holds interesting opportunities for success.

 

This article is part of the Foresight series; a collection of easy to read, short insights into trends and issues facing the infrastructure industry. Read other recent Foresight articles here.

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