What it takes for subnational PPPs in Brazil

 

Brazil was one of the top five investment foreign and domestic private flows destinations for 2017.  Nonetheless, foreign flows towards the country through Public Private Partnerships (PPPs) and concessions have sharply declined, from US$59.2 billion in 2012 to US$7.3 billion in 2017, according to World Bank latest  PPI Annual report.

What to do to regain the levels of 2012?

So far, the focus of investments has been in the renewable energy sector in Brazil, but there is another area where PPP seem sub-utilized and there are a lot of possibilities, especially at subnational level: transport sector. So what are the main hurdles to PPP development?

These and other questions where discussed last June in a workshop organized by the World Bank Group in São Paulo, with representatives from several states and regional capital across Brazil. The key impediments echoed the findings of the IFC/BNDES report on Structuring PPPs and Concessions in Brazil. Let’s pick up the three critical ones.

• First, the need for a bankable and operational pipeline of projects. Good projects are complex to develop and, often, city size and capacity is an issue. While biggest cities wouldn’t face issues in attracting investors, what about the 4,000 or so municipalities with less than 20,000 people? Such municipalities don’t have the capacity, in human and financial resources, to develop complex PPP projects. In this context, many subnational governments have resorted to the unsolicited proposals process (PMIs), often more self-serving for the developer than in the public interest – unrealistic “Black Friday” proposals, as one of the workshop participant put it. Yet, initiatives to promote better and bankable PPPs have materialized over the past two years.
• Second, the need for a better market structure. In the transport sector, project finance in its true sense has yet to be achieved in Brazil. Reluctance from banks to provide limited / non-recourse financing results partly from project preparation shortcomings and partly from large public banks having crowded out the market. This may well change soon, as BNDES intends to change the way it finances infrastructure, leaving further space for commercial financing. Although signs show that the situation is already changing, local capital markets are insufficiently used for infrastructure financing. Most debentures are indexed to the short-term floating rate (CDI), which makes financing long-term assets more difficult. Therefore, Brazil’s sizeable institutional investor base is not yet making a significant contribution to the financing of infrastructure.
• And third, a dichotomy between legal security and political influence. While political will and championing is essential for PPP to materialize, PPP contracts that will go across several city administrations (and, possibly, several parties ruling) are to be safeguarded from political influence. Rather, a strong and clear regulatory framework is essential to give confidence to investors on the long run.

There’s no magic wand solution to address these complex issues.  Yet, options exist to strengthen subnational governments to develop sound PPPs and reduce project risks to attract investors. The World Bank guarantee instruments can help mobilize long-term financing for subnational governments by mitigating credit risk and attracting new investors.

Bank operations, such as the Mato Grosso do Sul road transport project helped develop the State PPP unit and train its staff. At transaction level, the São Paulo highway concession structuring exemplifies the support that the IFC can provide to prepare successful deals.

From the field

Beyond discussing issues and solutions, many concrete experiences were shared. 

Together with several initiatives in the social sector and street lighting, the Belo Horizonte municipality focused on the Estação Barreiro PPP, a transit-oriented development for a bus terminal busy with 79,000 passengers per day.
The State of Bahia presented the double guarantee mechanisms to encore PPP partners are paid on time. Was also presented the BA-052 “concessão administrativa”, currently under bidding process and one of the few PPPs in the road sector in Brasil.

Finally, the São Paulo city government detailed its ambitious “Plano de desestatização “, covering more than 60 PPP projects and including, in the transport sector: Bus Rapid Transit, public transport integrated farecard system, intelligent traffic light systems and parking investments.

Ideas are burgeoning and energies are being mobilized. Knowledge is being build and increasingly shared among practitioners – the PPP network and human capacity development in are instrumental in that.

Good financing is getting ready for upcoming good projects!