Andrew Greenup, Deputy Head of Global Listed Infrastructure at Colonial First State Global Asset Management (‘CFSGAM’), recently spent a week in Brazil visiting infrastructure companies, assets, regulators and government in Curitiba, Brasilia and Sao Paulo.
The research paper, Brazil: Corajoso e bonito or Brazil: bold and beautiful, provides an overview of Brazil’s infrastructure and the listed companies involved and looks at the future prospects for its toll road, airport and railway sectors.
Some highlights from the research paper
- Brazil is a big, geographically unique country with large infrastructure needs which must be met to enable it to improve its productivity and prosperity. Importantly, there is widespread acknowledgement that infrastructure development is part of the solution to the country’s social, political and economic challenges.
- Brazil’s infrastructure sector suffers from high regulatory, political and legal risks: a scandal-plagued, lame duck government; a Presidential election in 2018; uncertainty surrounding concession rebalancing, amendments and renewals; as well as a slow legal system. Offsetting these negatives are strong volume growth and high degrees of inflation protection.
- For listed companies, infrastructure investment in Brazil is a trade-off between strong growth prospects (both organic and inorganic) with higher than average risks.
Brazil’s toll road, airport and railway sectors
- Toll roads: Risks to traffic growth forecasts are now to the upside, given the depth of the economic depression Brazil has endured. It is widely accepted by federal and state governments that new toll roads are needed to improve economic productivity and prosperity with six new roads to be auctioned in late 2017 or 2018. In addition, financially distressed construction companies are expected to be forced sellers of assets over the next year or two presenting opportunities for listed companies to expand their market positions.
- Airports: Like most emerging markets, Brazil enjoys strong structural growth in its air travel market. Until 2012, Brazil’s airports were wholly owned by the federal government but given their rundown state and the large amounts of capital needed to upgrade and expand them, it has been embarking on an aggressive privatisation program. The government has sold 51 per cent stakes in nine airports over the past five years and opportunities for new acquisitions remain high for listed companies looking to take advantage of growth opportunities in the sector.
- Freight railways: Brazil has a very underdeveloped freight railway infrastructure sector. The country has three freight railway operators spread across nine concessions with all but one concession due to expire between 2026 and 2028. Given the difficult economics of these new lines no listed companies are expected to be involved. Improving the freight railway industry (with productivity improvements recycled into lower logistics costs for major export industries including grain and iron ore) is of material significance to the government.
- Passenger railways: Brazilian governments are increasingly turning to the private sector to fund new urban mobility projects (subways, light rails, monorails, ferries) for Brazil’s car-clogged mega cities. In 2006 Brazil used a Public Private Partnership (PPP) for the first time and today the country has five large passenger railway PPPs in various degrees of operation. Going forward these types of passenger rail PPPs should deliver reasonable return with relatively low risk for listed companies.