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.

Read the full research paper.

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Andrew Greenup

Colonial First State Global Asset Management’s (CFSGAM) Global Listed Infrastructure team has marked their 10th anniversary by releasing a whitepaper, ‘Past, present, future’, reflecting on the last decade of investing in infrastructure via listed securities.

The paper, authored by Andrew Greenup, deputy head of Global Listed Infrastructure at CFSGAM, reviews:

• The performance the asset class has achieved for investors over the last 10 years;
• The steady increase in investible assets;
• Major trends that have affected global listed infrastructure;
• The main themes that will impact the sector over the next decade.

Some highlights from the report:

• Over the last decade, the global listed infrastructure securities (GLIS) asset class has generated returns of 9% p.a. with a standard deviation of 11% p.a. This compares favourably to global equities (6% p.a.), global property securities (3% p.a.) and global bonds (8% p.a.)
• Growth in investible assets has come from three main areas:
  • Corporate restructurings: In the lower growth world post the GFC, companies have increasingly looked to streamline and optimise their capital structures and this has often led to the divestment of their highly valuable infrastructure assets. Key examples in the paper.
  • Government privatisations: Significant rise in government debt post the GFC combined with increased spending on healthcare and social security, has led governments to dispose of high quality infrastructure assets to help maintain financial stability. Key examples in the paper.
  • Equity needed to grow existing infrastructure businesses: Listed infrastructure companies have issued large amounts of new equity over the past decade in order to grow existing asset bases while maintaining balanced capital structures.
• Key trends over the last decade include: resilient and growing earnings streams despite the GFC and subsequent sluggish economic recovery; high degree of structural, rather than cyclical, growth over the past decade notably the growing viability and expansion of renewable energy, airport passenger growth (2.6x global GDP) and mobile tower and small cell infrastructure to support society’s increasing demand for mobile data.
• Key issues that will impact GLIS over the next decade include: increased fund flows into GLIS due to increased demand for low volatility, income producing assets as baby boomers begin to draw down their retirement savings and put a greater emphasis on capital preservation; rising economic nationalism and de-globalisation has the potential to increase political and legal risks; potential disruption to infrastructure business models posed by the rollout of 5G, 3D printing, growing take-up of electric cars and autonomous vehicles, among others.

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