How Itaú foresees Brazilian infrastructure developments in 2021

Brazil’s infrastructure concessions agenda is likely to gain traction next year as the economy is forecast to pick up. 

The sanitation and highway segments are expected to offer major projects for investors, but certain risks persist.

BNamericas talks to Marcelo Girão, head of project finance at Itaú BBA, the investment arm of banking giant Itaú Unibanco, about risks and opportunities in 2021.

BNamericas? What is your expectation for the business environment in Brazil for 2021?

Girão: On the economic side for this year we’re projecting negative growth of 4.5% and for next year positive growth of 4%.

The recession this year was not as bad as was being projected at the start of the pandemic, in the months of April and May, and that’s good news.

Now for 2021 we have to consider that the optimistic scenario of growth of 4% will also depend on the maintenance of fiscal discipline in Brazil. We have a government agenda that’s somewhat stalled this month, because of the municipal elections, but once the elections pass, we need to resume the agenda of fiscal discipline.

BNamericas: What can we expect for infrastructure?

Girão: In general, major infrastructure projects were postponed to 2021. The schedule for auctions was changed because of the pandemic and many will be held next year.

Talking about sectors, airports, which is one of the sectors most affected by the pandemic, has auctions planned for concessions in both the sixth round and the seventh round next year. The good news is that even though it’s a very affected sector, the plan to hold the auctions was maintained.

Two areas that I see as a major highlight for next year in terms of auctions are highways and sanitation.

The railroad industry may have interesting news with the development of projects such as FIOL and Ferrogrão.

In the area of energy, we have no auctions this year, so some auctions are expected for next year. We'll only have the transmission line auction in December.

In general, despite seeing the postponement of auctions to next year, the infrastructure ministry managed to move forward on the agenda, approving processes at the TCU [audit court], and advancing the bureaucratic side of the projects.

Also this year, even during the pandemic, we had the approval of the new regulation for the sanitation sector, which was important for a resumption in auctions in this area. 

Next year, the recovery of the economy will be very much based on the infrastructure sector. There are also interesting developments related to the opening of the gas market.

There’s a positive expectation but we also have to remember that it won’t be a totally tranquil year, we still have the effects of the pandemic, there’s the possibility of a second wave of cases, and we still have to overcome the effects of the pandemic, which is likely to only happen with a vaccine.

Besides, there’s one important factor that we have to mention on the macroeconomic side. In the first quarter of next year, we’ll no longer have the effects of emergency aid paid by the government to low-income families, so we can expect an increase in the number of unemployed and also some effect on people's indebtedness, but the financial sector is provisioned to cope with that.

BNamericas: At the start of the pandemic, with the dramatic drop in demand in various infrastructure areas, there was a fear of widespread breaches of contracts, including concession contracts. How do you evaluate the issue of legal security in Brazil during the pandemic?

Girão: We went through some scary situations, we had some disputes involving the government in some localities, even with some weird decisions, which caused some discomfort for investors.

Investors who have been in Brazil for a long period have not been so scared, they understand the dynamic better.

In a positive way, we’ve seen signals from the federal government that it was open to discussing and adjusting contracts for those sectors hard hit by the pandemic. That helped improve perceptions.

BNamericas: You mentioned as positive highlights next year the sanitation and highway sectors. Could you expand on that?

Girão: The auction of [Rio de Janeiro water utility] Cedae is long awaited by market participants, because it involves dozens of billions of reais in payments and capex. There are investments of a spectacular magnitude and the auction is being well structured by [development bank] BNDES, which has talked to all stakeholders. This, without a doubt, will be the most awaited auction in the sanitation area in 2021.

Regarding highways, there are some auctions planned and my highlight is the Dutra auction [the highway between Rio and São Paulo].

Specifically about Cedae and Dutra, we’re working with investors who want to participate in these auctions.

BNamericas: In general, what kind of investors are likely to look at infrastructure assets?

Girão: In the area of sanitation, companies that already operate in the segment, which we call strategic operators. But there’s also the possibility of new entrants in the sanitation area, like concessionaires in other segments, such as CCR and Equatorial, as they’ve already said they’re interested in the segment as well.

The foreign investor is likely to be a little more cautious before entering the sanitation area because they prefer to wait a little while to see if the new sanitation framework will work.

In terms of highways, where we’ve consolidated rules, we see financial investors as being significant, for example, currently Patria is already one of the largest road operators in the country.

Railways are still a sector that I don't see as so clear. We didn’t have auctions for many years, we need to see which kind of investors are going to be more interested in FIOL and Ferrogrão. The trend is that it’s more attractive for companies that already operate in the logistics area. 

The energy sector is more dispersed. As the free power market will open up, with more customers accessing the free market, there’s a wide variety of developers looking for renewable energy and gas thermoelectric projects. In distributed generation there’s enormous diversity.

In the port sector, auctions are more dispersed, in general they are strategic players, verticalizing logistics, looking at the segment. BR do Mar, which is a bill that is linked to the port sector, tends to expand cabotage in the country. But port projects adopt more the model of corporate finance and not project finance.

For airports, I see interest from airport operators, as well as in the urban transport sector, where we recently saw Acciona taking on a major project in the São Paulo subway. 

BNamericas: With more positive expectations for next year, is the bank increasing its project finance area?

Girão: Today we have a team of 13 professionals and if there’s greater demand for projects, we can quickly increase this team. In the past decade, we had more than 20 people working in this area, then that number dropped, with the reduction in projects. In recent years we started to expand the team again.

BNamericas: What is the highlight of the 2021 legislative agenda for the area of infrastructure?

Girão: There are a series of measures, bills in progress that will move forward, that will improve the business environment. I would highlight projects in the area of modernizing infrastructure debenture rules and also the new concession law.