More than a flicker: How streetlighting PPPs withstand the Rio Grande do Sul floods

The heavy rains and floods affecting Brazil’s Rio Grande do Sul state have caused shockwaves throughout society and politics, and are likely to change perceptions about infrastructure.

Yet, streetlighting PPPs, in place in four cities in the state, including capital Porto Alegre, remain a safe bet and may even help prepare for and prevent similar disasters.

Pedro Iacovino, president of streetlighting concessionaires association ABCIP, tells BNamericas how they may help, why they are resilient and what the floods will change.

BNamericas: Is it possible to get a current estimate of the destruction the floods in Rio Grande do Sul have caused?

Iacovino: The impact on the infrastructure of cities and people's lives is gigantic.

We have information from concessionaires operating in the cities of Rio Grande do Sul that the streetlighting infrastructure has not been severely affected, but there is no point in having streetlighting if everything else is damaged.

I saw images of Porto Alegre and Canoas, where there are current PPP contracts for streetlighting, where entire neighborhoods are underwater, but the streetlights are still working; it is a very dramatic situation.

I believe that these climate events that are affecting Rio Grande do Sul will have a long-term impact on that region. 

The population's level of awareness of extreme weather events in that region will change drastically, reaching that entire population and this will have an effect on the perception of and demand for infrastructure, but about which we still have no idea because nothing like it has happened in the country before.

We are not talking about a problem that occurred in a specific city; it is a problem that affected about two-thirds of a state and the lives and perceptions of all these people will completely change from what they were, for example, two months ago.

BNamericas: So what are the expected impacts in the streetlighting area?

Iacovino: We will increasingly think about solutions and projects that are more resilient to extreme weather events.

But before talking about streetlighting, I would like to draw attention to some ideas that are emerging that I believe we may have problems with in relation to urbanization of cities in Rio Grande do Sul.

I saw some suggestions being considered by the state government for the creation of temporary localities, to receive people whose homes were affected by floods and whose structure was compromised.

In the 1960s, Rio de Janeiro state had the idea of creating a temporary location to target the low-income population who lived in richer neighborhoods of the city, but in a precarious situation. This temporary location in Rio de Janeiro today is one of the largest favelas in the state, the Nova Holanda favela. 

We need public managers, both governors and mayors, before putting some ideas into practice, to try to understand the long-term effects of what they are considering.

Now, speaking more specifically about the streetlighting sector, I do have concerns.

BNamericas: What are these concerns?

Iacovino: First, it is important to say that I do not see legal risk with the current contracts; I do not see signs of breach of contracts. However, I do see budget risks.

Several municipalities, including part of the state capital, Porto Alegre, are still facing floods and this has a direct impact on the cities' economic activity and an abrupt drop in revenue.

Streetlighting PPP contracts have great legal certainty because the government's part in the contracts is guaranteed by the existence of the so-called contribution to the cost of public lighting (COSIP), which is a fee charged directly to consumers' electricity bills every month. 

Given the state of calamity in some cities, it is possible that they will try to relax some tax rules temporarily. I do think that it is possible that in many cities affected by floods, there is a need to reform short-term budget rules.

BNamericas: Are there medium and long-term risks for PPP contracts in that region?

Iacovino: I see this risk that I mentioned as limited to the short term. In the medium and long term, I see Rio Grande do Sul state recovering.

Furthermore, in legal terms, I see contracts established with great legal certainty.

BNamericas: How do extreme weather events impact the business model of companies that work with streetlighting?

Iacovino: The trend of increasingly extreme weather events is confirmed month after month. We are seeing the beginning of a trend and the solutions we call smart cities should gain traction. 

Within these solutions we are talking about public lighting and the use of these structures to install sensors that measure the volume of rain, the risk of flooding, the risk of landslides, the need for cities to activate drainage mechanisms. In other words, we will increasingly see more technology being added to contracts to help public managers adopt urgent risk mitigation practices.

Today we see what streetlighting contracts are: they are more sophisticated contracts, with more solutions included, with public lighting, connectivity, distributed energy generation, everything together.

We have two good examples in this sense, of solutions linked to the broader concept of smart cities, which are PPPs in the cities of Angra dos Reis, Rio de Janeiro state, and in Carmo do Cajuru, Minas Gerais state.

BNamericas: What are the expectations in the streetlighting sector for the coming months, considering the municipal elections in October?

Iacovino: Expectations are very positive for the coming months, with more auctions taking place.

Even though we have elections in October, the projects that are structured and ready to be offered should come up for auction without any problems. 

The election impacts projects that are still being evaluated, with local administrators focusing on the electoral process and leaving projects to be structured only to move forward after the election.

But June, July and August will be busy months for PPP auctions in the area of streetlighting. Today, we have more than 800 PPP contracts in the sector in the structuring phase.

BNamericas: Do you see changes in the financing mechanisms?

Iacovino: The main forms of financing continue to be the companies' own capital and financing from equipment manufacturers in the sector.

But we are starting to see financing through infrastructure debentures [local bonds] gain traction. There are around 10 contracts financed through infrastructure debentures.

There is a limitation of financing lines in the segment because financiers still see the fact that the contracts in the segment are with only one party, which is a city hall, as a relevant risk. But this risk perception will evolve over time.

Despite the October election, we see the discussions mature, public managers, of any political persuasion, have realized that public lighting PPPs are positive for cities. PPPs bring a 50% reduction in the fixed cost of energy and this has a direct impact on city halls' cash flow.

BNamericas: What other trends in the sector do you foresee?

Iacovino: In addition to several projected auctions, we will see a series of operations in the secondary public lighting market. That is, I expect to see several mergers and acquisitions.

More than 60 companies are operating in the segment and I believe that we will have between 25 and 30 in the medium and long term. 

Some companies that entered the market with very aggressive bids in the past may realize that it is not worth continuing and opt to sell that contract to another company, which can achieve more synergies.

We will see market consolidation and, in the next auctions, less aggressive offers from companies than we have seen in the past, with these companies better understanding the costs of the contracts.