What investors need to know ahead of Brazil's US$8bn highway auctions

Brazil will likely hold five auctions for highway concession contacts in the remainder of this year. Of this total, three will be offered by the federal government and two by São Paulo state.

The five contracts involve investment expectations of 45.7 billion reais (US$8.16bn) during the 30-year tenures, but with most of the works and investments set to take place in the first few years of the contracts. 

Alberto Sogayar, a lawyer specialized in infrastructure contracts and a partner at law firm Sogayar e Alcântara Advogados, as well as former lawyer at Odebrecht Engenharia e Construção, Construtora Queiroz Galvão and other sector companies, speaks to BNamericas about the expectations for the bidding processes.

BNamericas: What are your expectations for the auctions?

Sogayar: I'll start by talking about where I believe there are problems. I see a lot of difficulty regarding the concession contract for BR-381, which is even known as the highway of death due to the high number of fatal accidents. 

If I were an investor, I would think twice before considering this contract because it involves very challenging works from an engineering point of view and high costs.

Another road section for which I foresee some difficulties in achieving success is the auction of BR-040, since this is part of a contract that has previously faced economic difficulties and is now being reoffered.

BNamericas: What about other contracts?

Sogayar: Highway auctions in São Paulo state have a greater chance of success because the risks in the contracts and the highways are better known to stakeholders. Furthermore, these road sections also have known demand regarding vehicle traffic.

As for the other federal government auction, BR-262 may also attract more interested parties as it's on an interesting route.

Of all the contracts to be offered, I see those in São Paulo state attracting more competition, both from players already with a strong presence in the sector such as [local infrastructure firm] CCR, as well as having the potential to attract new entrants.

BNamericas: Who could new entrants be?

Sogayar: We currently have a situation where one of the main problems for long-term projects is high interest rates for financing. However, there are long-term investors, such as funds and companies from Saudi Arabia and China that have access to lower financing lines than other participants and those contracts can attract investors from these locations, which have access to a wealth of resources at lower costs.

BNamericas: The concession contracts to be offered now have obligations, deadlines for investments, and involve similar works. Could this generate an inflationary effect in the sector?

Sogayar: Without a doubt. Both of these contracts being offered now and others that were offered more recently have an inflationary effect in the future for inputs, labor force, and services in the road sector.

Similar instances of inflationary pressure have already occurred in metro and port projects, which are sectors with numerous contracts offered recently.

However, I would say that this is a minor, manageable problem. I would be more concerned if we had no inflation at all, but also a complete lack of new projects. Brazil suffered for many years from a lack of good projects, which greatly affected the country’s infrastructure. Therefore, I class the current situation as a positive problem, caused by having lots of projects.

BNamericas: There is a negative perception among financial investors regarding Brazil's public finances. Has this perception also impacted investors in the infrastructure sector?

Sogayar: This negative perception also exists on the part of long-term investors. This makes our financing more expensive as financial investors look for safer places to invest, generating a scenario of prolonged high interest rates and greater pressure on the Brazilian real compared with the US dollar.

Given this, it's important for the government to maintain a disciplined fiscal policy, as this directly reduces project costs.