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Policy Review

Upturning Brazil’s Economy: Private sector set to play a bigger role [free access]

April 10, 2017

Brazil is currently facing its longest recession since the 1930s. The economic recession, which started in 2014, and the 2016 political crisis, which resulted in the impeachment of its then President Dilma Rousseff, has led the country to an economic collapse. As per International Monetary Fund estimates, the country’s economy shrank by 3.8 per cent in 2015 and by 3.6 per cent in 2016.

 

Since mid-2016, the government has been devising ways and measures to pull the economy out of the recession, regain economic growth and restore its investment-grade credit rating. With high fiscal deficits and shrinking revenue, the government is now looking to rope in the private sector to help revive its economy.

 

In September 2016, the government announced Projeto Crescer (Project Grow) under which select infrastructure projects will be awarded to the private sector for development under a concession model.

It comprises 34 infrastructure projects in the areas of transport, mines and energy (oil and gas exploration, electricity), water distribution, sewage collection and treatment as well as the sale of assets. The majority of these projects are expected to be auctioned in the first half of 2017 and 2018.

 

Projeto Crescer is part of the government’s Programa de Parcerias de Investimentos (PPI) or the Investment Partnership Programme, comprising measures to foster private investment in the country’s infrastructure sector.

 

Under the PPI, several changes were made to the concession rules to strengthen legal certainty, provide regulatory stability and modernise governance. These include expanding the period between the release of bidding rules and the holding of the auction to 100 days and allowing tenders to be announced only after preliminary environmental licensing has been received. To reduce private investor risks, each project is required to have at least 20 per cent of its financing from investor resources while the remaining can be financed via loans and debentures. By creating a transparent, secure and stable investment environment, the PPI is aimed at re-establishing the trust of foreign investors to bring in the much needed investment to jumpstart the economy and as a consequence, generate new jobs.

 

More recently, in March 2017, the government expanded the list of infrastructure projects under Projeto Crescer to include 55 concession projects, taking the total to around 90 projects entailing an investment of over BRL45 billion. Among these projects, 16 projects relate to the energy sector, of which three are oil and gas projects, five are electricity generation projects, one is a power transmission project and seven are power distribution projects. 

 

So far, only one energy project has been auctioned under Projeto Crescer. This is the privatisation of Celg Distribuição SA, the electricity distribution unit of state-owned Centrais Eletricas Brasileiras SA (Eletrobras). While attempts to auction Celg Distribuição were made in August 2016, it did not receive any bids. After being included in Projeto Crescer, the company’s bid price was reworked and the minimum amount was set to BRL1.791 billion. In the new auction that took place in November 2016, Italy-based energy company Enel won the concession after offering a bid of BRL2.2 billion (at a 28 per cent premium).

 

The government has plans to auction all the energy projects included in Projeto Crescer by the end of 2017, including the transmission project, which is scheduled to be auctioned on April 24.

 

The project entails the auction of 35 lots in 20 states: Alagoas, Bahia, Ceará, Goiás, Maranhão, Mato Grosso do Sul, Minas Gerais, Pará, Paraíba, Paraná, Pernambuco, Piauí, Rio de Janeiro, Rio Grande do Norte, Rio Grande do Sul, Rondônia, Santa Catarina, São Paulo, Sergipe and Tocantins. Through 35 lots, around 7,358 km of transmission lines and 13,172 MVA of substation capacity will be auctioned to new licensees. These facilities entail an investment of BRL13.1 billion. The concession contract, to be awarded by Brazil's energy regulator Agencia Nacional de Energia Eletrica (ANEEL), will be for 30 years.

 

The remaining six distribution projects under Projeto Crescer are brownfield projects involving privatisation of Eletrobras’ distribution companies for which the company did not extend concession contracts. These include Amazonas Distribuidora de Energia S.A., Boa Vista Energia S.A., Companhia de Eletricidade do Acre (ELETROACRE), Companhia de Energia do Piauí (CEPISA), Eletrobrás Distribuição Alagoas and Centrais Elétricas de Rondônia S.A. (CERON). The concessions for these companies will remain in operation until the tender is held. The bidding process for the privatisation of these companies is scheduled to be held in the second half of 2017.

 

The five generation projects to be auctioned also entail privatisation of existing generation plants for which concession contracts were not extended by owner companies. Three hydroelectric power plants totalling 2,445 MW of capacity—Volta Grande, Miranda and São Simão—are all located in the state of Minas Gerais and were owned by Companhia Energetica de Minas Gerais (Cemig). Two other hydroelectric plants to be auctioned include the Pery and Agro Trafo Small Hydroelectric Plants, located in the states of Santa Catarina and Tocantins, respectively. All five plants will also be auctioned in the second half of 2017.      

 

It is clear that the Brazilian government is working to bring the economy back on track, with initiatives like Projeto Crescer being an example of its efforts. However, only six of the 90 projects under Projecto Creser have been auctioned so far. Though majority of the proposed projects are scheduled for auctioning in the second half of 2017, bid schedules for most of these are yet to be announced. More concerted efforts need to be put in by the involved agencies to ensure that the projects are awarded on time, so as to bring in the much needed private investment.