Brazil has seen a wave of major sanitation concessions and the companies that have assumed these contracts are now seeking long-term financing to meet their investment obligations.
Thanks to a regulatory change in mid-2020 that paved the way for increased participation of private sector companies in the sanitation industry, a segment previously dominated by state-owned operators, several state governments have auctioned off concessions.
During these auctions, many companies obtained short-term financing to pay the one-time concession fees, but now these players are looking for longer-term financing lines to cover their sizable investments, leading banks to dedicate part of their project finance areas to attending to these firms’ needs.
Other sectors such as energy, ports, highways and airports are also in need of financing, despite inflation pressures currently being a big risk for advances in certain projects.
Fernando Mattos Pereira Guimarães, head of the project finance area at Bradesco BBI, the investment banking arm of Banco Bradesco, talks with BNamericas about the situation.
BNamericas: What is the current scenario for infrastructure financing activities in Brazil?
Guimarães: We’ve recently seen some tenders undergoing capex adjustments due to increased costs and even the postponement of bidding processes in some cases. Even so, there are advances in the auctions, but companies are being more conservative with respect to the value of the fees being offered.
BNamericas: How are inflation pressures affecting infrastructure projects?
Guimarães: There’s an impact on capex and this pressure is already being assessed in new contracts, with the governments that are offering the assets making adjustments to the public tender notices.
With regard to the projects that have been tendered in the past, which have long-term capex, we’re seeing companies trying to adapt.
For example, there are companies in the highway sector that are using less durable asphalt now, cheaper products, to reduce costs and they’re only looking at more durable, higher-cost asphalt after the inflation pressures subside.
BNamericas: In terms of business opportunities, what are the forecasts?
Guimarães: As of June 30, there will be an important tender in the energy area, which is the auction of transmission lines with estimated capex of 15bn reais [US$3.12bn]. This will be the biggest transmission line auction in a long time, as the previous auctions were small.
Because of that, we should have a lot of players making offers. But because of the existing cost pressures, I don’t know how aggressive these proposals will be.
Another frontier of opportunities for project financers is the sanitation sector. In recent quarters we’ve had lots of tenders in which some companies have sought short-term financing to cover the fees paid to governments.
Now we’re going to see these companies looking at long-term financing, seeking definitive financial solutions for the projects.
The sanitation sector is gaining great importance for players in the project finance area.
BNamericas: Are there any other sectors worth mentioning as vectors of expansion?
Guimarães: The port sector is appearing on our radar. In the past, we had lots of auctions for port terminals, which don’t necessarily require project finance solutions, because these are operations where demand is more for corporate finance.
But now, with the auction of Codesa and other port operators such as São Sebastião, Santos, I now see room for solutions where we’ll have a mix of project finance and corporate finance.
In the highway sector, we’ll probably see the continuity of the concessions agenda, but this is a sector where it’s difficult to see the entrance of new players, ones who aren’t already there, because it’s a sector where it’s necessary to have a lot of knowledge regarding local regulatory agents.
Airports also present business opportunities, both in terms of new auctions of assets and rebidding. In this segment, unlike the road sector, we have a lot of participation from foreign investors.
BNamericas: Do you expect any major changes to take place in the project finance area for banks?
Guimarães: If you looked at the largest banks operating in project finance two years ago, you’d see that all of the banks had priority for energy operations and a smaller proportion for logistics and other segments.
That has changed now. Energy continues to be important, but now I’d say that it forms around 30% of bank operations in general, while another 30% is in logistics, 30% in sanitation and the rest in other areas.
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