Engineering risks, fiscal constraints, and future sector auctions pose hurdles for public-private partnerships

06/06/2024

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Rafael Benini — Foto: Ana Paula Paiva/Valor

The package of metro and urban train concessions in São Paulo is generating interest in the market, but analysts consulted by Valor see significant challenges in moving these projects forward. The obstacles to attracting investors include high engineering risks, fiscal limitations for offering guarantees in public-private partnerships (PPPs), and competition from other infrastructure auctions scheduled in the coming years.

The São Paulo state government auctioned the first PPP of the package in February this year, the Intercity Train (TIC) between the capital city and Campinas. The auction attracted only one bidder—the consortium formed by Comporte and China’s CRRC. The contract was signed last Tuesday.

The government’s package includes at least 13 other projects under study, with a potential investment of R$130 billion. The most advanced initiative is the PPP for lines 11-Coral, 12-Safira, and 13-Jade, expected to have its tender launched in September and the auction held in the fourth quarter. The projected investment is R$10 billion.

Three more PPPs may be launched in 2025, according to the government’s schedule. One is the TIC Oeste, a new 100-kilometer line connecting São Paulo to Sorocaba in 60 minutes, with a projected investment of R$10 billion. The second project includes the existing Line 10-Turquesa and the new Line 14-Ônix, with an estimated investment of R$18 billion.

There is also a PPP to build Lines 19-Celeste and 20-Rosa of the metro. Studies are still evaluating the feasibility of this mega-project, which is expected to require R$45 billion. To achieve this, the government is considering forming a lot with existing lines—Lines 1-Azul, 2-Verde, 3-Vermelha, and 15-Prata are being studied.

Analysts anticipate new investors will emerge, but the market remains challenging. “Rail mobility is a complex sector, especially with new lines. Contracts require high investment and face geological, expropriation, and interference risks,” said Bruno Aurélio, a partner at Demarest.

Given that mobility contracts are generally PPPs requiring public investment, fiscal issues and the structuring of payment guarantees also need attention, noted Guilherme Quintella, president of EDLP (Estação da Luz Participações), which conducted studies for various intercity train projects for the São Paulo government in 2012. “There must be fiscal security. This is the biggest challenge. The projects depend on this funding to advance.”

Additionally, the long-term nature of the package introduces continuity risk, said David Wong, a director at A&M (Alvarez & Marsal). “The plans and timelines make sense. The challenge is attracting investors and ensuring that government changes don’t negatively impact projects, which is common in infrastructure,” he said. He also noted the need for multimodal integration with other mobility structures for route feasibility.

Today, a concern for both the government and the market is to broaden the range of investors in the sector, which is less developed than others like highways. “There are few specialized groups with experience to ensure the business plan is delivered,” said José Virgílio Lopes Enei, who heads the infrastructure area at Machado Meyer law firm.

Despite the challenges, analysts believe that the São Paulo government’s package is attracting new interest in the sector. “A single project struggles to attract new entrants because participating in an auction requires investing tens of millions of reais. But with a program, there’s more incentive for investors since losing one bid means there are other opportunities,” said Mr. Enei.

Currently, besides the groups already operating in the sector—mainly CCR, Acciona, and the Comporte-CRRC consortium—analysts suggest that foreign groups, investment funds, and even highway operators already active in Brazil could enter the market.

Rafael Benini, São Paulo’s secretary of partnerships and investments, said the state government has seen market interest in the projects. “People are conducting technical visits and accessing the data room to review information,” he said.

A significant change expected to increase competition is a tax incentive for subcontracting. This allows the winning group to subcontract another company for line operations, construction, and rolling stock supply. Currently, subcontracting is possible but suffers from double taxation, which the government plans to offset in the short term. “With the tax reform, this will be resolved in the future. For now, we will reimburse the company for the double taxation until 2028,” Mr. Benini said.

Renato Kloss, a partner at VAK Advogados law firm, emphasized the importance of diversifying the profile of interested parties to increase competition. “It’s essential to consider that the bidder need not be the operator. The winner can contract later. Changing this opens opportunities for other interested parties, such as investment funds,” he said.

*Por Taís Hirata — São Paulo

Source: Valor International

https://valorinternational.globo.com/