Infrastructure Investor - Brazil Intelligence Report

october 2011 | InfrastructureInvestor.
com
For tHe WorLDS INFrAStrUctUre MArKetS
Brazil
an intelligence report
tHe bIG IDeAS
How Brazil is luring private capital
PortS: trADING UP
Substantial investment as demand rises
teLecoMS:
FILLING tHe GAPS
Why better networks will fuel growth
LeGAL FrAMeWorK:
tHe PUbLIc INtereSt
Brazils embrace of arbitration
bANKING:
LANDMArK DeALS
Eyes on the capital markets
eNerGY: GreeN
DeVeLoPMeNt
The need for environmental responsibility
SPoNSorS:
SUPPorter:

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october 2011 infrastructure investor: brazil intelligence report 1
XXXXXXXXXXXXXX XXXXXXXXX OCTOBER 2011
More order, more progress
Ordem e PrOgressO (Order and Progress) is the national
motto of the Federative republic of Brazil. look back into the
history of Brazil and you discover the story of a nation occasionally
struggling to live up to these ideals. Fast forward to the present, and
you will fnd a proud nation making up for lost time.
Progress is refected in the current status of Brazil as one of
the worlds leading emerging markets. The country boasts the
worlds seventh-largest economy by nominal gross domestic prod-
uct (GDP), according to the World Bank, and the eighth-largest
by purchasing power parity, according to the Central intelligence
agency. Meanwhile, rio de Janeiros hosting last year of a United
Nations conference bringing global leaders together to address
cultural and religious differences, was seen as evidence of Brazils
growing political infuence on the world stage.
all well and good. But when it comes to the countrys infrastructure, progress has been less
rapid than in other areas. as we report elsewhere in this, the Infrastructure Investor Brazil intelli-
gence report 2011, Brazil is ranked 62nd out of 139 countries globally for the period 2010-11 for
the quality of its infrastructure (source: World Economic Forum). Given the size and fast growth
of its economy, together with its emergence on the world stage, here is a stark disparity for the
country to wrestle with. as with certain other emerging markets, maintaining recent growth rates
into the future will depend on this infrastructure gap being addressed.
The good news for infrastructure investors is, of course, that such a gap spells opportunity. in
the pages that follow, we focus on sectors such as ports (see p.11), energy (p.22) and transport
(p.29) to assess prospects and fnd opportunity aplenty. Just one example from our introduction
(p.4): Partners Groups Karin Hallin says airport privatisations are long overdue and the returns
expected from operational improvements may be very attractive.
To return to the national motto, Brazils progress as an infrastructure investment destination
depends in part on its orderliness. and here, too, there is room for optimism. For example, Bra-
zils legal framework has been tightened up to afford investors greater comfort and protection. as
Cesar a. Guimares Pereira of law frm Justen, Pereira, Oliveira & Talamini advogados, notes in
the introduction: We have shifted from the idea of protecting the government to a clear under-
standing that the broader public interest depends on the binding force of contracts. He expands
on the key issue of dispute resolution in an article on p.14.
This is not to gloss over continuing diffculties. as we note, water and sanitation is one area
where a lot more comfort still needs to be provided before investers will come forward with in-
vestment to the level required. and the recent auction for the proposed high-speed bullet train
between rio de Janeiro and So Paulo failed to attract any bidders forcing the government to
redesign the offering (see p.28).
Overall, however, we think the ideals of progress and order are being adhered to and in the
infrastructure space will bring their eventual reward. i will now invite you to turn to the follow-
ing pages of in-house features, external expert commentaries and interviews with key government
offcials, to draw your own conclusions.
Enjoy the report,
andy Thomson
Senior Editor
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INTRODUCTORY LETTER

2 infrastructure investor: brazil intelligence report october 2011
BRAZIL INTELLIGENCE REPORT 2011 CONTENTS
4. INTRODUCTION
tHINKING bIG
Brazil is transforming the way it attracts investment as officials, eager
to launch major infrastructure reform, strive to build momentum
8. Q&a: JUaREZ MORaES E SILVa, aBRaTEC
eXPANDING to Meet DeMAND
Brazil is seeing substantial investment in its ports as trade flourishes.
Juarez Moraes e Silva, president of the board at ABRATEC the
Association of Brazilian Container Terminal Operators in Public Ports
explains the role his organisation is playing in developments
11. PORTS FOCUS
PoteNtIAL bY tHe boAtLoAD
In the ports sector, Brazils rapid growth and stable regulatory
framework, combined with a need for new infrastructure, are
attracting interest from both domestic and foreign investors
14. DISPUTE RESOLUTION
StePS IN tHe rIGHt DIrectIoN
Cesar A. Guimares Pereira explores how Brazil has gradually
come to embrace arbitration of disputes and why investors
should take comfort
15. INTERVIEW: PaOLO BERNaRDO, MINISTER OF
COMMUNICaTIONS
PrIVAte FUNDS cAN DIAL INto teLecoMS
Amplification of broadband networks and implementing fiber optic
networks in medium-size cities are some of the goals outlined for
the development of Brazils telecommunications infrastructure
18. BaNKING FOCUS I
HoW to StrUctUre SUcceSSFUL DeALS
Mauro Cavalcanti de Albuquerque of Banco Santander reveals
how the firm has devised landmark transaction structures in
sectors ranging from toll roads to oil & gas
21. BaNKING FOCUS II
booSteD bY tHe cAPItAL MArKetS
The banking community in Brazil is seeing healthy deal flow,
but cannot provide all of the infrastructure financing required.
That means an increased role for the capital markets, says
Eduardo Muller Borges of Banco Santander
22. ENERGY FOCUS
HoW to KeeP brAZIL GreeN
Joo Capobianco, former Secretary in Brazils Ministry of Environment,
explains the challenges of marrying infrastructure development with
environmental responsibilities
25. INTERVIEW: JULIO BUENO,
SECRETaRY OF ECONOMIC DEVELOPMENT
More tHAN A GAMe
Rios development will long outlast the World Cup and Olympics,
thanks to broader economic changes and a wealth of industry,
according to Julio Bueno
27. LEGaL FOCUS
ALL-coMerS WeLcoMe
Foreign and domestic investors can expect equal treatment,
as well as strict enforcement of contracts in court. So says
Maral Justen Filho, founder and senior partner of Brazilian law
firm Justen, Pereira, Oliveira & Talamini
29. TRaNSPORT FOCUS
bUILDING tHe bAcKboNe
Federal- and state-level transport regulators discuss some of
the major concessions being granted in Brazil over the next
few years, and what role private investment can play
31. INTERVIEW: BENJaMIN ZYMLER, TCU
tHe WAtcHDoG
Benjamin Zymler, president of Brazils Court of Audit (TCU),
tells how adequate risk allocation is essential to successful
public-private partnerships
34. DaTa FILE
brAZIL: KeY FActS AND FIGUreS
We know that Brazil is a market with an under-developed
infrastructure, which therefore presents great opportunities
for investors theoretically at least. But what do the numbers
tell us?
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WItH tHE 2014 World Cup and the 2016 Olympic Games drawing
near, Brazil has spent nearly r$87 billion (37 billion; $53 billion)
on public works since President Dilma rousseff took offce on Janu-
ary 1 this year. around 75 percent of this came from private inves-
tors and state and local governments.
The funding to date is part of Brazils four-year, r$959 billion
spending plan to improve airports, ports, transit, energy supplies
and countrywide living conditions by 2014.
Over the past decade, Brazils commitment to maintaining
and improving infrastructure has failed to keep pace with its rap-
idly expanding economy and growing cities, says Karin Hallin, who
heads the So Paulo offce of Partners Group, a global private mar-
kets management frm.
With such infrastructure gaps, however, comes opportunity.
The regulation allows for higher returns than in the developed
markets, as the government is more interested in creating infra-
structure than limiting investors returns, says Hallin.
Beyond the current spending plan, Brazil can further open its
vast potential for private investment by fne-tuning outdated rules
and policies, analysts say.
Thinking big
Brazil is transforming the way it attracts investment as officials, eager to launch major
infrastructure reform, strive to build momentum in Latin Americas largest economy.
Maria Gallucci reports
INTRODUCTION BRAZIL INTELLIGENCE REPORT 2011
AIrPortS, PortS: Here
comes tHe private sector
The airport industry witnessed a major shake-
up earlier this year when the rousseff admin-
istration said it would offer private companies
concessions to operate fve passenger termi-
nals around the country.
Projects typically go to Brazils airports
authority infraero, which manages nearly 70
percent of airports in Brazil and accounts for
97 percent of air traffc. But the two sporting
events and an increasingly mobile middle
class will severely strain the limited airport
capacity at Brazils 20 principal airports,
and private spending is expected to speed
projects along.
an auction for a projected r$391 mil-
lion airport in Sao Gonalo de amarante
in northern Brazil, a host city for the World
Cup, was imminent at the time of going to press, with the starting bid
price for the license set at r$51.7 million.
Offcials also plan to auction licensing rights to So Paulos interna-
tional airport, plus airports in Brasilia and Campinas. The government
could offer construction concessions at hubs in the cities of rio de Ja-
neiro and Belo Horizonte, as well.
industry analysts estimate that an investment of r$25 billion to
r$34 billion will be needed in the next decade to boost airport capac-
ity to serve 310 million passengers annually, up from 130 million pas-
sengers today.
airport privatisations are long overdue, Hallin says, and the re-
turns expected from operational improvements may be very attractive.
in the ports sector, the administration is tweaking an archaic rule
that requires private operators to own a majority of the cargo handled
at the terminal, says Fernando Gentil, managing director of Darby
Overseas investments private equity and mezzanine fnance activities
in Brazil.
Now that rule is being changed, so an investor can build a new
port and be able to attract all sorts of clients, he says, noting that pub-
licly owned warehouses, rail facilities and other port services will also be
opened for concessions from private frms.
Major expansions are underway at the au industrial port in the
north of rio de Janeiro state, the largest complex of its kind in latin
america.
Netherlands royal Boskalis Westminster in august won a r$462
million contract for construction of a new port terminal at au, and
acciona, a Spanish infrastructure conglomerate, won a contract to
engineer, design and build the breakwater for a shipyard there, with
expenditure expected to top r$923 million.
reAL eStAte: rooms available
The real estate sector is making strides to accommodate the countrys
burgeoning middle class. Some 36 million people rose to middle class
status in the past decade, and an additional 36 million are expected to
join by 2014.
Joaquim rondon, managing director of aedas, a global architec-
ture and design frm in So Paulo, says that local fnancial markets in
recent years have made available the securitisation of assets or mort-
gage-backed securities, which can boost liquidity and shorten recovery
periods on investment. New mortgage frameworks allow investors to
reclaim real estate sold to tenants who dont pay.
The Brazilian securities exchange, or CVM, is also preparing new
rules that would require real estate funds to report any changes in the
market value of their properties. Fund managers say that this trans-
parency could allow the investment trusts to grow quicker and inspire
investor confdence.
industry estimates say the number of Brazilians seeking to buy
property will jump to 9.1 million by the end of this year, up from 4.2
million in 2009.
rondon notes that, in addition to rio and So Paulo, investments
are pouring in to Brasilia and north-eastern cities such as Salvador and
recife, as well as other medium-sized cities, where newfound economic
prosperity is taking hold.
Brazils housing-for-all programme which allots nearly r$279
billion of the infrastructure plan for low-income families says that
pre-approval for the development of 860,000 homes should be under-
way this year, with the bulk of properties planned for the north and
south-east regions.
so Paolo International Airport: auction plan
Tourism is also a boon for private investments in property.
around 1.2 million hotel rooms are currently available nationwide,
but 5.4 million more will be needed by 2020 to keep up with the
rising number of domestic and foreign tourists that pass through
Brazil each year not to mention the 600,000 foreigners projected
to attend the World Cup matches.
French hotel manager accor recently said it would spend r$462
million to add 5,000 hotel rooms throughout Brazil in the next few
years. and rondon notes that demand for mid- to low-range hotels
is rising among domestic travelers.
oIL, WIND PoWer: bonanza in sigHt
a r$366 billion spending programme by state oil giant Petroleo Bra-
sileiro, or Petrobras, has drawn many investors eyes to the oil and
gas industry.
The investment plan for 2011 to 2015 will enable Petrobras to
drill 10 exploratory wells in pre-salt offshore reserves, as well as ac-
celerate its efforts to map exploration opportunities in the Campos
basin, off the coast of rio de Janeiro.
They need everything, Darbys Gentil says of Petrobras, refer-
ring to new refneries and tankers, platforms, ships and maintenance
equipment to facilitate the new projects.
a lot of funds like ours are seeing opportunities to invest in
smaller companies that are suppliers for services and equipment to
Petrobras, he says.
Opportunities in renewable energy particularly wind power
along the eastern coast are also aplenty. The Brazilian wind mar-
ket is on track to reach 1,000 megawatts (MW) in installed capacity
this year, and industry offcials estimate that up to 5,000 MW of wind
power will be installed by 2015.
To attract developers and help it reach its national clean energy
goals, Brazil is offering incentives to wind farms through an Energy
Development account as well as special fnancing via the Brazilian
National Development Bank (BNDES).
Danish wind turbine maker Vestas says it expects its frst Brazilian
assembly plant in Fortaleza to be operational in the fourth quarter of
this year. The manufacturers total capacity of announced frm and
unconditional orders in Brazil will top more than 600 MW this year.
Germanys Siemens has been commissioned by utility Tractebel
Energia to provide a total of 145 MW in turbine capacity for fve
projects in two north-eastern states.
Banco Votorantim, a Brazilian fnance house, is reportedly planning
to raise up to r$1.2 billion for three private equity funds that will mainly
target wind farms, biomass plants and small hydropower projects.

StADIUMS, rAIL: cHallenges aHead
Brazils infrastructure development strategy, however, has not been
without hiccups.
in mid-July, an auction to build a 500-kilometre bullet train be-
tween So Paulo and rio de Janeiro failed to attract any bidders,
resulting in the third postponement since last November.
Brazilian transit offcials said that foreign frms and Brazilian
companies struggled to form a consortium to build the project, a re-
quirement for placing bids. The government estimates the train will
cost r$38 billion, though the private sector expects costs could reach
as high as r$90 billion and thus chip away at proftability.
The bidding process will now be split into two auctions. The frst
will choose the operator and technology of the high-speed trains and
could take place later this year. The second stage is to select a con-
struction frm in 2012.
Construction on the rail is likely to start in 2013, with offcials
Campos basin: exploration opportunities
Planned Itaquero stadium: will it be built on time?
skeptical it will be fnished ahead of the 2016 Olympic Games.
World Cup projects have also attracted criticism after Jerome Val-
cke, secretary general of Fifa, footballs governing body, expressed
concern about severe delays on stadium and airport construction in
the tournaments 12 host cities.
Only two of 13 air terminals are currently on track to fnish their
expansion work ahead of the World Cup, according to Brazils insti-
tute for applied Economic research.
Odebrecht, a state-run engineering enterprise, announced in
May that it would start construction on the itaquero Stadium in So
Paulo the same day that Valcke reportedly threatened to leave So
Paulo out of the World Cup due to delays. The 65,000-capacity sta-
dium is estimated to cost r$650 million, nearly two-thirds of which
will come from BNDES.
Brazils sports ministry, however, says it is confdent that construc-
tion and renovation work on the 12 stadiums will be wrapped up by
2013, and 10 of the stadiums will host matches for the Confedera-
tions Cup that same year.
Brazil is investing some r$23 billion in stadiums, airports, urban
transit and ports for the World Cup. Offcials anticipate the economy
will grow by at least r$114 billion as a result of public and private in-
frastructure investments, increased consumption and tax collection
generated by the tournament.
Darbys Gentil says he is confdent that Brazil will be ready to host
the sporting events.
it will be last minute, there will be cost overruns, but Brazil will
deliver, he says. The private sector believes that the government will
do everything possible to put on a good face to the rest of the world.
SANItAtIoN, SeWAGe: investors still wary
Gentil notes that water, sanitation and sewage management remain a
very visible gap in Brazilian infrastructure investment.
in my view, that is the sector that probably requires the most in-
vestment, in absolute dollar or real terms, he continues, but private
investors just dont yet feel comfortable enough with the regulatory
environment.
Many water and sewage projects are managed at the municipal
level, where local politicians are notorious for tweaking or ignoring
contracts as they see ft, he maintains.
at the federal and state level, however, courts are increasingly
protecting and enforcing contracts to provide the legal comfort
needed to spur private investment, says Cesar a. Guimares Pereira
of law frm Justen, Pereira, Oliveira & Talamini advogados.
He said that courts in Brazils civil law legal system, which are led by
the Supreme Court (STF) and the Superior Court of Justice (STJ), are
showing they understand that investments are based on legal stability.
local-scale investments are not necessarily unstable, he added.
States like So Paulo and Minas Gerais have a long history of com-
plex contracts and public-private partnerships and have shown that
they feel bound to what they sign. This tendency is spreading to other
local governments, particularly for local infrastructure projects that
receive federal funding and are thus obliged to comply with federal
contract guidelines.
We have shifted from the idea of protecting the government to a
clear understanding that the broader public interest depends on the
binding force of contracts, he says. n
Brasilia: investment pouring in
JUAREZ MORAES E SILVA
|
PRESIDENT OF THE BOARD
l
ABRATEC SPONSORED Q&A
WHEN WAS ABRAtEC EStABLISHED
AND WHY?
JMS: Considering the relevance of the activity of
containers to the Brazilian economy, we felt the
need to form aBraTEC in 2002. it was created
to represent companies that operate container
terminals for public use, under lease contracts
granted by the federal government after open
public tenders. aBraTEC acts on behalf of such
companies to establish institutional relations with
public and private entities which are directly or
indirectly involved in the port business.
The container terminals of public use, rep-
resented by aBraTEC, were responsible for 74
percent of container handling in Brazil in 2010.
in the period 1995 to 2010, they invested $2.5
billion and plan to reach $5 billion by 2015.
WHAt ARE YOuR KEY PRIORItIES At tHE
CuRRENt tImE?
JMS: Our current priorities are to ensure the sta-
bility of the regulatory framework and to cooper-
ate institutionally with the competent government
agencies on key issues, namely the advancement
of port expansion projects of aBraTEC termi-
nals and the possible upcoming rounds of public
tenders for new container terminals announced
by federal authorities in the specialist press. Such
expansion is necessary to address the growth of
foreign trade and the new container ships, which
are increasing in size and payload capacity. in
addition, given Brazils economic growth, the
federal government is expected to launch public
biddings for leases of new container terminals.
The domestic and international groups involved
in the Brazilian container market and affliated to
aBraTEC are waiting for this process to start in
order to qualify and take part in the correspond-
ing tender procedures.
WHAt IS tHE REGuLAtORY ENvIRON-
mENt LIKE fOR CONtAINER tERmINAL
OPERAtORS? IN WHAt WAYS mIGHt It BE
ImPROvED fuRtHER?
JMS: The regulatory framework is clear and
stable. The port terminals operated by pri-
vate companies act in accordance with their
respective legal regimes. Terminals leased
for public use provide unlimited services
to third parties, that is, public services; ter-
minals authorised for private use handle
exclusively or mostly their own cargo, and
only in a complementary manner will they
handle cargo belonging to third parties.
The terminals represented by
aBraTEC comply with the applicable
regulations. They cannot be compro-
mised by the inadequate operation of
other terminals originally authorised for
private use but which attempt to provide
unlimited public services.
YOuR WEBSItE REfERS tO A PORt
mODERNISAtION LAW tHAt CRE-
AtED SEvERAL NEW ASSOCIAtIONS
fOR PORtS IN BRAzIL. COuLD YOu
tALK ABOut tHAt LAW AND WHAt
EffECtS It HAS HAD IN tERmS Of
PORt ExPANSION PROjECtS IN RE-
CENt YEARS? HOW HAS tHAt LAW
AffECtED PRIvAtE INvEStmENt IN
PORt INfRAStRuCtuRE?
JMS: in the last two decades, the Brazilian
port sector has undergone modifcations.
in particular, law n. 8.630/93 brought
important new guidelines for the sector,
especially in respect to exploitation and
administration of ports. We must take
note that the new law sets forth a clear
defnition of activities which port opera-
tors are allowed to be engaged in and of
the types of legal arrangements (leases
and authorisations). law n. 10.233/2002
complemented and clarifed such changes,
completing the basic regulatory framework
for the sector.
Expanding to meet demand
Brazil is seeing substantial investment in its ports as trade flourishes. Juarez Moraes e Silva,
president of the board at ABRATEC the Association of Brazilian Container Terminal
Operators in Public Ports explains the role his organisation is playing in developments
moraes e silva: regulatory framework
clear and stable
Such expansion is
necessary to address
the growth of foreign
trade and the new
container ships, which
are increasing in size
and payload capacity
SPONSORED Q&A JUAREZ MORAES E SILVA
|
PRESIDENT OF THE BOARD
l
ABRATEC
law n. 8.630/93, the Port Modernisa-
tion act, is undeniably relevant because
it started the privatisation process of port
operations. Up to that point, port opera-
tions were performed by the various Docks
Companies (Companhias Docas). in
container activities, the federal govern-
ment has since 1993 carried out numer-
ous biddings of public port areas intended
for container terminals. The privatisation
of services was followed by investments,
technological innovation, productivity im-
provement, reduction in bureaucracy and
a change in the capital/work relationship.
The model was extremely successful. The
handling of containers in Brazil is experiencing constant growth. in
2010, 4,794,074 container units were handled.
Precisely in accordance with this institutional model, port serv-
ices are now entirely privatised, including the container terminals for
public use exploited under leases granted from 1995 on. Privatisation
allowed for investments in civil works (construction and increase of
docking berths and storage areas), the acquisition of modern equip-
ment and the better qualifcations of staff. This has ensured the
growth of port activity with the quality required by users.
aBraTEC embraces private investment in the port sector. all
its affliated companies are private organisations and base their op-
erations on domestic and foreign private capital. Private investments
are welcome and should be encouraged by ensuring legal and reg-
ulatory stability. Despite some attempts to get round the regulatory
framework, the port sector has proven to be attractive for private
investment. it is revealing that greenfeld and expansion investment
projects worth almost r$6 billion (2.6 billion; $3.8 billion) have al-
ready been submitted to the competent authorities for examination
and possible approval.
Based on the regulatory framework in force, leasing companies
of container terminals for public use have successfully become pub-
lic companies. in its iPO, Santos-Brasil J.C.P., the operator of Tecon
Santos, raised r$933.4 million. The Wilson, Sons Group, which op-
erates the terminals of rio Grande e Salvador, raised r$705.9 mil-
lion. log-in logstica intermodal, owner of the container terminal
of Vila Velha, in the state of Esprito Santo, raised r$848.2 million.
The funds that were raised totaled r$2.5 billion, originating mostly
from outside the country and which will go towards continuing to in-
crease the capacity of cargo handling in terminals, to the beneft of
port activity and of Brazilian foreign trade. it is expected that other
container terminals for public use will have stocks traded on the se-
curities exchange. The interest of possible investors will necessarily
be infuenced by the stability of the regulatory framework.
Particularly after the enactment of laws n. 8.630/93 and
10.233/2002, the Brazilian port sector follows the model recognised
worldwide. The government is responsi-
ble for the regulation, strategic planning
and infrastructure works of land and
waterway access common to all termi-
nals. The operations are carried out by
private companies under lease contracts
entered into by means of open public
biddings.
assessment of the infrastructure
needs of the port sector within the
scope of the new model of management
of national ports resulted in the prioriti-
sation of dredging, which is essential for
Brazilian ports to be able to receive the
large vessels that did not use the ports
of the Southern Cone.
after the National Dredging Program (PND) was established,
international companies were hired to carry out the deepening
and the maintenance of access canals to the ports. The ports of rio
Grande, angra dos reis, aratu, Salvador, itagua and recife are al-
ready in the maintenance phase and the dredging has now been ex-
tended to the ports of rio de Janeiro, Santos, Paranagu, Fortaleza,
Natal, Suape, Cabedelo and So Francisco do Sul.
The investments of the PND, estimated at r$2.6 billion, were in-
cluded in the Growth acceleration Plan (PaC), together with other
works for the maintenance, recuperation and increase of port in-
frastructure and the improvement of logistic effciency in Brazilian
ports. in total, the investment will reach r$7.6 billion, in two phases;
PaC 1 and PaC 2.
in the frst phase, closed in 2010, r$3.45 billion was applied and,
with already guaranteed funds, what is called PaC 2, to be carried
out from 2011 to 2014, will invest another r$4.15 billion, taking
dredging to ports that have not yet been tended to, such as Macei,
and giving continuity to the work that began in ports such as rio de
Janeiro and Santos.
likewise, construction and recuperation infrastructure works
will increase port capacity, adapting to new vessel sizes and improv-
ing access to ports, while expected investment in logistics manage-
ment allows the prediction of a 25 percent reduction in waiting time
for ships, as a result of better use of docking berths and equipment.
WHAt DO YOu SEE AS tHE mAIN CHALLENGES fOR ABRAtEC
IN tHE YEARS AHEAD?
JMS: aBraTEC, through its institutional operation, will collaborate
with associated companies in the coming rounds of public tenders
and auctions for new container terminals, expected to be launched
by the federal government in the near future. it will also collaborate
with companies for the approval of terminal expansion projects. These
initiatives are indispensable for meeting the rising demands of Brazil-
ian foreign trade. n
Expected investment
in logistics management
allows the prediction of
a 25 percent reduction in
waiting time for ships
PORTS FOCUS
WItHOut A DOuBt, shipping routes the world over are changing.
New vessels, increased levels of trade, strengthening of economies
in developing countries, and particular events such as the broaden-
ing of the Panama Canal, are all creating new demands on shipping
and container terminals across the globe.
Brazil, which has traditionally been at a disadvantage in terms
of receiving cross-currents from the East-West trade between devel-
oped nations in Europe and the US, is poised to grow. The coun-
try has faced many challenges in developing its port infrastructure,
which is ranked 123 out 139 countries in the World Economic Fo-
rums most recent competitiveness survey.
But the potential for investment in Brazils ports sector is
growing and is not going unnoticed. The ports and waterways
regulator (aNTaQ) is currently analysing around r$6 billion
(2.6 billion; $3.8 billion) worth of new investments in the sector.
WAtERSHED CHANGES
The federal growth acceleration programme (PaC) launched in 2007
under the guidance of Brazils former president luiz incio lula da
Silva has made infrastructure development one of the countrys top
priorities, and the PaC includes an extensive commitment to develop-
ing ports, reducing vessels transit time and expanding terminals. That
programme has created investments to deepen and broaden access
canals at ports including rio Grande and itagua, and has now been
extended to include dredging projects at rio de Janeiro, Paranagu,
Natal and other locations. The Brazilian Ministry of Ports (SEP) aims
to invest about r$5.3 billion in 66 projects as part of overall ports invest-
ment in the PaC plan, according to a recent report in Valor Econmico.
Expansion projects at Santos, in the state of So Paulo, and Sepeti-
ba, in rio de Janeiro, are just two examples of Brazils commitment to
rapid growth in the ports sector, using resources and knowledge from
both domestic and international companies, as well as development
institutions like the international Finance Corporation, which earlier
this year mobilised loans of $679 million to support a $908 million ex-
pansion project at Santos, marking the World Bank affliates largest-
ever ports investment.
The gloomy economic backdrop in the US and Europe seems
not to have alighted on Brazil, whose trade fows have nearly quad-
rupled from $100 billion to $370 billion since 1996. From about
1.25 million containers in 1996, the total shot up to over 4.5 million
containers by 2008. Those fgures dropped sharply in 2009, but
rebounded quickly as well.
investors say the countrys strengthening internal capital mar-
ket, growing consumer class and rapid industrialisation hold the
promise of long-term, sustained growth.
The widening of the Panama Canal will create room for new
mega-vessels, as well as room for new growth in Brazils ports. The ves-
sels of the 1960s and 1970s, with capacity of about 1,700 standard-size
containers, will give way to super-size so-called Panamax ships with
capacity for 15,000 containers. and those ships could fundamentally
alter port structures throughout latin america and the world.
in the face of the rise in demand of Brazilian foreign trade
and so as to meet the needs of the new feet of bigger ships that
started to use Brazilian ports, the expansion of terminals and the
launch of tenders for new terminals are the most urgent measures,
says Juarez Moraes e Silva, who chairs the board of the public-
use container terminal trade association aBraTEC (associao
Potential by the boatload
In the ports sector, Brazils rapid growth and stable regulatory framework,
combined with a need for new infrastructure, are attracting interest from both
domestic and foreign investors
Panama Canal: widening will create
room for mega-vessels
PORTS FOCUS
Brasileira dos Terminais de Contineres de
Uso Pblico).
in this sense, some terminals represented by
aBraTEC have already carried out their expan-
sion, while other expansions are under examina-
tion by the port sector regulator or are awaiting
permission from the environmental authority,
Moraes e Silva continues.
Container terminals operators including the
Wilson, Sons Group and Santos-Brasil, have also
had successful initial public offerings in recent
years, raising a total of about r$2.5 billion of capital that can then be rein-
vested in the ports sector.
StABLE INtERESt
Operators represented by aBraTEC alone have invested $2.5 billion in
container terminals over the past 15 years and plan to create investments
of about $5 billion by 2015, according to Moraes e Silva.
interest in the ports sector from both foreign and local private equity
frms is also growing. One recent example is Boston-based advent inter-
national, which announced in January that it would acquire a 50 percent
stake in Terminal de Contineres de Paranagu, Brazils third-largest con-
tainer terminal, through the frms ffth latin america-dedicated fund.
The investment marked advents frst commitment to Brazilian infrastruc-
ture and the largest deal the frm had done in Brazil up to that point. The
frms plans for Paranagu, located in southern Brazil, include construct-
ing an extra berth and acquiring new equipment to accommodate greater
container volume and increase capacity by about 70 percent, advent said
in January.
Brazilian frm Gvea investimentos has also committed to the growth
of ports and ports-related logistics in the country. Gvea invested in marine
terminal and dry port operator Multiterminais in 2006 and made subse-
quent expansions and infrastructure upgrades. in 2010 Gvea, together
with TPG, invested in rumo logstica, a logistics frm whose work includes
development of port-related infrastructure.
a number of questions arise: Why is Brazil
in such a good position to increase its capacity?
Why is it in a good position to beneft from new
developments, and why is the ports sector at-
tracting such interest?
apart from economic growth and the spe-
cifc changes mentioned above, two possible
reasons are the ports modernisation law and a
stable regulatory framework.
The 1993 Port Modernisation law created
important new guidelines for the sector, with
regard to both expansion and administration, according to Moraes e
Silva. The law established clear defnitions of activities permitted to port
operators and allowed port services to be privatised, he says.
The privatisation allowed for investments in civil works (construc-
tion and increase of docking berths and storage areas), the acquisition of
modern equipment and the qualifcation of human resources, Moraes
e Silva says. This has ensured the growth of port activity with the quality
required by users.
another potential reason why private equity frms and others inves-
tors may be drawn to ports is for the increasing regulatory stability of the
market.
The regulatory framework is pretty much in place already, says Ser-
gio Salamao, executive president of aBraTEC. Maybe the challenge
would be to keep that regulatory framework in place long enough for
investors to have a feeling of stability. But that only comes with time.
The framework is already there - basically we just need to use it. all
the parties that wish to invest in port areas may do so, Salamao continues.
They can either invest more if they are already legitimate operators in
this market or they can get into the market by using one of the instru-
ments that this regulatory framework offers. There are adequate instru-
ments for each kind of activity to be developed.
This stability, combined with the broad support from public agen-
cies and increasing investments from private operators, have left many
optimistic about the possibility of overcoming the challenges facing Bra-
zils ports. n
The framework is already
there - basically we just need
to use it. All the parties that
wish to invest in port areas
may do so
Terminal de Contineres de Paranagu: Advents first Brazilian infra deal
fOR A LONG time, arbitration was not a usual
form of dispute resolution in Brazil due to pro-
cedural diffculties. a new arbitration law was
enacted in 1996, but came into full practical
application only after 2001, when the STF [Bra-
zilian Supreme Court] rejected a constitutional
challenge against the law. in 2002, Brazil rati-
fed the New York Convention of 1958. Since
then, aDr (alternative dispute resolution) has
been thriving.
in 2009, CBar [Brazilian arbitration Com-
mittee], an arbitration think-tank, issued a re-
port in which it examined almost 800 state and
federal court rulings from 1996 to 2008 involv-
ing arbitration. Most large-scale contracts now
provide for arbitration, and the infrastructure
sector is no exception. Since the country is not a member of iCSiD
[the international Centre for the Settlement of investment Disputes],
domestic and international arbitration plays an essential part in the pro-
tection of investments in Brazil.
muLtItuDE Of AGREEmENtS
infrastructure contracts, often developed under project fnance arrange-
ments, typically involve a multitude of agreements. Most of them are
purely private, such as construction contracts and insurance policies.
However, some of the key contracts are directly or indirectly linked to the
government. in many cases, the sector at hand is subject to strict govern-
ment regulations, which affect the substance of the contracts. in others,
the activity to be carried out is either a government monopoly (such
as oil and gas) or a public service (e.g., water supply, energy or ports).
The main contract in an infrastructure arrangement is often a gov-
ernment concession (franchise), granted after a public tender. Other
government contracts may also be there. BNDES, Brazils government-
owned development bank, is commonly in charge of funding a large
part of infrastructure projects. Pursuant to Brazilian law, such govern-
ment contracts attract the application of a particular set of rules dis-
tinctly different from those applicable to private contracts.
if in private contracts Brazilian arbitration law and practice are
consistent with those existing in most other arbitration-friendly juris-
dictions, the matter can take a twist where government contracts are
involved. Certain law specialists will argue that matters of public inter-
est cannot be subject to arbitration, and this premise led some courts,
including the Brazilian Court of accounts (TCU), to initially reject al-
together the possibility of arbitration in government contracts. Fortu-
nately for foreign and domestic investors and contractors, the opposite
view has since prevailed.
in the wake of the Superior Court of Jus-
tice (STJ) rulings of 2005 and 2006 in a series
of cases involving power purchase agreements
and a port sector contract, arbitration in certain
government contracts has become common-
place. law scholars and courts generally reject
the previous objections and consider it admis-
sible for contractual fnancial claims to be set-
tled by arbitration. Such court rulings concede
that the Brazilian arbitration law of 1996 gave
suffcient basis for arbitration in government
contracts and no specifc statutory provision
was required.
Even so, several federal and state statutes,
either general or applicable to specifc sectors,
have expressly provided for arbitration. The most comprehensive ex-
amples are those of laws 11.079 (public-private partnerships/PPPs)
and 11.196 (government concessions), of 2004 and 2005. They estab-
lish specifc requirements: the arbitration must be conducted in Portu-
guese and in Brazil. There is no obstacle against the use of an interna-
tional arbitration centre, provided that the proceedings take place in
Brazil which, under Brazilian arbitration law, makes the outcome a
domestic award, not subject to recognition prior to enforcement. The
applicable material law in government contracts will generally be Brazil-
ian law, but public procurement regulations allow some latitude in the
choice of law and forum in some international contracts (article 32,
6, of law 8.666).
The enthusiasm concerning arbitration in infrastructure contracts
has led to local statutes regulating arbitration agreements entered into
by state and local governments. The state of Minas Gerais, arguably
the most active in Brazil in carrying out PPPs, enacted law 19.477 in
2011. although the act regulates closely the substance of the arbitration
agreement and therefore creates some procedural diffculties, it should
be praised for the state commitment it represents.
arbitration, like aDr methods in general, is about freedom, trust
and accountability, and this translates into good faith. at all levels of
government, Brazil has learned that, by showing reliability and instilling
confdence, it will attract investment and investors. Encouraging and
advancing arbitration as a form of dispute resolution are steps in the
right direction. n
1 Cesar A. Guimares Pereira is a partner at Justen, Pereira, Oliveira & Talamini
and director of CAIEP, an arbitration centre based in Curitiba, Brazil. Email: cesar@
justen.com.br. The author has co-edited Infrastructure Law of Brazil (2nd edition,
2011) and Arbitragem e Poder Pblico [Arbitration and State Parties] (2010), where
the reader may fnd a more at-length discussion of the subject matters of this article
SPONSORED ARTICLE DISPUTE RESOLUTION
Steps in the right direction
Cesar A. Guimares Pereira
1
explores how Brazil has gradually come to embrace arbitration of
disputes and why investors should take comfort
Cesar A. guimares Pereira
PAULO BERNARDO
|
MINISTER OF COMMUNICATIONS INTERVIEW
ARE tHERE PARtICuLAR tARGEtS IN
PLACE fOR tHE DEvELOPmENt Of
INtERNEt OR tELECOmmuNICAtIONS
INfRAStRuCtuRE OvER tHE NExt
SEvERAL YEARS? If SO, WHAt ARE
tHOSE tARGEtS?
PB: Yes. There are government objectives in
relation to the internalisation of the broad-
band network of Telebrs until 2014, which
shall directly provide services to at least 4,283
municipalities in 2014. Today, there is a back-
haul in broadband for all Brazilian munici-
palities, despite the fact that 200 still need
satellite connection based on geographical
location.
Within this goal, Telebrs shall enter
into partnerships with private companies
for the implementation of fber optic trans-
port networks in medium-sized cities which
still are not equipped with this type of infra-
structure. The telecommunications conces-
sionaires, also, are committed to offering
broadband access plans of 1Mbps (megabit
per second) at r$35.00 in every municipal-
ity, which, naturally, will require an ampli-
fcation of broadband transport networks,
mainly of backhaul.
WHAt ARE tHE tARGEtED
AmOuNtS Of PuBLIC fuNDING fOR
COmmuNICAtIONS INfRAStRuCtuRE,
AND IS tHERE A LACK Of SuCH
fuNDING? IS PuBLIC fuNDING - OR
ARE PLANNED PuBLIC-PRIvAtE
PARtNERSHIPS - SuffICIENt tO
mEEt tARGEtED INvEStmENt LEvELS
fOR tHE COmmuNICAtIONS SECtOR?
PB: Brazil has, today, enough fnancial
resources to meet the goals that were set out.
There are many ways in which this invest-
ment in telecommunications infrastructure
has been taking place through the state.
First, it has been done directly, through
Telebrs, which will construct a backbone
that will reach all of the Brazilian states
and 4,283 municipalities. it is a project for
which Telebrs will have at its disposal r$1
billion per year until 2014.
Secondly the National Economic
and Social Development Bank (BNDES),
which has lines of credit with appealing
interest rates that may be taken out by
any telecommunications company in Bra-
zil. it is estimated that, until 2014, r$6.5
billion of these lines of credit of BNDES
will be used for acquiring telecommunica-
tions equipment. The bank also has lines
geared towards small and micro-providers,
for which a loan of r$1 billion is estimated
until 2014.
Thirdly, the sector has public funds
that contribute resources to telecommuni-
cations infrastructure development, espe-
cially the Fund for Technological Develop-
ment of Telecommunications (FUNTTEl),
geared towards research, development
and innovation, that should invest around
r$1.75 billion until 2014. Public funding,
however, is not suffcient to lead Brazil to
where we want to get. The growth of pri-
vate backbones and, especially, the ampli-
fcation of metropolitan broadband access
networks are investments that will be made,
mostly, by private enterprise.
WHAt ARE tHE PROSPECtS fOR tHE
DEvELOPmENt Of A fIBER OPtIC
NEtWORK IN BRAzIL? WHAt DO YOu
ExPECt tO BE tHE ROLE Of tHE
PuBLIC SECtOR IN tHIS fIELD?
PB: Brazil today already has relatively large
fber optic networks at its disposal; however,
there are empty spaces, which are only
accessed through radio links or through
satellites. Many of these vacuums do not
have proftability prospects for a frm to
Private funds can dial into telecoms
Amplification of broadband networks and implementing fiber optic networks in medium-size
cities are some of the goals outlined for the development of Brazils telecommunications
infrastructure. Communications Minister Paulo Bernardo discusses the governments
ambitions and the role private investors can play
Bernardo: public funding not sufficient
for need
The growth of
private backbones
and, especially,
the amplification
of metropolitan
broadband access
networks are
investments that will
be made, mostly, by
private enterprise
INTERVIEW PAULO BERNARDO
|
MINISTER OF COMMUNICATIONS
invest in. Nonetheless, these areas become feasible options when
a joint and shared investment in fber optic backhaul is promoted.
The public sector will have a strong role in this linkage and induc-
tion of shared investments. Private companies have already been
doing this in Brazil in certain cases and the government wants to
intensify this strategy.
WHAt ROLE DO YOu SEE PRIvAtE INvEStORS OR PRIvAtE
INfRAStRuCtuRE fuNDS PLAYING IN tHE DEvELOPmENt
Of NEW COmmuNICAtIONS SYStEmS?
PB: Private funds have a very important role in the area of innovation
in the development of services, systems and over-the-top products for
advanced markets. They have also been developing more robust and
effcient technologies, which improves the performance and reduces
the costs of a series of means of transmission, such as radios, satel-
lites and spectral effciency in general, in addition to the capacity of
transmission of fber optic [cables], submarine cables, etc.
Moreover, private investors have the important role of carrying
out competition actions in this market or of covering markets that
are not served that are considered minimally appealing there are
still many of these in Brazil. [Brazilian Telecommunications agen-
cy] aNaTEl will launch a series of auctions for radio frequencies
that will allow, at a relatively low cost, more competition in the area
of access. There will be bids for ranges between 2.5 and 3.5 GHz,
mainly geared towards broadband in 4G technology, and of 450
MHz, geared towards rural broadband.
also on the agencys agenda are regulations whose objective is
to make the life of entering companies less diffcult, especially with
regard to the infrastructure access of third parties to compose their
own network. The regulations are the General Plan of Competition
Goals and the new regulation of industrial Exploitation of leased
lines.
We cannot forget that the telecommunications market in Brazil
is mainly private. Telebrs, aNaTEl and the Ministry of Commu-
nications have the purpose of stimulating this market for it to be
capable of providing what is best for the Brazilian population.
WHAt ROLE DOES tHE COmmuNICAtIONS mINIStRY
PLAY IN REGuLAtING PRIvAtE INvEStmENt IN
tELECOmmuNICAtIONS PROjECtS? WHAt IS tHE
INtERPLAY BEtWEEN tHE mINIStRY, ANAtEL AND OtHER
REGuLAtORY AGENCIES IN tHIS REALm?
PB: The regulatory role in the telecommunications market is aNa-
TEls. The Communications Ministry, however, has the ability to
supervise the agency, working as an offset, and elaborating public
policies to be implemented by it. The other regulatory agencies, in
relation to private investment in telecommunications, play a sec-
ondary role, especially regarding infrastructure sharing. Thus, if a
telecommunications company needs to share an optical fber (OPGW)
of an electricity transmission company, the regulatory agency of the
electric sector will also be involved in the case; if it wants to share
the structure of a gas pipeline of some oil company for the pulling
of fbers, the respective agency of the oil and natural gas sector will
also be involved.
Telemedicine: the way of the future
PAULO BERNARDO
|
MINISTER OF COMMUNICATIONS INTERVIEW
ARE tHERE LEGAL BARRIERS tO
HAvING PRIvAtE DOmEStIC OR
INtERNAtIONAL GROuPS INvESt
IN OR OPERAtE CERtAIN POStAL
OR tELECOmmuNICAtIONS
SERvICES? WHAt ARE tHOSE
BARRIERS? IS tHE fEDERAL
GOvERNmENt ENGAGED IN
DISCuSSING POSSIBLE CHANGES
tO SuCH BARRIERS?
PB: The only barrier for the presence
of foreign capital in the telecommunica-
tions sector is still in cable television serv-
ices, because this service is governed by a
specifc law, law n. 8.977/1995. Except
for this one, there are only requirements
of the regularity of setting up and the functioning of the company
in Brazil. The federal senate has recently passed the PlC (Bill of
the Chamber) 116, which aimed at reorganising the pay television
market, and the outcome is that this last barrier to the presence of
foreign capital has been reviewed.
With regard to barriers for investment or operation by national or
foreign private groups in postal services, there are those provided for
by the Postal law (law n. 6.538/78) which refer to the exclusive serv-
ices that the Union exploits in a monopoly system. among them are
the receipt, transportation and delivery, in national territory, and the
shipment abroad, of letters, postal cards and mailbags; manufacture,
issuance and sale of stamps; manufacture, import and use of franking
machines; as well as of molds for stamping or postmarks. There is no
discussion about possible changes to these barriers.
COuLD YOu DESCRIBE tHE EffECtS Of ANY mAjOR
PRIvAtISAtIONS Of tELECOmmuNICAtIONS BuSINESSES
IN BRAzIL IN RECENt YEARS? WOuLD YOu SAY tHAt
tHE ExIStING mODELS fOR tELECOmmuNICAtIONS
PRIvAtISAtIONS OR PuBLIC-PRIvAtE PARtNERSHIPS HAvE
BEEN SuCCESSfuL?
PB: The sector was largely privatised in the period 1996 to 1998, frst
with the mobile telephone companies and, after, with landline tel-
ephone companies. The privatisation allowed for landline telephone
services in Brazil to be available for all the locations with more than
100 inhabitants and increased teledensity from 12 accesses/100 inhab-
itants, in 1998, to 21.7 accesses/100 inhabitants in 2010. in cellular
telephone services, in which there is strong competition, there are
today more than 217 million accesses and, in 84 percent of Brazilian
households, at least one person owns a cellular phone.
We cannot, however, fail to recognise signifcant faults in the privati-
sation model. The number of accesses could be signifcantly higher
if basic subscription had a lower price. The model did not fore-
see effective exits to increase competition in the landline network
market, in such a way that measures such
as unbundling have still not occurred
widely. in addition, there was a process
of strong contraction of industrial activ-
ity in the telecommunications equipment
sector in Brazil, a process that has been
reversed in recent years through measures
to stimulate industrial development in the
sector, attracting foreign investments and
strengthening national capital industries.
WHAt IS tHE ADvANtAGE
Of HAvING CONvERGENt
SERvICES, WHERE DIffERENt
tELECOmmuNICAtIONS SERvICES
ARE PROvIDED BY tHE SAmE
OPERAtOR OR uNDER SINGLE CONtRACtS?
PB: The basic advantage of offering service packages is that this is
what most stimulates investment in infrastructure, since the potential
proftability over that cost is bigger the more services there are and the
higher the added value is. There are also disadvantages that impact
the regulation of the sector, to the extent that this model leads to
concentration of companies and abusive conduct tends to increase.
WHAt ARE SOmE Of tHE OBStACLES tO DEvELOPING
tHOSE CONvERGENt SERvICES AS WELL?
PB: in Brazil, there were until recently, as i have already mentioned,
legislative obstacles in relation to pay television. Other than this
recently removed obstacle, there are diffculties associated with invest-
ing in robust access infrastructure. a good part of access networks
in Brazil are still legacies of privatisation and are designed for voice
traffc. These networks have been developing and, thus, allowing
the offering of convergent services. But there is still a lot to be done
in Brazil.
BROADLY SPEAKING, WHAt ROLE DO YOu BELIEvE tHAt
tHE DEvELOPmENt Of tELECOmmuNICAtIONS AND
tELECOmmuNICAtIONS INfRAStRuCtuRE PLAYS IN tHE
LARGER BRAzILIAN ECONOmY?
PB: Telecommunications represents, on its own, a vigorous and
dynamic sector, but its main role, i believe, is to catalyse growth
in all other sectors of the economy. The trend is that the telecom-
munications business, more and more, will begin to make sense
together with the addition of value in content, services and applica-
tions. Technological development tends to reduce the maximum
cost of telecommunication transmission.
applications such as telemedicine, teleworking, tele-education, online
political participation, in addition to audiovisual content and other
innovative services, are at the heart of technological innovation going
forward. n
We cannot ... fail to
recognise significant
faults in the privatisation
model. The number
of accesses could be
significantly higher if basic
subscription had a lower
price
sponsored case study
|
BANCO SANTANDER BANKING FOCUS
BANCO SANtANDER HAS the broadest and
most experienced project fnance group in
Brazil with a total of 18 professionals sub-
divided into four industrial sector teams:
energy generation, oil & gas plus metals and
mining; logistics and energy transmission;
plus PPPs, water & waste.
With such focus, the group has been
able to build very specifc and compre-
hensive knowledge of each sector while
also being able to maximise global knowl-
edge sharing with project fnance teams
in Europe and the americas from our
experience gained in other countries and
markets.
The result of such a strong presence in
the local market is refected in the offcial
rankings from aNBiMa as Santander led
the project fnancing (and auction fnanc-
ing) advisory league tables for the last
three successive years.
Moreover, Santander has been able to
deliver innovative fnancing solutions to
its clients as evidenced by numerous deal
of the year and excellence prizes awarded
by a number of publications.
The infrastructure investment require-
ment for Brazil over the coming years is
enormous (government estimates nearly
r$300 billion by 2014 and another r$275
billion in energy projects alone from 2014
onwards). Not only is the diversifcation
of funding sources required, but also the
application of sophisticated and innova-
tive private and public-private partnership
(PPP) structures. Both are paramount to
satisfy such growth.
as case studies that illustrate the afore-
mentioned qualities, what follows are de-
scriptions of a specifc Santander project
in the logistics sector and a summary of
the banks successful track record in the
oil & gas sector.
cASe StUDY 1:
ROtA DAS BANDEIRAS tOLL
ROAD CONCESSIONAIRE
PROjECt
BY tHIAGO SOLLERO fIGuEIRA
at the end of 2008, Odebrecht Group won the
rights to exploit the Dom Pedro i road conces-
sion for 30 years. Besides being responsible for
developing a sizeable CaPEX program of circa
r$2 billion in the frst six years, the special pur-
pose vehicle created to develop this concession
(rota das Bandeiras) also makes canon pay-
ments to the government of the state of So
Paulo of circa r$1.4 billion during the initial
18 months.
Since canon payments are not eligible for
BNDES fnancing, an alternative funding had to
be put in place to provide the full fnance need-
ed. While the long-term fnancing structure was
developed, Santander led a bank syndicate that
raised r$1 billion through an 18-month bridge
loan facility on a limited recourse basis (based
on project guarantees). This facility was under-
written during very diffcult market conditions
(post fnancial markets collapse in 2008) and
counted an innovative structure.
This 18-month period provided the spon-
sors and Santander with time to better evalu-
ate alternatives to structure long-term fnanc-
ing for the project. BNDES fnancing was
the means most suitable to fnance CaPEX:
long tenors granted at competitive pricing,
able to pack in the same facility for the frst
six years of the project CaPEX. However, by
2010, the only tested option that could com-
plement BNDES funding was multilateral
loans often used in the fnancing of infra-
structure assets in Brazil. in such a structure,
as the characteristic of a toll road project is
Brl-denominated and cash fow generation
linked to infation, a comprehensive hedging
programme would need to be implemented
to mitigate currency risk exposure.
How to structure successful deals
Mauro Cavalcanti de Albuquerque of Banco Santander reveals how the firm has devised
landmark transaction structures in sectors ranging from toll roads to oil & gas
mauro Cavalcanti de Albuquerque
The infrastructure
investment
require ment for
Brazil over the
coming years
is enormous
sponsored case study
|
BANCO SANTANDER
Up to that moment, capital markets had
been an important source of funds for in-
frastructure sponsors. However, most spon-
sors had only been able to access investors
to fund-established businesses/projects. in
order to access capital markets compatibility
to suit a toll road project, fundamental issues
had to be taken into consideration, such as
longer tenors, a customised amortisation,
structured guarantees, minimum credit rat-
ing, price equivalence and sheer volume.
as initial discussions with potential inves-
tors indicated appetite from fnancial inves-
tors (as well as pension funds), a necessary
step was to present the potential operation
to credit risk agencies for evaluation. Credit
rating issues concerned: construction risk
(mitigated by a strong lump sum EPC con-
tract with Construtora Norberto Odebre-
cht); demand risk (due to limited historic data mitigated by,
among other factors, resilience of cash fows even in stress scenar-
ios); operational risk (mitigated by the sponsors track records);
and adequate project accounts operations (rigid payments water-
fall/reserve accounts managed by independent collateral agent),
among others.
Equal ranking (pari passu) of the project bond with the
BNDES loan was a must have condition. This requirement was
addressed in discussions with the BNDES team who realised its
importance in order to accommodate investors requirements
and hence develop the frst Brazilian project bond (debentures)
denominated in reais. rota das Bandeiras obtained the following
credit ratings - aa2.br (Moodys) and braa (S&P) - showing the
strong creditworthiness of the transaction.
Finally, in July 2010, the rota das Bandeiras debentures deal
was launched in the Brazilian market, introducing for the frst
time the concept of a long-term (12 years), infation-linked, non-
recourse project bond, which was successfully placed after having
raised orders above the r$1.1 billion offer amount. The investor
base was comprised of pension funds, asset management frms, f-
nancial institutions and insurance companies. Surely, more transac-
tions with a similar confguration and approach to capital markets
will arrive in the near future as this transaction opened an impor-
tant new channel for fnancing the growing infrastructure pipeline.
cASe StUDY 2:
PIONEERING OIL & GAS SECtOR DEALS
BY PAtRIC LANGE
Brazilian energy company Petrobras expects domestic crude oil pro-
duction to jump to 3.1 million barrels a day by 2015, up from current
output of about 2.1 million barrels a day. Pre-salt oil production is
forecast to rise to 543,000 barrels a day by 2015 and 1.15 million bar-
rels a day by 2020. Total production, including natural gas output and
overseas operations, is expected to come in at 3.99 million barrels
of oil equivalent, or BOE, by 2015 and rise
to 6.42 million BOE by 2020.
For such enormous growth to material-
ise, needed investment in upstream equip-
ment and infrastructure has been mounting
and Santander has already established itself
in a leading position as provider of adviso-
ry/structuring services and in the fnancing
of offshore drilling rigs and foating vessels
for the oil industry in Brazil.
Back in 2007, Santander advised Ode-
brecht Oil and Gas (OOG) in the structur-
ing and fnancing of the frst non-recourse
fnance for a drilling unit in Brazil (Norbe
Vi). This $430 million fnancing was used as
a benchmark for fnancing this type of asset
in Brazil.
in 2008, Santander advised OOG in the
structuring and fnancing of two ultra deep-
water drilling ships (Norbe Viii and Norbe iX). The structuring
of this $1.334 billion fnancing faced the challenge of being the
frst large-sized, full-blown syndicated facility to close (successfully)
after the US banking crisis. This fnancing received a number of
international awards.
in 2010, Santander identifed the opportunity to tap new f-
nancing sources for drilling rig projects and worked with OOG to
put together one of the frst large-sized project bonds for offshore
drilling units in Brazil. This $1.5 billion project bond was used to
refnance the existing project loans of Norbe Viii and Norbe iX
and was a huge success with demand exceeding fve times the ini-
tial offering. This project bond earned a number of international
awards and helped to create a new asset class.
in 2011, Santander led and coordinated Queiroz Galvos frst
inroads in the international capital markets with the issuance of a
$700 million project bond based on two recently upgraded semi-
submersible mid-water drilling rigs (alaskan and atlantic Star).
This project bond was also very well received by international bond
investors and closed successfully in July 2011, despite the quite un-
favorable market environment.
in June 2011, with the constitution of Sete Brasil, Santander
closed a $5 billion benchmark transaction that will allow the con-
struction in Brazil of deepwater drilling units that will be subse-
quently chartered to Petrobras at competitive market prices. The
structure that supports the constitution of Sete Brasil was formed
and structured by Santander, which acted as sole advisor to Petro-
bras. Santander also acted as advisor to Sete Brasil in its initial capi-
tal raising effort and led the private placement that attracted over
$1 billion of equity commitments to Sete Brasil.
also in 2011, Santander participated in the fnancing of oil serv-
ices company OSXs frst FPSO (foating, production, storage and
offoading unit) OSX 1 - and is currently leading the fnancing of
OSXs second production unit (OSX2). Santander also participated
in the fnancing of the Petroserv drilling rig, Carolina, and in OOGs
two additional deepwater drilling ships ODN 1 and ODN 2. n
BANKING FOCUS
In 2010, Santander
identified the
opportunity to tap new
fi nancing sources for
drilling rig projects
sponsored keynote
|
BANCO SANTANDER BANKING FOCUS
YOu HAvE tO bear in mind the heritage of
Santander in order to understand its position
as one of the leading banks in the Brazilian
infrastructure space, according to Eduardo
Muller Borges, Santanders head of credit
markets in Brazil.
He explains that the bank frst built up
its knowledge of investing in infrastructure in
the Spanish and Portuguese markets before
spreading out to the rest of Europe, investing
heavily in the infrastructure sector through-
out the region. He adds: We have supported
the big construction companies as they have
invested in the development of energy and
logistics, and we have accumulated a lot of in-
house knowledge.
With its European experience under its
belt, Borges says the bank saw it as very much
part of our destiny to commit to Brazil. He
says the bank frst began investing in the
country in 1997 when it made its frst acquisi-
tion, but more intensively on structures and
teams for the last six or seven years. The bank
formed the view that infrastructure had huge
potential since it would need to develop in
line with Brazils strong growth rate.
This view has been vindicated in recent
years by a lot of deals, says Borges, especially
in the oil and gas sector. For example, in 2009
Santander acted as fnancial adviser and archi-
tect of the fnancing of two vessels for drilling
rigs in deep water (Norbe Xiii and iX). The
$1.7 billion funding was the largest project f-
nance transaction in the debt market after the
US sub-prime crisis, and saw the participation
of 12 commercial banks. This transaction was
refnanced last year through a project bond also
managed by Santander, the frst of its kind fully
placed in the international capital markets.
INNOvAtIvE mECHANISmS
He also points to the eight-year term loan struc-
tured in June last year for SiiF Energies, Brazils
largest wind energy company. The loan, one of
the largest for a wind project in Brazil, featured
a number of innovative mechanisms such as
customised amortisation and cash sweep of the
excess resources generated by the companys
wind farms.
Despite the strong deal fow, Borges says
that Brazilian banks generally have struggled to
put as much capital to work as they might have
liked in part due to the long-term nature of
these deals. He also notes that, in a high inter-
est rate environment (albeit that the central
bank recently cut its key rate from 12.5 percent
to 12 percent), development bank BNDES of-
ten fnds itself in an unbeatable position.
it [BNDES] has an important role to play
in terms of fnancing projects that create jobs
and have positive social aspects at a good, com-
petitive interest rate compared with what the
local banks can offer, notes Borges.
However, even allowing for the consid-
erable infuence of BNDES, Borges says it
does not have endless resources to lend, even
though infrastructure is such a high priority for
the government. The amount of fnancing re-
quired surpasses the amount thats available in
the traditional banking market.
Therefore, Borges stresses the role that
the capital markets have to play in Brazilian
infrastructure going forward. More and more,
you will see the capital markets being utilised
for project fnance in Brazil the capital credit
market and, to a lesser extent, the equity capital
markets.
as an example of capital markets poten-
tial, he points to the project fnancing for the
rota das Bandeiras toll road in July last year, for
which Santander acted as fnancial adviser. The
fnancing featured a 12-year, r$1.1 billion de-
benture issue Brazils largest-ever debenture
issue with the longest-ever term.
it was a big success, fully placed with in-
stitutional investors, says Borges, refecting
on the fnancing. There was great interest in
the sources of fnance and the level of demand
from investors. My feeling is that there is a lot
of pension fund money that can potentially go
into Brazilian infrastructure. n
Boosted by the capital markets
Santander is part of a banking community in Brazil which is seeing healthy deal flow,
but which cannot provide all of the infrastructure financing required. That means an
increased role for the capital markets, says Eduardo Muller Borges
eduardo muller Borges
The amount of
financing required
surpasses the
amount thats
available in the
traditional banking
market
q&a
|
JOO CAPOBIANCO, ENVIRONMENT SECRETARY ENERGY FOCUS
IN WHAt WAYS DOES tHE
ENvIRONmENt mINIStRY - OR ANY
OtHER ENvIRONmENt PROtECtION
AGENCY - ADDRESS CONCERNS
RELAtED tO INfRAStRuCtuRE
DEvELOPmENt?
JC: Both the government and society at large
agree upon the need for major investment in
the improvement of Brazilian infrastructure.
The lack of investment is even considered
one of the greatest problems faced by the
country.
This does not mean, however, that these
works could or should disrespect environ-
mental laws or be done without regard for
planning.
The problem is that the lack of invest-
ment in infrastructure coincided with a lack
of investment in the public institutions of
the federal and state governments, leading
to a lowered capacity for these organs to op-
erate at the current time.
The case of the federal agency known
as ibama instituto Brasileiro do Meio am-
biente e dos recursos Naturais renovveis
[Brazilian institute of Environment and
renewable resources] - is emblematic of
this issue. in 2003, there were almost no
career employees involved in the analysis
and approval of environmental licenses.
Most of the workforce in the organisation
in this area was made up of external con-
sultants that were called in for the analysis
of specifc cases and then left at the end of
the procedure. Due to this, the organisa-
tion did not amass experience and could
not maintain its own technical capability to
quickly resolve cases that involved similar
licensing issues. This began to change in
2004, with the creation of a specifc board
for environmental licensing. at the same
time, several positions for permanent spe-
cialists were advertised in the organisation.
This hiring procedure, however, is long and
demands permanent investment in person-
nel training, which has not occurred so far.
Therefore, although the Ministry of the
Environment and the environmental state
agencies are committed to collaborate so
that infrastructure works may become more
expedient, the technical limitations of the
organisation and the low quality of the envi-
ronmental impact studies have led to inevi-
table delays in licensing procedures.
WHAt WOuLD YOu SAY ARE SOmE
Of tHE PRImARY ENvIRONmENtAL
CHALLENGES CuRRENtLY fACING
BRAzIL?
JC: Brazil faces several environmental chal-
lenges, but four should be emphasised:
controlling deforestation, especially in the
amazon and the Cerrado; maintaining the
current environmental legislation, which the
Congress comes under strong pressure to
modify; implementing climate change poli-
cies; and increasing the institutional capacity
for environmental licensing.
WOuLD YOu SAY tHAt tHE
DEvELOPmENt Of INfRAStRuCtuRE
IN BRAzIL RuNS CONtRARY tO
ENvIRONmENtAL PROtECtION? ARE
tHE INtEREStS Of INfRAStRuCtuRE
DEvELOPERS AND ENvIRONmENtAL
CONCERNS NECESSARILY OPPOSED?
JC: The interests of those that defend
infrastructure works and those that defend
environmental issues are not structurally
opposed. Quite the opposite, and, as previ-
ously stated, there is an agreement over the
need to improve our infrastructure.
as proof of this, controversial works,
How to keep Brazil green
Brazil is conscious of the need to marry infrastructure development with environmental
responsibilities, but a lack of experienced human resource is affecting the licensing
procedure. Joo Capobianco, former Secretary in Brazils Ministry of Environment,
explains the challenges
Joo Capobianco
Maintaining
the status of the
Brazilian energy
network as the
cleanest in the
world is a challenge
that must be
actively pursued
Areas of Expertise
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Tel ecommuni cat i ons
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Since 1956 www. mf r a. c o m. b r
RIO DE JANEIRO Av. Almirante Barroso, 52 - 5th floor Centro CEP 20031-000
Rio de Janeiro RJ Brazil Tel 55 (21) 2533 2200 | 3257 2200 | Fax 55 (21) 2262 2459
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So Paulo SP Brazil Tel 55 (11) 3082 9398 | 2192 9300 | Fax 55 (11) 3082 3272
q&a
|
JOO CAPOBIANCO, ENVIRONMENT SECRETARY ENERGY FOCUS
such as the integration of the So Francisco basins or the hydroelec-
tric dams of the Madeira river, were only approved after great effort
from both parties to correct the initial studies and perform the nec-
essary adaptations in order to minimise the environmental impacts.
The biggest challenge is that there is a problem that cannot be re-
solved in a short amount of time and has led to great diffculties in the
licensing procedure: the lack of scientifc know-how, macro-regional
planning and environmental zoning which are necessary as a basis for
the environmental impact studies and all the necessary analysis.
One example of this problem is related to biological inven-
tories, fundamental for any decision in the licensing procedure.
Studies released by the Ministry of the Environment through the
National Biological Diversity Program show that we have wide areas
of the national territory where basically no study of the fauna and
fora has ever taken place.
Due to this gap, which should be flled with a permanent ef-
fort and long-term fnancing from the government, the reference
terms for environmental impact studies realised by the licensing
organisations often include these studies as one of the duties of the
contractor.
Naturally, this leads to several problems. The frst is the long
time required for these studies, as samples must be collected in all
seasons and, ideally, for several years. The second involves the gen-
erally highly increased costs. The third concerns the reliability of
these studies when they are performed by the interested party, as
an inventory that reveals a great diversity in species or identifes
species that are facing extinction may hinder or even prevent the
issuance of the license.
although these gaps in basic knowledge are spread over the en-
tire country, it is greater in the Northern region, where 65 percent
of the hydro-electrical potential in the country is located.

WHAt ARE SOmE Of tHE PRImARY WAYS tO SAfEGuARD
ENvIRONmENtAL INtEREStS IN A PERIOD Of RAPID
INfRAStRuCtuRE DEvELOPmENt? SPECIfICALLY, HOW
CAN ENvIRONmENtAL INtEREStS BE PROtECtED DuRING
tHE PERIOD Of RAPID DEvELOPmENt LEADING tO tHE
2014 WORLD CuP AND tHE 2016 OLYmPICS?
JC: The infrastructure works for the 2014 World Cup and the 2016
Olympics could be an opportunity, and not a threat to the environ-
ment.
For this, it is necessary to consider the environmental factor
in the planning of the necessary works, so as to guarantee that
the needed prior studies are done accurately and in the required
amount of time.
The funds needed to guarantee the environmental quality of
the works are every bit as relevant as the funding for the works
themselves, as they can ensure greater speed, reliability and a more
favourable social outlook on the works.
During these mega-events, Brazil will be on centre stage inter-
nationally and demonstrating its commitment to environmental
concerns will be hugely benefcial for the country.
ARE tHERE PARtICuLAR SECtORS Of INfRAStRuCtuRE
DEvELOPmENt tHAt POSE LARGER ENvIRONmENtAL
CHALLENGES tHAN OtHERS? WHAt SECtORS WOuLD YOu
SAY POSE tHE LARGESt CHALLENGE?
JC: Without a doubt, the sectors that make the biggest impact on the
environment are those related to the generation and transmission
of energy and the construction of highways.
These are the greatest challenges currently faced and the ones
that have led to the most conficts between the government, envi-
ronmentalists and local communities. The two biggest examples of
these conficts are the hydro-electric power plant of Belo Monte,
in the state of Par, and highway Br 319, in the states of rondnia
and amazonas.

ARE tHERE ANY WAYS IN WHICH tHE DEvELOPmENt
Of NEW POWER SOuRCES AND ENERGY-RELAtED
INfRAStRuCtuRE HAvE AffECtED ENvIRONmENtAL
INtEREStS?
JC: The development of new alternative sources of energy is consid-
ered of great interest to the environmental issue.
Maintaining the status of the Brazilian energy network as the
cleanest in the world is a challenge that must be actively pursued in
the next few years, with the goal of maintaining the low emission of
greenhouse-effect gases and minimising the impacts of large water-
related infrastructure works.
investments in biomass, solar and wind power are considered
vital for the future and to maintain strong support from the envi-
ronmental sector.

WHAt ARE SOmE Of tHE PARtICuLAR ENvIRONmENtAL
CHALLENGES RELAtED tO tHE DEvELOPmENt Of WIND
ENERGY IN BRAzIL? HOW DO YOu PLAN tO ADDRESS
tHOSE CHALLENGES?
JC: Wind energy has increased greatly in Brazil in the last few years,
despite the strong opposition this source of energy has suffered from
the Ministry of Mines and Energy itself, as the ministry responsible
for energy policy in the country considered it a costly and unreliable
source of energy.
in the last two auctions completed in august 2011, almost half
(48 percent) of the total energy marketed was made up of wind
power plants. The cost of this energy was below r$100 per MW/
hour, less than gas-powered thermo-electric power plants and hy-
dro-electric power plants, which up to now had been the least costly
energy produced in Brazil.
as a whole, there is strong support from the environmental sec-
tor for the production of clean energy with low installation impact.
The problem that wind power plants may create is the im-
pact on the landscape. To counter this, it is important to ensure
proper environmental planning in the location of these enter-
prises. n
JULIO BUENO
|
secretary of economic development INTERVIEW
A mIx Of Houston and Barcelona. it may
sound like an unusual combination but, ac-
cording to Julio Bueno, a blend of those two
locations is what the thriving city of rio de
Janeiro will resemble in the future.
Bueno is the Secretary for Econom-
ic Development, Energy, industry and
Services for the State of rio de Janeiro
(Secretrio de Estado, Secretaria de
Desenvolvimento Econmico Energia in-
dstria e Servios), and his vision for the
growth of the state includes an intermin-
gling of industry and culture.
Bueno says rio should be modeled
on Houston because of its status as the
headquarters of the energy, oil and gas
businesses that power the US, which the
state of rio, home to 80 percent of Brazils
oil production in Buenos estimation, will
soon rival. rio produces 40 percent of the
countrys natural gas, Bueno says, making
it a vital power provider for the country.
Barcelona, meanwhile, should be a
model for rios development, according
to Bueno, because the Spanish port city
has grown into a cultural and tourist cen-
tre, visited by many for its concentration
of art, intelligence and design.
its hard to imagine the distinctive,
sprawling city of rio looking exactly like
either Houston or Barcelona in the near
future. But its clear that the state of rio
which is home to nearly 16 million peo-
ple, according to the 2010 census will be
undertaking some major changes in the
upcoming years.
Many of those changes must happen
before the 2016 Olympics, which are set
to take place in rio and are expected to
draw an enormous infux of investment.
reports have estimated that investment in
the State of rio will be more than r$200
billion ($125.7 billion; 87.2 billion) by
2020.
But Bueno wants to emphasise that the
Olympics are not the heart of the issue,
and that rios growth will not peak in the
run-up to the Games four years from now.
Bus rapid transit lines, new ports, new in-
dustrial developments as well as a revitali-
sation of the neighbourhood around rios
old port are planned as part of the prep-
aration for the Games, but Bueno says
there are also long-term changes taking
place quite apart from the international
sporting events.
Those projects are not because of the
Olympic Games, Bueno contends. You
have an economic cycle in Brazil espe-
cially in rio de Janeiro in terms of rail,
steel plants, petrochemicals, but its not
connected to the Games.
Bueno says that overall, he has seen
an extraordinary increase in interest from
foreign investors in recent years.
The level of interest has increased a
lot, Bueno says, adding that its almost
unbelievable.
i was in New York discussing [this]
with some investors and its impressive
how rio and Brazil is important at the
More than a game
Rios development will long outlast the World Cup and Olympics, thanks to broader
economic changes and a wealth of industry, according to Julio Bueno
Bueno: unbelievable interest from foreign investors
Much more
important than the
Games are the
oil sector, iron ore
sector and the
steel sector
JULIO BUENO
|
secretary of economic development INTERVIEW
INTERVIEW
moment, Bueno says. Groups he says
have shown interest in investing in Brazil
include GE, Honeywell, iBM and Halli-
burton.
The 2011 World Investment Report
from the United Nations Conference
on Trade and Development ranks Brazil
as the ffth-largest recipient nation for
foreign direct investment, following the
US, China, Hong Kong and Belgium.
South america had attracted the greatest
increases in the past year, according to
the report, with Brazil particularly buoy-
ant. in terms of projected investment
from 2011 to 2013, Brazil edges past russia, placing it fourth on
the list.
The increased level of interest in Brazil, Bueno says, refects the
economic cycle that we are living now.
Not only because of the Games, Bueno continues. Much more
important than the Games are the oil sector, iron ore sector and the
steel sector.
in March, the US Export-import Bank announced that it had au-
thorised up to $1 billion in export credit for infrastructure projects in
rio de Janeiro.
Brazil is an emerging economy with extensive infrastructure
needs, and this authorisation will provide further opportunities for
american exporters and small business owners, Export-import Bank
chair Fred Hochberg said in a statement, adding that the fnancing
could support investments related to the World Cup or the Olympics,
or to food relief.
Bueno says rio is assessing together with the Export-import Bank
what projects the export credit should support, but added that par-
ticular projects have not been decided on yet.
WHY BRAzIL?
Bueno says Brazils attractiveness to foreign investors has to do pri-
marily with structural conditions taking root in the country.
The frst condition: we are a democracy, Bueno says. We
have law in Brazil. We respect contracts.
Macroeconomic stability is the second reason. State debt in
Brazil is less than 40 percent of gross domestic product, accord-
ing to Bueno. infation, while still high, is decreasing rather than
increasing, Bueno says. The Brazilian real is strengthening and the
country has achieved high levels of foreign currency reserves, Bue-
no says. Brazils foreign currency reserves have reached near-record
levels of about $350 billion, President Dilma rousseff told reporters
in early august.
The third and fourth reasons, according to Bueno, are root-
ed deeply in Brazils population and wealth of natural resources.
Those resources include oil, iron ore,
and agriculture, as well as the pre-salt
oil and gas reservoir developments that
Bueno says have lured interest from for-
eign companies as well.
Population growth and the strength-
ening and stabilising of Brazils internal
market have also had an impact.
We have a market, an internal mar-
ket, and people are anxious to consume,
to go to consumer markets, Bueno says.
One area in which he sees particularly
large possibilities for private equity inves-
tors is in the energy sector.
i think the energy sector is very important for private equity,
Bueno says, estimating that Brazil needs to add about 6,000 mega-
watts of energy generation capacity over the next ten years in order
to keep pace with population growth and industrialisation. He said
he sees strong opportunities for private equity to invest in energy
transmission and distribution as well as energy generation in Brazil.
There are some areas for private investment where Bueno be-
lieves the federal government could be pushing harder to increase
development. One such area is the airports sector, and the poten-
tial privatisation of airports, about which he is outspoken. The Bra-
zilian aviation agency (aNaC) has released a call for projects for
concessions at airports including Brasilia, Campinas and Guarulhos
international airport at So Paulo.
We represent the interest of rio de Janeiro society. The rio
de Janeiro people. So we are in favour of privatisation of the air-
ports, Bueno says, adding that the federal government, he feels,
has reservations about the potential airport concessions because it
is left-wing.
When asked what its role is in the securing of privatisations, Bue-
no says that his agency does not have a direct role in pushing forward
any potential tenders. Only political pressure, Bueno says.
A fEW HIGHLIGHtS
Some of the projects that Bueno highlights include industrial and port
developments, as well as development of the Olympic Port project,
which Bueno says will create a commercial centre akin to londons
Canary Wharf.
Bueno also mentions three bus rapid transit lines, one of which is
projected to extend to the Tom Jobim international airport, as well as
the extension of the city of rios subway lines.
The upgrades to urban infrastructure, and specifcally the im-
proved transport systems, Bueno says will beneft the states industrial
and cultural development even after the World Cup and the Olympics.
its a legacy, Bueno says, adding that he sees it as one of the
most important legacy projects in rio. n
We represent the
interest of Rio de Janeiro
society. The Rio de
Janeiro people. So we are
in favour of privatisation
of the airports
LEGAL FOCUS SPONSORED Q&A
|
JUSTEN, PEREIRA,

OLIVEIRA & TALAMINI
WHAt ARE tHE KEY LEGAL ISSuES IN
RELAtION tO PRIvAtE INvEStmENt IN
BRAzILIAN INfRAStRuCtuRE?
MJF: The current outlook in Brazil favours invest-
ments in the feld of infrastructure. The last few
years have brought political stability alongside a
strong economic momentum. and there is an
immediate need for infrastructure investments,
which go far beyond the requirements for the
coming World Cup and Olympic Games.
Many of these investments in infrastructure
will be made with public funds, by means of gov-
ernment contracts. These contracts require a
public tender for the selection of the contractor.
another system will be public-private partner-
ships (PPPs), which also rely on public tenders
for selection of the private partner.
WHAt ARE tHE StRENGtHS AND
WEAKNESSES Of BRAzILIAN LAW IN
AN INfRAStRuCtuRE CONtExt?
MJF: Brazil has a stable and sophisticated regulatory framework in several
areas, such as telecommunications, energy and ports. However, consider-
able advances could be made in sectors such as railroads and airports.
The legislation in these sectors is scant in some respects, occasionally
leading to diffculties and legal risks for the private investor. This became
evident during the recent bid for the concession for a high-speed train
project, in which all prospective bidders seem to have refused to bid
due to uncertainties in the project.
another diffculty involves the general system for enforcement of
credits against government agencies, which can be time-consuming
and cause mistrust in investors. The lack of investor-state arbitration
(iCSiD) is sometimes viewed as a shortcoming.
Brazilian legislation addresses such diffculties by granting the pri-
vate partner in PPPs a specifc system of guarantees and enforcement
of credits. it also allows for domestic or international arbitration. in
all government contracts, the private contractor is generally protected
against the economic effects of uncontrollable circumstances.
DO REGuLAtORY fRAmEWORKS tEND tO WORK IN INvES-
tORS fAvOuR? WHAt ImPROvEmENtS NEED tO BE mADE?
MJF: Several improvements could be implemented to overcome regu-
latory diffculties that increase risks to investors. Currently, the most
important bottlenecks in Brazilian infrastruc-
ture are in the air and land transport sector.
The air transport legislation is dated
and imprecise. aNaC, the National Civil
aviation agency, faces many diffculties in
achieving its objectives, mostly because al-
most all airports are fully operated by iN-
FraErO, a government agency.
There are already signs of change. The
recent creation of the Civil aviation Secre-
tariat led to changes in the legislation of
aNaC and iNFraErO. The government
has also made clear its intention of granting
the concession of some important airports
to private exploitation under a PPP system.
roads suffer from poor planning
and an overall lack of investment, which
leads to expensive projects and an une-
ven coverage of paved roads. a relatively
low percentage of highways in Brazil are
paved, mostly in the more developed
south and south-east regions.
railroads are not widely used, serving mostly for the transport of
grains to be shipped by seaports. The regulatory agency responsible
for the railroads has recently passed new resolutions changing the
rules for the usage of railroad tracks, though it is still early to gauge its
effects and acceptance by the current operators. a project for the con-
struction of a high-speed passenger train connecting So Paulo and
rio de Janeiro is in the planning stages.
Overall, despite the current shortcomings, recent policies, such as
the PaC [Growth acceleration Program], show that the government is
aware of its diffculties and is making use of Brazils economic boom to
improve on infrastructure.
IS tHERE A tRACK RECORD Of CONtRACtS BEING
EffECtIvELY ENfORCED?
MJF: Yes. Brazilian legislation concerning infrastructure contracts is thor-
ough in ensuring their enforcement. Moreover, both the government
and the courts have generally demonstrated their intent of establishing
a safe environment for the enforcement of all contracts signed. When
the terms of the contract are not followed, the other party may request
in court specifc performance, including injunctive relief or fnancial
compensation.
All-comers welcome
Foreign and domestic investors can expect equal treatment, as well as strict enforcement of
contracts in court. So says Maral Justen Filho, founder and senior partner of Brazilian law firm
Justen, Pereira, Oliveira & Talamini, in a wide-ranging interview about the key legal issues in
Brazilian infrastructure
maral Justen Filho
SPONSORED Q&A
|
JUSTEN, PEREIRA,

OLIVEIRA & TALAMINI LEGAL FOCUS
The Brazilian legal system allows for full
judicial review of government actions, and
the state can be brought to court or arbitra-
tion in some cases to comply with contracts
or give compensation for any breach.
During the 1990s, a dispute relating to
certain state government PPPs in the toll
road sector gave rise to strong case law stress-
ing the binding force of government con-
tracts and the duty to comply with the con-
tractual conditions.
ARE fOREIGN INvEStORS ABLE tO HAvE AS muCH
CONfIDENCE IN tHE LEGAL AND REGuLAtORY
fRAmEWORKS AS DOmEStIC INvEStORS?
MJF: Yes. There is no reason for foreign investors to fear they may be
treated differently from domestic investors. Once a contract is signed,
the nationality of the investor is irrelevant for the allocation of the risks
of the contract. it should be noted that, in 2010, public procurement
regulation was changed to establish a margin of preference to products
made in Brazil (a Buy Brazilian act). Even in its narrow feld of appli-
cation, this rule relates only to bidding procedure, not to contractual
conditions or performance.
S&P tOLD uS IN AN INtERvIEW tHAt mOSt BRAzILIAN
PROjECt fINANCE DEALS HAvE BEEN StRuCtuRED tO
RELY mORE ON CORPORAtE OR SPONSOR SuPPORt
RAtHER tHAN ON ROBuSt LEGAL AND StRuCtuRAL
SEPARAtENESS ELEmENtS. tHEY ALSO ADDED tHAt
tRANSACtIONS [HAvE] tO RELY mORE ON tHE
CREDItWORtHINESS Of tHE PROjECt ASSEtS tHAN ON
SPONSOR SuPPORt. DO YOu AGREE WItH tHIS vIEW AND
WHAt IS BEING DONE tO ADDRESS tHESE ISSuES?
MJF: law 11.079, enacted in 2004 and relating to PPPs, seeks to ensure
that project fnance is based on the creditworthiness of the project itself
and not on corporate sponsorship. its article 9 requires a Special Purpose
Company (SPC) as the vehicle for the PPP. another condition that aims
to advance a pure project fnance system is the provision requiring the
public partner (government) to offer security for its obligations under
the PPP, be it through performance bonds or special government funds.
This measure improves the quality of the private partners receivables
under the PPP and makes it easier for non-recourse project fnance
to be viable.
HOW WOuLD YOu EvALuAtE tHE APPEtItE Of LOCAL
BANKS tO ENtER INtO PPP AGREEmENtS? mANY Of
tHE tRANSACtIONS SEEm tO BE HIGHLY DEPENDENt
ON BNDES.
MJF: BNDES, the Brazilian National Social and Economic Develop-
ment Bank, is a crucial part of Brazilian economic policy. BNDES
serves as an effective means of fnancing government undertakings. it
ensures less costly fnancing for infrastructure projects that might not
seem proftable to the private enterprise
otherwise. Other government-controlled
banks, such as Banco do Brasil and the
Caixa Econmica Federal also fnance a
great number of public projects.
it should be stressed that, in PPPs,
public fnancing cannot be higher
than 70 percent of the total fnancing
of the project, ensuring that the part-
nership is never wholly dependent on
public funds. law 12.431, passed in late
2010, grants tax exemptions for private
investment in several areas, seeking greater private investments in
infrastructure.

IS tHE fEDERAL GOvERNmENt YEt tO ENGAGE IN
tRuE PPP CONtRACtS (ExCEPtING LOCAL REGIONS
AND muNICIPALItIES)? If SO, IS tHERE AN OBStACLE
tO PPP DEvELOPmENt IN BRAzIL?
MJF: Public contracts with the private sector are common in Brazil,
including with the federal government. However, true PPP contracts,
in which the government is responsible for part or all of the private
partners earnings in the performance of a public service, are quite
new in Brazil.
These contracts were introduced by law 11.079, passed in 2004.
The law imposes several contractual, administrative and fscal con-
ditions for the creation of a PPP. These requisites and the newness
of PPPs may explain the relatively scarce cases of true PPP at the
level of federal government. However, there are numerous PPPs in
operation mostly at state level.
Several projects currently under study by the federal government
may be developed through PPPs, such as the proposed high-speed
train and the concession of airports to private enterprise. The con-
cept of PPPs is widespread, and this system is expected to be used in
a variety of government and government-related activities.
mExICO CREAtED A NEW tYPE Of INStRumENt LASt
YEAR ALLOWING DEvELOPERS tO LISt tHEIR PROjECtS
ON tHE StOCK ExCHANGE, tHuS fACILItAtING ACCESS
tO fuNDING fROm INStItutIONAL INvEStORS. WHAt
mEASuRES, If ANY, ARE BEING CONSIDERED tO AttRACt
tHESE SOuRCES Of LONG-tERm CAPItAL IN BRAzIL?
MJF: Brazilian infrastructure projects resulting from public con-
tracts are not listed on the stock exchange. However, the compa-
nies that exploit the projects may choose to go public. Most large
infrastructure operators in Brazil have done so in various areas
such as toll road concessions, port terminals, railroads, energy and
telecommunications.
The government has also taken several measures to attract long-
term investors, as is the case with the tax exemptions created in
2010 by law 12.431 and the creation of an investment fund based
on the Social Security funds. n
Several improvements
could be implemented
to overcome regulatory
difficulties that increase
risks to investors
TRANSPORT FOCUS
tHE DEvELOPmENt Of a surface transportation network - often
referred to as the spine of a country - can determine much about how
goods are shipped, where people live, how people commute, and can
also prove essential to easing congestion at ports and airports.
in Brazil, several major projects are underway to improve the coun-
trys surface transportation networks. While some of these projects
could help to relieve congestion before the World Cup in 2014 and
Olympics in 2016, they also serve the larger purpose of reducing bur-
dens on airports and increasing the accessibility of port infrastructure,
as well as maximising existing rail infrastructure.
These projects are large-scale - potentially too large or complex to
be funded exclusively through public procurement. as a result, Bra-
zil is contemplating some potentially ground-breaking public-private
partnerships (PPPs) in both the road and rail sectors.
BuLLEt tRAIN
One of the most high-profle projects has been the proposed bullet train
connecting rio de Janeiro to So Paulo. The 511-kilometre train line,
which would also link to the city of Campinas, has been estimated to cost
about r$33 billion (14.2 billion; $20.1 billion), though other estimates
have put the cost signifcantly higher.
Following two postponements, the July 2011 auction for the
project failed to attract any bidders. The government then announced
plans to split the project into two phases, which private investors would
bid on separately.
The frst phase, explains Hlio Mauro Frana, an executive su-
perintendent at agncia Nacional de Transportes Terrestres (aNTT),
Brazils National land Transport agency, will focus on fnding an op-
erator which will also provide the technology necessary to build the
high-speed line.
The winning operator and technology supplier will also create a
business plan for the project, as well as provide engineering and de-
sign documents for the proposed line.
Following the frst phase, a second phase of the concession will
include infrastructure construction as well as the development of real
estate along the line, such as stations.
Frana says private operators concerns about the proposed rail
line include the discrepancy in the total volume of investments, and
the possibility of shouldering too much risk.
Now we need to keep the risk separate, so that its not conta-
gious, Frana says. We can mitigate all risk in phase one and we
Building the backbone
Federal- and state-level transport regulators discuss some of the major concessions being
granted in Brazil over the next few years, and what role private investment can play in the
development of the countrys road, rail and bus systems
Bullet train: coming to Brazil soon?
TRANSPORT FOCUS
can mitigate risk in phase two, he says,
adding that revenues from real estate
development along the lines could help to
offset some of the risks associated with build-
ing the rail lines infrastructure.
Frana also says the two-part structure
could help to assuage other concerns private
investors appeared to have during the bidding
process.
The groups that would bid on the frst
phase of the concession are not typical inves-
tors in terms of the way they planned to invest
in this particular project, Frana says.
Usually they are not investors. They
sell rolling stock, they sell systems, they sell
equipment. But they were willing to be very
minority shareholders, Frana says. But
when more investment is required they would
disappear as a shareholder or they would
have to put more money in as a shareholder
and so they were not comfortable.
Medium-size construction companies
wanting to participate in the project as a part
of a consortium had equity but they did not
have debt, Frana says.
He says the costs associated with the
project are higher than the government had
expected, and that accurate costs cannot be
ascertained without further studies.
So we said we cannot go ahead with
that, we cannot wait, lets see what happens if
we change the model. So thats what we are
doing now, Frana says.
Bidding documents for the frst phase
are expected to be made public by Novem-
ber, Frana says, with bids taking place next
year. For the second phase, Frana estimates
that bidding will take place in the following
year. n
IN SO PAuLO, the state-level transport
regulator agncia reguladora de Servios
Pblicos Delegados de Transporte do Es-
tado de So Paulo (arTESP) is also begin-
ning to undertake a ground-breaking and
large-scale concession.
arTESP, which is responsible for
managing road concessions and draft-
ing procurement documents in addi-
tion to regulating and supervising about
5,400 kilometres of highways and 1,130
lines of inter-city passenger transport,
has begun preliminary studies for the
Tamoios highway expansion project.
The project, which includes dou-
bling the width of the existing highway
as well as constructing bypass roads that
will give access to the Port of So Se-
bastio, is slated to be built in two phas-
es and is expected to require investment
of more than r$4 billion.
The state of So Paulo has chosen to
pursue the project as a PPP because of its high associated costs, according to Karla Ber-
tocco Trindade, director general of arTESP. Those high costs could also mean that
Tamoios will be the frst private concession in So Paulo that is backed not only by tolls,
but also by public subsidies.
This type of concession differs from the highway concessions previously utilised in
the state of So Paulo as these previous concessions did not include the possibility of
public funds serving as revenue for the private contractor, Trindade says.
The project will both allow for better use of the Port of So Sebastio and relieve traffc
on routes traveling to So Paulos heavily-traffcked Port of Santos, according to Trindade.
Trindade says private investment has a substantial role to play in the development of
transport networks in So Paulo and that private investors hold a key role in infrastruc-
ture projects in the state of So Paulo.
it is undisputed that private companies, investment funds and large corporations
are considered partners of the state of So Paulo, according to Trindade, who adds that
the instrument of concession has been increasingly utilised by the state in delegating
the rendering of public services to private partners. n
APARt fROm SOmE of the large and highly
visible PPP projects, aNTT and arTESP also
have plans to supervise new concessions for
rail and inter-municipal lines.
Projects under the purview of aNTT in-
clude bus lines as well as recently enabled
concessions aimed at maximising the poten-
tial for using existing rail networks, according
to Frana. Frana estimates that about 18,000
kilometres of existing rail networks are under-
utilised and he says the government, under re-
cently implemented regulations, is exploring
options to open some of those under-utilised
networks to new concessions.
Trindade emphasises that plans for So
Paulo extend beyond the 2014 World Cup
and 2016 Olympics, and argues that the need
for transportation development in Brazil
stems not from particular events but from the
greater distribution of income in the popula-
tion and the growth of Brazil as a whole. That
growth has created greater wealth in several
regions and requires a stronger connection
between economic centres, Trindade says.
if the World Cup were to happen this
year, the highways that connect all airports in
So Paulo are already in a condition compat-
ible with the best highways in the world, Trin-
dade claims.
She says a transportation plan for So
Paulo will be published by the end of the year,
and that the plan could open the concession
of intercity lines to private operators. n
broader HigHways
new projects
so Paolo highway: private investors have
key role
BENJAMIN ZYMLER
|
president, tcu INTERVIEW
COuLD YOu DISCuSS tHE HIStORY
Of tHE tRIBuNAL DE CONtAS DA uN-
IO (tCu) AND HOW tCuS ROLE HAS
EvOLvED OR CHANGED SINCE 1988?
COuLD YOu ALSO DISCuSS tHE ROLE
tCu CuRRENtLY PLAYS IN EvALuAt-
ING PRIvAtE INvEStmENt IN INfRA-
StRuCtuRE?
BZ: TCU [Brazils Court of audit] was cre-
ated to control the public administration,
help perfect it and increase its contribution
to society. TCU was established on Novem-
ber 7, 1890 and has been included in all six
Brazilian Constitutions since 1891. However,
its competencies have changed several times
over the years.
in 1998, the current Constitution im-
plemented a signifcant change to TCUs
competencies, allowing it to evaluate the op-
erational performance of public institutions,
entities and programmes with a view to as-
sessing their legitimacy and value for money.
in recent times, TCU has cemented
its place as a fundamental institution in
the consolidation of Brazilian democracy,
contributing signifcantly to an increase in
transparency, accountability and better gov-
ernance.
This is due to the independence, tech-
nical expertise and professionalism that
TCU has sought to develop over the years,
incorporating the most relevant criteria,
methods and techniques in the evaluation
works carried out by the court.
Our main function is to help the Na-
tional Congress of Brazil [the countrys
legislative body] exercise external control.
However, TCU is independent vis--vis any
other institution, since the court can carry
out supervisory works of its own initiative.
TCU has also reached an understand-
ing with Brazils judicial authorities not
to review any decisions taken by TCU re-
garding cuts to federal public spending.
Therefore, the judicial authorities will only
analyse TCUs decisions to make sure they
conform to constitutional guarantees and
legal processes. TCU aims to work in sync
with the judicial authorities. in this sense,
it provides information that may contribute
to speedy and more effective work by the
judicial authorities.
The external control exercised by TCU
on public policies concerning the formu-
lation, regulation and implementation of
infrastructure investments applies the same
techniques used in the most developed de-
mocracies in the world.
The execution of public works is moni-
tored by technical units specialising in dif-
ferent infrastructure sectors, like roads or
hydro-power, for example. Their work al-
lows the court to point out irregularities
that, once corrected, can avoid serious
damage to the public budget.
Concerning private sector projects, like
concessions or PPPs, TCU monitors these
projects throughout their tender process,
evaluating technical and economical feasibil-
ity studies, including estimated investments,
The watchdog
Benjamin Zymler
TCU has paid a lot
of attention to the risk
allocation between the
government and the
private sector
Benjamin Zymler, president of Brazils Court of Audit (TCU), tells how adequate risk
allocation is essential to successful public-private partnerships and describes how the
court ensures these projects are properly implemented
tariff rates and the bidding process itself. TCU also follows the work
and performance of the regulatory authorities involved in these
projects.
Finally, the court plays an important role in the evaluation and
strategic management of several government investment plans, like
the Programa de acelerao do Crescimento [Growth acceleration
Plan]. By systematically following the public bodies executing the
plan, TCU tries to make recommendations that promote better
governance, transparency and accountability.

COuLD YOu DESCRIBE tHE tYPICAL EvALuAtION PROC-
ESS fOR AN INfRAStRuCtuRE PROjECt?

BZ: TCU simultaneously assesses the tender process for infrastructure
projects as well as the regulatory agencies managing these projects.
The monitoring of private infrastructure projects starts with an
analysis of the technical studies, promoted by the procuring author-
ity, which precede the bidding process. at this stage, TCU evaluates
the quality of the technical and economical studies for a project,
including estimated construction costs, the cost of services to be
provided, expected revenues, limits to bidding prices, environmen-
tal studies and environmental permits.
after the tender documents are published, TCU checks that
they conform to previous studies and legislation. The court takes
a look at questions related to risk transfer, the contracts economic
equilibrium, guarantees provided, and services to be rendered,
among other things.
Once the concession contract is signed, TCU follows its execu-
tion by monitoring the regulatory agencies that have to manage the
implementation of these concession contracts. in this context, TCU
oversees the effciency, legality and value for money of the work
carried out by these regulatory agencies to guarantee a balance be-
tween private interests and the users of the services tendered by the
government.
HOW DO YOu ENSuRE ACCOuNtABILItY IN tHE
EStABLISHmENt Of PuBLIC AGREEmENtS WItH tHE
PRIvAtE SECtOR? WHAt mEASuRES NEED tO BE tAKEN
IN ORDER fOR A PuBLIC-PRIvAtE PARtNERSHIP tO BE
SuCCESSfuL fROm tHAt StANDPOINt?

BZ: TCU is very concerned about transparency during its oversight of
the entire tender process. We have sent several requests to procuring
authorities asking them to provide more information to interested par-
ties and publish, on their websites, answers to questions asked during
public hearings prior to the tender process or during the appeals phase.
in many cases, the court sends inspectors to these public hearings
to make sure they are following proper procedure and to get infor-
mation about the main demands of all the parties involved. We also
demand transparency when there are changes to tariffs, requiring the
regulatory agencies to justify tariff changes.
To give an example, TCU recommended that Brazils National
Petroleum agency [agncia Nacional do Petrleo] conduct environ-
mental studies for land it wishes to tender for exploitation. We also told
them to hold regional public hearings encouraging a broad outreach
to the community. regarding public-private partnerships, the key to
their success lies in explicitly defning the risk allocation between the
public and private parties.

WHAt DO YOu tHINK ARE SOmE Of tHE WAYS tO BALANCE
tHE NEED fOR INfRAStRuCtuRE GROWtH WItH tHE NEED
tO SAfEGuARD PuBLIC INtEREStS? DO YOu ADDRESS ONLY
tHE fISCAL ISSuES RELAtED tO PuBLIC COmmItmENtS tO
INfRAStRuCtuRE, OR ARE YOu ALSO CONCERNED WItH
PuBLIC POLICY, ENvIRONmENtAL, LABOuR OR SOCIAL
ISSuES? AND HOW ARE tHOSE ISSuES DIffERENt IN
PuBLIC-PRIvAtE PARtNERSHIPS?

BZ: The discussion about the proper balance [between public and private
parties] and the need to safeguard the public interest is primarily carried
out in the National Congress of Brazil, taking into account applicable
legislation. it is TCUs job to then make sure that the legislation is fol-
lowed and that the decisions taken are acceptable. Our oversight goes
beyond budgetary and economic questions and also extends to the social
and environmental arenas. This translates into recommendations issued
by TCU to project managers requiring them to conduct environmental
studies, obtain environmental permits and implement, when necessary,
measures to mitigate the socio-environmental impacts of a given project.
TCU has a unit specialised in environmental issues that looks at
these questions. The private partner has to comply with the conditions
required to obtain the installation and operation permits necessary to
develop its project. its important to highlight, though, that TCU is
not responsible for designing and issuing these permits thats the
responsibility of the environmental authorities. The court is respon-
sible, though, for making sure that environmental legislation and the
rulings of environmental authorities are carried out.

DID tHE ExPERIENCE Of CONtROLLING GOvERNmENt
ExPENDItuRE IN tHE RIO 2007 PAN-AmERICAN GAmES
INTERVIEW BENJAMIN ZYMLER
|
president, tcu
Hydro-power: monitored by specialist unit
INfLuENCE tCuS ACtIONS WItH REGARD
tO tHE 2014 WORLD CuP AND tHE 2016 OL-
YmPICS? If SO, HOW? DO YOu ExPECt ANY
SPECIfIC CHALLENGE WItH REGARD tO tHE
CONtROL Of SuCH EvENtS?

BZ: The control exercised by TCU during the 2007
Pan-american Games illustrates the importance of
planning ahead to avoid the risk of incurring vastly
greater expense than initially forecast.
Taking into consideration the diversity of
agents involved in the execution of the 2014
World Cup and the 2016 Olympics federal gov-
ernment, states, municipalities and private com-
panies the court has been working to make sure
there is adequate and timely planning for both
events.
regarding the World Cup, for example, TCU
has tasked the Sports Ministry with sending ten-
der documents and contract drafts to the court
every two months, starting on February 26, 2010.
it was also decided to audit the Banco Nacional de Desenvolvi-
mento Econmico e Social (BNDES) and the Caixa Econmica
Federal (CaiXa) with the objective of checking loans and fnanc-
ing provided to state or municipal governments to build or re-
furbish football stadiums and associated urban mobility works
related to the World Cup.
another area of activity for the court is external control in-
spections to avoid irregularities before projects are fnished. These
preventive actions are occurring for the construction of ports and
airports linked to the main cities that will host the World Cup,
since these projects are executed with federal resources. recent
inspections carried out by TCU for the projects to build the Belo
Horizonte and Manaus airports have yielded combined cost sav-
ings of over r$140 million (61 million; $88 million).
TCUs big challenge for the coming years is to continue to per-
form its core tasks to the highest standard whilst dealing with the
increased demand resulting from the sports events Brazil will host.
HOW HAvE LEGAL fRAmEWORKS CHANGED IN RECENt
YEARS IN RELAtION tO PRIvAtE INvEStmENt IN INfRA-
StRuCtuRE?

BZ: The most important change to the legal framework occurred
in the nineties with the creation of the concessions law. afterwards,
laws were promulgated creating regulatory agencies and allowing
private investment in several infrastructure sectors. Various com-
panies in the telecommunications, transport and energy sectors
were privatised through these laws, transforming the state from a
provider into a regulator of these key public services.
importantly, 1995 was also the year when a constitutional
amendment broke Petrobras monopoly in exploiting and pro-
ducing petroleum. Subsequently, a law was made that created the
agncia Nacional do Petrleo [National Petroleum agency] and
regulated the private exploitation and production of petroleum.
another important innovation was the law allowing public-
private partnerships, promulgated in 2004.

WHAt ARE SOmE Of tHE mAjOR CHALLENGES IN CON-
tRACtuAL fRAmEWORKS PRESENtED BY PRIvAtE INfRA-
StRuCtuRE INvEStmENt?

BZ: TCU has paid a lot of attention to the risk allocation between
the government and the private sector to make sure that a fnancial
equilibrium is maintained over the long life of concession contracts,
which often last more than 30 years.
One of the main challenges is to improve the quality of early-
stage studies and projects preceding the actual tender to make
sure that the subsequent contracts are drafted appropriately.
adequate, pre-defned risk allocation diminishes private sec-
tor uncertainty and increases the predictability of future govern-
ment spending if certain variables occur, thus reducing the prob-
ability of juridical insecurity and damages to the public purse.
Establishing contractual procedures that guarantee trans-
parently a fair remuneration for investors as well as adequate
tariffs for users over the long term helps to cut risks for the private
party and increases social well-being for the benefciaries of the
services being rendered.

IS DOmEStIC PRIvAtE INvEStmENt IN INfRAStRuCtuRE
EvALuAtED DIffERENtLY fROm INtERNAtIONAL PRIvAtE
INfRAStRuCtuRE INvEStmENt?

BZ: We make no difference when evaluating foreign or domestic
investments. However, there are some strategic areas outlined in
the constitution, such as telecommunications and aviation, that
require a majority of domestic capital or even domestic ownership.
These requirements are checked by TCU. n
INTERVIEW BENJAMIN ZYMLER
|
president, tcu
2014 World Cup: Sports Ministry reports to TCU
DATA FILE
Brazil: Economic indicators and forecasts
2008 2009 2010 2011e 2012e
Domestic economy
GDP change in % (real) 5.2 -0.6 7.5 4.0 4.5
GDP ($bn) 1,653.3 1,593.0 2,089.0 2,546.4 2,742.6
Inflation in % (annual average) 5.7 4.9 5.0 6.6 5.0
Budget balance in % of GDP -2.0 -3.3 -2.6 -2.0 -1.5
External sector ($bn)
Merchandise exports 197.9 153.0 201.9 245.0 263.0
Merchandise imports 173.1 127.7 181.7 220.0 242.0
Current account balance -28.2 -24.3 -47.4 -54.5 -67.5
Current account balance in % of GDP -1.7 -1.5 -2.3 -2.1 -2.5
Net foreign direct investment 24.6 36.0 36.9 60.0 65.0
Gross foreign debt 262.9 277.6 351.9 420.0 445.0
Foreign debt in % of exports* 109 146 146 144 143
Foreign exchange reserves excl gold 192.8 237.4 287.1 350.0 370.0
Import cover in months* 8.5 13.1 11.8 12.0 11.6
Interest rates
SELIC policy rate (annual average) 12.4 10.0 9.9 12.2 12.8
Spread (EMBI+), basis points, year end 2011: 08/05) 428 192 189 179
Stock market
Bovespa Index year end, 2011: 08/05) 37,550 68,588 69,305 52,949
Exchange rate
Year end (BRL per USD) 2.34 1.74 1.69 1.60 1.65
Annual average (BRL per USD) 1.83 2.00 1.76 1.60 1.63
*Goods, services & income e= estimate; f = forecast
Source: Allianz Economic Research & Corporate Development
Brazil: key facts and figures
We know that Brazil is a market with an under-developed infrastructure, which therefore
presents great opportunities for investors theoretically at least. But what do the numbers
tell us? We look at some compelling statistics covering areas such as Brazils infrastructure,
economic competitiveness and macro-economic indicators
Stage of development
According to the World Economic Forums global competitiveness report 2010-11, Brazil is ranked as a Stage 2 country, ranking it
halfway between those countries least developed and most developed. Below is a selection of countries ranked in each of five categories:
Stage 1 transition from 1 to 2 Stage 2 transition from 2 to 3 Stage 3
Bangladesh Angola brAZIL Bahrain Australia
India Egypt China Chile Germany
Nicaragua Iran Mexico Hungary Japan
Nigeria Paraguay Romania Poland Singapore
Philippines Saudi Arabia Tunisia Taiwan United Arab Emirates
Zimbabwe Venezuela Turkey Uruguay United States
Source: World Economic Forum, The Global Competitiveness Report, 2010-11
DATA FILE
Global competitiveness ranking
Competitiveness of infrastructure
Brazil is ranked 58th out of 139 countries around the world
according to economic competitiveness in 2010-11. This
represents a fall of two places compared with the equivalent
ranking in 2009-10. Below is a selection of countries ranked:
Confirming that much needs to be done when it comes
to infrastructure development, Brazil ranks 62nd globally
for the quality of its infrastructure lower than its overall
ranking. Below is a selection of the sub-ranking based on
the infrastructure metric:
country/economy rank Score 2009-10
rank
Switzerland 1 5.63 1
United States 4 5.43 2
United Kingdom 12 5.25 13
France 15 5.13 16
Saudi Arabia 21 4.95 28
Chile 30 4.69 30
Thailand 38 4.51 36
Spain 42 4.49 33
India 51 4.33 49
brazil 58 4.28 56
Mexico 66 4.19 60
Bulgaria 71 4.13 76
Egypt 81 4.00 70
Greece 83 3.99 71
Argentina 87 3.95 85
Mongolia 99 3.75 117
Kenya 106 3.65 98
Nicaragua 112 3.57 115
Zimbabwe 136 3.03 132
Chad 139 2.73 131
country/economy rank Score
Hong Kong 1 6.77
United States 15 5.65
Bahrain 27 5.08
Russian Federation 47 4.46
brazil 62 4.02
Azerbaijan 76 3.69
Serbia 93 3.39
Bolivia 100 3.04
Tajikistan 116 2.63
Nepal 139 1.81
Brazilian infrastructure:
assessment of quality
The World Economic Forum measured Brazils infrastructure quality
in a number of different areas, giving it a thumbs-down for the
current condition of its roads and ports infrastructure (as below):
rank Score
Infrastructure 62 4.02
transport infrastructure 67 3.76
Quality of overall infrastructure 84 3.79
Quality of roads 105 2.93
Quality of railroad infrastructure 87 1.94
Quality of port infrastructure 123 2.94
Quality of air transport infrastructure 93 3.98
Available airline seat kilometres 9 3,001.79
electricity and telephony infrastructure 65 4.28
Quality of electricity supply 63 5.06
Fixed telephone lines 62 21.42
Mobile telephone subscriptions 76 89.79
DATA FILE
Funds in market: a selection of infrastructure funds being raised
with Brazil as a target region
Fund Fund manager target size ($m) Fund sectors
Astra Infrastructure Fund Astra Investimentos $1,000 Energy, transportation,
waste, water, telecoms
BRZ Brazil Infrastructure BRZ Investimentos $1,000 Diversified
BRZ Brazilian Ports and Logistic Settlements BRZ Investimentos $523 Transportation
Latin Power IV Conduit Capital Partners $500 Energy
Rio Bravo Energia I FP Rio Bravo Investimentos $600 Energy
Valora Oil & Gas Fund Valora Investimentos $500 Energy
bndes: Annual disbursements by number of projects
BNDES is a state-owned development bank which is a major supporter of Brazilian infrastructure projects. The figures below show the
banks increasing involvement in areas such as clean energy, roads and ports
Sector 2003 2004 2005 2006 2007 2008 2009 2010 2011
Hydro 10 17 13 9 9 19 22 17 16
Thermal 3 1 1 1 0 0 3 5 16
Nuclear 0 0 0 0 0 0 0 0 1
Clean energy 7 7 9 30 38 48 45 46 60
Distribution companies 1 4 8 11 15 22 17 24 21
Transport companies 5 8 11 6 13 7 12 17 31
Railways 1 5 5 8 5 6 6 5 9
Roadways 15 12 13 11 11 4 16 19 29
Ports, terminals and warehouses 3 4 4 6 7 4 8 14 21
Navigation 10 9 11 9 9 11 12 6 10
Air transport 0 0 3 3 2 1 0 0 1
total 55 67 78 94 109 122 141 153 215
Source: BNDES
Source: www.infrastructureconnect.com
brazil: key facts
capital: Brasilia
Largest city: So Paolo
Language: Portuguese
President: Dilma Rousseff
total area: 3,287,597 sq m (5th largest country in the world by area)
Population (2010 census): 190,732,694 (5th largest population in the world)
Population density (2010 census): 57 per sq m (182nd largest population density in the world)
GDP nominal (2010 estimate): $2.090 trillion
GDP per capita (2010 estimate): $10,816
Human development index (2010): 0.699 (73rd highest in the world)
Source: Wikipedia
Contacts
Mr. Juarez Moraes e Silva
President of the Board
aBraTEC
av. rio Branco, 45-Gr.2406/2408 Centro
CEP: 20090-003 rio de Janeiro rJ
Tel: +55 21 2233 8205
Email: abratec@abratec-terminals.org.br
Mr. Helio Mauro Frana
Superintendente aNTT
aNTT
SBN Quadra 2 Bloco C 9 andar
70040-020 Braslia-DF
Tel: (61) 3410-1982/1984
Email: helio.franca@antt.gov.br
Mrs. Karla Bertocco Trindade
Director General
arTESP
Condomnio Edifcio Joviano Moraes
rua Urussu, 300 - itaim Bibi - So Paulo - SP
CEP 04542-051
Tel.: (11) 3465-2000 / 2201 / 2202
Email: kbertocco@sp.gov.br
Email Secretary: elainececilio@sp.gov.br
Mr. Fbio Nascimento
assessoria de Comunicao Sedeis
Department of Economic Development, Energy, industry & Services
Government of rio de Janeiro
2332-8301 / 8596-8194
avenida rio Branco 110 - 22 andar - Centro
CEP: 20.040-001
Email: gabinete@desenvolvimento.rj.gov.br
Mr. Maral Justen Filho
Partner
Email: marcal@justen.com.br
Mr. Cesar A. Guimaraes Pereira
Partner
Justen, Pereira, Oliveira & Talamini
rua Visconde do rio Branco, 237
80.410-000, Curitiba, Pr, Brazil
Tel: +55 41 3017 1800
Email: cesar@justen.com.br
Mr. Joo Paulo Ribeiro Capobianco
Director
Mtra - Planejamento Socioambiental Estratgico ltda.
rua Bela Cintra, 24 - 1. andar
01415-000 - So Paulo/SP
metra.socioambiental@me.com
Mr. Paulo Bernardo Silva
Minister of Communications
Ministry of Communications
Esplanada dos Ministrios - Bloco r 8 andar
CEP 70044-900 - Braslia - DF
Tel: + 55 61 3311 6000 / 6092
Email: ministro@mc.gov.br
Mr. Eduardo Muller Borges
Head of Credit Markets
Email: eborges@santander.com.br
Mr. Mauro Cavalcanti de Albuquerque
Head of Project Finance
Santander
av. Juscelino Kubitschek, 2235, 27th foor
04543-011, So Paulo, SP
Tel: +55 11 3012 7196
Email: malbuquerque@santander.com.br
Mr. Benjamin Zymler
President
Tribunal de Contas da Unio (TCU)
SaFS - lote 1 Edifcio Sede Sala 327
CEP: 70.042-9000 Braslia DF
Tel: + 55 61 3316-7201 / 3316-7089
Email: presidente@tcu.gov.br
Brazil
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