Fitch: Brazil Infrastructure Program Will Require Higher Tariffs

The new Brazilian infrastructure program will likely require projects to carry higher tariffs to support higher financing costs, Fitch Ratings says. The BRL198.4 billion (USD63.7 billion) program announced on June 9, of which BRL69.2 billion (UDS22.2 billion) is slated to be invested by 2018, will also depend on the government's willingness to allow higher sponsor returns.

Financing terms to be offered by Brazil's development bank Banco Nacional do Desenvolvimento Economico e Social (BNDES) have been made public, as they were in previous program announcements. The new terms will cap the use of subsidized loans at levels ranging from 15% of total capital expenditures for airports to 35% for toll roads. If a project has issued capital markets debt, the caps can be increased by up to 20%. This shift to more private market financing will require higher tariffs to support credit metrics and sponsor returns. The rise in tariffs will further shift funding costs from the general tax base to users.

Higher tariffs are also needed to attract private sponsors. Fitch expects project sponsors to put greater importance on prices, rather than volume, to support revenue forecasts. Volume growth expectations are weaker than in recent years and long-term economic prospects are generally lower as the government has struggled to pass much-needed structural reforms. Further, new, smaller national and international sponsors are likely to enter the market while sponsors of previous concession programs will likely preserve cash levels and focus on current projects in light of ongoing 'Operacao Lava Jato' investigations. The participation of previous sponsors is also likely to be limited due to the high short-term capital expenditure requirements and long-term investment payback of infrastructure projects.

The program estimates that a total of BRL66.1 billion (USD21.4 billion) will be invested in new and existing toll roads. Four auctions will likely be held this year. The airports in Porto Alegre, Salvador, Fortaleza, and Florianopolis, which in 2014 transported 27.7 million passengers, encompass 99% of the BRL8.5 billion (USD2.7 billion) investment estimated for the sector.

Of the BRL37.4 billion ( billion) allocated for ports, approximately 30% will go to existing concession renewals. New terminals in the ports of Santos and Para, totalling BRL4.7 billion, are expected to be auctioned this year. Railroads are expected to take longer. The framework for compensation has not been decided and viability studies are ongoing. Approximately 45% of the BRL86.4 billion estimate relates to a 3,500 km railroad project running from Brazil through Peru.