Interview: MARTHA SEILLIER
The Investment Partnership Program (PPI) is spearheading an ambitious government agenda of privatizations and concessions auctions of key infrastructure and is expanding into social services, but with mixed results.
BY Joe Rowley
Brazil’s Investment Partnership Program (PPI) was established in May 2016 to oversee the privatization and concession auctions of hundreds of government assets ranging from highways and ports, to airports and railways.
During the almost two years since right-wing president Jair Bolsonaro took office in 2019, the government has expanded and accelerated the PPI timetable.
Postal service Correios and telecoms company Telebrás are among the large state-owned enterprises (SOEs) recently added to the PPI pipeline, joining other soon-to-be-privatized SOEs including power company Eletrobras and the operator of the Port of Santos. Following the introduction of a new sanitation law in July, three sewage concessions came to market and secured billions of dollars in new investments from private operators Aegea and BRK Ambiental in 2020. New concessions in social infrastructure projects including children’s day care centers, prisons and national parks and monuments are in various stages of planning and will extend the PPIs remit into new areas of the economy. Nevertheless, implementing the PPI’s sweeping agenda privatization agenda has not been without it setbacks. Since March, COVID-19 has disrupted the timetable as social distancing measures and travel restrictions forced the PPI to renegotiate contracts for core infrastructure, such as airports. Popular and political opposition led to delays in the privatization of Eletrobras and Rio de Janeiro’s state water company CEDAE. More recently, President Bolsonaro was also forced to withdraw a decree in October allowing state-operated clinics known as Basic Health Units, or UBSs, to be included in the PPI over fears it would lead to the privatization of the public health service, the SUS. Martha Seillier, special secretary of the PPI, spoke with LatinFinance about the challenges of implementing the PPI’s growing portfolio of projects, the aims for the program in the coming years and the challenges posed by the coronavirus pandemic. The interview was edited for clarity and length.
LatinFinance: What were the main areas of focus for the PPI in terms of its privatization and concession agenda in 2020? And how did it compare to 2019?
Martha Seillier: Well, in 2019 we had 36 different auctions in Brazil, mostly in transportation, so there were PPP opportunities in ports, railways, highways and airports, but also held auctions for energy, both on the generation side and the transmission side, and oil and gas. In 2020, we started moving forward with many projects in those sectors, but we were also trying to diversify the portfolio, bringing more investments in sectors such as sanitation, and helping the Brazilian state and municipalities develop their own PPP agendas by helping them structure feasibility studies and get together the bidding documents for PPPs. We have also been diversifying our portfolio with PPPs of parks and forests and urban mobility with the subway of Belo Horizonte. We started this year with the aim of moving forward with what we already were doing in terms of transportation and energy, but also diversifying the portfolio and helping each time more the municipalities and the state.
LF: What impact did COVID-19 have on the timetable for this pipeline of projects?
MS: Of course, the coronavirus has impacted the planning of the projects. We had to review several of the studies, and we had to stop traveling to some of the projects, so some of the engineering and environmental studies had to be postponed. In some sectors, such as airports, there was a huge fall in demand, so we had to go back to our spreadsheets and review the forecasts, not only for 2020, but also for next year. Essentially, we had to do double the work to keep moving with all the projects, but even considering all that, we had a very interesting year and held some important auctions, even with coronavirus.
LF: Some of the highest profile auctions this year were for sewage concessions. How much potential do see for private investment in this area?
MS: We now have a new law that gives more incentives for private participation in the sanitation sector and had three different auctions in the sector this year. So, we already have an answer about the potential. The three successful auctions gave us a sign of how much investors, not only from Brazil, but also international investors, want to invest in the sanitation sector. We have a very strong pipeline of projects and have conducted studies showing that just to supply the water and sewage infrastructure currently lacking in Brazil will require around $170 billion in investments over the next 30 years. That's a huge amount, but also a huge opportunity for private investors from all over the world to come to this sector and it is also good from an environmental, social and governance (ESG) perspective. Sanitation is almost the very definition of ESG in infrastructure: it helps protect the natural environment and it also prevents diseases in the population. Next year, we also expect to auction sanitation services in Rio de Janeiro, which is a huge contract to provide water and sewage services to 14 million people and make around $6 billion in investments.
LF: How many projects do you think will be auctioned in 2021? And do you have an estimate of how much they will raise?
MS: We will keep on moving forward with our transportation agenda next year. We have 22 airports for auction, probably in March or April next year, and we also have important railway opportunities next year including in the state of Bahia with a $500 million investment expected. We have different highways also for auction next year too, such as NovaDutra, which is a very important highway between the states of Rio de Janeiro and São Paulo, and we think it will be very competitive with around $3 billion in investment expected. Then we have other important projects, such as a highspeed technology auction that should happen in the first semester next year, which will bring many investments to the telecoms sector, and the privatization agenda is moving forward. Two important examples are Eletrobras and Correios, which is a very challenging project because [Correios] is the largest company we have in Brazil in terms of people working there. We have 100,000 people working for the national post in Brazil, so it will be a very challenging process for us to privatize the company. But it's a decision from the government and we believe we can attract interesting investors to bring more capacity and enterprise in terms of technology to modernize the enterprise and bring more investments as well. We're moving forward with the ports agenda and structuring the privatization of some important ports in Brazil, such as the Port of Santos, which is the largest port in Latin America. There will be concessions in terms of contracts and a privatization in terms of selling the operating company. We expect this auction to happen in 2022.
LF: You previously said the privatization model for Correios should be ‘filet and bone’, combining both the profitable and less profitable areas of the business. Can you tell us a bit more about some of the considerations that go into deciding on what privatization model to adopt for large companies, such as Correios?
MS: It depends a lot on the sector. The advantage of PPPs is that you are not selling the enterprise and we don't need authorization from Congress to move forward, so that makes the whole thing easier. But that is not necessarily better. Of course, when we consider an enterprise such as Correios, we look around the world for examples, but it's hard to say there is a right model that could be applied in Brazil. We're spending time studying what other countries did so that we can learn from best practices, and we are also learning also from countries where it doesn't work well, or where there were problems. Currently, we are advancing on two different fronts. One is with Congress, where we need to approve a bill to have the authorization to bring private investors to the company, and the other is with the feasibility studies. We have two phases with the studies. One is to help us choose the right approach through an analysis of all the possibilities. For example, we could have an IPO of the company or we could have PPP contracts with one or several investors to provide services. So, it could be private company, but with a contract with the government to ensure public services are still provided by that company. And the second part is to make all the decisions and price the track we decide. So, we need to figure out how much will this cost? What investments we need in the company? What the real value is of the company before we can have an auction?
LF: You touched on some of the difficulties in privatizing state-owned assets and an example of this was recently seen by the government’s decision to scrap its plans to include Basic Health Units in the PPI after widespread opposition. Why did the government change its mind, and will there be another attempt to include UBS in the PPI again?
MS: Yes, we will try to include them again. I think there was a big misunderstanding about that because there were municipal elections [happening at the time], so it became very politicized. The privatization is very technical, but it was being discussed on a more political level. We wanted to do it very in a quiet way with some pilot projects, but even our small attempt was met with a lot of opposition. But that motivates us even more because the health sector in Brazil needs to be reviewed. It is inefficient and there are huge losses due to corruption. We're talking about huge amounts of money sent to the states and municipalities to maintain the health service and we should be getting much better services for the population than we do. When you try to bring efficiency and the private sector to sectors that have many problems, the reaction usually is very loud. We also have that reaction for sanitation, but we've spent four years in Congress trying to change the law and fighting against all sorts of institutions to bring private investment to the sanitation sector. It’s almost like a war, but we want to win that war. There are also two pilots going on right now that are being structured by us for [children’s] day care. One is in Alagoas where we’re trying to provide children in the metropolitan region with 67 additional day care [centers] with around a $70 million investment. We also have another project in Teresina, the capital of the state of Piauí, where are talking about 40 new day cares and probably something around a $50 million investment. Normally, once you get two good pilots going, then you can scale the projects to the whole country. So that's why we're working with smaller numbers now, because if it's successful, we can move forward with more projects in Brazil.
LF: Thank you.