Brazil's airport privatisations attract a host of would-be investors as the rush is on pre-2014
Investors have always kept an eye on events in Central and Southern America while operators like AENA, Flughafen Zurich, Copenhagen Airports and the late lamented TBI cut their teeth in what can be a challenging environment. After a series of successful and not so successful privatisations in and between Mexico and Argentina, some of which resulted in subsequent IPOs, the region dropped out of fashion with foreign firms for a while. But now, driven by events in Brazil, where the government is battling to have infrastructure in place for the forthcoming sporting events in 2014 and 2016, it is back in fashion. As a result it is attracting the attention of investors from across the world, including (and not for the first time) North America.
The first round of Brazilian privatisations (excepting a trial privatisation at São Gonçalo do Amarante airport in Natal province) was completed early in 2012 when the National Civil Aviation Agency (ANAC) moved swiftly to conclude the concession auction for three major airports, two in Sao Paulo and one in Brasilia. With the 2014 World Cup looming, less than two and half years away at the time, and the government having faced mounting criticism from many quarters as to its tardiness in resolving infrastructure issues, the swiftness was apposite.
The conclusion of concessions to operate and upgrade three of the country's airports (Sao Paulo Guarulhos and Campinas-Viracopos, and Brasilia International) for a total of BRL24.5 billion (then USD14.2 billion), was almost five times the minimum value of BRL5.47 billion (then USD3.2 billion) set by the Brazilian Government. The auction was contested by 11 consortia formed by 28 companies, both domestic and foreign. The winning bidders were:
- Infrastructure and Investment Holdings SA, a consortium of Airports Company South Africa (ACSA) (10%) and Invepar (90%), won the concession for Guarulhos. The consortium offered BRL16.21 billion (USD9.4 billion), which is 373.51% above the minimum price demanded. This bid was reported to have been 42.5% higher than the second-placed one;
- Brazil Airports Consortium, which includes TPI Triunfo Participacoes e Investimentos SA, UTC Holdings SA and France’s EGIS Airport Operation (10%), was awarded the concession for Campinas-Viracopos. The consortium offered USD3.8 billion (USD2.2 billion) for the project, which is 159.75% above the minimum price;
- InfrAmérica, a consortium of Engevix Participacoes SA (50%) and Corporación America SA (50%), won the concession for Brasilia. The consortium offered USD4.51 billion (USD2.6 billion), which is 673.39% above the minimum price.
In all cases State operator Infraero retained 49% of the overall equity.
One notable peculiarity of the transactions is that they had varying concession periods of 20, 25 and 30 years.
Initial reactions were mainly of surprise at the very high value of these deals, allowing for some of the issues that faced the participants. However, weighed against those issues was Brazil’s recently booming economy (no longer the case) and a huge increase in air travel, irrespective of the forthcoming sporting events.
Privatised airport royalties intended to prop up Infraero airports
The winners won the contracts on the understanding that they will completely upgrade the gateways and overhaul their infrastructure ahead of the 2014 World Cup and 2016 Olympics. They will make annual payments, in accordance with the concession period of each airport, to the Fund for National Civil Aviation (FNAC). The funds raised for the FNAC were intended to improve not only the quality of existing airports but also other airports, thus enhancing the development and integration of Brazil.
But evidence that the theory is resolving in practice is hard to find. In Sep-2013 Infraero revealed that it is experiencing delays to renovation and expansion works at seven of eight airports at 2014 FIFA World Cup host cities: Rio de Janeiro Galeão; Porto Alegre; Curitiba; Salvador; Ciuaba; Fortaleza; and Belo Horizonte Tancredo Neves. Existing works were between 6% and 34% complete, while at Porto Alegre they were yet even to begin. Worryingly, most are “expected to be complete” by May-2014, just before the World Cup is set to kick-off (12-Jun) and with some supporters already arriving.
Indeed the government is reportedly considering a BRL2 billion capital injection into Infraero, funds which would be “crucial to ensure continued investments at airports that remain under federal Government control”, according to Infraero president Gustavo do Vale. The ongoing privatisation of the country's largest airports has impacted revenue generation capability at the operator, with Mr do Vale noting: “Before, we had a lot of revenue and few works. Now, we have a lot of works and little revenue.”
According to one of the leading airlines, the country’s airports need much more in the way of “works”. Azul’s director of communications and branding Gianfranco Beting recently complained that poor airport infrastructure in Brazil combined with high costs and a high US dollar is a “deadly combination”, and that the state of infrastructure has prevented the carrier from operating to certain destinations. Mr Beting said fire fighting in particular was an issue, with a lack of trucks and trained personnel preventing some airports from being served by certain aircraft types. On the government's projected plan to upgrade 270 regional airports, Mr Beting noted it was still unclear what sort of improvements this would entail, and at which airports, and that he has “reservations” about the plan.
Rio and Belo Horizonte airports next in the privatisation pipeline
Rio de Janeiro Galeão (34% works completion) and Belo Horizonte Tancredo Neves (31% works completion) are the two airports scheduled to be privatised next, in the forthcoming second privatisation round. The Brazilian Government must wish that it had started the privatisation procedure earlier (except of course for the fact that recent demonstrations made it clear that there is massive public discontent with the privatisation programme amongst many other things) because renovations at the privatised facilities are reported to be at least 50% complete overall (São Paulo Guarulhos works 60% complete, Brasilia 50% complete and São Gonçalo do Amarante 54% complete. If we take this single issue of renovation works as a benchmark then privatisation can be declared a success. As the Civil Aviation Minister, Moreira Franco, commented: “The concessioned airports are fine, but Infraero's works have a low level [of completion].”
Belo Horizonte Tancredo Neves International Airport capacity, (seats per week by carrier): 07-Oct-2013 to 13-Oct-2013
The first round of concessions attracted a motley crew of investors/operators that included France’s EGIS, Corporacion America, Invepar, TPI Triunfo Participacoes e Investimentos, Engevix and South Africa’s state-run airport operator ACSA. Interestingly, such big hitters as Fraport, ASUR and Flughafen Zurich failed to make the cut, despite all of them having operational experience in Latin America. India’s GMR Infrastructure seemingly changed its mind at the last minute, having been close to finalising a USD2 billion loan from a consortium of banks and having been in talks with at least three Brazilian companies as it sought to find a partner. GMR said it would consider joining a second round of bidding (i.e. the one about to begin) but declined to go ahead with a bid on that occasion as, "we need some more time to understand the country, the geography and the environment (but) we are committed to the Brazilian privatisation story and we would definitely like to participate in the second round”, (it hasn’t so far).
EGIS, a successful consortium (Brazil Airports Consortium) bidder at Campinas-Viracopos, is also a 20% investor in Hermes Airports, which operates the Larnaca and Paphos airports in Cyprus, where new terminals have been constructed and put into operation, and has extensive interests in Africa. EGIS is well known for its work in Third World countries, in Africa and Asia-Pacific. Brazil, the B in BRIC, does not fall into such a category but French companies in general have a reputation for their ability to enhance existing airport infrastructure and service levels.
Corporacion America is the majority owner of Aeropuertos Argentina 2000, which operates 33 airports in Argentina since 1999. It has a 30-year concession to manage and develop Carrasco International Airport, Montevideo, Uruguay, as part of the Puerta del Sur consortium (and where a state-of-the-art terminal opened in 2009.
Invepar (Sao Paulo) is a Rio-based infrastructure group active in highway concessions. It is understood its financial contribution was financed by the independently managed pension funds of state oil giant Petrobras and Banco do Brasil. TPI Triunfo Participacoes e Investimentos (Campinas-Viracopos) is a leading Brazilian infrastructure company with interests in companies that operate highways, ports and power generation facilities. Engevix (Brasilia) is a multi-sector construction company that claimed already to have played a large role in the modernisation of the Brazilian airport system, taking part in 15 projects “in the most important airports in the country”.
ACSA was the airport authority that helped South Africa handle the 2010 Soccer World Cup and it was anticipated thereafter in CAPA reports that it could, and would, make a successful punt to assist Brazil in some way or other as South Africa seeks to expand its own diplomatic and economic horizons.
Many air transport industry observers were concerned that South Africa might not be able to handle the task in 2010 but it rose to the occasion through the frequently criticised ACSA, which made long awaited improvements to and expansion of the Johannesburg and Cape Town airports while building a new green field airport for Durban; all delivered on time (the King Shaka Airport at Durban was operational a month before the tournament began) and within a ZAR17 billion budget target for the improvements to those airports and to the peripheral ones where only a few games were held.
Unfortunately, South African airlines and passengers have since had to pay for these improvements via sky-rocketing charges at ACSA’s airports.
Lengthy introspection over first round ‘failures’ prompts shifting of the goalposts in round two
So with this first stage completed, what has happened since? It would be no exaggeration to say that there was a lengthy period of introspection in the government about how the second privatisation stage should be handled.
Despite the fact that the majority of the participants in the first round were Brazilian entities and all but two (ACSA, EGIS) were Latin American, there is no known objection to foreign participation in the next stage. That is a good thing, because there are plenty of foreign companies lining up.
On the other hand, the qualification criteria have been toughened up, and then (partly) relaxed.
In the immediate aftermath of the conclusion of the first round procedure, President Rousseff expressed concerns about the winners of the airports concessions auction, claiming some of the companies did not possess adequate airport managerial experience. The government set about considering new rules for the next round of airport auctions.
In particular, the operational experience requirement for bidders was increased to that of managing airports with 35 million passengers per annum. This always seemed an unduly oppressive figure, one that would have debarred some of the previously successful bidders like EGIS and ACSA. Even Johannesburg’s O R Tambo international Airport, the second busiest on the African continent, handled only 18.6 million passengers in 2011, a little over half of the requirement. Brazil's Court of Audit questioned the experience requirement over fears it “might unduly restrict competition in the granting process”.
Subsequently, at the end of Sep-2013, the Civil Aviation Minister said the experience requirement for the bidders in the forthcoming privatisation of Belo Horizonte’s Tancredo Neves Airport would be lowered from 35 million passengers per annum to 20 million. However, the 35 million passenger requirement would remain for Rio’s Galeão airport.
The Court of Audit has also been active in other aspects of the bidding procedure, raising the following proposals and concerns:
- Raise Galeão's minimum bid level from BRL4.7 billion (USD2 billion) to BRL4.8 billion (USD2.1 billion) and Tancredo Neves' from BRL994 million (USD437 million) to BRL1.09 billion (USD479 million);
- Review the need for Infraero's participation in the concessions, and if the state-owned operator remains with a minority 49% stake, this should be reduced over time.
The Civil Aviation Minister has defended (23-Sep-2013) other, equally draconian, restrictions on participation in the Rio and Belo Horizonte privatisations. He said two options were possible: prohibiting the winners of previous privatisation rounds from participating completely, or limiting their participation to 15% stakes in consortium with other firms. He added that a 15% cap means they would not be able to appoint directors, and that they would not have access to information which could allow them a competitive advantage with the other airports they operate. He concluded: “We want competition. It is healthy, important for the passenger. It ensures price, quality and safety.”
At the beginning of Oct-2013 Brazil's Federal Audit Court (TCU) voted 7-to-1 to maintain the 15% cap on past privatisation winners' participation in bids for the Rio de Janeiro and Belo Horizonte airports, while the government is expected to heed the TCU's advice and lower the experience requirement for Galeão bidders from 35 million to 22 million passengers per annum and, for Tancredo Neves bidders, from 20 million to 12 million passengers per annum. The TCU president, Augusto Nardes noted the government was still free to remove this restriction and open the bidding to all interested parties.
Invepar had reportedly been lobbying to have the 15% restriction lifted.
But removing the restriction on past privatisation winners risks a situation where one operator could control 84% of Brazil's international passenger traffic and 50% of its cargo traffic, due to the concentration of this traffic at Galeão and at the already privatised São Paulo Guarulhos International Airport.
One way of looking at this would be that the government has painted itself into a corner through a lack of determination to stick to a set of principles which themselves could be considered to be a knee-jerk reaction to the outcome of a first-stage process that was entirely new to it. Investors like certainty. The privatisation of airports at Delhi and Mumbai in 2006 provides good examples, where the goal posts shifted continuously almost right up to the last day of bidding. The result was a lingering lack of confidence in the Indian system which persists even as a further six airports are readied to be privatised by the same method (PPP).
Questions have been asked, too, about whether Infraero’s continuing presence at the partially privatised airports should continue. This is a long way from the position originally envisaged when Brazil grudgingly (at the time, in the aftermath of the previous President’s time in office) accepted the concept of the privatisation of its airports but anticipated an overbearing presence of Infraero would remain, with that entity able to veto projects. But Brazil’s Civil Aviation Minister, Moreira Franco, recently went on record to say that said it was “not time to reconsider” Infraero maintaining a 49% stake in the privatised airports. Responding to the Audit Court’s concerns over Infraero remaining vested in the facilities, Mr Franco said, “they always question it.” He added that the presence of a state-owned firm such as Infraero was necessary for the industry as low profitability at smaller regional airports meant they would not attract interest from the private sector (which doesn’t really answer the question). Mr Franco noted: “We are a continental country and we have a large number of airports, with a tendency to have more.”
President Rousseff remains confident about Brazilian infrastructure projects; appeals to US investors
Despite the continuing uncertainty surrounding the change to the modus operandi since the first privatisation round, President Rousseff remains bullish about prospects and recently pitched the country's infrastructure projects, including the airport ones, to potential US investors, commenting: “I believe Brazil can offer opportunities that very few countries in the world can...legal risk does not exist in Brazil”.
The Rio and Belo Horizonte privatisations are reported to have attracted interest from eight companies in six consortiums. The interested parties include:
- ADC & HAS Airports Worldwide, Fidensand Galvão Engenharia;
- Flughafen Munich, Flughafen Zurichand CCR;
- BAA/Ferrovial and Queiroz Galvão;
- Aeroports de Paris, Schiphol Group, GP Investimentos and Carioca Engenharia;
- Fraport and EcoRodovias;
- Changi Airports International with Odebrecht.
An unspecified number of the consortia reportedly plan to bid for both airports, with Galeão generally regarded as the main prize. The auction is to be held on 22-Nov-2013, following a delay from the original date of 31-Oct-2013 to accommodate the proposed changes to the concession agreements outlined above.
There are some interesting bidders, both from the established ‘old school’ as well as the ‘new wave’ and sometimes working in conjunction with each other.
The Texas and Toronto-based ADC & HAS is on a roll just now, having taken over much of the airport assets of Spain’s Abertis recently, and has chosen to work with a mining construction company (Fidens) and an engineering and construction company (Galvão Engenharia). This could be a good move; involvement with blue collar Brazilian companies is likely to be looked on appreciatively.
Flughafen Zurich returns to Latin America, where it has plenty of experience, along with Munich Airport, which is fairly new to the area but which is pursuing a new airport development in Peru (see below) and CCR, a Sao Paulo-based toll road operator, and one of the largest private infrastructure groups in the world. CCR and Flughafen Zürich previously teamed up to bid for the first round concessions. Munich may have been co-opted because its airport handles over 35 million ppa.
An intriguing consortium seemingly includes Ferrovial and its own partially owned subsidiary BAA (now Heathrow Airport Holdings). Ferrovial has taken an active role in seeking out new opportunities latterly but BAA (as was) had taken a back seat. If it is involved here it suggests a greater degree of autonomy in future and possibly an acceptance that the UK Airports Commission may not find in favour of adding one or more new runways at capacity constrained London Heathrow Airport, prompting it again to seek out new opportunities for growth as it did in the 1990s following privatisation.
Another intriguing combination is that of Aeroports de Paris (AdP) and Schiphol Group, which have a cross shareholding alliance that mirrors the operations of the airline alliance (Air France/KLM) but which appears to manifest itself here as a structured joint bid to operate the Brazilian airports, in conjunction with GP Investimentos, regarded as the leading alternative investment company in Latin America, and Carioca Engenharia, a Brazilian engineering firm which operates in the construction and infrastructure segments.
Schiphol Group has been absent from the foreign investment scene for several years but recently returned with several targets in mind, including the Peruvian airport referred to below. AdP, once a serious player, and particularly in Latin America, has also been quiet of late with much of its focus on New York La Guardia Airport's planned USD3.6 billion central terminal building, together with its (invested) partner TAV.
Fraport is of course already present on the continent at Lima Airport and continues a policy of actively seeking out new opportunities globally and especially in Brazil. Fraport has teamed up with Brazilian highway concessionaire EcoRodovias.
Finally, Changi Airports International, which has little experience in Latin America, joins forces with Odebrecht, the privately owned Brazilian conglomerate (engineering, construction, chemicals, and petrochemicals), which is said to be the largest construction company in Latin America.
It remains to be seen if President Rousseff’s recent pitch to US investors will generate more interest from there beyond that of ADC & HAS.
The Rio and Belo Horizonte airports are not the only ones being privatised. In Aug-2013 the São Paulo State Government launched several public consultations on a tender for a package of five business aviation facilities in the state, including Campos do Amarais Airport, Jundiaí Comandante Rolim Adolfo Amaro Airport, Bragança Paulista Arthur Siqueira Airport, Itanhaém Antônio Nogueira Júnior Airport and Ubatuba Gastão Madeira Airport. The public consultation period was extended on 18-Oct-2013.
The minimum bid for the 30-year concession is BRL11.5 million (USD4.8 million), and the tender will grant full private interest in the airports, though details are subject to change until the final tender is published following the consultations. The winning bidder will have to commit to BRL48.8 million (USD20.5 million) in minimum investments over 2014-2019, and foreign participation is allowed in the tender. The shift of business and general aviation from commercial airports such as Rio’s city centre Santos Dumont Airport and São Paulo Congonhas Airport is one of the strategies being pursued to ease demand for slots at the saturated facilities and allow for the expansion of commercial operations.
Foreign expansion is on hold for Infraero
Where does this leave Infraero? It has been reported to be interested in expanding into international markets, particularly in Latin America, as a consequence of the end of its Brazilian monopoly but so far it has shown no outward sign of that. But with so many problems at home, why would it?
Beyond Brazil, there is more airport privatisation activity though perhaps not on the same frantic scale.
The Peruvian government, through its investment promotion arm Proinversion, began a search for investors and constructors for the new Cusco Chinchero International Airport back in 2011. The project is one of many investments in a USD22 billion infrastructure investment plan for the country. The 40-year concession is expected to be awarded early in 2014 following final bids in Dec-2013, with construction on the replacement facility for the Cusco Velazco Astete Airport to be complete in four to five years.
The total investment amount, including future extensions, is USD556 million and the investment needed to commence operations is USD433 million. The existing airport is being swamped by tourist demand to nearby Machu Picchu.
The new terminal in Chinchero, 29km outside Cusco city centre, is expected to handle around 2.6 million passengers annually by 2021.
Two other locations, at Canchis and Anta, have been considered as alternative locations for the construction of Cusco’s new airport.
The ‘Project Influence Area’ of Cusco Chinchero Airport
The number of potential bidders has varied, between 22 and 27 being reported in total, but it is the seven that were identified in Mar-2013 that undeniably form the backbone of desire for this project. They include (again) Aeroports de Paris, Schiphol Group (this time separately) and Munich Airport, together with unnamed public-private companies from Thailand and India, an unnamed public company from China and the Government of South Korea.
Part of the reason for that is that only six of the original parties have the necessary experience in construction works according to the regional government.
Having said that, the vast majority of bidders are identified as Chinese and Brazilian consortiums.
Meanwhile, Colombia’s National Infrastructure Agency received EoIs from 21 Colombian and foreign parties for modernisation works at Baranquilla Ernesto Cortissoz Airport, Nevia La Marguita Airport, Popayan Guillermo Leon Valencia Airport and Armenia El Eden Airport. The concessions cover airport “administration, modernisation, operation, maintenance and commercial exploitation”.
Interested Colombian parties include Conconcreto, Colpatria, Grupo Odinsa, CSS Constructora, Mario Huertas, El CóndorandEpisol. International interested parties include Vinci (France), Tradeco (Mexico), OMA (Mexico), China’s China Harbour Engineering Company and Spain’s Sacyr deEspaña, Ferrovial and Cintra. No timeframe for the procedures have been announced.
Asuncion Airport privatisation has stalled
One country where an unexpected privatisation process has run onto the rocks is Paraguay, where Asunción's international airport Silvio Pettirossi was proposed for a concession last year. That was not the first occasion. The country’s Congress already tried to concession out the airport in 2011, but then-president Fernando Lugo vetoed the bill and the process stalled.
Earlier this year the National Directorate of Civil Aviation (DINAC) director Carlos Fugarazzo described the airport as “old and needing a lot of investment”. He added, “The infrastructure itself is [at capacity], we are undergoing an expansion, but every year we are doing this, and we do not have enough money for a big expansion.” Mr Fugarazzo said the capacity constraints are "felt most with the loading and unloading of passengers", and noted the airport reached its one million passenger capacity last year.
But airport workers oppose the facility's privatisation due to a lack of perceivable benefit to the public, warning that charges may increase under public-private ownership. Paraguay's President-elect Horacio Cortes is believed to be in favour of privatising the facility.
There has always been an element of suspicion about airport privatisations in the region, both from blue collar workers and governments. It was not that long ago that the Bolivian Government renationalised three airports. But it is one that is finding favour again with investors nonetheless.
STOP PRESS!! Galeão and Tancredo Neves auctions will be held on 22-Nov-2013
The Rio and Belo Horizonte's final concession agreements were approved on 04-Oct-2013 by the regulator, ANAC. The auction will be held on 22-Nov-2013 with bidding to be made simultaneously, and each bidder or consortium may only win one of the two auctions.
The specifics break down as:
- Concession Period: 25 years, extendable for an additional five years;
- Minimum bid: BRL4.8 billion (USD2.1 billion);
- Estimated investment required: BRL5.7 billion (USD2.6 billion);
- Mandatory works: Construct 26 aerobridges by 30-Apr-2016, expand apron by unspecified amount by 30-Apr-2016, construct 1850-vehicle parking garage by 2015, ensure "adequacy" of cargo storage facilities for 2016 Olympic Games and construct system of independent runways once airport reaches 262,900 operations per annum;
- Bidder experience requirement: Operator with experience handling airports serving more than 22 million passengers per annum at least once in the past five years must hold at least a 25% stake in any consortium, a requirement which may be met by up to two operators;
- Tancredo Neves:
- Concession period: 30 years, extendable for an additional five years;
- Minimum bid: BRL1 billion (USD453 million);
- Estimated investment required: BRL3.5 billion (USD1.6 billion);
- Mandatory works: Construct new passenger terminal with "at least" 14 aerobridges and related airport access works by 30-Apr-2016, expand apron by unspecified amount by 30-Apr-2016 and construct second runway by 2020, or once airport reaches 198,000 operations per annum;
- Bidder experience requirement: Operator with experience handling airports serving more than 12 million passengers per annum at least once in the past five years must hold at least a 25% stake in any consortium, a requirement which may be met by up to two operators.
Immediate terminal upgrades must be made at each airport in terms of signage, washroom renovation and provision of free Wifi access, among others. A 120-day transition period will follow after the signing of the contracts, during which Infraero will work together with the new concessionaires to manage the facilities, followed by a 90-day period during which the concessionaires will operate the facilities with Infraero in support, prior to the concessionaires assuming full operational control.
The two airports currently account for 14% of passenger movements in Brazil and 10% of cargo movements. Galeão currently handles 17.5 million passengers per annum which is expected to increase to 60 million passengers per annum by the end of the concession in 2038. Tancredo Neves currently handles 10.4 million passengers per annum which is expected to increase to 43 million passengers per annum by the end of the concession in 2043.