Changi Airport Group Market Cap (as of 06/12/13): N/A
Odebrecht Market Cap (as of 06/12/13): N/A
On November 22nd Changi of Singapore and Odebrecht of Brazil won a $19bn ($8.3bn) bid to operate Rio de Janeiro’s Carlos Jobim International Airport (Galeão) in a consortium with state-owned operator Infraero. The same day the government awarded a concession contract to operate the Confins airport in the city of Belo Horizonte that saw the AeroBrasil consortium (Brazil’s CCR SA, Switzerland’s Flughafen Zürich AG and Germany’s FMG Flughafen München GmbH) win with a bid of R$1.8bn ($789mln).
The deals mark the strengthening of a push from the Brazilian government to attract foreign direct investment (FDI) into the country in order to modernize old infrastructure ahead of the 2014 World Cup and 2016 Olympics in Rio de Janeiro. The government’s track record includes a successful previous privatisation round in early 2012 of three of the country’s most important airports, including hubs in São Paulo and Brasília, which raised a total of R$24.5bn. The airport deals are part of a larger shift of Brazil as a whole towards much needed FDI.
Balancing the government’s positive outlook on the future of infrastructure development in the country, which according to IMF estimates would require up to $150 billion over the next five years, a number of economic analysts point to the fact that the South American country will have to secure significant foreign investment in order to achieve the much needed infrastructure update. According to the most recent IMF data, gross fixed capital formation, a component of the expenditure on GDP, is still 5% lower compared to its 2011 peak, thus emphasizing the importance of foreign capital in delivering new investment projects.
Brazil has received significant foreign direct investment inflows over the last decade. Annual FDI flows averaged 2.5% of GDP between 2003 and 2012. The destination of FDI has remained relatively broad, with shares of investment in mining and agriculture increasing in the mid-2000s, amid the commodity price boom, and inflows into services rising later on, in tandem with the emergence of a middle class that enjoyed relative easy access to credit. However, investments in infrastructure development has only recently come to the forefront of the national development agenda, in part because of the country’s notorious traffic congestions and also due to increased media attention regarding the staging of the FIFA World Cup in 2014, and Summer Olympic Games in 2016.
Despite the recent currency volatility and slowing GDP growth, Brazil remains Latin America’s premier fundraising and deal making hub. Private equity and venture capital groups invested nearly $2bn in a range of deals in Brazil during the first six months of 2013. The country accounted for 70% of total deals (value and volume wise) struck in Latin America during the period. Furthermore, foreign investor appetite for Brazilian infrastructure assets is expected to become even more significant once the government agrees to boost the rate of return it awards to public-private consortiums.
Odebrecht and Changi will have to invest about R$5.7bn in the Rio airport to provide a third runway, expand the aircraft apron, a sort of parking lot for airplanes, as well as provide new cargo storage areas and car parking facilities. In Belo Horizonte, the winning bidders will have to invest an estimated R$3.5bn to build a new terminal, a second runway, and expand the apron.
Overall, the Brazilian airport deals of the past few years have generated huge interest (average premiums north of 250% over the minimum bid price) and have undoubtedly marked an important ideological opening in the attitude of Dilma Rousseff’s Workers’ Party towards private investment in infrastructure. Three main challenges however remain. First, it is still uncertain how the public-private ownership structure, with state-owned Infraero maintaining a 49% stake in all airports, will work out. Second, the high prices paid by bidders will only be justified to investors if the return on investment is healthy, not an obvious proposition in capital-intensive projects lacking predictable revenue streams. Last, it is of key importance for Brazil to expand its renovation efforts to less glamorous but nonetheless fundamental infrastructure sectors such as rail and road transportation.