The perception among infrastructure sector operators and investors about Brazil’s economic prospects improved in the first half of the year, according to the Infrastructure Barometer that consultancy EY and Brazilian infrastructure association ABDIB produce twice a year.
The level of optimism regarding GDP growth reached the highest level in two years, climbing to 36.4% in the survey published in June, compared with 25.8% in the previous edition.
Gustavo Gusmão, the head of infrastructure, PPPs and the public sector at EY Brasil, talks with BNamericas about market sentiment and the sector’s outlook.
BNamericas: What explains the improved sentiment among infrastructure sector participants?
Gusmão: It seems to me that in the first year of [President Luiz Inácio Lula dda Silva’s] administration there was some apprehension about the continuity of some sector policies of the previous administrations. Over time, there has been a sign of continuity for several of the policies.
One of the highlights that I would point out is the role of [development bank] BNDES, which continues to be a major structurer of projects, PPPs and concessions, helping to advance both federal and subnational government projects.
In addition to BNDES, [state-run lender] Caixa Econômica Federal has also maintained a project structuring profile and the transport ministry has implemented a very strong plan in the area of highway and rail concessions.
So, the market went from that first moment of apprehension to a perception that the plan continues at the same pace.
BNamericas: Do you see other factors behind this optimism?
Gusmão: An element that should add traction to project structuring, and that we will likely see with a series of projects being structured in the short term, will be the fund that the government created and is being managed by Vinci, which has up to 1 billion reais [US$189 million] to invest in project structuring alone.
With these resources, it is possible to work on structuring dozens of projects in the country.
BNamericas: Which segments stand out in the improved perception of infrastructure investors?
Gusmão: The sanitation sector saw a hiatus of a few months without new auctions, but it is a sector that will gain new momentum in the coming months, with bidding for the sanitation contract in Piauí [state] and regional projects structured by BNDES also moving forward.
This is the sector that continues to be the hottest in terms of business and investment opportunities on the radar of investors and infrastructure operators.
Second are highways, for which there is a very large pipeline of projects that makes the private sector look at the segment with interest.
Then I would highlight the energy area, which has a stable pipeline of projects and should continue to maintain a prominent position in the coming months, with more opportunities.
BNamericas: In the medium term, which segments would you highlight?
Gusmão: There is great interest from the government in giving traction to what we call social infrastructure, which are, for example, education and health PPPs.
Furthermore, I would pay attention to an important trend developing in the state of São Paulo, where we see the preparation of projects linked to urban mobility.
This is not well captured yet in the perception of the stakeholders, but it is a sector that is bound to move upwards. As of 2025, urban mobility should gain considerable prominence in a positive way.
BNamericas: What can we expect on the freight rail front from the national rail plan that the government wants to announce in the coming months?
Gusmão: I have been following the government’s statements in this regard and we should have a plan with a better outline. However, it is important to note that freight rail projects take a long time to design and build.
What I understand is that the government is trying to move in the right direction for this segment, but these are projects that will take time to get off the ground.
BNamericas: You mention positive expectations regarding social infrastructure PPPs. But how difficult is it to move forward with this without solid counterpart guarantees from governments, like the guarantee in the streetlighting area through the Cosip fee?
Gusmão: This is a real challenge, as there really is nothing as secure in terms of guarantees as the case with Cosip for streetlighting PPPs.
Regarding Cosip, which represents a solid means of payment for contracts, there are expectations for Cosip to serve as a counterpart both for streetlighting PPPs and, going forward, for more sophisticated contracts that are associated with the broader concept of smart cities.
Returning to social infrastructure, what we may see in terms of guarantees will be transfers from the federal government to local governments to honor their obligations.
BNamericas: How will extreme weather events impact infrastructure in Brazil?
Gusmão: This issue was already being discussed a lot in the highway sector, but after the events in Rio Grande do Sul state, the discussion became broader.
I see two developments.
The first is that we will pay greater attention when modeling contracts and quantifying the need for measures to mitigate climate risks. Today, the risk matrix is not properly inserted into the contract models, as they are not quantified. With the increasing frequency of these extreme events, it is challenging, but the government will have to find a way to incorporate these risks into the project modeling.
We will also need better structuring of contracts, in terms of the obligations of each party in the case of repairs due to these events.
Even though there are well-structured contracts with delimited risks, the challenge I see is to have a better definition to understand where the resources will come from in the case of repairs due to extreme events. A solution could be creating a fund as part of the contract, with resources that are used in the case of extreme events.
This could be a solution when these events occur and impact several parties, so the difficulty of having to find ways to obtain resources from all sides does not arise.
Now regarding the actual projects, risk mitigation should initially be for publicly funded projects, and in the future, we will be able to see the structuring of such projects that also have private sector participation.
BNamericas: What are the highlights from a regulatory point of view?
Gusmão: I mentioned that the sanitation sector has the strongest attraction for stakeholders, and this is also true for the regulatory area.
We still have some sector guidelines that are being developed by regulator ANA, and we need to know how much subnational agencies will put these guidelines into practice, knowing that agencies in the states are not necessarily obliged to follow ANA’s orders.
Another sector that needs to advance with its regulation is solid waste.
An issue that has also caused concern is tax reform. There is a lot of uncertainty over the reform’s regulations and how these will impact the segments of the infrastructure sector.
