Pressure mounting to review Brazil concession contracts amid rising costs
Stakeholders in the infrastructure segments in Brazil are concerned about persistent increases in costs and are calling for dialogue with the government to conduct an economic-financial review of existing concession contracts to reduce the risks.
“We’re experiencing a scenario of price disruptions for raw materials linked to construction, such as steel, asphalt, various products linked to infrastructure chains. Due to this disruption, we’re already seeing companies evaluating measures to request the rebalancing of contracts,” Letícia Queiroz de Andrade, an infrastructure-focused partner at law firm Queiroz e Maluf, told BNamericas.
“I’m now working directly on the evaluation of two potential cases in the highway sector that will be requests for contract rebalancing. The trend is that lawyers working in these segments will have a lot of work in the coming months, because costs have grown a lot more than anyone could have predicted,” she added.
The pressure on prices, already in effect before the start of the COVID-19 pandemic, has been ramped up even further by Russia’s invasion of Ukraine, mainly thanks to the rapid increase in oil prices.
This situation looks likely to oblige companies to hike their rates for users, particularly in the most heavily exposed segments, which are highways and airports.
“Of course, we care about the public and the consequences that the transfer of this increase will have on people’s lives. We’re aware and very concerned about the whole situation, but the [transportation] sector is unfortunately no longer able to hold back on this increase, which has to be passed on immediately,” said Vander Costa, president of transport industry association CNT, in a release.
According to Costa, the airline sector is one of worst-affected industries, as companies were already in a very delicate economic position because of the impacts of the pandemic.
The impact of cost increases for companies and infrastructure concessionaires related to existing contracts could also be reflected in the agenda of concessions that the government wants to push forward this year, offering concessions for highways, airports, ports and railways.
“The continued increases in costs have two main effects on concessions. Existing contracts face the risk of being reviewed and, for new auctions, there’s a risk that companies may be reluctant to submit bids at a time when the cost structure is dysfunctional,” Paulo Dantas, an infrastructure and project finance specialist at law firm Castro Barros Advogados who advises companies on concession contracts, told BNamericas.
However, the federal and state governments still have room to make efforts to update the tender notices for upcoming concessions and ensure that auctions are attractive enough to draw bids.
“The imminent cost problem at the moment is in the current contracts. For the upcoming auctions, the governments can still prepare public notices with the high costs incorporated in the economic and financial evaluation. If these public notices aren’t updated and there are no very clear clauses on price readjustments in the contracts, then neither companies nor project financiers will be interested,” Bruno Aurélio, an attorney focused on infrastructure and regulatory matters at law firm Demarest, told BNamericas.
GOOD NEWS ON SUPREME COURT RULING
Despite the challenges in costs, infrastructure firms still have some reasons to celebrate, after Brazil’s supreme court ruled against a request made by the prosecutor’s office in 2003 to change a rule that, in practice, could prevent a company from taking over a concession from another company through a direct acquisition without carrying out a new bidding process.
The case was resumed last year and the supreme court decision has brought some welcome relief to various large infrastructure companies.
If the supreme court had ruled against direct transfers, projects like São Paulo’s metro line No. 6 would have been at risk. The concession for the line, currently under construction, is held by a consortium led by Spanish infrastructure and renewable energy group Acciona.
In 2020, Acciona took over the contract from the Move São Paulo consortium. Formed by Odebrecht Transport, Queiroz Galvão and UTC, the consortium came under scrutiny in 2016 amid the Lava Jato corruption scandal, which generated financial problems that forced it to abandon the project and the works were halted.
Meanwhile, the sanitation concessions assumed by BRK Ambiental and Iguá Saneamento, acquired respectively from Odebrecht Ambiental and CAB Ambiental, were also under threat, as were the highway concessions Odebrecht sold to Monte Equity Partners and Auto Raposo Tavares.