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Two-year balance of infrastructure in Brazil: specific sectors

This is the last of three articles on challenges ahead for the new administration. The first article focused on state-owned enterprises, and the second on the creation of a structure to accelerate the flow of projects in the administration's bureaucracy and on the refocus of BNDES' priorities, with the rise of project bonds as a financing tool. This final article looks into specific regulatory issues on logistics and energy sectors.

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The primary goal of the Temer administration for infrastructure was to accelerate the projects pipeline to stimulate investments and the economy. Some sectors, however, faced specific regulatory issues. The government attempted to tackle them working with independent agencies for power (ANEEL), oil and gas (ANP), and logistics (both ANAC and ANTT). Solutions were not always achieved, but negotiations have driven disputes closer to resolution

Initiatives in the power sector addressed the underlying regulation. On the one hand, the government made improvements that contributed to successful auctions for transmission lines and new long-term power purchase agreements. On the other, Eletrobras had excessive debt due to a number of projects still under construction, so the government structured an important divestment programme to sell Eletrobras' assets and its controlling interests in highly costly distribution companies. Not all participations were sold before the end of the Temer term, but the Bolsonaro administration will take over a much better situation for Eletrobras and the sector more generally.

The power generation sector is currently waiting on a structural reform. The Brazilian power generation grid was initially supposed to rely on hydroelectric plants, and projects shared, as a pool, the hydrological risk. With the change in rainfall patterns, the pool of power generation concessionaires that shared the risk is now challenging this regulatory scheme. The concessionaires have managed to gain some relief in the federal courts. The injunctions have unbalanced the market, and the government, generators and distributors have been trying to reach a settlement. A solution is closer now than it was two years ago; however, it is an ongoing issue that the new government will have to address when approving a reform to restructure the sector.

For oil and gas, the government was quick to remove the right granted to Petrobras to be the sole operator of pre-salt fields. With this and other measures to increase the participation of private companies, reduce protectionism via local content regulations and remove Petrobras' debt load, the government reopened the auction rounds, and, for the first time, created a schedule of bidding rounds. In 2018, 29 exploration and production contracts (seven on pre-salt areas) were auctioned. More regulatory improvements are expected soon, such as on reserve based lending, decommissioning and local content. The results from two years of liberarisation speak for themselves and the importance of retaining existing policies is evident.

The logistics sectors are another field were the government attempted, without much success, to save the recent concessionaires. The 2012/2013 airports and highways concessions were granted under (excessively) optimistic macroeconomic premises. The economic recession, together with the very aggressive bids by the private parties during the rounds of auctions, have created a lot of uncertainty. One airport concessionaire is currently under judicial reorganisation, and several others are facing challenges in meeting contractual construction and payment schedules.

When it comes to territorial transportation, the complex issue of concession renegotiation and devolution is closer to a solution. A law was passed allowing for the renegotiation of contractual terms, contingent on certain administrative processes. The administrative processes are awaiting an executive decree to clarify the details. Concessionaires interested in renegotiating contractual terms (such as construction completion), without being exposed to contractual and administrative sanctions, are awaiting a decree that will create the rules for renegotiation and reauction of the concessions.

This article concludes a series of three that analyse important measures taken in the past two years to tackle challenges in the infrastructure field. The situation has improved since 2016, but there is still unfinished work in some areas. The President-elect has said he intends to reduce the role of government in people's lives and in companies' business activities. These new policies will create opportunities that infrastructure developers and financers do not want to miss.

de Andrade

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