Brazil: Brazilian Federal Government Listens To The Market And Increases The Internal Rate Of Return For New Concessions

Aiming at increasing the participation of the private sector in the new round of concessions included in the second phase of the Program for Investment in Logistics ("PIL 2"), the Ministry of Finance has updated the parameters for the calculation of the reference Internal Rate of Return (Taxa Interna de Retorno, or "TIR") for the upcoming concessions. This change meets a request of the private sector that has been debated since the first phase of the plan ("PIL 1"). According to the Ministry of Finance, the methodology for the calculation of the TIR is the same that was used for the previous concessions. There are four criteria used for the update of the TIR, of which three include risk rates. It is worth noticing that the rates of the TIR disclosed do not necessarily correspond to the effective rate of return of the investment made by the companies, which will depend on the actual operation of the relevant projects by each investor, including, for example, the financing conditions.

Airports

With the update, the TIR for the airport concessions increased from 6.63% per year (used in the prior auctions) to 8.5% per year. According to the federal government, this value will be used only to define the minimum granting amount (i.e. amount to be paid by the winner of the auction to the government). The current plan is to carry-out the concessions of the Porto Alegre (RS), Florianópolis (SC), Fortaleza (CE) and Salvador (BA) airport terminals next year. The winner will be the company or consortium that presents the highest granting amount.

Ports

The government has also indicated that port tariffs shall increase. The Ministry of Finance established a TIR of 10% for the ports concessions in the PIL 2, compared to a rate of 8.3% in the PIL 1.

Toll-roads

The Ministry of Finance increased the TIR for the concession of toll-roads to 9.2%, compared to a rate of 7.2% in the PIL 1.

Railways

There is an expectation that the TIR for railways concessions will be set above a rate of 10%, considering that such projects seem to have higher risks among all the projects included in the new concession plan.

The federal government expects the new round of concessions of infrastructure projects to foster the economy – and the clarification of strategic points for investors, which include, among other matters, the definition of the return rates – are essential not only to increase the investments, but also to sustain their long-term growth.

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