Airports: investment opportunities in Brazil for aviation sector recovery
Lefosse Advogados – Brazil
Karen Mentzingen Coutinho
Lefosse Advogados – Brazil
Lefosse Advogados – Brazil
The context of airport privatisations in Brazil
In the past, all federal airports in Brazil were operated by INFRAERO, a federal state-owned corporation, incorporated under Federal Law No. 5,862, issued on 12 December 1972. INFRAERO is administratively and financially autonomous and is responsible for implementing, managing, operating, and exploring the federal airport and air navigation support infrastructure.
According to INFRAERO’s Management Report (2010), the company managed 67 airports that year, was responsible for about 97 per cent of regular air traffic in Brazil, and was present in all of the 26 Brazilian States.
Since 2011, Brazil has changed its public policy on the management and maintenance of airports. The federal government has started a process to grant the private sector the largest airports under a concession regime. At first, the concessions sought to boost much-needed investments. Such measures were needed to meet the ongoing air traffic demand and the demand from major events that Brazil would be holding. Over a four-year period, Brazil hosted three such events: the 2013 Confederations Cup, the 2014 World Cup and the 2016 Olympic Games.
Also, given INFRAERO’s regulatory restrictions as a state-owned corporation on spending money on investments in the short- and medium-term, the airport concession plan seemed to be the most feasible alternative to improve quality of the services as the sector simultaneously grew.
In 2011, São Gonçalo do Amarante Airport (ASGA), located in Rio Grande do Norte State, was the first airport to be granted to the private sector. In the following year, concessions for other important international airports were also granted: Brasília Airport (BSB), which serves the Brazilian Federal Capital; Guarulhos International Airport (GRU), which is the most important one in the country; and Viracopos, in Campinas (VCP), which was (at the time) known for having great potential in terms of passenger flow, logistics and cargo handling.
Later, in 2013, concessions for two other significant international airports were granted: Antônio Carlos Jobim – Galeão, in Rio de Janeiro (GIG) and Tancredo Neves – Confins, in Belo Horizonte (CNF). Four more airport concessions were granted in 2017: Hercílio Luz, Florianópolis (FLN), Luiz Eduardo Magalhães, in Salvador (SSA), Pinto Martins in Fortaleza (FOR), and Salgado Filho, in Porto Alegre (POA).
Finally, last year (2019), a new concession model for the fifth round was been implemented and the federal government granted concessions for the exploitation and expansion of a total of 12 airports, divided into three clusters,each one including some important and some less profitable airports.
Since 2011, therefore, 22 airports have been privatised. The concession model has seen many changes throughout its lifespan of almost 10 years. These changes offered more legal certainty for the involved players, that is, the experience has allowed the regulators, players and the government to mature over the years. The civil aviation sector has attracted substantial investments and many international airport operators – which were key elements in allowing an infant sector to finally develop.
Of course, such a development did not occur without any setbacks. Some concessionaires have faced financial troubles, which were partially in the aftermath of corruption investigations involving investments in infrastructure assets in other sectors, but the main reason was more related to inadequate early-stage models, which have now been much improved.
The main agents involved in airport privatizations in Brazil
The concession of federal airports in Brazil involves three main agents: the Secretariat for Civil Aviation of the Federal Government (SAC/PR), the Brazilian Civil Aviation Agency (ANAC) and the Brazilian Federal Court of Accounts (TCU). Broadly speaking, the SAC/PR is linked and subordinated to the Ministry of Infrastructure. It is responsible for supervising the privatisations process and contracting feasibility studies. The ANAC is responsible for regulating the sector, implementing the public policies and signing and supervising the concession agreements.
The TCU is the external control institution of the Federal Government and is responsible for overseeing and monitoring privatisation processes, which includes analysis of the feasibility studies. The TCU can issue orders and recommendations to the SAC/PR, intervening, to a greater or lesser degree, in the concession. The TCU has acted in the prior approval of the bid documents related to the auctions.
The Investment Partnerships Program (‘PPI’) was created by Federal Law No. 13,334, of 13 September2016 to expand and accelerate the exchange between the Government and private enterprise.PPI is divided into two administrative bodies: PPI Council and a PPI Secretariat. The first one evaluates and recommends to the President the projects that integrate the PPI, deciding, also, on the issues related to the execution of the PPI’s agreements. The Secretariat, linked to the Ministry of Economy, acts in support of Ministries and regulatory agencies for the execution of program activities.
The projects included in PPI’s Portfolio are treated as a national priority, so the entities involved must act so that the processes that are necessary for the structuring, liberation and execution of the project to occur in an efficient manner.
Relevant economic and regulatory changes in the Brazilian airport concession model
The airport concession model has been improved over the years. The conditions of exploitation by private initiative of the airport infrastructure were established by Federal Decree No. 7,624, of 22 November2011 – after the concession for ASGA had already been granted. The auctions that came right after the initial experience can be considered somewhat similar to the first one – despite progress in each new round, involving economic incentives and the understanding of each airport’s characteristics. Additionally, for these initial rounds, INFRAERO held 49 per cent of the voting capital of the privatised airport and became a party to a new shareholder’s agreement. All these initial rounds had a common characteristic that can be criticised: the infrastructure expansion triggers were dates, instead of demand.
From the fourth round onwards, the scenario began to change. There was the flexibility on fixed grant contributions and tariffs caps, public consultations were opened to interested parties regarding several aspects of the economic and operational management of airport sites, infrastructure expansion triggers shifted to actual demand (that is, annual number of passengers) and there was no INFRAERO interest in the corporate capital of the concessionaires, among other changes.
In the fifth round, however, the concession agreement brought substantial changes compared to the previous ones. The gathering of the airports into clusters, the establishment of initial and variable grant contributions and capex investments based on demand triggers were considered the main achievements of the new model.By dividing into clusters, the Federal Government found a very feasible way of granting the private sector not only essential and important airports, but also of coupling these with smaller and less profitable ones, by allocating cross-subsidies within the airports.
Other important changes were the greater flexibility of fees, with the replacement of caps for each category of fee by the caps of average fee revenue per passenger, and the possibility of changing the concession parameters through either a proposal presented by the concessionaires (proposta apoiada), the adoption of consultations or agreements between airports and their users(the airlines).
These changes offered more legal certainty for the players involved and the experience has allowed the regulators, players and the government to mature over the years.
For the next round, the Brazilian Government is structuring further concessions divided in three clusters: six airports in the central region of the country (with Goiânia/GO as the most important airport), seven in the north (with Manaus/AM as the most important airport) and nine in the south (with Curitiba/PR as the main airport). Final documents are expected to be published by the end of November 2020, with an auction taking place in March 2021.
The rules and studies for the tender were submitted to public consultation last March, but due to the impacts of the Coronavirus pandemic, reviewing some points of the project modeling and demand perspective was necessary, so as to update the feasibility studies. Therefore, in order to increase the auction’s attractiveness by reducing costs and maintaining competitiveness, the SAC/PR updated the studies and, in August, ANAC started a second public consultation to receive comments on the studies.
Among other changes, it can be highlighted that the North Cluster has undergone important progress to include the cargo demand risk share between the Government and the concessionaire, in case Manaus loses its free trade zone tax benefits at some point in the future. Another significant improvement was the exclusion of the requirement of submission of a financial feasibility certificate, prepared by a financial institution. The current concession model already offers mechanisms to prevent the execution of concession agreements with bidders that have been economically disqualified.
Foreign investments are indeed expected to participate, given the fact that traditional sponsors and operators have been facing several financial difficulties as a result of the impact of Corona virus on the aviation sector. Powered by these recent events, for the first time the federal government allowed, in the bid document drafts sent for TCU approval, operators to participate without minimum equity requirements (that is, as service providers, with the investor submitting a commitment to contract an operator that fulfills the technical requirements of the bid notice or a binding services agreement, which will include technical support, operation, and management services).
In other words, there is no compulsory participation of an airport operator in the auction as a bidder, individually or in consortium. This will allow, for example, investment funds to bid alone.
The debate will very likely be centered on how detailed these binding services agreements will need to be. This will most likely change the profile of the auction participants, especially considering the crisis that the aviation sector is going through worldwide.
The seventh round is expected to take place in the first half of 2022 – and the bid documents will be published at the end of 2021. Such round will include around 17 airports also divided into three clusters. Among them, there are the two of the most highly-prized government gems: Santos Dumont Airport (SDU), in Rio de Janeiro’s capital, and Congonhas (CGH), in São Paulo’s capital.
SDU and CGH airports are the main Brazilian hubs between the two most populous cities in the country. Both are in easily accessible locations within the urban centers. In 2018, the route between both airports was considered the fifth busiest domestic route in the world.Until 2019, SDU served traffic of approximately 29,000passengersdaily, while CGH’s daily people traffic was around 60,932 passengers, 592 flights, and 159,124 kilograms of air cargo.
An important point in the feasibility studies of this round will be a possible ban on the participation of specific participants. Always seeking to benefit both competitiveness and the equitable treatment among bidders, the SAC/PR, ANAC, and other applicable authorities may analyse this concession model in light of competition issues.
In other words, researching in-depth is important, because if the same participant is awarded both the SDU block and the CGH block, this could potentially imply in-market concentration, which may result in disadvantages to the airports’ users. Likewise, the same assessment applies in case the shareholders of the Guarulhos (SP) and Galeão (RJ) concessionaires are allowed to bid, respectively, for CGH and SGU. That is because, if these shareholders are awarded, they would control both airports in the states of São Paulo and Rio de Janeiro.
VCP and ASGA re-biddings
In 2017, Federal Law No. 13,448of 5 June2017was enacted, establishing general guidelines for the extension and ‘re-bidding’ of concession agreements with the Federal Government. Federal Decree No. 9,957, of 6 August2019, set forth the applicable procedure for road, rail and airport infrastructure sectors.
On 12 November2019, ANAC issued Resolution No. 533, which regulates the procedures and methodology for calculating the indemnification amounts related to non-amortised reversible assets investments in the event of early termination of the concession agreement, due to re-bidding, forfeiture or bankruptcy.
Broadly speaking, re-bidding is the possibility of conducting a new bid for projects previously granted to the private sector before the end of the corresponding contractual term. The procedure is an alternative to concessionaires that are no longer able to comply with their respective contractual obligations or are under financial distress.
This is the case of Viracopos Aeroportos Brasil, the concessionaire responsible for VCP Airport, whose judicial recovery proceeding started in 2018. The contractual term was, at first, 30 years, ending in 2042. In another case of re-bidding, in the beginning of 2020, Inframerica, the current operator of ASGA, announced its intention to return the concession to ANAC because of financial difficulties. The contractual term was initially 28 years, ending in 2040.
Both VCP and ASGA airports have been recently included in PPI’s Portfolio, under Federal Decree No. 10,427of 16 July2020, and Federal Decree No. 10.472, of 24 August2020.The latter also provides for the repeal of Federal Decree No. 7,205of 10 June2010, which had established a specific concession model for ASGA. Due to such revocation, a single standard airport concession model comes into force in Brazil, thus bringing greater uniformity and legal certainty to the future concessionaire of ASGA.
The first steps towards the process of re-bidding will be completed in the upcoming few months. The SAC/PR will receive feasibility studies for both concessions in order to draft the new bid documents. Additionally, both concessionaires will have a 90-day period, after the respective Decree is issued, to sign an amendment to the concession agreement with ANAC. This amendment will establish specific rules for the airports to be returned by the current concessionaires.
The re-biddings for VCP and ASGA airports will probably be held independently (each on a different occasion) and are expected to happen at some point in the second half of 2021.
Sales of INFRAERO’s participation in privatised airports
The second and third rounds of concessions required the awarded private bidders to have INFRAERO as a shareholder of the concessionaries (Special Purpose Entities – SPE). The private awardee was required to hold 51 per cent interest in the voting capital of the respective concessionaire. Currently, INFRAERO holds 49 per cent stakes in GRU, GIG, CNF and BSB airports, which are among the main airports in Brazil and Latin America.
This requirement was the Federal Government’s first attempt to implement cross-subsidies among profitable and unprofitable airports, as INFRAERO’s revenues as a shareholder of these major privatised airports could be earmarked for less profitable or unprofitable airports. The other purpose of such a requirement was to try to take advantage of the benefits the private sector offers, absorbing know-how and applying such knowledge to other INFRAERO airports.
INFRAERO does not hold corporate control of these concessionaries, but shares governance with decision-making powers, which are established in shareholders’ agreements executed by and between INFRAERO and awardees of the mentioned rounds.
The Brazilian Federal Government currently believes that offering the chance to once again reschedule the payments of the contributions (outorgas) of these concessionaries will be enough to make the private 51 per cent shareholders renegotiate the current shareholders’ agreement, to make the sale of INFRAERO’s 49 per cent stake more attractive. Rescheduling grant fees has been allowed previously and it is now permitted in specific cases under Federal Law No. 14,034, of 5 August,2020.
The sale of INFRAERO’s 49 per cent stakes in GRU, GIG, CNF and BSB is expected to take place in the second half of 2021. In VCP, the sale should take place upon the re-bidding procedure.
Despite the impact of the coronavirus pandemic, the aviation sector has begun the significant process of recovery, thanks to aid measures (promoted by the government) that focus on minimising the effects of the crisis and on adequate sanitary procedures, to be adopted by both the airport operators and airlines.
The Federal Government has been working to respond to thisunprecedented crisis, making adjustments to the concession modelsto ensurenecessary legal certainty for they players in the sector. In this regard, it is very clear that the airport infrastructure investment agenda remains in place.This will be crucial for the sector's recovery.
‘INFRAERO’s Annual Report 2010’(INFRAERO),seehttps://transparencia.infraero.gov.br/wp-content/uploads/2019/02/relatorios-anuais/relatorio_anual_2010.pdf accessed on 9 October 2020.
Southeast Block: Vitória (VIX) and Macaé (MEA) airports; Central-West Block: Alta Floresta (AFL), Sinop (OPS), Várzea Grande (CGB) and Rondonópolis (ROO); and Northeast Block: Juazeiro do Norte (JDO), Campina Grande (CPV), João Pessoa (JPA), Recife (REC), Maceió (MCZ), Aracaju (AJU).
The SAC/PR was created by the Federal Government by the Provisional Measure No. 527, of 18 March2011, in response to a series of events related to the collapse of the Brazilian air transport called the ‘air transportation blackout’, which began in 2006.
‘External control’ (TCU), see https://portal.tcu.gov.br/english/inside-tcu/external-control/ accessed 10 September 2020.
‘The Investment Partnership Program’ (PPI), seehttps://www.ppi.gov.br/about_the_program accessed on 10 September 2020.
This means that, by the time a certain date is reached, expansion needs to be implemented, triggering not only a CAPEX commitment fromthe airport operator, but also an OPEX commitment to operate the expanded infrastructure, even without proper demand for it.
In the first rounds, the airports were individually auctioned, preventing cross-subsidies within the airports; there was a fixed initial contribution, which represented high disbursement at the beginning of the project and prevented the sharing of revenue risks with the government; and the investment trigger was based on a predicted date, regardless of demand, causing considerable distortions.
Available on: www4.infraero.gov.br/imprensa/noticias/ponte-aerea-rio-sao-paulo-60-anos/.Accessed on 09/09/2020.