Privatisation of Brazilian airports continues apace

Introduction
First round of privatisations
Future developments

Introduction

Despite Brazil's position as a major emerging market, its transportation infrastructure is somewhat lacking. Ground-based alternatives are limited, which exerts tremendous pressure on the air transport system. Passenger numbers have increased consistently and demand arising from preparations for the 2014 World Cup and the 2016 Summer Olympics has made airport infrastructure improvement a key government objective.

Civil aviation has traditionally been treated as a sector of critical national interest, resulting in considerable government control of certain sectors, including administration of the country's major airports. Brazilian airports have been managed by the federal government through the Empresa Brasileira de Infraestrutura Aeroportuária, commonly known as INFRAERO. Since 1972 INFRAERO has controlled most of the major Brazilian airport facilities, collectively managing 67 airports, 34 cargo terminals and 51 air navigation units. This represents 97% of the air transport traffic in Brazil and over 155 million passengers every year.

Like many government agencies, INFRAERO does not have the necessary resources to modernise its facilities. It has therefore turned to privatisation to speed up renovation of the country's most important airports. The government has decided to grant concessions to private companies, which have begun to manage a number of airports and modernise their infrastructure, in exchange for management rights.

First round of privatisations

Five airports - located in the cities of Sao Paulo, Campinas, Rio de Janeiro, Belo Horizonte and Brasilia - were privatised in 2012, in line with the government's National Privatisation Plan. These five airports are now under the direct supervision of a new government department, the Civil Aviation Secretariat (SAC), which is responsible for implementing the concessions and monitoring the privatisation process. Directly subordinated to the presidency, the SAC replaced the Ministry of Defence for all matters concerning civil aviation, including the regulation of the National Civil Aviation Agency, which is now subordinate to the SAC.

These privatisations have taken place through public concessions. A public announcement made in 2012 by INFRAERO determined the qualification rules for the auction. Some of the most significant terms were as follows:

• Winning bidders will be given 51% of the equity of airport management, while INFRAERO retains the remaining 49%;
• Bidders can be Brazilian or foreign entities (or partnerships with Brazilian and non-Brazilian participants); and
• Bidders must have at least five years of prior experience in managing airports with over 5 million passengers annually.

The first auction took place on February 6 2012. The winning bidder for the international airport serving the city of Sao Paulo (which is actually located in the municipality of Guarulhos) was a joint venture between Brazilian entity Invepar and Airports Company South Africa. The concession was granted for 20 years in exchange for a payment of R16 billion. Another joint venture - which comprises Brazilian companies UTC Participações and Triunfo Participações e Investimentos, together with French partner Egis Airport Operation - will be in charge of Viracopos airport for the next 30 years. Its bid was for R3.821 billion. Brasilia airport will be managed by Infravix Participações SA and Corporacion America AS, from Brazil and Argentina respectively, for 25 years. Their bid was R4.5 billion. These amounts will be paid out over time in instalments with interest that can be either fixed or floating.

These entities will be in charge of any extensions and new construction needed at the airports, as well as their management. In return, they will receive any income above the airport fees and the right to develop the terminals and commercial areas of the airports. In order to avoid the risk of significant increases in airport fees as a result of the privatisation, the government has also announced the possibility of allowing the development of the areas surrounding the airports through the construction of hotels and business centres. In an effort to establish and maintain a competitive environment, the government has indicated that it may restrict any single group from managing more than one airport.

The risk of increased airport fees is significant. According to an study prepared by the International Air Transport Association in relation to airport privatisations conducted in other regions, all airports privatised in Europe, Latin America and Oceania have seen increases in airport fees. In consideration of improved services and inflation, some increase is to be expected. However, a number of fee increases exceeded the amount that could reasonably be attributed to these factors. In the United Kingdom, for example, airport fees increased by 20% following privatisation. In Greece, airport fees went up by almost 500% after the airport was privatised for the 2004 Olympics. In order to avoid similar increases, the National Civil Aviation Agency may set caps on certain fees.

Renovations to be conducted by the winners will be financed by the National Development Bank (BDNES). Bridge loans of R1.2 billion each will benefit the companies aiming to expand and modernise the airports in the cities of Campinas and Guarulhos in the state of Sao Paulo. Another bridge loan of R488 million was also approved for the international airport at Brasilia.

Future developments

The SAC recently announced that the next bids will target the international airports in Rio de Janeiro and Belo Horizonte and are expected to take place in September 2013. A further public announcement made on April 5 2013 indicated that feasibility studies for these two airports should be ready in late April. Rules for the tenders are expected to be announced in August and the tenders should be conducted by December.

The SAC expects that the two future concessions will raise R11.4 billion jointly in renovation and expansion - R6.6 billion for the Galeão airport in Rio de Janeiro and R4.8 billion for the Confins airport in Belo Horizonte. The BDNES is expected to finance approximately two-thirds of this sum. After completion of these two privatisations, INFRAERO's control over Brazilian ariports will be reduced to approximately 50% when measured by revenue.

For now, INFRAERO is in the process of arranging visits for prospective parties to both airports. Foreign visitors may schedule visits, but should be accompanied by a translator. Requests for access to customs facilities or other restricted areas must be made to the Brazilian authorities at least 48 hours in advance.

Whether the privatisation of Brazil's major airports will be a success is still unknown. However, what is certain is that the airports are in desperate need of improvement if they are to meet growing demand. INFRAERO's president has indicated that revenue raised from the privatisations will be invested in the establishment or improvement of 270 smaller regional airports in an effort to develop Brazil's infrastructure further.

For further information on this topic please contact Kenneth D Basch at Basch & Rameh by telephone (+55 11 3064 8599), fax (+1 561 431 5808) or email (ken.basch@baschrameh.com.br).