Higher input prices make infrastructure projects — a flagship of President Jair Bolsonaro’s reelection campaign — more expensive. Concessionaires seek to revise contracts
Price increases of up to 80% since the beginning of last year in key inputs for infrastructure projects have become a problem for highway, railway and airport concessionaires and a headache for the government less than three months before the election.
Asphalt, steel and diesel, among other items linked to civil construction, have soared amid the global inflationary process aggravated by the war in Ukraine. Rising costs threaten to slow down concessionaires’ works, and they are talking about revising contracts at a time when the government is more interested in showing machines at work. Construction companies carrying out public works face the same difficulties.
Concessionaires have warned the government that higher costs may delay works and even affect maintenance services, with consequences for users. They expect some kind of compensation in order to meet the targets they committed to in the auctions.
The list of increases weighing heavily on companies’ cash flow is topped by petroleum asphalt cement, one of the most widely used materials in any highway project. The input has risen 80% over the last 18 months. But price increases in civil construction have spread to items such as steel, PVC pipes, bituminous binders, timber, copper and diesel oil.
Construction companies also complain about the prices of inputs such as rebar, carbon steel wire and cement. The latter alone rose by an average of 16.84% in the first half of the year.
In general, companies are trying to convince the government of the need to restore the economic and financial balance of the contracts. In practice, this may mean higher tariffs and extended contractual deadlines, among other measures. There are problems in older concessions and also in those signed under the government of Jair Bolsonaro (PL), who is seeking reelection in October.
— There are indeed problems detected in concessionaires’ cash flow. What matters is building a solution — says Marco Aurélio Barcelos, CEO of the Brazilian Association of Highway Concessionaires (ABCR).
He stresses that works may be delayed: — Without a doubt, without changes, delays are possible, because the numbers simply don’t add up. The risk is that the schedule will be compromised.
Interest rates complicate the situation
A wave of contract revisions could hit hard one of Bolsonaro’s possible showcases in the election year: infrastructure, which propelled former minister Tarcísio Gomes de Freitas (Republicanos) to become the pro-Bolsonaro candidate for governor of the State of São Paulo.
In 2021, for example, the federal government signed three highway concessions: BR-116/101, between São Paulo and Rio de Janeiro; BR-153/080/414, covering regions of Goiás and Tocantins; and BR-163/230, whose area covers Mato Grosso and Pará.
The remedy applied by the Central Bank to fight inflation — higher interest rates — makes the situation even more difficult by increasing the cost of financing.
— The situation is very difficult, not least because this inflation problem is not solved with high interest rates. The case of highways is quite significant. Road maintenance and upkeep services are affected, as are projects under way — says the president of the Brazilian Association of Infrastructure and Basic Industries (Abdib), Venilton Tadini.
Fernando Paes, executive director of the National Association of Rail Transporters (ANTF), says the rise in diesel prices led the association to ask the National Land Transportation Agency (ANTT) for an extraordinary review of tariff caps.
He says the sector is heavily affected by the “sharp and unexpected increases in the price of diesel”, which powers the machines on construction sites, and calls for a swift response from the agency: — The impact of rising prices of the main inputs for investments in railways, as well as highways, ports and airports, will certainly require a review of contracts that provide for investments.
He explains that one of the arguments used by concessionaires is that annual adjustments to tariff caps follow the IPCA or IGP-DI. These indexes, he stresses, do not reflect the sector’s real cost inflation, whose inputs are rising well above average. — We have our own inflation, which is not everyday inflation. The price of steel rose by around 70% in 2021 — says Vicente Abate, president of the Brazilian Railway Industry Association (Abifer), by way of example.
Pilgrimage to Brasília
The Ministry of Infrastructure and ANTT confirmed to O GLOBO that they have been discussing the issue with concessionaires, but said that, so far, no formal request for contract revision has been received. However, this price escalation does not only create a problem for concession contracts. It also makes the operations of construction companies carrying out public works more expensive. Companies in the sector have been making a pilgrimage to Brasília seeking contract adjustments.
“The Ministry of Infrastructure monitors any changes in input prices that may affect the sector. The budgeting system of the National Department of Transportation Infrastructure (Dnit) is based on the Reference Cost System for Works (Sicro), which is updated periodically and is widely used as a cost benchmark for highway works”, the ministry said in a statement.
The National Association of Airport Management Companies (Aneaa) says it is following with concern the escalation in the prices of construction inputs, with significant increases since mid-2020.
“The sector’s concessionaires must meet contractual targets for investment in expanding infrastructure, and the increases — in some cases of more than 50% — seen in the prices of heavy materials have a strong impact on the cost forecasts established in these concession contracts”, it says in a statement.
Airport handed back
Some of the privately managed airports managed to rebalance their contracts this year, after the heavy impact of the first years of the pandemic. One of the companies that requested a review and was unsuccessful, Changi, decided to take a more drastic step: hand back the concession for Galeão International Airport in Rio.
The decision ended up leading the government to remove Santos Dumont Airport, in downtown Rio, from the package of terminals to be conceded this year, further delaying investment in the sector. The Rio terminals are only expected to go to auction next year.
Attorney Frederico Favacho, partner at Santos Neto, believes the scenario may lead to court disputes: — When there is inflation in the cost of works, there is usually no room for automatic pass-through in contracts signed with public authorities, which are bound by the terms of the tender notices that preceded them. This may lead to a wave of litigation over these contracts seeking economic rebalancing.
Infrastructure contracts specialist Giuseppe Giamundo Neto advocates revision. — This is a problem affecting a large share of infrastructure concessions with works under way. There have been unexpected departures from the historical patterns of indexes related to materials such as asphalt, galvanized steel and Portland cement, among others. It is something extraordinary and absolutely unforeseeable, which has placed an excessive burden on cash flow, hence the need for immediate correction — argues the partner at Giamundo Neto Advogados.
Ernesto Tzirulnik, an infrastructure contracts specialist with a doctorate in Economic and Financial Law from the USP Law School, believes that the rise in input prices meets the criterion of an “unforeseeable factor or one with incalculable consequences”, an understanding which, according to him, is already settled at the Federal Court of Accounts (TCU).
Story by Eliane Oliveira, originally published on 07.18.2022 in O Globo (in Portuguese) (https://oglobo.globo.com/economia/negocios/noticia/2022/07/alta-de-custos-pode-atrasar-obras-de-infraestrutura-e-concessionarias-tentam-rever-contratos.ghtml)
