The attractiveness of investments in Brazilian railways.
| Autor | Filho, Fernando Correa Ferreira |
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Introduction
A public-private partnership (PPP) is a contractual arrangement established between governments and private companies with the objective of leveraging investments in infrastructure to provide services to society (Osei-Kyei & Chan, 2015). Despite the "appetite" of governments to implement these partnerships, a number of difficulties for the stakeholders involved include high transaction costs, inability to properly measure risks (Mladenovic et al., 2013), difficulty in accessing capital markets, and others. In some cases, it is not even feasible to conclude the partnership without government contributions in the form of guarantees and public financing (Osei-Kyei & Chan, 2015). Nevertheless, the evidence in Greece indicates that maturing PPP contracts enable a more efficient framework for risk allocation (Roumboutsos & Anagnostopoulos, 2008).
Developed countries have a higher chance of successfully implementing PPPs, because of their stability in macroeconomic terms. A strong and well-established capital market in a mature financial system, coupled with regulatory and institutional stability, and several alternatives available for access to capital, either by public or private entities, all contribute to success (Jamali, 2004). Osei-Kyei and Chan (2015) comment on the low contribution of research on PPPs from emerging markets, due to the low incidence of these partnerships in these economies--probably associated with higher implementation risks.
Brazil presents itself as a good case for analysis, since there is a lack of investment in infrastructure--especially transportation--with an impact on industry attractiveness and growth (Amann et al., 2016). This lack could be met through public-private partnerships, but this solution is challenging: an incipient capital market is associated to a still-unstable institutional environment, where the concessionaire is exposed to changes of rules or regulatory legislation, as already observed in concessions currently in force in Brazil. Research developed on public-private partnerships is mostly focused on the benefits of PPPs and how these benefits can be better utilized and expanded (Verweij, 2015). Osei-Kyei and Chan (2015) conducted a literature search on the critical success factors in the implementation of a PPP, showing that one of the most important factors is risk allocation and sharing. Several studies have also attempted to quantify, through real options, the value of guarantees offered by the government to the concessionaire, to mitigate risk and make the PPP viable.
Burke and Demirag (2015) dealt with the risk of demand from the perspective of the different actors. Xu et al. (2012) developed a model to rank the level of relevance of different risks in a PPP project, while Grimsey and Lewis (2002) quantified these risks in a water treatment plant project. In the literature no studies both quantify the risks associated with a PPP arrangement and indicate measures to mitigate them, especially for projects involving infrastructure in emerging markets. In 2012, due to the lack of speed and efficiency in the implementation of railways by public enterprises, Brazilian government launched the Program for Investment in Logistics (PIL), a public-private partnership proposal, whose objective is to attract private investment in the expansion of the rail network (ANTT, 2012a). In the following four years, no railroad had been auctioned due to lack of investor interest.
The present paper quantifies the risks involved in a railroad PPP and evaluates the attractiveness of this investment by means of Monte Carlo simulations. It considers the Brazilian regulatory framework, and it shows the effective possibility of gain or loss by this project. Following are measures proposed for the government to improve the attractiveness of these investments with a low burden for the government and to minimize impacts on the quality of rail transportation. New analysis of attractiveness conducted by Monte Carlo simulations shows a reduced venture risk.
As observed by Osei-Kyei and Chan (2015), research on PPPs in emerging markets is still an unexplored subject, so the theoretical justification of this work is to contribute to broadening the discussion about PPPs in those markets which do not yet have ideal conditions for the implementation of these partnerships. The practical contribution of this work is to support the construction of a model of PPP applied to railways that is intrinsically Brazilian, making investment in infrastructure attractive enough to ensure the expansion of the railway logistics network. It may be possible for other developing countries to follow this model to also attract investments.
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Theoretical Reference
2.1 The Public-Private Partnership (PPP)
The first public-private partnership projects were developed in Australia and England from the late 1980s and early 1990s (Grimsey & Lewis, 2002), and their importance has recently grown in the face of a reduction in the privatization movement (Brandao & Saraiva, 2007). In addition, a contractual arrangement between private companies and governments is needed to ensure the continuity of private investment in infrastructure. In the literature no single definition of public-private partnership nor single arrangement for this partnership is found. In a broad sense, PPP is a long-term agreement between the state and private entities, with the objective of implanting or managing infrastructure to provide a service to society (Grimsey & Lewis, 2002; Osei-Kyei & Chan, 2015).
Given the relevance of the theme and the growth in the number of partnerships signed, study of PPPs has increased, as shown by Osei-Kyei and Chan (2015). They analyzed research involving critical success factors in the implementation of public-private partnerships between 1990 and 2013. This same work points to a lack of studies in emerging economies. It is noted by this definition that PPP contracts contain elements of both incomplete and complete contracts. As long-term arrangements, their uncertainties are scarcely comprehensively mapped and mitigated beforehand. Additionally there is information asymmetry for agent (investor) and principal (government), both of which are also subject to timely changes in the counterparty's behavior. Guasch et al. (2007) confirm this observation by indicating that the renegotiation of PPP contracts at the initiative of the concessionaire has contractual reasons or unexpected shocks and renegotiations on the initiative of the government are politically motivated, tending to follow electoral periods.
The government seeks in a PPP the possibility of exempting itself, offering the minimum of guarantees and providing social welfare. Investors are looking for a return on investment, while minimizing or sharing risk. In this way the government has an ex-ante benefit by having the investment implemented without the need for disbursement, and the investor has an ex-post benefit, since it will be remunerated by future cash flows. On the other hand, asymmetry of information exists throughout the duration of the partnership, since the principal is not clear about the level of effort expended by the agent, having access only to the bottom-line result of the company.
This asymmetry can lead to opportunistic behavior on the part of the concessionaire, who seeks to maximize the utility of the enterprise for itself by minimizing effort, requesting the principal to maximize incentives and risk sharing (Fudenberg et al., 1990). A properly-designed contract should seek to mitigate these opportunistic behaviors by creating appropriate forms of incentive that promote adequate risk sharing while promoting the search for greater effort on the part of the concessionaire. In addition, according to Guasch et al. (2007), the existence of a strong and independent regulatory body contributes to inhibit and mitigate opportunistic behavior.
2.2 The feasibility of a PPP
Given the characteristics of PPP investments, which are long duration and maturity, capital intensity and low liquidity, their quantitative evaluation is a complex activity and requires great expertise (Grimsey & Lewis, 2002). Cruz and Marques (2014) perform a quantitative comparison between the implementation of a project by the state and private initiative. They point out that the alternative that maximizes value for money should be chosen, and that outcome would indicate whether to establish a PPP. Investments with uncertainty and risk demand valuation methodologies that contemplate such random variables. Hertz (1974) was the precursor of the investment analysis using Monte Carlo simulation, breaking with the deterministic view of the investment analysis by including stochastic components in the evaluation. Deterministic assessments fail to adequately point out the risks associated with these ventures (Smith, 1994), which in the case of PPPs are of great amplitude.
Demand risk from the perspective of the different actors in a PPP was considered by Burke and Demirag (2015). They show that, although the purpose of a PPP is to allocate the risk to the entity that is best able to manage it, the private partner undersizes the risk to overcome the competition, the financial agents overestimate the risk and demand government guarantees, and the government assumes a risk that should belong to the private partner--a situation that can generate low Value for Money projects, which in turn do not justify a PPP (Burke & Demirag, 2015). Xu et al. (2012) developed a computerized model to quantify project risks of a PPP, to help investors to choose between projects. The model indicates which are the least risky, and points out where the main risks of each project are. The risks were estimated based on a literature review and prioritization criteria defined by the authors.
Table 1 presents a summary of the different risks found in the literature regarding the...
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