Brazil - Economics
A new era for Brazilian airports: what can we expect?
Brazil has to mature the civil aviation policies at the same time that it expands the capacity. The body of laws governing this key activity is still weak and cumbersome and we hope that our authorities will take the measures before learning the hard way. From London, Ítalo Romani.
Congonhas Airport, São Paulo. Source: Wikipedia
We recently watched the awkward concession auction of 3 major Brazilian airports: São Paulo – Guarulhos (GRU), São Paulo – Campinas (VCP) and Brasília (BSB). In the dawn of her mandate, early last year, President Dilma Rouseff, feeling the pressure of having a far outdated and saturated airport infrastructure on the eve of the FIFA World Cup, pushed several government departments to solve this problem and, as a remarkable example of inter-governmental collaboration and union towards a goal, they managed to book the unbelievable sum of 25 billion Brazilian Reais (USD 13.5 billion) as grant for exploitation of those airports. Where does this money come from and how was this possible to happen? Unfortunately, these questions are easier to answer than the questions of how this amount will be paid and what benefits the Brazilian people will have with it.
The prevailing social-developmentist stream followed by the federal government started with the following assumption: the government alone is not able to expand the airport capacity, but on the other hand it does not want to quit its strong presence in this business. The compromise solution found was to design a concession scheme where the private sector has a share of 51% and the remaining 49% stays with the omnipresent state airport operator Infraero, what can be considered at least unusual and was compared by some critics to putting the fox to guard the chickens. Even if we assume that Infraero is as efficient as reasonably possible, it causes fear for the investor entering in a business having a partner with such power and which is strongly influenced by politics. Furthermore, Infraero will remain responsible for key services, such as airport tower and authority coordination which at limit situations can paralyze the whole business. The bottom line is that the government wants investor partners willing to participate with a low degree of autonomy.
Despite this controversial condition, many international airport operators became interested and established partnerships with local corporations to participate in the auction which took place on February 6, 2012, in São Paulo. Without going into details of the dispute, the overall result was the following:
- São Paulo Guarulhos opened at R$ 3.42 billion and closed at R$ 16.2 billion, along 20 years of concession with the private partners Invepar (Brazil) and ACSA (South Africa);
- Brasília opened at R$ 582 million and closed at R$ 4.5 billion, along 25 years of concession with the private partners Engevix (Brazil) and Corporación América (Argentina);
- São Paulo Campinas opened at R$ 1.47 billion and closed at R$ 3.8 billion, along 30 years of concession with the private partners Triunfo and Constran (Brazil) and Egisavia (France).
The possibility of subsided loans from the BNDES up to the amount of 80% of the grant value left room for artificial inflation of the bids.
There is still an appeal being judged for the case of Campinas as this article is being written, although there are signs that nothing will change this result. For the whole result, it sounds a reasonable criticism saying that the possibility of obtaining subsided loans from the National Bank of Social Development (BNDES) up to the amount of 80% of the grant value, whatever it would be, left room for artificial inflation of the bids. The incomes and the profitability that have to be obtained in order to cover these grants and additional investment are well above official forecast studies and what was expected by other aggressive participants, such that the financial market received these news with disappointment and the stocks of the winning companies slumped. On the other hand, the winners declare that they are confident that the movement will increase substantially and can make it by diversifying services, boosting the commerce, parking, hotels, etc. Even though, it seems that an entirely new Las Vegas would be necessary around each airport to cope with such ambition. The positive side of this astronomical grant is that a big part of it is expected to be used in the development of smaller airports, although the legal mechanisms that oblige the government to do so are not so clear. The negative side is that the pressure for recovering the invested value will increase the service price paid by the airport users, together with the risk of eventually not recovering this value, which would be paid by the whole society. Furthermore, the investment mandated by the concession contract, which is apart from the concession grant and which is what must really be invested in the airport infra-structure, is very open to interpretation. Anyway, it is important saying that each airport and its new corporation have different characteristics and perspectives.
If we keep optimistic and assume that the situation is manageable and the perspective positive, there are several fates and challenges to be faced in the scenario of airport infrastructure in the forthcoming years, as explained in the following items.
Increase the connectivity between the airports and the city locations
Given that going from these airports to the final travelling destination and vice-versa is either very time consuming or expensive, the federal, state and local governments should devote an amount of investment compatible with that being invested in the airports, what means an even higher investment, to increase the airport connectivity. The problem is that creating new railway lines cannot be done with compromise solutions such as done in the airport concession. The plain failure of the recent High Speed Train (TAV) bidding that was for connecting Campinas – São Palo – Rio de Janeiro, as well as for one rail line between the São Paulo city center and the airport in Guarulhos are the proof. The government will need to perform primary investment instead of recycled investment. Besides, the planned TAV line, even if not at a terrific speed, can avoid for many years having to build a green field airport in the São Paulo metropolitan area.
Do not take the safety for granted
Since its creation, the National Agency of Civil Aviation (ANAC) has been doing a great job in the aspect of economic regulation in the aviation business, but not so great in the aspect of aviation safety. The absolute number of accidents was record in 2009 and in 2011 and this is not felt by the public only because the tragedies happen mostly with small aircrafts. However, where there is smoke, there is fire. Pilots of smaller aircrafts begin their careers in the same schools as the airline pilots do; their licenses and aircrafts follow many regulations in common. The care for their lives and mostly, for ours, the passengers’, must not be driven by the rules of the market. The fear is that, if the safety was already in low evidence, the great hunger for making money with the airport business will further decrease the safety priority in the regulation effort.
ANAC will have to develop an effective methodology to evaluate the airport capacity in which safety and security are not relegated to the background.
Have the planned investment in the airport effectively executed
The airport concession obliges the holders to invest in capacity expansion and this obligation is stated in terms of capacity goals. The problem is that the airport capacity numbers are prone to manipulation and there is the risk that the capacity expansion be only perfunctory. Therefore ANAC will have to develop a clear and effective methodology to evaluate the airport capacity in which safety and security are not relegated to the background. Besides, the grant paid for the concession of these 3 big airports must be duly and properly used for the improvement of smaller airports. Yet, the legal mechanisms to fulfill this expectation remain to be created.
Dedicate adequate effort to business and general aviation
With the demand for air travel growing at a pace much faster than the airport capacity to handle more aircrafts, the smaller ones, namely business jets and general aviation, are being pressed to use more peripheral and less equipped airports, thus decreasing its attractiveness for potential users. It must be recognized that the business and general aviation make feasible and enhance a roll of unsubstitutable activities for the economy and, if not properly treated, the country competitivity in the global scenario decreases. Therefore, the aviation authorities must offer adequate support for this sector. Fortunately, there are signs that this point is being taken seriously by the authorities, such as the recent approval for construction of a green field private airport by the city of São Roque, located 60 km from São Paulo.
Observe the effects of the concession for some years before conceding another major public airport
Given the surmounting uncertainties around the benefits and losses arising from this concession scheme, it is prudent first watching the consequences not to repeat errors that were not identified in the beginning. This prudence will also decrease the political risk, and the President is well aware of it. Probably she will wait the end of this presidential mandate before reconsidering this.
To summarize in a few words, Brazil has to mature the civil aviation policies at the same time that it expands the capacity. The body of laws governing this key activity is still weak and cumbersome and we hope that our authorities will take the measures before learning the hard way.