Brazil airports overhaul plan seen as another blow to investors

By Alonso Soto and Roberta Vilas Boas

BRASILIA/SAO PAULO, Jan 27 (Reuters) - President Dilma Rousseff's plans to shake up Brazil's troubled airports sector could undermine billions of dollars in private investment and serve as a broader cautionary tale for investors in infrastructure.

The questions over confidence in the rules of the road come as Rousseff struggles to finance over $100 billion in highway, road, port and rail projects. The sweeping plans, announced in 2011, are aimed at adding momentum to an economy that has struggled to grow over the last three years.

One of the early successes of the plan was the sale of nearly $20 billion in concession rights to Brazilian and foreign companies to operate the country's five largest airports. The winners pledged more than $10 billion in initial investment.

But the concessionaires could now face unanticipated competition due to a proposed rule change, spurring talk of potential court battles and contract revisions.

Specifically, Civil Aviation Secretary Wellington Moreira Franco told Reuters earlier this month that the government intends to overturn regulations that prevent most airports operated by the private sector from receiving commercial passenger flights.

The change would allow companies to build new commercial airports from scratch. That could over time help ease severe overcrowding at Brazil's existing airports, which have not been able to keep up with a doubling of passenger traffic during the last decade.

But the change also represents an unexpected and unwelcome challenge to Brazilian and foreign companies that agreed to pay nearly $20 billion to acquire concessions to airports in Sao Paulo, Belo Horizonte, Brasilia and Rio de Janeiro.

The government never guaranteed the concessionaires that they would not face new competitors, according to the concession contract and a government official close to talks with the bidders.

Nevertheless, the companies made their projections for profitability and passenger traffic based on the current legislation, which they did not believe would change.

"This is worrisome for investors and could end up in court battles," said Francisco Lyra, a consultant for CFly Aviation and former head of the country's general aviation association.

Rousseff, a left-leaning economist, has come under fire from the private sector for making abrupt changes to rules and regulations throughout the economy. State intervention was one reason why Brazil's stock market sank nearly 16 percent last year, one of the world's worst performing stock indices.

Latin America's largest economy has struggled with low investment levels of about 19 percent of gross domestic product - less than half that of China - contributing to slow economic growth of only 2 percent or so last year.

Government officials have said changes like the ones to airport rules seek to improve bottlenecks for consumers, and that contracts are rigorously respected. Moreira Franco, the aviation secretary, said the government will seek changes that have no negative effects on concessionaires and new players.

Nevertheless, the changes could potentially delay or even reduce investment at existing airports and lead the companies to demand a revision of concession contracts that are barely a year old, experts and executives of some of the airport operators privately say.

"If the government makes that legal change we will demand a review of the financial terms of the contract," an executive with a consortium that won an airport concession told Reuters.

"I hope the government doesn't take that route because it will show total lack of respect for investors," the executive said, speaking on condition of anonymity. Another representative of a separate consortium also said that companies could demand that authorities change the terms of their contracts.

BIGGEST EFFECT IN SAO PAULO

The airports that could suffer the most from the overhaul in the medium term are Guarulhos and Viracopos, both located near the country's most populated city, Sao Paulo.

Brazilian construction firms Camargo Correa and Andrade Gutierrez plan to build a new airport in Caieiras, located about 40 km (25 miles) from Sao Paulo, which experts say could take away demand from both Guarulhos and Viracopos.

Guarulhos is operated by Brazil's Invepar and South Africa's ACSA. A consortium made up by Brazil's Triunfo Participacoes , UTC Participacoes and France's Egis Airport Operation runs Viracopos.

The two consortiums are also under pressure to carry out emergency investments to build new terminals before the start of the soccer World Cup in June, when thousands of tourists are expected to land at the already overcrowded airports.

Companies from both consortiums and Inframerica Aeroportos, which operates the Brasilia airport, declined to comment on the rule change. Brazilian builder Odebrecht Transport, which is part of a consortium that won the bid to operate Rio de Janeiro's Galeao airport, declined to comment.

Germany's Flughafen Zürich AG, which has the rights over Belo Horizonte's Confins airport, did not want to comment.

Airports aren't the first sector to potentially see a major rule change.

A last-minute tweak to the terms of an auction to build and operate a $16-billion high-speed rail made two of the three bidders pull out of the competition last year. The government then suspended the auction for the high-profile project and many believe it may never materialize.

Despite those difficulties, Brazil's infrastructure program gained some momentum after the government awarded five highway concessions in the second half of 2013.

This year the government expects to auction at least one more road, but experts believe it will struggle to sell the rights to refurbish and operate railways and seaports with some pending legal challenges.

One diplomat who helped companies from his country participate in the 2012 airport auction expressed concern that the rule changes could chill participation in future infrastructure concessions.

"You just don't do that to people," the diplomat said. "This just came out of the blue, leaving everyone very worried."