NEW YORK--(BUSINESS WIRE)--Projects financed by Brazilian states should drop to less than 5% of state operating budget expenditures in 2015 and 2016 as states try to create budget surpluses amid challenging economic times, Fitch Ratings says. We expect projects to be cut because it is easier to reign in or postpone future plans, as opposed to reducing headcount or cutting other operating expenditures. Going forward, we believe public-private partnerships (PPPs) could address these pressures.
Declines in project financing are also due to World Cup project delays. According to the Federal Court of Accounts, total project investments attributable to the World Cup reached BRL23 billion (USD7.2 billion). The states financed 17% of that total and received mixed results. Some infrastructure projects, mostly transportation-related, have either been delayed or suffered several cost overruns. Amid soaring costs, the VLT Cuiaba light-rail project in Mato Grosso is still not operating almost a year after the World Cup.
The pressure on state budgets even includes some projects that have been completed. Counted as expenditures since 2000, the investments have produced negative surpluses (in non-financial savings). Moreover, once a project is finished, the local government must pay for the increased operating expenditures required to operate and maintain the new facility.
Fitch believes states and municipalities would benefit from PPPs. In our view, they generally preserve the debt capacity of states and local governments and can reduce the amount of debt held by a public entity. Some PPPs allow the private operator to finance the project under a design-build-operate-and-finance (DBOF) plan. Belo Horizonte, in Minas Gerais, has three operating projects under DBOF. The construction is financed by the private operator and reimbursed by the city upon completion.
Nevertheless, there are political risks involved that could undermine adequate implementation of PPP projects. Some municipal water projects in Governo do Distrito Federal (GDF) have not made their agreed payment to PPP Centrad, a special public vehicle. The GDF's public prosecutor's office has questioned the payments to PPP Centrad because GDF has not yet occupied the buildings.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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